tag:blogger.com,1999:blog-29383110557606653572024-03-17T20:03:38.170-07:00Ed Dolan's Econ BlogA Resource for Understanding EconomicsEd Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.comBlogger602125tag:blogger.com,1999:blog-2938311055760665357.post-65790756879459910442024-02-15T11:35:00.000-08:002024-02-15T11:35:35.426-08:00Redefining Poverty: Towards a Transpartisan Approach<p> </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhJDM993GfJlHxAKYLZ7SrpjVNdn2DUCG9K_AF93NaOMvlJtFsBqRkNmvoDKevolZtjM0SCheR8tyP-a9gazfaLxcBXF3SHWRqRq_3tsweOAgQHExU4H32Pb26uNxplpL5MagIG2JazqoRMmRMr1J7-bUCJwp8xhoEAcE5uefa6QQfGnTiQcDcpMZFwl6mk" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="" data-original-height="359" data-original-width="623" height="184" src="https://blogger.googleusercontent.com/img/a/AVvXsEhJDM993GfJlHxAKYLZ7SrpjVNdn2DUCG9K_AF93NaOMvlJtFsBqRkNmvoDKevolZtjM0SCheR8tyP-a9gazfaLxcBXF3SHWRqRq_3tsweOAgQHExU4H32Pb26uNxplpL5MagIG2JazqoRMmRMr1J7-bUCJwp8xhoEAcE5uefa6QQfGnTiQcDcpMZFwl6mk" width="320" /></a></div><p>A new report from the National Academies of Science,
Engineering, and Medicine (NASEM), <a href="http://nap.nationalacademies.org/26825"><b><i>An Updated Measure of
Poverty: (Re)Drawing the Line</i></b></a><i>, </i>has hit Washington with
something of a splash. Its proposals deserve a warm welcome across the political spectrum. Unfortunately, they are not always getting it from the conservative side of the aisle. </p><p>The AEI’s <a href="https://www.aei.org/research-products/working-paper/the-effects-of-elevating-the-supplemental-poverty-measure-on-government-program-eligibility-and-spending/"><b>Kevin
Corinth</b></a> sees the NASEM proposals as a path to adding billions of dollars to federal
spending. <a href="https://www.aei.org/research-products/testimony/testimony-on-measuring-poverty/"><b>Congressional
testimony</b></a> by economist Bruce Meyer takes NASEM to task for
outright partisan bias. Yet in their more analytical writing, these and other conservative critics offer many of the same criticisms of the obsolete methods that constitute the current approach to measuring poverty. As I will explain below, many of their recommendations for improvements are in harmony with the NASEM report. Examples
include the need for better treatment of healthcare costs, the inclusion of
in-kind benefits in resource measures, and greater use of administrative data
rather than surveys.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">After some reading, I have come to think that the disconnect
between the critics’ political negative reaction to the NASEM report and their accurate
analysis of flaws in current poverty measures has less to do with the
conceptual basis of the new proposals and more with the way they should be put
to work. That comes more clearly into focus if we distinguish between what we
might call the <i>tracking</i> and the <i>treatment</i> functions,
or <i>macro</i> and <i>micro</i> functions, of poverty
measurement. <o:p></o:p></p>
<p class="MsoNormal">The tracking function has an analytic focus. It is a matter
of assessing how many people are poor at a given time and tracing how their
number varies in response to changes in policies and economic conditions. The
treatment function, in contrast, has an administrative focus. It sets a poverty
threshold that can be used to determine who is eligible for specific government
programs and what their benefits will be.<o:p></o:p></p>
<p class="MsoNormal">There are parallels in the tracking and treatment methods
that were developed during the Covid-19 pandemic. By early in 2020, it was
clear to public health officials that something big was happening, but slow and
expensive testing made it hard to track how and where the SARS-CoV-2 virus was
spreading. Later, as tests became faster and more accurate, tracking improved.
Wastewater testing made it possible to track the spread of the virus to whole
communities even before cases began to show up in hospitals. As time went by,
improved testing methods also led to better treatment decisions at the micro
level. For example, faster and more accurate home antigen tests enabled
effective use of treatments like Paxlovid, which works best if taken soon after
symptoms develop.<o:p></o:p></p>
<p class="MsoNormal">Poverty measurement, like testing for viruses, also plays
essential roles in both tracking and treatment. For maximum effectiveness, what
we need is a poverty measure that can be used at both the macro and micro
level. The measures now in use are highly flawed in both applications. Both the
NASEM report itself and the works of its critics offer useful ideas about where
we need to go. The following sections will deal first with the tracking
function, then with the treatment function, and then with what needs to be done
to devise a poverty measure suitable for both uses.<o:p></o:p></p>
<p class="MsoNormal"><b>The tracking function of poverty measurement<o:p></o:p></b></p>
<p class="MsoNormal">As a tracking tool, the purpose of any poverty measure is to
improve understanding. Each proposed measure represents the answer to a
specific question. To understand poverty fully – what it is, how it has
changed, who is poor, and why – we need to ask lots of questions. At this macro
level, it is misguided to look for the one best measure of poverty. <o:p></o:p></p>
<p class="MsoNormal">First some basics. All of the poverty measures discussed
here consist of two elements, a <i>threshold</i>, or measure of needs, and
a measure of <i>resources</i> available to meet those needs. The
threshold is based on a <i>basic bundle </i>of goods and services
considered essential for a minimum acceptable standard of living. The first
step in deriving a threshold is to define the basic bundle and determine its
cost. The basic bundle can be defined in absolute terms or relative to median standards
of living. If absolute, the cost of the basic bundle can be adjusted from year
to year to reflect inflation, and if relative, to reflect changes in the
median. Once the cost of the basic bundle is established, poverty thresholds
themselves may be adjusted to reflect the cost of essentials not explicitly
listed in the basic bundle. Further adjustments in the thresholds may be
developed to reflect household size and regional differences. <o:p></o:p></p>
<p class="MsoNormal">Similarly, a poverty measure can include a narrower or
broader definition of resources. A narrow definition might consider only a
household’s regular inflows of cash. A broader definition might include the
cash-equivalent value of in-kind benefits, benefits provided through the tax
system, withdrawals from retirement savings, and other sources of purchasing
power.<o:p></o:p></p>
<p class="MsoNormal">Finally, a poverty measure needs to specify the economic
unit to which it applies. In some cases, that may be an individual. In other
cases, it may be a family (a group related by kinship, marriage, adoption, or
other legal ties) or a household (a group of people who live together and share
resources regardless of kinship or legal relationships). Putting it all
together, an individual, family, or household is counted as poor if their
available resources are less than the applicable poverty threshold.<o:p></o:p></p>
<p class="MsoNormal">The current official poverty measure (OPM), which dates from
the early 1960s, includes very simple versions of each of these components. It
defines the basic bundle in absolute terms as three times the cost of a
“thrifty food plan” determined by the U.S. Department of Agriculture. It then
converts that to a set of thresholds for family units that vary by family size,
with special adjustments for higher cost of living in Alaska and Hawaii. The
OPM defines resources as before-tax regular cash income, including wages,
salaries, interest, and retirement income; cash benefits such as Temporary
Assistance for Needy Families and Supplemental Security Income; and a few other
items. Importantly, the OPM does not include tax credits or the cash-equivalent
value of in-kind benefits in its resource measure.<o:p></o:p></p>
<p class="MsoNormal">The parameters of the OPM were initially calibrated to
produce a poverty rate for 1963 of approximately 20 percent. After that, annual
inflation adjustments used the CPI-U, which to this day remains the most widely
publicized price index. As nominal incomes rose due to economic growth and
inflation, and as cash benefits increased, the share of the population living
below the threshold fell. By the early 1970s, it had reached 12 percent. Since
then, however, despite some cyclical ups and downs, it has changed little.<o:p></o:p></p>
<p class="MsoNormal">Today, nearly everyone views the OPM as functionally
obsolete. Some see it as overstating the poverty rate, in that its measure of
resources ignores in-kind benefits like the Supplemental Nutrition Assistance
Program (SNAP) and tax credits like the Earned Income Tax Credit (EITC). Others
see it as understating poverty on the grounds that three times the cost of food
is no longer enough to meet minimal needs for shelter, healthcare, childcare,
transportation, and modern communication services. Almost no one sees the OPM
as just right.<o:p></o:p></p>
<p class="MsoNormal">In a recent paper in the <a href="https://www.journals.uchicago.edu/doi/10.1086/725705"><b><i>Journal of
Political Economy</i></b></a>, Richard V. Burkhauser, Kevin Corinth, James
Elwell, and Jeff Larrimore provide an excellent overview of the overstatement
perspective. The question they ask is what percentage of American households
today lack the resources they need to reach the original three-times-food
threshold. Simply put, was Lyndon Johnson’s “War on Poverty,” on its own terms,
a success or failure?<o:p></o:p></p>
<p class="MsoNormal">To answer that question, they develop what they call
an <i>absolute full-income poverty measure</i> (FPM). Their first
step in creating the FPM was to include more expense categories in the basic
bundle, but calibrate it to make the FPM poverty rate for 1963 equal to the OPM
rate for that year. Next, they expanded the resource measure to reflect the
growth of in-kind transfer programs and the effects of taxes and tax credits.
They also adopt the household, rather than the family, as their basic unit of
analysis. Burkhauser et al. estimate that adding the full value of the EITC and
other tax credits to resources, along with all in-kind transfer programs, cuts
the poverty rate in 2019 to just 4 percent, far below the official 10.6
percent. <o:p></o:p></p>
<p class="MsoNormal">Going further, Burkhauser et al. raise the issue of the
appropriate measure of the price level to be used in adjusting poverty
thresholds over time. They note that many economists consider that the
CPI-U <a href="https://www.brookings.edu/research/the-measurement-of-output-prices-and-productivity"><b>overstates
the rate of inflation</b></a>, at least for the economy as a whole. Instead,
they prefer the personal consumption expenditure (PCE) index, which the Fed
uses as a guide to monetary policy. Replacing the CPI-U with the PCE reduces
the FPM poverty rate for 2019 to just 1.6 percent. It is worth noting, however,
that some observers maintain that prices in the basket of goods purchased by
poor households tend to rise at a faster rate than the average for all
households. In that case, an FPM adjusted for inflation using the PCE would not
fully satisfy one of the criteria set by Burkhauser et al., namely, that “the
poverty measure should reflect the share of people who lack a minimum level of
absolute resources.” (For further discussion of this point, see, e.g., <a href="https://www.bls.gov/evaluation/technical-recommendations-for-the-consumer-inflation-measure-best-suited-for-conducting-annual-adjustments-to-the-official-poverty-measure.pdf"><b>this
report</b></a> to the Office of Management and Budget.)<o:p></o:p></p>
<p class="MsoNormal">Burkhauser et al. do not represent 1.6 percent as the “true”
poverty rate. As they put it, although the FPM does point to “the near
elimination of poverty based on standards from more than half a century ago,”
they see that as “an important but insufficient indication of progress.” For a
fuller understanding, measuring success or failure of Johnson’s War on Poverty
is not enough. A poverty measure for today should give a better picture of the
basic needs of today’s households and the resources available to them. <o:p></o:p></p>
<p class="MsoNormal">The <a href="https://www.census.gov/library/visualizations/2021/demo/poverty_measure-how.html"><b>Supplemental
Poverty Measure</b></a> (SPM), which the Census Bureau has published since
2011, is the best known attempt to modernize the official measure. The SPM
enlarges the OPM’s basic bundle of essential goods to include not only food,
but also shelter, utilities, telephone, and internet. It takes a relative
approach, setting the threshold as a percentage of median expenditures and
updating it not just for inflation, but also for the growth in real median
household income. On the resource side, the SPM adds many cash and in-kind benefits,
although not as many as the FPM. It further adjusts measured resources by
deducting some necessary expenses, such as childcare and out-of-pocket
healthcare costs. Finally, the SPM moves away from the family as its unit of
analysis toward a household concept.<o:p></o:p></p>
<p class="MsoNormal">Since the SPM adds items to both thresholds and resources,
it could, depending on its exact calibration, have a value either higher or
lower than the OPM. In practice, as shown in Figure 1, it has tracked a little
higher than the OPM. (For comparison, Burkhauser et al. calculate a variant of
their FPM that uses a relative rather than an absolute poverty threshold. The
relative FPM, not shown in Figure 1, tracks slightly higher than the SPM in
most years.)<o:p></o:p></p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEiDi8CGbOAcZk3R0rtmGkWymV8N9QNr2R1HrWw973ZniyiweReXEs1DpGil67x0KBZXFNcCRNyIENpAz8RHyeg2C_PAh-jp-F5_mwQ3lNjcThbq4WTPXalDeBHnd9gpsB_0nkxVmTOGfINMUWzfiT5v-4uOBHHx5UwcRSnJaBv9SQ0pN_z5yraPOJNNBRsR" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="359" data-original-width="623" height="231" src="https://blogger.googleusercontent.com/img/a/AVvXsEiDi8CGbOAcZk3R0rtmGkWymV8N9QNr2R1HrWw973ZniyiweReXEs1DpGil67x0KBZXFNcCRNyIENpAz8RHyeg2C_PAh-jp-F5_mwQ3lNjcThbq4WTPXalDeBHnd9gpsB_0nkxVmTOGfINMUWzfiT5v-4uOBHHx5UwcRSnJaBv9SQ0pN_z5yraPOJNNBRsR=w400-h231" width="400" /></a></div><br /><p class="MsoNormal">That brings us back to our starting point, the NASEM report.
Its centerpiece is a recommended revision of the SPM that it calls the
principal poverty measure (PPM). The PPM directly addresses several
acknowledged shortcomings of the SPM. Some of the most important
recommendations include:<o:p></o:p></p>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">A
further movement toward the household as the unit of analysis. To
accomplish that, the PPM would place more emphasis on groups of people who
live together and less on biological and legal relationships.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">A
change in the treatment of healthcare costs. The SPM treats out-of-pocket
healthcare spending as a deduction from resources but does not treat
healthcare as a basic need. The PPM adds the cost of basic health
insurance to its basic package of needs, adds the value of subsidized
insurance (e.g., Medicaid or employer-provided) to its list of resources,
and (like the SPM) deducts any remaining out-of-pocket healthcare spending
from total resources.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">A
change in the treatment of the costs of shelter that does a better job of
distinguishing between the situation faced by renters and homeowners.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">Inclusion
of childcare as a basic need and subsidies to childcare as a resource.<b><o:p></o:p></b></li>
</ul>
<p class="MsoNormal">Although Burkhauser et al. do not directly address the PPM,
judging by their criticisms of the SPM, it seems likely that they would regard
nearly all of these changes as improvements. Many of the changes
recommended in the NASEM report make the PPM more similar to the FPM than is
the SPM.<o:p></o:p></p>
<p class="MsoNormal">Since the NASEM report makes recommendations regarding
methodology for the PPM but does not calculate values, the PPM is not shown in
Figure 1. In principle, because it modifies the way that both needs and
resources are handled, the PPM could, depending on its exact calibration,
produce poverty rates either above or below the SPM.<o:p></o:p></p>
<p class="MsoNormal"><b>Measurement for treatment<o:p></o:p></b></p>
<p class="MsoNormal">The OPM, FPM, SPM, and PPM are just a few of the many
poverty measures that economists have proposed over the years. When we confine
our attention to tracking poverty, each of them adds to our understanding. When
we turn to treatment, however, things become more difficult. A big part of the
reason is that none of the above measures is really suitable for making
micro-level decisions regarding the eligibility of particular households for
specific programs. <o:p></o:p></p>
<p class="MsoNormal">For the OPM, that principle is laid out explicitly in <a href="https://www.census.gov/topics/income-poverty/poverty/about/history-of-the-poverty-measure/omb-stat-policy-14.html#:~:text=Related%20Sites-,Office%20of%20Management%20and%20Budget%20(OMB)%20in%20Statistical%20Policy%20Directive,and%20establishments%20for%20statistical%20purposes."><b>U.S.
Office of Management and Budget Statistical Policy Directive No. 14</b></a>,
first issued in 1969 and revised in 1978:<o:p></o:p></p>
<p class="MsoNormal">The poverty levels used by the Bureau of the Census were
developed as rough statistical measures to record changes in the number of
persons and families in poverty and their characteristics, over time. While
they have relevance to a concept of poverty, these levels were not developed
for administrative use in any specific program and nothing in this Directive
should be construed as requiring that they should be applied for such a
purpose.<o:p></o:p></p>
<p class="MsoNormal">Despite the directive, federal and state agencies do use the
OPM, or measures derived from it, to determine eligibility for many programs,
including Medicaid, SNAP, the Women, Infants, and Children nutrition program,
Affordable Care Act premium subsidies, Medicare Part D low-income subsidies,
Head Start, and the National School Lunch Program. The exact eligibility
thresholds and the rules for calculating resources vary from program to
program. The threshold at which eligibility ends or phase-out begins for a
given household may be equal to the Census Bureau’s official poverty threshold,
a fraction of that threshold, or a multiple of it. The resource measure may be
regular cash income as defined by the OPM, or a modification based on various
deductions and add-backs. Some programs include asset tests as well as income
tests in their measures of resources. The exact rules for computing thresholds
and resources vary not only from one program to another, but from state to
state.<o:p></o:p></p>
<p class="MsoNormal">That brings us to what is, perhaps, the greatest source of
alarm among conservative critics of the NASEM proposals. That is the concern
that a new poverty measure such as the PPM would be used in a way that raised
qualification thresholds while resource measures remained unchanged. It is easy
to understand how doing so by administrative action could be seen as a backdoor
way of greatly increasing welfare spending without proper legislative
scrutiny. <o:p></o:p></p>
<p class="MsoNormal">Kevin Corinth articulates this fear in a <a href="https://www.aei.org/research-products/working-paper/the-effects-of-elevating-the-supplemental-poverty-measure-on-government-program-eligibility-and-spending/"><b>recent
working paper</b></a> for the American Enterprise Institute. He notes that
while the resource measures that agencies should use in screening applications
are usually enshrined in statute, the poverty thresholds are not. If the Office
of Management and Budget were to put its official stamp of approval on a new
poverty measure such as the SPM or PPM, Corinth maintains that agencies would
fall in line and recalculate their thresholds based on the new measure without
making any change in the way they measure resources. <o:p></o:p></p>
<p class="MsoNormal">Corinth calculates that if the current OPM-based thresholds
were replaced by new thresholds derived from the SPM, federal spending for SNAP
and Medicaid alone would increase by $124 billion by 2033. No similar
calculation can be made for the PPM, since it has not been finalized, but
Corinth presumes that it, too, would greatly increase spending if it were used
to recalculate thresholds while standards for resources remained unchanged.<o:p></o:p></p>
<p class="MsoNormal">Clearly, Corinth is onto a real problem. The whole
conceptual basis of the SPM and PPM is to add relevant items in a balanced
manner to both sides of the poverty equation, so that they more accurately
reflect the balance between the cost of basic needs and the resources available
to meet them. Changing one side of the equation while leaving the other
untouched makes little sense.<o:p></o:p></p>
<p class="MsoNormal">Logically, then, what we need is an approach to poverty
measurement that is both conceptually balanced and operationally suitable for
use at both the macro and micro levels. Corinth himself acknowledges that at
one point, when he notes that “changes could be made to both the SPM resource
measure and SPM thresholds.” However, he does not follow up with specific
recommendations for doing so. To fill the gap, I offer some ideas of my own in
the next section.<o:p></o:p></p>
<p class="MsoNormal"><b>Toward a balanced approach to micro-level poverty
measurement<o:p></o:p></b></p>
<p class="MsoNormal">To transform the PPM from a tracking tool into one suitable
for determining individual households’ eligibility for specific public
assistance programs would require several steps.<o:p></o:p></p>
<p class="MsoNormal"><b><i>1. Finalize a package of basic needs. </i></b>For
the PPM, those would include food, clothing, telephone, internet, housing needs
based on fair market rents, basic health insurance, and childcare. The NASEM
report recommends calibrating costs based on a percentage of median
expenditures, but conceptually, they could instead be set in absolute terms,
either based on costs in a given year or averaged over a fixed period leading
up to the date of implementation of the new approach.<o:p></o:p></p>
<p class="MsoNormal"><b><i>2. Convert the package of needs into thresholds. </i></b>Thresholds
would vary according to the size and composition of the household unit. They
could also vary geographically, although there is room for debate on how fine
the calibration should be. Thresholds would be updated to reflect changes in
the cost of living as measured by changes in median expenditures or (in the
absolute version) changes in price levels.<o:p></o:p></p>
<p class="MsoNormal"><b><i>3. Finalize a list of resources. </i></b>These
would include cash income plus noncash benefits that households can use to meet
food, clothing, and telecommunication needs; plus childcare subsidies, health
insurance benefits and subsidies, rent subsidies, and (for homeowners) imputed
rental income; minus tax payments net of refundable tax credits; minus work
expenses, nonpremium out-of-pocket medical expenses, homeowner costs if
applicable, and child support paid to another household. <o:p></o:p></p>
<p class="MsoNormal"><b><i>4. Centralize collection of data on resources. </i></b>Determining
eligibility of individual households for specific programs would require
assembling data from many sources. It would be highly beneficial to centralize
the reporting of total resources as much as possible, so that all resource data
would be available from a central PPM database. The IRS could provide data on
cash income other than public benefits (wages, salaries, interest, dividends,
etc.) and payments made to households through refundable tax credits such as
the EITC. The federal or state agencies that administer SNAP, Medicaid and
other programs could provide household-by-household data directly to the PPM
database. Employers could report the cash-equivalent value of employer-provided
health benefits along with earnings and taxable benefits. <o:p></o:p></p>
<p class="MsoNormal"><b><i>5. Devise a uniform format for reporting eligible
deductions from resources. </i></b>Individual households applying for
benefits from specific programs would be responsible for reporting applicable
deductions from resources, such as work expenses, out-of-pocket medical
expenses, homeowner costs and so on. A uniform format should be developed for
reporting those deductions along with uniform standards for documenting them so
that the information could be submitted to multiple benefit programs without
undue administrative burden.<o:p></o:p></p>
<p class="MsoNormal"><b><i>6. Use net total resources as the basis for all
program eligibility. </i></b>Decisions on eligibility for individual
programs should use net total resources, as determined by steps (4) and (5), to
determine eligibility for individual programs. <o:p></o:p></p>
<p class="MsoNormal"><b><i>7. Harmonization of program phase-outs. </i></b>It
would be possible to implement steps (1) through (6) without making major
changes to the phase-in and phaseout rules for individual programs. However,
once a household-by-household measure of net total resources became available,
it would be highly desirable to use it to compute benefit phaseouts from all
programs in a harmonized fashion. At present, for example, a household just
above the poverty line might face a phaseout rate of 24 percent for SNAP and 21
percent for EITC, giving it an effective marginal tax rate of 45 percent, not
counting other programs or income and payroll taxes. As explained in <a href="https://www.niskanencenter.org/work-disincentives-hit-the-near-poor-hardest-why-and-what-to-do-about-it/"><b>this
previous commentary</b></a>, such high effective marginal tax rates impose
severe work disincentives, especially on families that are just making the
transition from poverty to self-sufficiency. Replacing the phase-outs for
individual programs with a single harmonized “tax” on total resources as
computed by the PPM formula could significantly mitigate work
disincentives. <o:p></o:p></p>
<p class="MsoNormal">Implementing all of these steps would clearly be a major
administrative and legislative undertaking. However, the result would be a
public assistance system that was ultimately simpler, less prone to error, and
less administratively burdensome both for government agencies at all levels and
for poor households.<o:p></o:p></p>
<p class="MsoNormal"><b>Conclusion<o:p></o:p></b></p>
<p class="MsoNormal">In a <a href="https://freopp.org/its-time-to-rethink-the-meaning-of-poverty-e9246f33627f"><b>recent
commentary</b></a> for the Foundation for Research on Equal Opportunity,
Michael Tanner points to the potentially far-reaching significance of proposed
revisions to the way poverty is measured. “Congress should use this opportunity
to debate even bigger questions,” he writes, such as “what is poverty, and how
should policymakers measure it?” Ultimately, he continues, “attempts to develop
a statistical measure of poverty venture beyond science, reflecting value
judgments and biases. Such measures cannot explain everything about how the
poor really live, how easily they can improve their situation, or how
policymakers can best help them.”<o:p></o:p></p>
<p class="MsoNormal">The “beyond science” caveat is worth keeping in mind for all
discussions of poverty measurement. A case in point is the issue of whether to
use an absolute or relative approach in defining needs. It is not that one is
right and the other wrong. Rather, they reflect fundamentally different
philosophies as to what poverty is. For example, as noted earlier, Burkhauser
et al. compute both absolute and relative versions of their full-income poverty
measure. The absolute version is the right one for answering the historical
question they pose about the success or failure of the original War on Poverty,
but for purposes of policy today, the choice is not so clear. Some might see an
absolute measure, when used in a micro context, as producing too many false
negatives, that is, failures to help those truly in need. Others might see the
relative approach as producing too many false positives, spending hard-earned
taxpayer funds on people who could get by on their own if they made the effort.
The choice is more a matter of values than of science.<o:p></o:p></p>
<p class="MsoNormal">The choice of a price index for adjusting poverty measures
over time also involves values as well as science. Should the index be one
based on average consumption patterns for all households, such as the PCE or
chained CPI-U, or should it be a special index based on the consumption
patterns of low-income households? Should the index be descriptive, that is,
based on observed consumption patterns for the group in question? Or should it
be prescriptive, that is, based on a subjective estimate of “basics needed to
live and work in the modern economy” as is the approach taken by the <a href="https://www.unitedforalice.org/essentials-index"><b>ALICE Essentials
Index</b></a>?<o:p></o:p></p>
<p class="MsoNormal">In closing, I would like to call attention to four
additional reasons why conservative critics of existing poverty policy should
welcome the proposed PPM, even in its unfinished state, as a major step in the
right direction. <o:p></o:p></p>
<p class="MsoNormal"><b><i>The PPM is inherently less prone to error. </i></b><a href="https://www.aei.org/research-products/testimony/testimony-on-measuring-poverty/"><b>Bruce<i> </i>Meyer</b></a> is
concerned that “the NAS[EM]-proposed changes to poverty measurement would
produce a measure of poverty that does a worse job identifying the most
disadvantaged, calling poor those who are better off and not including others
suffering more deprivation.” In fact, many features of the PPM make it
inherently less prone than either the OPM or the SPM to both false positives
and false negatives. The most obvious is its move toward a full-income
definition of resources. That avoids one of the most glaring flaws in the OPM,
namely, the identification of families as poor who in fact receive sufficient
resources in the form of in-kind transfers or tax credits. The PPM also
addresses some of the flaws of the SPM that Meyer singles out in his testimony,
most notably in the treatment of healthcare. Furthermore, by placing
greater emphasis on administrative data sources and less on surveys, the PPM
would mitigate underreporting of income and benefits, which Burkhauser et al.
identify as a key weakness of the SPM. (See NASEM Recommendations 6.2 and 6.3).<o:p></o:p></p>
<p class="MsoNormal"><b><i>The PPM offers a pathway toward consistency and
standardization in poverty policy.</i></b><i> </i>In his critique of the
PPM, Tanner suggests that “Congress should decouple program eligibility from
any single poverty measure, and adopt a broader definition of poverty that
examines the totality of the circumstances that low-income people face and their
potential to rise above them.” I see that kind of decoupling as exactly the
wrong approach. Our existing welfare system is already a clumsy accretion
of mutually inconsistent means-tested programs – as many as 80 of them, <a href="https://www.heritage.org/poverty-and-inequality/report/the-war-poverty-after-50-years"><b>by
one count</b></a>. It is massively wasteful and daunting to navigate. In large
part that is precisely because each component represents a different view of
the “totality of circumstances” of the poor as seen by different policymakers
at different times. What we need is not decoupling, but standardization and
consistency. The proposed system-wide redefinition of poverty offers a perfect
opportunity to make real progress in that direction.<o:p></o:p></p>
<p class="MsoNormal"><b><i>The PPM would be more family-friendly. </i></b>One
pro-family feature of the PPM is its recognition of childcare costs on both the
needs and the resources sides of the poverty equation. In addition, by moving
toward households (defined by resource-sharing) rather than families (defined
by legal relationships), the PPM would mitigate the <a href="https://ifstudies.org/blog/how-tangled-welfare-programs-create-a-marriage-penalty-for-the-near-poor"><b>marriage
penalties</b></a> that are built into some of today’s OPM-based poverty
programs.<o:p></o:p></p>
<p class="MsoNormal"><b><i>Properly implemented, the PPM would be more
work-friendly</i></b><i>. </i>As noted above, the benefit cliffs,
disincentive deserts, and high effective marginal tax rates of existing
OPM-based poverty programs create formidable work disincentives. Moving toward
a harmonized phaseout system based on the PPM’s full-income approach to
resources could greatly reduce work disincentives, especially for households
just above the poverty line that are struggling to take the last steps toward
self-sufficiency.<o:p></o:p></p>
<p class="MsoNormal">In short, it is wrong to view the proposed PPM as part of a
progressive plot to raid the government budget for the benefit of the
undeserving, as some conservative critics seem to have done. Rather, both
conservatives and progressives should embrace the PPM as a promising step
forward and direct their efforts toward making sure it is properly
implemented. <o:p></o:p></p><p class="MsoNormal"><i>Based on a version originally published by <a href="https://www.niskanencenter.org/redefining-poverty-a-response-to-conservative-critics/">Niskanen Center</a>. </i></p><p class="MsoNormal"><br /></p>
<p class="MsoNormal"><o:p> </o:p></p>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-50417579180911069502024-02-14T06:52:00.000-08:002024-02-14T06:54:23.647-08:00A Negative Income Tax, One Step at a Time<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEj9zzaQiaV82JRf_jpg1o-6qwil93KzenuePLAVyRZ8NDsmo5Aa1ivnWzXSfn491sPfrc8LqkekNR1Be09lXOjxfls8Uh4HsnXD_xoCceWzm6KUbF-1_VBXIELoW2KxXSAku_CaFGHKJPvmtA7RYudRvGZ4l9oXTrVXiUQBZEIP6J92yuRzrCOpmLXe44-T" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="" data-original-height="1536" data-original-width="1536" height="240" src="https://blogger.googleusercontent.com/img/a/AVvXsEj9zzaQiaV82JRf_jpg1o-6qwil93KzenuePLAVyRZ8NDsmo5Aa1ivnWzXSfn491sPfrc8LqkekNR1Be09lXOjxfls8Uh4HsnXD_xoCceWzm6KUbF-1_VBXIELoW2KxXSAku_CaFGHKJPvmtA7RYudRvGZ4l9oXTrVXiUQBZEIP6J92yuRzrCOpmLXe44-T" width="240" /></a></div><p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman", serif; font-size: 19.3333px;">The negative income tax (NIT) sometimes seems like the carbon tax of social policy. Both are irresistibly appealing to economists and have long pedigrees. Both are supported by blindingly persuasive logic. Yet neither policy seems capable of mustering much political support in 21st-century Washington politics. I see two things as essential in repackaging the NIT for today’s America.</span></p><p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">The first essential is to recognize
the reality of path dependency — the need to start from where we are, not from
a clean slate, and take things one step at a time. <a href="https://global.oup.com/academic/product/the-open-society-and-its-complexities-9780190648978?cc=us&lang=en&"><span style="color: blue;"> Gerald Gaus</span></a> calls that approach “exploring the
adjacent possible.”<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">The second essential is to present the NIT in a
value framework that has broad appeal across the political spectrum. As things
stand, the NIT has about an even balance of progressive and conservative
skeptics, yet properly implemented, it offers much that is in harmony with the
values of both sides.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Here, then, are some ideas for nudging
the NIT along from a merely an elegant concept toward something more concrete
and workable.<span></span></span></p><a name='more'></a><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;"><o:p></o:p></span><p></p>
<p class="MsoNormal" style="background: white; margin-bottom: 7.5pt; margin-left: 0in; margin-right: 0in; margin-top: 12.0pt; margin: 12pt 0in 7.5pt; mso-line-height-alt: 13.9pt; mso-outline-level: 2;"><b><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 19.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">One step at a time<o:p></o:p></span></b></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">When I moved to Vermont years ago, I
found that the locals had a wealth of tongue-in-cheek jokes, sometimes at their
own expense. In one, a New Yorker stops his car to ask a farmer how to get to
the tiny town of North Pomfret. After thinking for a minute or so, the
Vermonter answers, “You can’t get there from here.”<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Path dependency is the social
scientist’s way of saying, “You can’t get there from here.” The steps you took
to get where you are now constrain what you can do in the future.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">In either its rustic or academic
version, path dependency is highly relevant to the design of an NIT. When
Milton Friedman<a href="https://hypertextjournal.substack.com/p/the-progress-of-mans-welfare"><span style="color: blue;"> first started thinking</span></a> about the
concept in the late 1930s, the modern welfare system did not exist. Roosevelt’s
New Deal had introduced some ad hoc jobs programs like the Civilian
Conservation Corps and the Works Progress Administration, but there was little
else. If an NIT had been introduced then, it could have been drawn on a blank
slate.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Things are different today. Each of
our many poverty programs has its own constituents, its own staff who depend on
it for their jobs, and its own rent-seeking hangers-on. As a textbook exercise,
throwing out the whole lot and replacing them with an NIT has a definite
appeal, but it doesn’t look likely to happen.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Could an NIT simply be added on top of
our current welfare system? Some say yes. Consider, for example, a
proposal called<a href="https://drive.google.com/file/d/1UDFPwUYu2Rf4RGgXuOTacmBj2Gt9paAV/view"><span style="color: blue;"> Guaranteed Income for the 21<sup>st</sup> Century</span></a> (GI21),<a href="https://www.niskanencenter.org/guaranteed-income-for-the-21st-century-a-proposal-with-promise/"><span style="color: blue;"> about which I have written previously</span></a>. Its
authors designed GI21 as a Universal Basic Income with a phase-out, which made
it,<a href="https://bleedingheartlibertarian.substack.com/p/ubi-vs-negative-income-tax"><span style="color: blue;"> in effect, an NIT</span></a>. However, they were
specific that GI21 was to supplement existing poverty programs, not replace
them. They were less specific as to just how the phase-out rates of GI21 were
to interact with those of SNAP (also known as food stamps), the Earned Income Tax
Credit (EITC), and so on. By my calculations, however, no matter which of
several variants were chosen, it was clear that GI21 beneficiaries would keep
little, if anything, of each additional dollar they earned, especially in the
critical near-poor range of $10,000 to $50,000 per year. GI21 would have
boosted the incomes of many families, but it would have been anything but
work-friendly.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">But, if starting from a blank slate is
impossible due to path dependency, and if an add-on NIT would be destructive of
work incentives, what is to be done? I see at least three ways forward that
would not require the immediate repeal of current programs, but only changes in
their phase-in and phase-out parameters.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">One way would be simply to modify
existing programs. Consider the EITC, the largest cash transfer program we have
now.<a href="https://www.cbpp.org/research/policy-basics-the-earned-income-tax-credit"><span style="color: blue;"> As of 2023</span></a>, the EITC gives a credit of 34
cents per dollar earned to a family with two parents and one child, up to an
income of $11,750. Starting at an income of $28,120, the credit phases out at a
rate of 16 percent. Anybody in between gets the full credit amount, $3,995. It
is, in effect, an NIT married to a wage subsidy for low-income workers.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">A few steps would bring the EITC
closer to an NIT. One would be to raise the minimum credit to a positive
amount, say, $5,000 per family. Minnesota’s<a href="https://www.revenue.state.mn.us/working-family-credit"><span style="color: blue;"> Working Family Credit</span></a>, which is part of its
version of the EITC at the state level, offers a possible model. Another
idea would be to broaden eligibility by making the EITC available to married
workers on terms comparable to those who are unmarried, thus fixing the program’s
existing<a href="https://www.brookings.edu/wp-content/uploads/2016/06/20000920.pdf"><span style="color: blue;"> marriage penalty</span></a>. Paying benefits monthly,
instead of once a year at tax time, would help, too. At the same time, other
benefits that are also delivered through the tax system could be expanded or
modified.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">A second approach would be to offer an
option to convert selected in-kind benefits to cash. For example, SNAP
beneficiaries could opt to receive cash rather than the current electronic
benefits transfer cards, which can be used only for food. Princeton economist<a href="https://econpapers.repec.org/paper/priindrel/468.htm"><span style="color: blue;"> Diane Whitmore Schanzenbach</span></a> estimates
that between 20 and 30 percent of food stamp recipients would spend less on
food than their food stamp benefit amount if they received cash instead of
stamps. She interprets that as meaning that they would be better off with cash.
On average, she thinks that those stamp recipients value their total benefits
at 80 percent of their face value. These estimates suggest that a cash option
would likely have a good take-up even if the amount of cash offered were less
than 1-to-1 with the face value of the in-kind benefits. Part of the budget
savings from the lower maximum benefit could be used to improve work incentives
by reducing the phase-out rate to something below its current 24 percent.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">A third, more radical, approach would
be what I call total income phase-out (TIP). Regardless of how many cash and
in-kind welfare programs stayed on the books, TIP would introduce a harmonized
phase-out system that would apply to all of them. Applied consistently, it
would be mathematically indistinguishable from an NIT.</span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">The central aim of TIP is to ease the
biggest source of work disincentives for the poor, namely, the current practice
that makes the phase-out rates of various programs additive. Today, for
example, if you are in the phase-out zone for both EITC (16 percent) and SNAP
(24 percent), 40 cents of every extra dollar you earn disappears in benefit
reductions. The numbers worsen as a family qualifies for more programs, such as
Medicaid, housing, or school lunches. As my earlier research has shown, these
work disincentives<a href="https://www.niskanencenter.org/work-disincentives-hit-the-near-poor-hardest-why-and-what-to-do-about-it/"><span style="color: blue;"> hit the near-poor hardest</span></a>. People who have
worked their way up from nothing to the threshold of self-sufficiency do not
infrequently encounter “<a href="https://www.tandfonline.com/doi/full/10.1080/10875549.2020.1869665"><span style="color: blue;">disincentive deserts</span></a>” where more than 80 cents of
each extra dollar earned is taken away in benefit reductions. And that is
before you factor in commuting costs, child care, or work-related clothing.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">TIP would replace the additive
phase-outs with a uniform rate of, say, 35 percent applied to total net income.
Total net income would include the sum of earned income, cash benefits, and the
cash value of in-kind benefits, minus payroll taxes, income taxes (if any), and
work-related expenses. It might still be worth consolidating or cashing out
some of today’s alphabet-soup of in-kind public assistance programs, but that
would not have to be done all at once. Even if the TIP approach were, at first,
used to harmonize the phase-outs of just a single pair of programs, such as
EITC and SNAP, it would be a step forward. Ultimately, if applied to all public
assistance programs, the overall profile of household earnings and total net
incomes under TIP could be made mathematically indistinguishable from a classic
NIT.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 7.5pt; margin-left: 0in; margin-right: 0in; margin-top: 12.0pt; margin: 12pt 0in 7.5pt; mso-line-height-alt: 13.9pt; mso-outline-level: 2;"><b><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 19.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Value framing<o:p></o:p></span></b></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Let’s turn now to the second big issue
that must be addressed if an NIT is to become a politically realistic option in
today’s America. That is to present the concept in a way that appeals to the
values of voters and policymakers across the political spectrum. That is not as
impossible a task as it might seem, given the current degree of polarization.
Although progressive and conservative critics of the NIT often use different
language, a careful examination shows that many of their underlying concerns are
similar. Consider, first, the progressive point of view, which tends to
emphasize the values of inclusivity, accessibility, opportunity, and
empowerment.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Compared with our current welfare
system, an NIT is hands-down more inclusive. Despite all the billions spent,
the current system fails to help everyone who needs and deserves it. Even if
you draw a line at undocumented immigrants (an admitted point of contention), a
classic NIT would exclude fewer deserving recipients.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Accessibility is a closely related
virtue of the NIT. The current system too often denies access to people who
ought to be eligible because of excessive red tape, lack of English literacy,
lack of internet access, processing backlogs, waiting periods, and a host of
other reasons. A fully implemented NIT would make feasible automatic enrollment
— the ultimate in accessibility. Short of that, each step toward an NIT would
be a step toward simplicity and universality.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Next, progressives lament that
although America is supposed to be a land of opportunity, the current welfare
system can make that promise a sham. Work disincentives, discussed earlier, are
a case in point. What good is it to offer someone the opportunity to work
longer hours, seek a promotion, or apply for a higher-paying job if the lion’s
share of any extra earnings would disappear into the black hole of benefit
reductions? In contrast, an NIT promises to make opportunities for self-help a
reality.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Finally, an NIT opens a path to
empowerment and autonomy. Its inclusiveness and simplicity clear away the
paternalism of a system that, in the name of the supposed best interests of
beneficiaries, too often restricts their ability to lead their lives as they
see fit. Those restrictions make welfare disempowering and stigmatizing. Food
stamps, housing vouchers, even Medicaid suggest distrust of those they intend
to help. Cash is liberating.</span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">And what about conservatives?<i> </i>Although
the NIT was famously championed by Milton Friedman, one of their intellectual
icons, it has no shortage of conservative skeptics. Yet, on closer examination,
an NIT is in harmony with key conservative values of work, family, freedom, and
cost-effectiveness.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Perhaps the most stubborn myth among
conservatives is that the poor are lazy, and that giving them cash would make
them lazier still. But that myth crumbles under closer examination. For one
thing, the “lazy poor” are, in reality, few in number.<a href="https://www.niskanencenter.org/expanded-work-requirements-in-non-cash-welfare-programs/"><span style="color: blue;"> Data show</span></a> that more than half of those
who benefit from programs like SNAP and Medicaid already work at least
part-time. Of those who do not work, the great majority cite caretaking duties,
school, or poor health as the reason. If conservatives really want people to
achieve self-sufficiency, they should use fewer sticks and more carrots. A
properly designed NIT would encourage self-sufficiency by letting workers with
low incomes keep a larger share of each extra dollar they earn.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Next, the current welfare system not
only penalizes work, but also<a href="https://ifstudies.org/blog/how-tangled-welfare-programs-create-a-marriage-penalty-for-the-near-poor"><span style="color: blue;"> marriage and the family</span></a>, which many
conservatives (<a href="https://press.uchicago.edu/ucp/books/book/chicago/T/bo205550079.html"><span style="color: blue;">not without justification</span></a>) view as bedrocks of
economic security.<a href="https://ifstudies.org/blog/how-to-fix-work-disincentives-and-marriage-penalties-in-americas-social-safety-net"><span style="color: blue;"> The best way to lift the marriage penalties</span></a> in
the current welfare system would be to cash out welfare benefits and
consolidate programs wherever possible – exactly what an NIT would do.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Freedom is the third key value that
should attract conservatives to an NIT. What, do you say anything with the word
“tax” is a threat to freedom? That is a narrow definition. There is a broader<a href="https://hypertextjournal.substack.com/p/hayek-republican-freedom-and-the"><span style="color: blue;"> “republican” view of freedom</span></a>, championed by
Friedrich Hayek and other writers that conservatives revere. Republican freedom
emphasizes the ability of individuals to live their lives according to their
own decisions and plans, rather than being subject to the will of others.
Compared with today’s welfare system, the NIT greatly enhances individual
freedom in the republican sense. Cash gives greater latitude to live your own
life as you choose than do food stamps or housing vouchers. And, since everyone
is eligible for the NIT, the right to enrollment does not depend on the whim of
some social worker.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Finally, morality aside, conservatives
see a great deal of waste in our current welfare system. An NIT would enhance
the cost-effectiveness of social programs by reducing administrative costs, by
making sure that fewer of the poor fall between the cracks, and by encouraging
work and self-sufficiency.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Running through these lists, we see
how progressive and conservative values converge when applied to an NIT. Sure,
the language may differ. But aren’t the autonomy and empowerment that concern
progressives just a different way of expressing what conservatives call
republican freedom? Aren’t opportunity and work incentives two sides of the
same coin? Isn’t the inherent administrative simplicity of an NIT both a way of
enhancing access and at the same time making social insurance more cost
effective? The same features of today’s welfare system that upset both
progressives and conservatives ought to make both of them love an NIT.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; margin-bottom: 7.5pt; margin-left: 0in; margin-right: 0in; margin-top: 12.0pt; margin: 12pt 0in 7.5pt; mso-line-height-alt: 13.9pt; mso-outline-level: 2;"><b><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 19.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">Getting there from here<o:p></o:p></span></b></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">I started by calling a negative income
tax the carbon tax of social policy – attractive on paper but never enacted. In
fact, though, an NIT and a carbon tax differ in an important way that makes the
NIT even harder to implement. The difference is this: A carbon tax would
improve environmental performance whether it were the sole emissions reduction
policy or an add-on to existing regulations and subsidies. In contrast, a
conventional NIT added to the already crushing work disincentives of our
current welfare system would be a disaster.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">It is utopian to think of wiping the
slate clean and starting from scratch with a stand-alone NIT. Instead, NIT
advocates (and advocates of the NIT’s close cousin, a UBI) need to figure out a
step-by-step approach. But there is a catch: Not any random series of steps
will work. What we need is a sequence of reforms, each of which meet three
criteria:<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">1. Each step should be small
enough to enact with a single piece of legislation, regulatory action, or
executive order. A<a href="https://www.niskanencenter.org/bipartisan-reform-options-for-the-child-tax-credit/"><span style="color: blue;"> refundable Child Tax Credit</span></a> is an
example of one such step, and one that is not totally beyond the realm of
legislative feasibility.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">2. Each step should improve both
the lives of the poor and the performance of the economy even while other
programs remain in place. For example, given the evidence that people value
cash more than equally costly in-kind benefits, a cash-out option for SNAP
could improve the lives of the poor while cutting the burden on federal
taxpayers.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">3. Each step should be a win-win
as viewed from values of both progressives and conservatives. The progressive
values of inclusivity, accessibility, opportunity, and empowerment are, after
all, complementary to the conservative values of work, family, freedom, and
cost-effectiveness. With a little imagination, each step toward reform can be
sold as a plus to both sides.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 19.2pt; margin-bottom: 0in; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;">This essay has been too short to offer a complete road map
to repackaging the NIT for today’s America. I have tried, though, to give
examples that make such a project look at least a little more feasible.<o:p></o:p></span></p><p class="MsoNormal" style="background: white; line-height: 19.2pt; margin-bottom: 0in; mso-margin-top-alt: auto;"><span style="color: #404040; font-family: "Times New Roman",serif; font-size: 14.5pt; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 0pt; mso-ligatures: none;"><i>Adapted with permission from "A Negative Income Tax for Today's America," published in <a href="https://hypertextjournal.substack.com/p/a-negative-income-tax-for-todays">Hypertext</a>, a newsletter of Niskanen Center. Image generated by Gemini.</i></span></p>
<p class="MsoNormal"><o:p> </o:p></p>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-73141951168480128802023-06-29T09:53:00.000-07:002023-06-29T09:53:54.125-07:00The War on Inflation: Victory at What Cost? <div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOSygbI0yGd5J-8xkq5HzNXVnJGYeoRJxJLPL4T3A5raIKShOSi6Mi-jF1NSwYoyRUBT7ZUmIuEtk5-9SnLLXGuUAqAsQUvAAzl8KdzZz_yFIZV-4SkhW1OgXS1dWlS3E6pyL01FGRF5d8gyXF4o5jpzGdCULzhAAsbAevMGe-ONBtcnUAjMc6Rw3bKNzt/s977/P230629-1.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="691" data-original-width="977" height="226" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOSygbI0yGd5J-8xkq5HzNXVnJGYeoRJxJLPL4T3A5raIKShOSi6Mi-jF1NSwYoyRUBT7ZUmIuEtk5-9SnLLXGuUAqAsQUvAAzl8KdzZz_yFIZV-4SkhW1OgXS1dWlS3E6pyL01FGRF5d8gyXF4o5jpzGdCULzhAAsbAevMGe-ONBtcnUAjMc6Rw3bKNzt/s320/P230629-1.png" width="320" /></a></div><p>For more than a year, the Fed, led by its chair Jerome
Powell, has been fighting the worst outbreak of inflation in the United States in 50 years. <a href="http://tiny.cc/NPLion">This slideshow</a>, first presented at the Northport MI Lions Club on July 28, 2023, addresses three questions: </p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"></p><ol style="text-align: left;"><li>How are we doing? </li><li>Why is inflation so hard to reverse?</li><li>When will things get back to normal?</li></ol><div>The bottom line: The good news is that inflation is falling faster than we might think from reports in the mass media. The bad news is that things are not yet back to normal. Trying to push the inflation fight too fast could do more harm than good.</div><div><br /></div><div><a href="http://tiny.cc/NPLion">View the full slideshow </a>for details.</div><o:p></o:p><p></p>
<p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><o:p></o:p></p>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-45660571067986727072023-04-15T09:24:00.000-07:002023-04-15T09:24:13.945-07:00Corporate Political Responsibility in a Captured Economy<p><span style="background-color: white; color: #222222; font-family: "Source Sans Pro"; font-size: 18px;"></span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEiuHZqrxjqJuyKbDz7SHhcmvmcK_1Sd3O0btz17ovFx4rfYCsM10hWyi-Fa5rt1E9FLmZTYs-h9zFuLYsVjbJGmMgUUwFdela4RzKN9qNic492btZw0CK65WO6lPVNjU-p-ga9mjq-8WU7RyDO6XCA4E8uPetjxJIwJdjzQDmBlvBKllqKrvWxi6a5ijQ" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="" data-original-height="720" data-original-width="960" height="240" src="https://blogger.googleusercontent.com/img/a/AVvXsEiuHZqrxjqJuyKbDz7SHhcmvmcK_1Sd3O0btz17ovFx4rfYCsM10hWyi-Fa5rt1E9FLmZTYs-h9zFuLYsVjbJGmMgUUwFdela4RzKN9qNic492btZw0CK65WO6lPVNjU-p-ga9mjq-8WU7RyDO6XCA4E8uPetjxJIwJdjzQDmBlvBKllqKrvWxi6a5ijQ" width="320" /></a></div><p></p><p><span style="background-color: white; color: #222222; font-family: "Source Sans Pro"; font-size: 18px;">The social responsibility of business has been debated for years. One point of view follows</span><span style="background-color: white; color: #222222; font-family: "Source Sans Pro"; font-size: 18px;"> </span><a href="https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html" rel="noreferrer noopener" style="box-sizing: border-box; color: maroon; font-family: "Source Sans Pro"; font-size: 18px; pointer-events: auto; text-decoration-line: none;" target="_blank">Milton Friedman</a><span style="background-color: white; color: #222222; font-family: "Source Sans Pro"; font-size: 18px;">’s maxim, “In a free society … there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.” Others argue for the priority of ESG values, even if they conflict with profit-making. A more pragmatic perspective sees ESG simply as a set of tools that facilitates risk assessment and enhances long-run profitability. </span></p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">The <em style="box-sizing: border-box;">political</em> responsibility of corporations has, unfortunately, received much less attention. Friedman himself <a href="https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html" rel="noreferrer noopener" style="background-color: transparent; box-sizing: border-box; color: maroon; pointer-events: auto; text-decoration-line: none;" target="_blank">alluded</a> to political responsibility when he added the proviso that firms must “stay within the rules of the game” by pursuing profit through “open and free competition without deception or fraud.” Unfortunately, he failed to follow up by asking the critical question: In a free society, <em style="box-sizing: border-box;">who </em>makes the rules?</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;"><strong style="box-sizing: border-box;">The rules of the game</strong></p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">There is little controversy about the basic rules of the game for free-market capitalism: respect property rights, compete openly and honestly based on price and quality, and follow common-law principles of fraud, nuisance, and negligence. The hot-button disputes over corporate political responsibility pertain not to the basic rules themselves, but to their application to issues that dominate the daily news, like environmental protection, railroad safety, or workers’ rights.<span></span></p><a name='more'></a><p></p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">Friedman seemed to posit a sharp division between business and government. Government has the responsibility to impose taxes and spend money for social purposes, such as controlling pollution, subject to free and fair elections and an elaborate system of checks and balances. Businesses are then supposed to follow the law as they find it and leave it to the government to make laws and levy taxes.</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">Unfortunately, that is not how the world works.</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;"><strong style="box-sizing: border-box;">From Friedman to the captured economy</strong></p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">In the real world, corporations do not just mind their own affairs and leave politics to others. Instead, they contribute company funds to political campaigns and political action committees to help elect candidates they like and defeat candidates they don’t like. After legislators are in office, they lobby them, directly or through trade associations, to vote for or against laws that affect their industry. They lobby the executive branch and its regulatory agencies to carry out the laws in ways they like. They bring lawsuits or intervene in actions brought by others to obtain favorable interpretations of the rules from judges. More broadly, they engage in civic discourse through advocacy, philanthropy, social media, and any other channels that grant them reach.</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">In aiming to enhance profits by shaping the rules of the game, all this corporate political activity suggests a very different division of labor from what Friedman envisioned. Instead, what we see is a game in which businesses do everything in their power to shape rules that maximize their profits, and then make sure those rules are enforced to their own benefit and to the detriment of others. </p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">This can no longer be called a free market. In fact, there is a name for it: <em style="box-sizing: border-box;">the Captured Economy</em>. In the captured economy, business and government are inextricably intertwined. The powers of government become instruments of corporate enterprise rather than constraints on it. </p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;"><strong style="box-sizing: border-box;">Corporate responsibility in a captured economy</strong></p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">The captured economy is anathema to supporters of free markets and constitutional democracy. But what to do about it?</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">Some reformers aim to create, or recreate, a Friedmanite world in which democratic government makes the rules and business follows them. Some, for example, advocate a <a href="https://thehill.com/homenews/house/3819814-democrats-introduce-constitutional-amendment-to-reverse-citizens-united-campaign-finance-ruling/" rel="noreferrer noopener" style="background-color: transparent; box-sizing: border-box; color: maroon; pointer-events: auto; text-decoration-line: none;" target="_blank">constitutional amendment</a> to overturn the 2010 Supreme Court case <em style="box-sizing: border-box;">Citizens United</em>, impose limitations on corporate political spending, and replace it with public financing of political campaigns. However, that approach faces serious obstacles and limitations. </p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">The obvious political obstacles in today’s polarized America are only part of the story. Even if corporate political spending were limited, it is not the only avenue of corporate political activity. Furthermore, participation in public discourse, funding of nonprofits, and engagement in legislation and regulatory rulemaking cannot simply be cut off. The right to petition the government for redress of grievances is itself, for good reasons, explicitly protected by the Constitution.</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">Solving the whole problem of corporate political responsibility at a blow is asking too much. A recent initiative by the <a href="https://erb.umich.edu/partner-with-erb/erb-principles/" rel="noreferrer noopener" style="background-color: transparent; box-sizing: border-box; color: maroon; pointer-events: auto; text-decoration-line: none;" target="_blank">Erb Institute</a> at the University of Michigan takes a more modest, but crucial, first step by defining exactly what is meant by corporate political responsibility (CPR). </p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">The Erb CPR principles begin by defining political activity broadly to include not just direct spending but all participation in public political discourse, including actions undertaken indirectly through trade associations and other third parties. They then pose four questions to determine whether specific corporate political activities are compatible with free markets and constitutional democracy:</p><ul style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin-bottom: 26px; margin-left: auto; margin-right: auto; overflow-wrap: break-word; padding: 0px;"><li style="box-sizing: border-box; font-size: 14px !important; line-height: inherit; margin-bottom: 10px; margin-left: 21px;"><strong style="box-sizing: border-box;">Is the activity legitimate? </strong>Does it reflect the company’s views, not those of the individual managers or officers? Does it pressure employees, shareholders, or other stakeholders to engage in political activities they would not voluntarily endorse?</li><li style="box-sizing: border-box; font-size: 14px !important; line-height: inherit; margin-bottom: 10px; margin-left: 21px;"><strong style="box-sizing: border-box;">Does the activity maintain accountability? </strong>Do political activities align with the company’s stated commitments, purposes, values, and goals?</li><li style="box-sizing: border-box; font-size: 14px !important; line-height: inherit; margin-bottom: 10px; margin-left: 21px;"><strong style="box-sizing: border-box;">Is the activity undertaken responsibly? </strong>Are political activities consistent with healthy “rules of the game?” With free and open competition? With minimum adverse impact on stakeholders other than owners? With respect for established science?</li><li style="box-sizing: border-box; font-size: 14px !important; line-height: inherit; margin-bottom: 0px; margin-left: 21px;"><strong style="box-sizing: border-box;">Are the activities undertaken transparently? </strong>Does the company communicate openly and honestly about its political activities, including those of trade associations or other third parties? Does it provide good-faith information and expertise to all levels of government as needed to support informed, effective policymaking?</li></ul><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">To ensure that these principles do not remain mere window dressing, companies that publicly subscribe to the principles are required to implement certain observable actions regarding political spending, board involvement, reporting, and transparency.</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">These principles of legitimacy, accountability, responsibility, and transparency do not require corporate leaders to prioritize the interests of outside stakeholders over their duties to shareholders. They are fully consistent with the principle of shareholder primacy, including the primacy of shareholders in determining the degree to which the corporation should balance profit with ESG values.</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">What they do require is that corporate leaders not use their political activities to change the rules of the game in ways that encroach on the public interest. That includes the broadest such interests: the maintenance of constitutional democracy, the rule of law, civic freedoms, effective, transparent and accountable civic institutions, and equitable access to civic and political processes.</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">At first glance, the CPR principles seem very abstract. To make them less so, try applying them to items from the latest news. For example, in February 2023, a Norfolk Southern freight train carrying hazardous materials derailed in East Palestine, Ohio, causing serious health concerns and threatening property values. The railroad’s executive vice president and chief operating officer Paul Duncan was quoted by the <a href="https://www.washingtonpost.com/transportation/2023/02/18/norfolk-southern-derailment-ohio-train-safety/" rel="noreferrer noopener" style="background-color: transparent; box-sizing: border-box; color: maroon; pointer-events: auto; text-decoration-line: none;" target="_blank">Washington Post</a> as having told analysts, prior to the accident, that “operating safely is the right thing for our employees, customers, shareholders and the communities that we serve … even one serious incident is too many.” Yet, as reported by both the Washington Post and the <a href="https://www.nytimes.com/2023/02/17/opinion/ohio-train-derailment-safety-regulation.html" rel="noreferrer noopener" style="background-color: transparent; box-sizing: border-box; color: maroon; pointer-events: auto; text-decoration-line: none;" target="_blank">New York Times</a>, Norfolk Southern had vigorously lobbied against federal regulatory efforts to improve rail safety. Were the company’s political activities well-aligned with its stated values and goals? Were they consistent with healthy market “rules of the game” that minimize costs imposed on stakeholders other than owners?</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">In short, the CRP principles offer a checklist for asking, “Do I want to invest in this company? “Do I want to buy from or sell to it?” “Do I want to spend my own time and resources disputing what it says in public discourse?” </p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;"><strong style="box-sizing: border-box;"><em style="box-sizing: border-box;">The bottom line</em></strong></p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">No set of principles, whether those of the Erb Institute or any other, is going to convert corporate leaders to sainthood. They are, however, a big step forward over the naïve view that corporations can plead “just following the rules of the game” while covertly undertaking political activities that skew those rules in favor of profits for their owners at the expense of broader public interests. </p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">There is a lot at stake here. Some 80 years ago, Joseph Schumpeter wrote <a href="https://www.amazon.com/Capitalism-Socialism-Democracy-Perennial-Thought/dp/0061561614" rel="noreferrer noopener" style="background-color: transparent; box-sizing: border-box; color: maroon; pointer-events: auto; text-decoration-line: none;" target="_blank">in <em style="box-sizing: border-box;">Capitalism, Socialism, and Democracy</em></a> that capitalism would destroy itself when the classes that capitalism had made successful turned against that very system of private property and freedom in order to entrench their own power. It is not too far-fetched to see the rise of the captured economy as a step toward that outcome. A world in which corporations make their own rules of the game, concentrating wealth and political power ever more tightly in their own hands, is not one in which either free markets or liberal democracy can survive. Yet, that is the direction in which unchecked corporate political irresponsibility is leading us. It is a slippery slope that only ends badly for all of us.</p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; font-size: 18px; margin: 0px auto 26px; overflow-wrap: break-word;">The Erb CPR principles will be a worthwhile endeavor even if they do nothing more than help guide corporations through the politically charged environment in which we find ourselves today. </p><p style="background-color: white; box-sizing: border-box; color: #222222; font-family: "Source Sans Pro"; margin: 0px auto 26px; overflow-wrap: break-word;"><i style="background-color: transparent;"><span style="font-size: medium;"><a data-saferedirecturl="https://www.google.com/url?q=https://www.promarket.org/2023/04/10/corporate-political-responsibility-in-a-captured-economy/&source=gmail&ust=1681559619018000&usg=AOvVaw1N93W1a3FLfvcGtdvpvd2Z" href="https://www.promarket.org/2023/04/10/corporate-political-responsibility-in-a-captured-economy/" style="color: #1155cc;" target="_blank">Originally published </a>by <span style="box-sizing: border-box;">ProMarket</span> from the Stigler Center at the University of Chicago Booth School of Business. For republication permission please contact <a href="mailto:ProMarket@chicagobooth.edu" style="color: #1155cc;" target="_blank"><span style="color: maroon; font-family: Source Sans Pro;"><span style="box-sizing: border-box;">P</span></span><span style="box-sizing: border-box;"><span style="color: maroon;"><span style="box-sizing: border-box;">roMarket</span></span> </span></a>. Photo courtesy of <a href="https://pixabay.com/photos/meeting-room-board-room-10270/">Pixabay</a> . </span></i></p><div><br style="background-color: white; color: #222222; font-family: Arial, Helvetica, sans-serif; font-size: small;" /></div>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-68309347835941665012023-03-17T08:09:00.006-07:002023-04-15T09:07:45.265-07:00Supercore Inflation is Worth Watching, but it is Probably Not a Good Policy Target<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjGtx_0S7RXN2MTcBIsl6f26EewhuIH4pDhFglXJtkjUD82Cxl36jjVPeVQe7sBNz0M2vtOenq7f-bYRbx2T7qujf9MbLluntXy4NPlNC20-b39YVFzxPid8ImI30H3DpNxSDmAyGTv-tCylyHHQIZEllHCxuhc4KAVshuzcbqikj7TrXw-Jq7AZAcu_w" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="" data-original-height="391" data-original-width="675" height="116" src="https://blogger.googleusercontent.com/img/a/AVvXsEjGtx_0S7RXN2MTcBIsl6f26EewhuIH4pDhFglXJtkjUD82Cxl36jjVPeVQe7sBNz0M2vtOenq7f-bYRbx2T7qujf9MbLluntXy4NPlNC20-b39YVFzxPid8ImI30H3DpNxSDmAyGTv-tCylyHHQIZEllHCxuhc4KAVshuzcbqikj7TrXw-Jq7AZAcu_w=w200-h116" width="200" /></a></div>Although headline inflation continues to fall and
unemployment is near a 50-year low, the Federal Reserve still faces some tricky
policy decisions over the next few months. Many of these have to do with the
unusual volatility of relative prices during the 2021-2022 inflation, a topic
that I wrote about in a <a href="https://www.niskanencenter.org/the-inflation-of-2021-22-was-different-what-we-should-learn-from-it/">recent
commentary</a>. This piece picks up where that one left off. It focuses on the
behavior of the subset of prices that constitute the so-called <a href="https://www.wsj.com/articles/what-is-supercore-inflation-11675195498"><i>supercore</i></a>
relative to prices that are more flexible.<p></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Supercore prices have been in the news lately because some
observers think the Fed is targeting them. This commentary will argue a focus
on supercore inflation may have led to a more-than-prudent degree of monetary
policy tightening by late 2022 and early 2023. The fact that high
interest rates appear to have been a contributing factor to the banking crisis
that was touched off by the failure of Silicon Valley Bank in March only
strengthens the case.<o:p></o:p></p>
<p class="MsoNormal"><b>So, what is the supercore?<o:p></o:p></b></p>
<p class="MsoNormal">So, what, exactly, is the supercore? The notion of ordinary
core prices is familiar enough. The core consumer price index, for example, is
the ordinary CPI with the highly volatile prices of food and energy removed.
The personal consumption expenditures index, a CPI alternative, also has a core
version that removes the same two sectors. Measures of the supercore go further
by removing still more items.<span></span></p><a name='more'></a><o:p></o:p><p></p>
<p class="MsoNormal">The impression that the Fed is targeting supercore inflation
was reinforced by a <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230201.pdf">press
conference</a> held on February 1 by Chairman Jerome Powell. In answering a
reporter’s question, Powell divided prices into three sectors. “In the goods
sector,” he said, “you see inflation now coming down because supply chains have
been fixed … In the housing services sector, we expect inflation to continue
moving up for a while but then to come down … So, in those two sectors, you’ve
got a good story. The issue is that we have a large sector called nonhousing
service — core nonhousing services, where we don’t see disinflation yet.”
Although he does not use the term, what Powell calls core nonhousing services
is what others call the supercore.<o:p></o:p></p>
<p class="MsoNormal">It is almost as if Powell is treating the problem of
inflation the way a frontline surgeon might treat a wounded soldier. “We’ve
stopped the bleeding in his leg; we’ve got the bullet out of his shoulder; now
all we’ve got to do is get that pesky piece of shrapnel out of his neck.” But
is continuing to tighten monetary policy until supercore prices, too, stop
rising really a good idea? Read on.<o:p></o:p></p>
<p class="MsoNormal"><b>Why supercore prices are sticky<o:p></o:p></b></p>
<p class="MsoNormal">Economics 101 teaches us that market prices rise or fall in
response to changes in supply and demand. True enough, but some prices respond
faster than others. At the flexible end of the spectrum, the prices of oil or
wheat quoted on commodity exchanges change by the minute. At the sticky end of
the spectrum, prices like city bus fares or college tuitions are likely to
change just once a year, if that often.<o:p></o:p></p>
<p class="MsoNormal">Economists suggest a variety of reasons for price
stickiness. Some point to the costs of announcing and implementing price
changes, such as a restaurant’s cost of printing new menus or a laundromat’s
cost of adjusting the coin mechanisms on its washers and dryers. Others
emphasize strategic considerations, such as the fear that the first seller to
raise prices might lose market share to competitors who are slower to change. Marketing
considerations like the fear of annoying loyal customers may be another factor.
And prices that are subject to long-term contracts often can change only when
those contracts expire.<o:p></o:p></p>
<p class="MsoNormal">The <a href="https://www.atlantafed.org/research/inflationproject/stickyprice">Atlanta
Fed</a> publishes monthly indexes for a flexible CPI and a sticky CPI. Using an
admittedly arbitrary cutoff, it classifies flexible prices as those that
change, on average, at least once every 4.3 months and sticky prices as those
that change less frequently. That division makes about half the prices in the
CPI flexible and half sticky. If weighted by value, the split is about 30
percent flexible and 70 percent sticky.<o:p></o:p></p>
<p class="MsoNormal">The bulk of the sticky CPI consists of services. The Atlanta
Fed derives a “core sticky CPI” by removing its only food or energy element,
“food away from home.” It then derives a measure called “core sticky CPI ex
shelter” by further removing the category “owner equivalent rent.” That index,
more than 90 percent of which is made up of services, covers 45 percent of the
full CPI.<o:p></o:p></p>
<p class="MsoNormal">In what follows, I will use the Atlanta Fed’s core sticky
CPI ex shelter as a measure of the supercore. It is probably not the exact
measure of “core nonhousing services” to which Powell referred at his press
conference, but if not, it is very close.<o:p></o:p></p>
<p class="MsoNormal">Figure 1 shows year-on-year data for the rate of change of
the Atlanta Fed’s sticky and flexible price indexes since 1967. Not
surprisingly, the flexible index is the most volatile. At major turning points,
changes in the sticky price inflation lags visibly behind changes in flexible
price inflation by an amount ranging from half a year to well over a year.<o:p></o:p></p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhfUP78eE6UhcfcnG6Pgb05gmssG_7LjT2UWWo5gAGMpIB2nitLMR__pDJNYFkr5NdM_1hD68O-Ds6Gg74NiJkfr3p8dO_4o4DS91CpMCNlmHnKYvdlo7OwlRSpzDq_v1hwp2VzouRX60DUc_UESTsO8EbO2kuHVUGfxF9WG2Csas0G0o-K7DXS4eOWmw" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="358" data-original-width="675" height="213" src="https://blogger.googleusercontent.com/img/a/AVvXsEhfUP78eE6UhcfcnG6Pgb05gmssG_7LjT2UWWo5gAGMpIB2nitLMR__pDJNYFkr5NdM_1hD68O-Ds6Gg74NiJkfr3p8dO_4o4DS91CpMCNlmHnKYvdlo7OwlRSpzDq_v1hwp2VzouRX60DUc_UESTsO8EbO2kuHVUGfxF9WG2Csas0G0o-K7DXS4eOWmw=w400-h213" width="400" /></a></div><br /><p class="MsoNormal"><b>The relative supercore index<o:p></o:p></b></p>
<p class="MsoNormal">Let’s turn now from the inflation rate of supercore prices
to the value of the supercore relative to the flexible CPI. Figure 1 showed the
long-term trend of inflation rates, but nothing about the relative level of
sticky and flexible prices. Figure 2 provides the missing information. For easy
comparison, the top line, measured on the left-hand vertical axis, repeats the
rate of flexible price inflation as shown in Figure 1. The lower line, measured
on the right-hand vertical axis, shows the ratio of the level (not the
inflation rate) of supercore CPI to the level of the flexible CPI, with January
1967 equal to 100. I will refer to this ratio as the <i>relative supercore
index. </i>A value above the trendline shows that the nonhousing services in
the supercore index are more expensive than usual relative to the goods in the
flexible index. Similarly, a value below the trendline shows that increases in
the prices of the items in the supercore have fallen behind those of more
flexible goods.<o:p></o:p></p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEi2OhOdUvbp0SFIz8k-eHEgQBoKe9acmLwpSC0Dr1tF_ETwAnsptVDCuR0uqFB8rPFv1ducSn15x_F4Ttz2snK4PNpuYKuneJKVUmb5t202bLwGv9bIXUaoRY-tb9O2-VXUArSC5OrM0fIrsHQCHe0SNPOk3f-dcbVDMdie_dfFa7VXXwQz98m8a-jn7w" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="391" data-original-width="675" height="231" src="https://blogger.googleusercontent.com/img/a/AVvXsEi2OhOdUvbp0SFIz8k-eHEgQBoKe9acmLwpSC0Dr1tF_ETwAnsptVDCuR0uqFB8rPFv1ducSn15x_F4Ttz2snK4PNpuYKuneJKVUmb5t202bLwGv9bIXUaoRY-tb9O2-VXUArSC5OrM0fIrsHQCHe0SNPOk3f-dcbVDMdie_dfFa7VXXwQz98m8a-jn7w=w400-h231" width="400" /></a></div><div class="separator" style="clear: both; text-align: center;"><br /></div>
<p class="MsoNormal">Two features stand out in Figure 2.<o:p></o:p></p>
<p class="MsoNormal">First, as the trendline indicates, the ratio of supercore to
flexible prices has increased by about 20 percent over time when cyclical ups
and downs are smoothed out. My best guess is that this trend is largely due to
the “<a href="https://en.wikipedia.org/wiki/Baumol_effect">Baumol effect</a>.”
As William Baumol and W. G. Bowen noted in a 1965 paper, there is a tendency
for labor productivity to increase more rapidly in goods markets than in
service markets. (It takes far fewer farm workers to harvest a ton of wheat
than it did in the 19<sup>th</sup> century, but the same number of musicians to
perform a Beethoven string quartet.) Because of slower productivity growth, the
prices of services tend to rise faster than the prices of goods. Since more
than 90 percent of the flexible CPI consists of goods while more than 90
percent of the supercore consists of services, the Baumol effect provides a
plausible explanation of the upward trend of the relative supercore index.<o:p></o:p></p>
<p class="MsoNormal">Second, even a casual look at Figure 2 suggests that the
relative supercore index tends to drop below its trend during periods when
flexible prices are especially volatile. The stagflationary 1970s are one
example. The supercore dropped below trend again in the years around the global
financial crisis of 2007-2008, when the flexible-price inflation rate was
highly variable, even though not as high as in the 1970s. In contrast, during
the period of relative stability from the mid-1980s to the early 2000s – the
Great Moderation – the supercore recovered relative to the flexible CPI.<a href="#_ftn1">[1]</a><o:p></o:p></p>
<p class="MsoNormal"><b>Implications for policy<o:p></o:p></b></p>
<p class="MsoNormal">Back now to our main theme – does targeting supercore
inflation make sense? I can think of three reasons why it might not.<b><i> </i></b></p>
<p class="MsoNormal"><i><b>Lags matter. </b></i>The first reason is that monetary policy operates only with
a considerable lag. <a href="https://www.atlantafed.org/about/atlantafed/officers/executive_office/bostic-raphael/message-from-the-president/2022/11/15/long-and-variable-lags-in-monetary-policy">Raphael
Bostic</a>, president of the Atlanta Fed, wrote recently that “a large body of
research tells us it can take 18 months to two years or more for tighter
monetary policy to materially affect inflation.” A recent paper by <a href="https://www.kansascityfed.org/research/economic-bulletin/have-lags-in-monetary-policy-transmission-shortened/">Taeyoung
Doh and Andrew T. Foerster</a> of the Kansas City Fed suggest that because of
changes in the way the Fed implements tightening, those lags may be shorter now
than they used to be. Even so, the new estimates show a lag of a full year for
the effect on inflation and as much as three years for the effect on
unemployment, with a wide range of uncertainty.<o:p></o:p></p>
<p class="MsoNormal">The Fed did not start its program of rate increases until
March 2022. Taken at face value, that would mean we won’t feel the full effects
of recent tightening until the fall of 2023 – or later this spring, at the
earliest, if the new estimates hold up. Of course, the lag is less for some
prices than others. Since supercore prices, by definition, are among the
stickiest, it would seem that they would be subject to a lag toward the long
end of the estimated range.<o:p></o:p></p>
<p class="MsoNormal">Lags matter for policy. If you want to nip an inflationary
outbreak in the bud, the time to act is not when you see the relevant numbers
starting to climb, but months in advance. Similarly, if you want to head off an
impending recession, then you should not wait for unemployment to start rising
or for inflation to fall all the way back to its target. You should ease off
well before that point.<o:p></o:p></p>
<p class="MsoNormal">By that reasoning, critics may be right to say that in
retrospect, the Fed would have better controlled inflation had it started to
tighten earlier than the spring of 2022. However, continued tightening into
2023 could equally turn out to be a mistake. To see why, we need to understand
the role the inflation expectations play in the making of monetary policy.<o:p></o:p></p>
<p class="MsoNormal"><b><i>Forecasting and expectations. </i></b>In a world with lags, optimal policy calls for action in
advance of economic turning points. For that reason, some economists maintain
that “inflation targeting” should instead be called “inflation-forecast
targeting.” Under such a policy, central banks would cautiously adjust interest
rates to keep inflation as close as possible to its forecast path, rather than
waiting to raise rates until inflation got out of control.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">That being the case, one argument for targeting core
inflation is that the core reflects underlying trends in the economy. In
contrast, indexes that are strongly affected by the flexible prices of items
such as food and energy are more subject to random exogenous shocks. At the
same time, central banks should closely monitor inflation expectations, which
can be thought of as the inflation forecasts of consumers and producers.<o:p></o:p></p>
<p class="MsoNormal">In a methodological paper linked from the home page of the
Atlanta Fed’s sticky price index, <a href="https://www.atlantafed.org/-/media/documents/research/inflationproject/stickyprice/sticky-price-cpi-supplemental-reading.pdf">Michael
F. Bryan and Brent Meyer</a> argue that sticky prices have especially close
links both to expectations and to future inflation outcomes. In particular,
they show that an index of sticky prices provides more accurate forecasts 3,
12, and 24 months ahead than does an index of flexible prices.<a href="#_ftn2">[2]</a>
However, the correlations they observe do not necessarily constitute an
argument for using either sticky prices in general or supercore prices as a
policy target, nor do they make such an argument.<o:p></o:p></p>
<p class="MsoNormal">In particular, it seems questionable whether the relatively
high rate of supercore inflation in early 2023 was primarily driven by
expectations. Look at the far-right tail of the supercore series in Figure 2.
Between May 2021 and May 2022, the relative supercore index dropped by 25
points – its sharpest drop ever. Although it began to recover just a bit in the
second half of the year, by February, the relative supercore index had
recovered only about a third of the amount by which it had dropped below trend.
That being the case, ongoing price increases in the supercore sector may not,
after all, reflect service providers’ expectations of ongoing inflation in the
economy as a whole. Rather, they may simply be trying to get their heads back
above water after two years in which their own prices spectacularly failed to
keep up with the rise of wages and the prices of material goods.<o:p></o:p></p>
<p class="MsoNormal">If observed correlations among supercore prices,
expectations, and near-term inflation outcomes turn out to not to be causal in
nature, any attempt to use supercore prices for forecasting or targeting risks
running afoul of <a href="https://en.wikipedia.org/wiki/Goodhart%27s_law">Goodhart’s
law</a>. According to that principle, statistical relationships tend to break
down when they are used for policy purposes. The demise of the quantity theory
of money and the subsequent abandonment of money-supply targets by central
banks are often cited as a case in point.<o:p></o:p></p>
<p class="MsoNormal"><b><i>The health of the supercore.</i> </b>But Goodhart’s law to one side, shouldn’t we welcome the
Fed’s efforts to smother inflation in the last stronghold where it survives? As
consumers, don’t we consider low bus fares and manicure prices good things in
themselves? The answer, I think, is yes – as long as firms remain able to
provide a steady supply of high-quality services. But if relative prices of
supercore services stay low indefinitely even while their costs have risen,
suppliers will sooner or later come under real pressure.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Consider wages. According to the <a href="https://www.bls.gov/news.release/empsit.t17.htm">most recent data</a>, 85
percent of privately-employed workers are employed in the service sector and
just 15 percent in the production of goods. However, since workers are free to
move back and forth between the two, relative wages in the goods and service
sectors tend to be more stable than relative prices. In fact, between mid-2021
and mid-2022, while the relative supercore price index was dropping like a
stone, wages in the service sector as a whole actually rose fractionally
relative to wages of goods-producers.<o:p></o:p></p>
<p class="MsoNormal">Clearly, the combination of stable relative wages and
dramatically falling relative prices puts the service sector under pressure.
Add to that the fact that service firms need many non-labor inputs, such as
fossil fuels and motor vehicles, that are sold by goods-producers. Further, add
the fact that demand for goods <a href="https://www.brookings.edu/research/nine-facts-about-the-service-sector-in-the-united-states/">recovered
more rapidly</a> from the pandemic than did the demand for services, and you
get a picture of a sector at risk. Its cost-price squeeze is going to continue
until relative supercore prices claw back at least a good part of the amount by
which they have fallen below trend. It hardly seems like the right moment to
single out nonhousing service prices for special restraint.<o:p></o:p></p>
<p class="MsoNormal"><b>The bottom line <o:p></o:p></b></p>
<p class="MsoNormal">On the whole, I am enthusiastic about the Fed’s incipient
moves away from old-style Phillips curve models that lump all prices together
as a single variable, whether that is the CPI, the PCE, or something else. In
that regard, Powell’s division of prices into goods, shelter, and nonshelter
services is a step in the right direction. More detailed models could divide
prices into a greater number of buckets, add input-output relationships among
sectors, and include other details.<o:p></o:p></p>
<p class="MsoNormal">In my opinion, such models are likely to strengthen the case
for a more flexible approach to inflation targeting in times of high relative
price volatility like the past few years. Yes, it would be great to “Whip
Inflation Now,” as a mid-70s policy slogan put it. However, if the current
pattern of relative prices is out of whack, freezing it in place may not be a
great idea. It would be worth considering giving more leeway for relative price
adjustment even though that might slow the rate at which overall inflation
returns to target. If the market turmoil that followed the failure of SVB causes
the Fed to rethink its plans for further monetary tightening, that may turn out
to be a good thing.<o:p></o:p></p><p class="MsoNormal"><i>This article was originally published by <a href="https://www.niskanencenter.org/does-targeting-supercore-inflation-make-sense/">Niskanen Center,</a> and is reposted here by permission.</i></p>
<div align="center" class="MsoNormal" style="text-align: center;">
<hr align="center" size="2" width="100%" />
</div>
<p class="MsoNormal"><a href="#_ftnref1">[1]</a> A statistical test confirms the
visual impression that low values for the relative supercore index are
associated with volatile flexible-price inflation. The standard deviation over
a moving two-year period of the monthly increase or decrease in the flexible
CPI can serve as a measure of volatility. The correlation between that measure
and the relative supercore index is negative and statistically significant (R =
-.78).<o:p></o:p></p>
<p class="MsoNormal"><a href="#_ftnref2">[2]</a> Their paper was published in
2010. It will be interesting to see how their results hold up when more recent
data is include<o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br />Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-8155015499500359272023-02-01T12:00:00.003-08:002023-02-01T12:01:54.538-08:00Why the Inflation of 2021-22 Did Not Spiral Into Stagflation and Implications for Policy Going Forward<div class="separator"><p style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="" height="218" src="https://lh6.googleusercontent.com/xJHtURkJDineTZfW92SiUONvSK30aac-wMZ1QCqUQyKxuzoe-E5YXfyqykx5QV37hPfGJxAejncI7Gj5FPsJ9M06gjhJP12kQ5CL5qoArlbOwkDWXXBR2jl76AnajoXwHnA5nau0SzBmHDjXSUBw-Q=w231-h218" width="231" /></p></div><p>The ominous uptick in consumer prices that began in the spring of 2021 triggered alarm bells. By fall, the future looked dark to many observers. A market strategist cited by Reuters warned that the surge in inflation would not be transitory, as the Fed and Biden administration were then promising. “Sticky and sustained” inflation when the country was “past peak growth” would constitute “stagflation," <a href="https://www.reuters.com/business/1970s-all-over-again-stagflation-debate-splits-wall-st-2021-10-27/">he said</a>, reviving a term coined in the 1960s.</p><p>Yet there was no stagflation. The 2021-2022 episode turned out to be very different from the economic turmoil that bedeviled the U.S. economy from the 1960s into the early 1980s. Its brevity was one key difference. A second difference was a far greater volatility of relative prices. A third concerned the role of expectations. As this commentary will explain, these three differences, taken together, carry important lessons for policymakers. <span></span></p><a name='more'></a><p></p>
<!--/wp:paragraph-->
<!--wp:heading-->
<h2><strong>“Transitory” or not, the inflation of 2021-2022 was short-lived</strong></h2>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>To be sure, not everyone caught stagflation fever. Janet Yellen, the only person to have served as the president's chief economist, Fed chair and Treasury secretary, was one skeptic. “My judgment right now is that the recent inflation that we have seen will be temporary,” she <a href="https://thehill.com/policy/finance/555799-yellen-expects-high-inflation-rates-to-be-temporary/">told a congressional committee</a> in May of 2021. By the end of the year, even she <a href="https://www.reuters.com/business/1970s-all-over-again-stagflation-debate-splits-wall-st-2021-10-27/">had second thoughts</a>. In retrospect, though, her original assessment looks more right than wrong. By the end of 2022, inflation had come down even more quickly than it had risen, and did so while the unemployment rate was, surprisingly, falling. </p><p>Figure 1 provides a panoramic view of inflation over the past 60 years. The dots show monthly observations, stated as annual percentage rates, for the change in the consumer price index over the preceding three months. (For short, I will refer to these as “3-month rates.”) The solid line is a 12-month moving average of the 3-month rates. </p>
<!--/wp:paragraph-->
<!--wp:image {"align":"center"}-->
<figure class="wp-block-image aligncenter"><img alt="" height="344" src="https://lh5.googleusercontent.com/y33FU8LC161A_bGDrnrmEse1sTmaSS-_USUwcayULqXinE-qDzEX90Kxa5j3AFhprpnHIRFo-etU9U-vH8rUi437B909IC2fPtsSoEloxjs0JWOjKgZnWrtFOEUFTYGtq438TccV-oCYXcAlZiFlzg=w481-h344" width="481" /></figure>
<!--/wp:image-->
<!--wp:paragraph-->
<p>As the chart shows, the wave that peaked early in 1980 was the culmination of three that spanned nearly two decades. Each of the waves made the next one more difficult to handle because of its effects on expectations – a theme to which we return below. The inflation of 2021-22, in contrast, was a single spike that came after a 40-year period of relative price stability that has come to be known as the “Great Moderation.” </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Table 1 breaks down the four inflationary episodes into periods of accelerating inflation (shown in the chart by red arrows) and disinflation (green arrows). I count 2 percent per year, the Fed’s target inflation rate, as effective price stability. Accordingly, I measure accelerations from the last month in which 3-month inflation is near 2 percent to the peak 3-month rate, and disinflations from the peak 3-month rate to the month in which inflation drops below 2 percent, or a new acceleration begins. The table also shows the rate of acceleration or disinflation, measured as the number of basis points by which the rate of inflation changed each month. (A basis point is 1/100<sup>th</sup> of a percentage point.)</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEixQ-OmlZAjHqN0N4pN9Q6Um3J-zGwKrLaLgiYOZmROMuuq9KwndmNUL84mVz0EQMm-eAtpypQ5Sgm1NPw6XDSk3AdURjibwAFL8N-HcqKSKB2GDpLQjPmpxejxqtssriL-m0V1m6-QCg5NWOHDGSilhotLfdmZmaPTW3_Lg2mSO13_MuDRVtkvtJBMXQ" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="309" data-original-width="790" height="190" src="https://blogger.googleusercontent.com/img/a/AVvXsEixQ-OmlZAjHqN0N4pN9Q6Um3J-zGwKrLaLgiYOZmROMuuq9KwndmNUL84mVz0EQMm-eAtpypQ5Sgm1NPw6XDSk3AdURjibwAFL8N-HcqKSKB2GDpLQjPmpxejxqtssriL-m0V1m6-QCg5NWOHDGSilhotLfdmZmaPTW3_Lg2mSO13_MuDRVtkvtJBMXQ=w488-h190" width="488" /></a></div><br />As the table shows, the acceleration phase of the 2021-22 inflation was shorter than any of the earlier episodes, and the rate of acceleration, measured in basis points of change per month, was more rapid. The same is true of the disinflation that took place in the second half of 2022 compared to the earlier disinflations – it was shorter in duration and inflation slowed more rapidly. <p></p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>There has been much debate over whether this episode of inflation was transitory. By comparison with the 1960s and 1970s, I think the term fits, but there is no official definition. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>The chart ends in December 2022. Is it possible that inflation will come roaring back in 2023? That 2021-22 was just the first in a series of stagflationary waves like those of the past? The final section will return to that issue, but first we need to look at two other ways in which the recent inflation was different.</p>
<!--/wp:paragraph-->
<!--wp:heading-->
<h2><strong>Relative prices and why they matter</strong></h2>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>This section turns to a sometimes-neglected distinction between changes in the average level of prices and changes in relative prices. Figure 1 and Table 1 show only changes in the average price level. Obviously, though, the prices of individual goods and services do not all rise or fall at the same rate. Even while the average is rising, some prices rise more rapidly than others. During disinflations, some prices slow down or even fall while others continue to increase.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Changes in relative prices can be either the result of changes in the average price level, or the cause of such changes. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Consider, first, relative price changes that are caused by inflation – endogenous relative price changes, I will call them. In standard models, inflation is typically driven by changes in aggregate demand, such as those induced by expansionary fiscal or monetary policy. These expansionary policies put upward pressure on prices throughout the economy. However, even if the pressure is uniform, the response to it is not. Some prices change quickly, even by the hour. Others are “sticky.” They change infrequently and only when pressures for change accumulate.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>The Atlanta Fed publishes a separate index of sticky prices. According to <a href="https://www.atlantafed.org/research/inflationproject/stickyprice">its research</a>, prices of personal services, public transportation, and rents are among the stickiest, while prices of gasoline, fresh produce, and used cars are among the quickest to move. As a result of differential stickiness, a broad change in aggregate demand induces endogenous changes in relative prices as some markets react faster than others. If overall demand were to stabilize long enough, the sticky prices would eventually catch up. The original configuration of relative prices would then be restored, but at a higher average level.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>In other cases, exogenous changes in relative prices are the original impetus for inflation. Suppose, for example, that the world price of oil increases while policies affecting aggregate demand remain unchanged. One might think that as the higher oil price shows up at the gas pump, increased spending on gasoline would divert demand away from other goods, whose prices would fall, leaving average prices unchanged. But in practice, markets don’t work that way. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>For one thing, even if demand for goods other than oil falls, prices won’t adjust immediately in markets where they are sticky. Also, oil is not just a consumer good, but also an input into the production of other goods and services. As a result, prices of things like air fares and plastics made from petroleum will rise when the price of oil rises even if higher oil prices divert demand away from those markets. Consequently, the initial exogenous change in the price of oil triggers endogenous relative price changes throughout the world economy. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Episodes of inflation like this that begin with an exogenous change in the price of a single good are known as <em>supply shocks</em>. Supply shocks pose a dilemma for policymakers. When inflation is caused by rising aggregate demand, the Fed’s go-to remedy is to increase interest rates. As the effects spread throughout the economy, they reduce demand for all goods and services, and inflation slows. If rates are raised in a timely fashion and not by too much or too little, the overheated economy will cool off without major disruptions.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Inflation caused by a supply shock is trickier. Since a supply shock begins with an increase in the relative price of one good (oil in our example) and then spreads to other markets where that good is used as an input, there would be no way to prevent an increase in the average price level unless the prices and wages in some other sector fall. But stickiness gets in the way. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Not only are the prices of some goods inherently stickier than others, but many prices are stickier downward than upward. Consider apartment rents, for example. They are sticky even upwards, as we have seen, but even so, landlords will be quicker to raise rents in response to low vacancy rates than to cut rents in response to high vacancies. Wages are especially asymmetrical in their stickiness. Workers are rarely reluctant to accept offered wage increases, but if wages are cut, they protest, fall into an unproductive sulk, or simply quit.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>The asymmetrical stickiness of prices and wages is a major problem when the Fed sets out to fight supply-side inflation by repressing aggregate demand. Attempts to offset increases in some prices by pushing prices and wages down elsewhere disrupt markets, raise unemployment, and lower real output. To avoid that, the Fed may prefer to “accommodate” supply shocks by going easy with interest rate increases. Accommodation allows the average price level to rise by enough that even the prices and wages that need to fall in <em>relative</em> terms can do so without actual <em>nominal </em>reductions. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>The optimal amount of accommodation depends on just how volatile relative prices are. During the Great Moderation, the Fed settled on a target inflation rate of about 2 percent rather than aiming for zero inflation. That was seen as enough to accommodate the degree of volatility that was then considered normal. However, 2 percent is not necessarily enough to handle really large supply or demand shocks, or both at once. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Coming back from theory to the real world, Figure 2 adds data on the volatility of relative prices (red line, right axis) to the inflation data that was shown in Figure 1 (blue line, left axis).<a href="#endnote1"><sup>[1]</sup></a> Both variables are charted as 12-month moving averages.</p>
<!--/wp:paragraph-->
<!--wp:image {"align":"center"}-->
<figure class="wp-block-image aligncenter"><img alt="" height="340" src="https://lh5.googleusercontent.com/1_PmcRG7Cu70qeRFxwi8iKtnY8FdSJ1-dTIG-zXtKxomOa-_QwXz9QiF5anNQcJq7cWmoneDDfzffL11aclsU1hTk7F_m9jCMKYAH7LQF9FSGWW10adO_A6XYi9o-jo6AEnJ2OoPBa3b14qLQB_Lmg=w479-h340" width="479" /></figure>
<!--/wp:image-->
<!--wp:paragraph-->
<p>It is clear at a glance that inflation and relative price volatility are related. All four of the major inflation waves discussed in the previous section were associated with increases in relative price volatility. What is more, the deflationary episodes of 2008-2009 and 2014-2015 were also associated with spikes in volatility.<a href="#endnote1"><sup>[2]</sup></a></p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Note, though, that the volatility of relative prices during the 2021-2022 inflation was higher, both absolutely and in relation to the peak inflation rate, than during any of the inflationary episodes of the 1960s or 1970s. The volatility was due in large part to an unusual cluster of shocks, including pandemic-driven shifts in consumer spending from services to goods and back again; supply chain problems that sent prices of new and used cars soaring; and disruptions to world oil and grain markets stemming from the war in Ukraine. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>The last section of this commentary will discuss whether or not the fiscal and monetary response to these shocks was appropriate. Before that, however, I would like to point out one more way in which the inflation of 2021-22 differed from those of earlier decades.</p>
<!--/wp:paragraph-->
<!--wp:heading-->
<h2><strong>Inflation expectations, anchored and adaptive</strong></h2>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>Episodes of inflation and stagflation are often represented using <a href="https://www.niskanencenter.org/is-the-phillips-curve-back-when-should-we-start-to-worry-about-inflation/">Phillips curve</a> charts. Typically, these show the unemployment rate on the horizontal axis and the year-on-year rate of CPI inflation on the vertical axis. In the traditional version, the Phillips curve is a simple negatively sloped line. Over the course of a cyclical expansion, the unemployment rate falls and inflation rises. The economy slides up and to the left along the Phillips curve. After the cyclical peak is reached, it slides back down along the same path.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>In practice, though, the behavior of the economy over the business cycle is not that simple. Figure 3 shows the path of the U.S. economy before and after the inflation peaks of the 1970s and early 1980s. In each case, the unemployment rate began to rise before the peak rate of inflation was attained. After the inflation peak, the unemployment rate continued to rise for several months as inflation slowed. In the chart, that pattern, which gave rise to the term stagflation, forms series of arcs that rise and fall from left to right.</p>
<!--/wp:paragraph-->
<!--wp:image {"align":"center"}-->
<figure class="wp-block-image aligncenter"><img alt="" height="398" src="https://lh5.googleusercontent.com/RgtGsDs2c5l9I5TK8_Kd44nq58wwgRo0HSkyG89Rxq_tAxsbJY7FtU3RCoEZsomy3bKIflR3SCITAwuBAtO-70MKZQ2dHU_KUqECReLqLjX5aVKBaqF-rW0le3NkBRhylzrAw7mZyWZ5iUEG0XJFwg=w429-h398" width="429" /></figure>
<!--/wp:image-->
<!--wp:paragraph-->
<p>Economists explain the left-to-right arcs in terms of the way monetary policy interacts with inflation expectations.<a href="#endnote1"><sup>[3]</sup></a> The patterns in Figure 3 were a consequence of the way workers and producers <em>adapted</em> their expectations in the wake of repeated waves of inflation in the 1960s and 1970s. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Here is one way to tell the story: Suppose you are unemployed and looking for work. If a prospective job offers to pay enough to cover not just the rent and grocery bills you are now paying, but the higher bills you expect in the future, you will take it. If not, you will continue looking. Or suppose you are a firm making your production and marketing plans for the coming year. You have plenty of customers, but you expect wages and the prices of inputs to rise, so you ramp up production and raise your own prices preemptively in an effort to preserve your profit margin.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>These adaptive behaviors work fine as long as the economy remains strong, but suppose now that the Fed raises interest rates to slow the growth of demand. Workers looking for jobs take longer to find them. That by itself would be enough to raise the unemployment rate. At the same time, firms see sales slow and inventories start to rise. They cut output and lay people off, which further raises unemployment. Yet both workers and firms still expect more inflation to come. Ambitious wage demands and preemptive price increases continue. The economy moves up and to the right along an arc like those in the chart. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Eventually, though, if the Fed sticks to its guns, higher unemployment and slowing demand start to bite. Workers take jobs at wages they would previously have turned down. Firms cut prices to get rid of growing stocks of unsold goods. Inflation slows and the economy moves along the downward slope of the arc. But it takes a long time and a lot of unemployment to finally break the momentum of inflation expectations.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Now turn to Figure 4, which shows the path of the economy in the months around the inflation peak of 2022. Here, the pattern is completely reversed. The arc, instead of running from left to right, runs from right to left. Unemployment falls as the inflation peak approaches, much as posited by the classic Phillips curve. After the peak is reached, inflation rapidly slows with little change in unemployment.</p>
<!--/wp:paragraph-->
<!--wp:image {"align":"center"}-->
<figure class="wp-block-image aligncenter"><img alt="" height="412" src="https://lh6.googleusercontent.com/xJHtURkJDineTZfW92SiUONvSK30aac-wMZ1QCqUQyKxuzoe-E5YXfyqykx5QV37hPfGJxAejncI7Gj5FPsJ9M06gjhJP12kQ5CL5qoArlbOwkDWXXBR2jl76AnajoXwHnA5nau0SzBmHDjXSUBw-Q=w438-h412" width="438" /></figure>
<!--/wp:image-->
<!--wp:paragraph-->
<p>A reasonable explanation of the right-to-left arc in Figure 4 is that this time, inflation expectations were no longer adaptive. Instead, they had become <em>anchored</em> by the decades of price stability during the Great Moderation. That being so, the rising inflation of 2021 and early 2022 did not cause each month’s inflation to be taken as a signal of more inflation to come. Rather, even while the fiscal stimulus from pandemic-era spending, combined with a series of supply shocks, pushed prices upward, workers and firms expected inflation soon to begin falling back toward the Fed’s 2 percent target. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>The anchoring of expectations indicated by the 2021-2022 Phillips curve is confirmed by more conventional sources, as Fed Governor <a href="https://www.federalreserve.gov/newsevents/speech/cook20230106a.htm">Lisa D. Cook</a> noted in a recent speech. After reviewing several measures of inflation expectations derived from surveys and bond market prices, Cook concluded that “expectations are still within their pre-pandemic ranges.” </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>In short, the available evidence suggests a fundamental regime change from adaptive to anchored inflation expectations over the past 40 years. The change is of more than theoretical interest. Its practical effect has been an enormous reduction in the cost of disinflation. The descents from the inflation peaks of earlier years involved month after month of high and rising unemployment. The descent in 2022 took just half a year, throughout which unemployment remained near historic lows. </p>
<!--/wp:paragraph-->
<!--wp:heading-->
<h2><strong>Implications for policy</strong></h2>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>Earlier sections have described three fundamental differences between the inflation of 2021-2022 and the repeated waves of stagflation that roiled the U.S. economy in the 1960s and 1970s. </p>
<!--/wp:paragraph-->
<!--wp:list {"ordered":true}-->
<ol><!--wp:list-item-->
<li>Whether we call it “transitory” or not, the recent inflation has been the shortest of the four episodes examined, with the most rapid rate of acceleration and most rapid rate of disinflation.</li>
<!--/wp:list-item-->
<!--wp:list-item-->
<li>The 2021-2022 inflation, which was, in large part, driven by an unusual combination of supply shocks, had the greatest relative price volatility of any period in the last 60 years.</li>
<!--/wp:list-item-->
<!--wp:list-item-->
<li>The decades of the Great Moderation saw a fundamental regime shift away from adaptive and toward anchored expectations, as shown by a reversal of the Phillips curve pattern and confirmed by conventional survey-based and market-based measures.</li>
<!--/wp:list-item--></ol>
<!--/wp:list-->
<!--wp:paragraph-->
<p>Here are some conclusions for policy that I draw from these differences.</p>
<!--/wp:paragraph-->
<!--wp:heading {"level":3}-->
<h3><strong>Policy in 2021-2022 does not look so bad, after all</strong>. </h3>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>Macroeconomic policy over the past two years has had no shortage of critics. Start on the fiscal policy side. In February 2021, when prices were just beginning to rise, <a href="https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/">Lawrence Summers</a>, a former Treasury secretary and a key adviser to President Barack Obama, weighed in against the size of the economic stimulus package that the Biden administration was proposing. “There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation,” he said. He pointed specifically to a “risk of inflation expectations rising sharply.”</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Monetary policy came in for its share of criticism, too. In a May 2022 interview with CNBC, when inflation had still not peaked, former Fed Chair <a href="https://www.cnn.com/2022/05/16/economy/fed-ben-bernanke-jerome-powell-recession/index.html#:~:text=%E2%80%9CThe%20question%20is%3A%20Why%20did,agree%20it%20was%20a%20mistake.%E2%80%9D">Ben Bernanke</a> complained of inaction by monetary policymakers. “Why did they delay their response? I think in retrospect, yes, it was a mistake. And I think they agree it was a mistake,” he added.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Yet, from the perspective of early 2023, the past two years of monetary and fiscal policy look much better. Yes, inflation in mid-2022 spiked to its highest levels in four decades. Yes, many people felt the pain. But would a tighter budget and higher interest rates imposed earlier really have eased that pain, or only changed the form it took? </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Shutting down the growth of aggregate demand in early 2021 would not have erased supply shocks from the pandemic, war, and tangled supply chains. But slower growth of demand would have made it more difficult to achieve the necessary relative price realignments. With slower inflation, unavoidable relative price changes would have required actual cuts to nominal prices and wages in lagging sectors, rather than just relatively slow rates of increase. I have been calling that “asymmetrical price stickiness,” which is a rather bloodless term, but it reflects a real psychological aversion by firms to resist price cuts and workers to resist wage cuts. Forcing those cuts would have meant lost jobs, personal and business bankruptcies, and loan defaults. Paradoxically, even though the peak rate of inflation might have been lower, the recovery would likely have been slower and accompanied by higher unemployment rates than what we actually saw in the second half of 2022.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Writing for the Financial Times, <a href="https://www.ft.com/content/86275542-fe94-4f4e-ab0b-c7325ba7fa4b">Raghuram Rajan</a>, himself a former central bank head, laments how difficult it is for central bankers to establish the right kind of credibility. Should they focus entirely on establishing a reputation as fierce inflation fighters? Or should they let it be known they will accommodate higher inflation when appropriate? Rajan thinks the Fed played it too loose in 2021-2022. I think that whether by strategy or purely by luck, they got it just about right. </p>
<!--/wp:paragraph-->
<!--wp:heading {"level":3}-->
<h3><strong>The Fed needs to pay more attention to relative prices. </strong></h3>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>This commentary has highlighted the role of supply shocks and relative price changes in the 2021-2022 inflation. Fed officials are beginning to pay attention, too. In the presentation cited earlier, Fed Governor Cook includes <a href="https://www.federalreserve.gov/images/cook-figure2-20230106.png">a chart</a> showing the dramatic divergence in inflation rates in three key sectors of the economy. She asks, “Would adopting a model with multiple price components improve our understanding of and ability to forecast overall inflation? Relatedly, should we look to inflation models with nonlinear or threshold effects?” My answers are, “Yes, and yes!” Relative price changes, both endogenous and exogenous, should be central to the Fed’s planning, not an afterthought. So too should the nonlinearities introduced by differential and asymmetrical price stickiness.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p><a href="https://www.minneapolisfed.org/article/2023/why-we-missed-on-inflation-and-implications-for-monetary-policy-going-forward">Neel Kashkari</a>, president of the Minneapolis Fed, is another high official who is catching on to this. In a recent essay, he criticizes the Fed’s “traditional Phillips-curve models,” which consist of labor market effects via unemployment gaps, changes to long-run inflation expectations, and little more. These “workhorse models,” he says, “seem ill-equipped to handle a fundamentally different source of inflation” which he describes as “surge pricing inflation” – his own term for one kind of the relative price effects discussed here. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>“Can we,” asks Kashkari, “develop frameworks and tools to analyze and potentially forecast inflation outside of the labor market and expectations channels?” He answers himself in the affirmative. “If we can deepen our analytical capabilities surrounding other sources and channels of inflation, then we might be able to incorporate whatever lessons we learn into our policy framework going forward.”</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>A suitable model might start with a multi-sector input-output framework to trace the impacts that price increases in one sector, such as energy goods, has on others, from farming to freight transportation to plastics. A dynamic version of such a model could incorporate differential and asymmetric price and wage stickiness as price shocks are passed from one sector to another. By gaming out different monetary policy strategies, such a dynamic, nonlinear, asymmetric model could estimate the optimal degree of monetary accommodation in the face of various kinds of endogenous and exogenous shocks. I am far from having either the analytical firepower or the data needed to construct such a model, but the Fed, with its vast resources and hyper-talented staff, surely does.</p>
<!--/wp:paragraph-->
<!--wp:heading {"level":3}-->
<h3><strong>Get ready for the post-moderation world. </strong></h3>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>It would be wonderful if we could breathe a sigh of relief that we got through the COVID-19 exit crisis with only a transitory bump in inflation, and could now look forward to renewal of the Great Moderation. But that isn’t going to happen.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>For a laundry list of the shocks ahead, we can turn to the great Gloom Meister himself, <a href="https://www.project-syndicate.org/commentary/high-inflation-long-term-problem-owing-to-real-and-metaphorical-wars-by-nouriel-roubini-2022-12?utm_source=Project+Syndicate+Newsletter&utm_campaign=d2481d0547-sunday_newsletter_01_01_2023&utm_medium=email&utm_term=0_73bad5b7d8-d2481d0547-105576337&mc_cid=d2481d0547&mc_eid=687ec9272c">Nouriel Roubini</a>. Writing in December for Project Syndicate, Roubini listed five “wars” that cloud the economic future: hot or cold wars between the West and revisionist powers; a war against climate change and its effects; wars against pandemics and the demographic effects of aging populations; wars against disruptions from artificial intelligence and other new technologies; and wars against rising inequalities of income and wealth. As the wars themselves eat into output and desperate governments try to inflate their way out of unsustainable debt, Roubini sees the outcome as – you guessed it – global stagflation.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>I’m not quite so pessimistic. In the short run, in the United States, the greater risk is likely to be a plain old recession without the inflation. <a href="https://www.reuters.com/markets/rates-bonds/fed-faces-difficult-call-avoid-overdoing-rates-shock-romer-says-2023-01-08/">Christina Romer</a>, head of the Council of Economic Advisers in the Obama administration, explained why in a 2022 keynote address to the American Economic Association. The problem, which she illustrated vividly with a pair of charts, is that any policy moves by the Fed take about two years to affect output and unemployment. That means that sharp increases in interest rates since 2021 are just now becoming visible. Because of the long lags, says Romer, “policymakers are going to need to dial back before the problem is completely solved if they want to get inflation down without causing more pain than necessary.” A “soft landing” without recession is still possible, but the longer the Feds sticks to its strict anti-inflation program, the less likely that becomes.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Neither is 1970s-style stagflation in the cards in the longer term, at least not in the United States. The only way to get true stagflation would be to run both monetary and fiscal policy flat out for a decade or more, long enough to break the inflation expectations anchor. The Fed may make some mistakes, but nothing that big. If it gets busy and updates its models, based both on what has gone wrong and what has gone right in the past two years, there are real grounds to hope that the pessimists will be proved wrong again.</p><p><i>Originally published by <a href="https://www.niskanencenter.org/the-inflation-of-2021-22-was-different-what-we-should-learn-from-it/">Niskanen Center</a>, Jan. 30, 2023. Reposted by permission.</i></p>
<!--/wp:paragraph-->
<!--wp:separator-->
<hr class="wp-block-separator has-alpha-channel-opacity" />
<!--/wp:separator-->
<!--wp:paragraph-->
<p id="endnote1"><sup>[1]</sup> There seems to be no generally accepted metric for the volatility of relative prices. In Figure 2, I use monthly values of the standard deviation of rolling 3-month inflation rates across 11 CPI components: Energy goods, energy services, transportation services, new vehicles, used vehicles, food at home, food away from home, apparel, medical services, medical goods, and shelter. Those 11 account for about 80 percent of the CPI. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p id="endnote1"><sup>[2]</sup> Economists are taught not to trust their eyes alone. Let V be the monthly value for the measure of price volatility. Let A be the monthly “inflation anomaly,” that is, the absolute value for a given month of the difference between the 3-month inflation rate and the average inflation rate over the preceding two years. The correlation of P with A is positive and statistically significant (R = 0.54). </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p id="endnote1"><sup>[3]</sup> See <a href="https://www.niskanencenter.org/is-the-phillips-curve-back-when-should-we-start-to-worry-about-inflation/">this earlier commentary</a> for a more detailed explanation of the theory behind the next few paragraphs. </p><p id="endnote1"><br /></p>
<!--/wp:paragraph-->Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-34333383682831167652022-12-22T11:33:00.001-08:002023-04-15T09:09:03.437-07:00No, Prof. Mankiw, Better Social Insurance Would Not Kill American Prosperity<!--wp:paragraph-->
<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjeaBj0sg4XsG7U8NxxCZ-BtVngL80DnbQAfKjWP6XAk88B-LWtFiyfzvB3mQzhC4xmE-OPRq8qMts8T3_IF-aGyz5PjAsYcbVQcRD-j02WuMXHfgy6OXXnezk6F-2KQopmc2UujYlYbovhirUQU8HNWowLf_KYrw62xHcTAaXHQuEKbcSFT7DDQ_Ha0g" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="" data-original-height="343" data-original-width="358" height="192" src="https://blogger.googleusercontent.com/img/a/AVvXsEjeaBj0sg4XsG7U8NxxCZ-BtVngL80DnbQAfKjWP6XAk88B-LWtFiyfzvB3mQzhC4xmE-OPRq8qMts8T3_IF-aGyz5PjAsYcbVQcRD-j02WuMXHfgy6OXXnezk6F-2KQopmc2UujYlYbovhirUQU8HNWowLf_KYrw62xHcTAaXHQuEKbcSFT7DDQ_Ha0g=w200-h192" width="200" /></a></div><p></p><p>In a recent <em>New York Times</em> op-ed, Harvard professor N. Gregory Mankiw asks, “<a href="https://www.nytimes.com/2021/09/15/opinion/biden-spending-plan-welfare.html">Can America Afford to Become a Major Social Welfare State?</a>” By welfare state, he has in mind the Biden administration’s plan for better child benefits, improved healthcare, extending free public education to preschool and community college, and the rest.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>From a “narrow budgetary standpoint,” Mankiw agrees that these things are affordable. But he is concerned about the larger question of whether stronger social protections are consistent with prosperity and with our aspirations for the “kind of nation we want to be.” Let’s take each of those in turn.</p><p>Prosperity, for Mankiw, means GDP. Yes, America has lots of that. He points out that as of 2019, GDP per capita was 14 percent lower in Germany than in the United States, 24 percent lower in France, and 26 percent lower in the United Kingdom.</p><p>But GDP per capita has its limits as a measure of prosperity. It is, after all, an average whose numerator lumps together the incomes of billionaires and the incomes of the poor. True, the United States does pretty well in the billionaire sweepstakes. It has 19 percent more <a href="https://en.wikipedia.org/wiki/List_of_countries_by_number_of_billionaires">billionaires per capita</a> than Germany, 2.7 times as many as the UK, and 3.2 times as many as France. But most people don’t count the “prosperity” of their city or town by the number of billionaires who live there. They are more interested in whether their neighbors, the people they stand in line with at their local supermarkets, can maintain a decent standard of living.<span></span></p><a name='more'></a><p></p><p>For that, median incomes, not averages, provide a better picture. The median is the income that divides the population right down the middle, with half the people doing better and half not as well. <a href="https://worldpopulationreview.com/country-rankings/median-income-by-country">Germany’s median per capita income</a> is just 9 percent lower than the United States, while the UK and France are 20 percent below. The fact that European median incomes are closer to U.S. values than European GDPs reflects that U.S. incomes are more concentrated at top, leaving less for those at the bottom. What is more, the European countries that most people think of first when they hear the term “welfare state” – Norway, Sweden, Denmark, and Finland – all have <em>higher</em> median incomes than we do. How can we talk about prosperity without asking, prosperity for whom?</p><p>Let’s turn now to the broader question of the kind of nation we want to be. Since the days of its founding, America has striven to be what political scientists call a <em>liberal democracy. </em>The <a href="https://www.lexico.com/definition/liberal_democracy">Oxford English Dictionary</a> defines that as “A democratic system of government in which individual rights and freedoms are officially recognized and protected, and the exercise of political power is limited by the rule of law.” </p><p>In my own work, I like to break down liberal democracy into five measurable components (<a href="https://www.liberalcurrents.com/how-liberal-is-america/">see here</a> for the methodology):</p><ul><!--wp:list-item-->
<li><em><strong>Quality of governance</strong>,</em> including things like rule of law, judicial independence, and government integrity.</li>
<!--/wp:list-item-->
<!--wp:list-item-->
<li><em><strong>Quality of market institutions,</strong></em> including things like security of property rights, enforcement of contracts, and investor protections.</li>
<!--/wp:list-item-->
<!--wp:list-item-->
<li><em><strong>Personal freedoms,</strong></em> including those enumerated in the Bill of Rights.</li>
<!--/wp:list-item-->
<!--wp:list-item-->
<li><em><strong>Procedural democracy,</strong></em> meaning the rules and institutions that ensure free and fair elections.</li>
<!--/wp:list-item-->
<!--wp:list-item-->
<li><em><strong>Social protections,</strong></em> meaning the things that make “the pursuit of happiness” a real possibility, not just a slogan.</li>
<!--/wp:list-item--></ul><p>As I see it, these five traits taken together – not just GDP or median income – are what define real prosperity. They are the things for which refugees cross oceans in leaky boats, trek through deserts, and brave hostile checkpoints.</p><p>Mankiw’s thesis is that if you want the fifth item on the list – social protections – you will sacrifice the others. He maintains that European countries, “by aiming for more compassionate economies, … have created less prosperous ones.” “Americans”, he goes on to warn, “should be careful to avoid that fate.”</p><p>But what have Americans really gained by skimping on social protections? Nothing. Here are the data, in the form of a spider chart: (The scale on the chart is standard deviations above the mean for 112 countries, with zero at the center of the chart.)</p><figure class="wp-block-image aligncenter size-full"><img alt="" class="wp-image-8979" src="https://www.niskanencenter.org/wp-content/uploads/2021/09/unnamed-75.png" /></figure><p>The chart shows clearly that (as expected) the United States falls far short of the leading European liberal democracies in terms of its social protections. But we fall short in all the other respects, too. We underperform Mankiw’s favored trio of Germany, France, and the UK, despite the fact that they have substantially lower GDP per capita and lower median incomes. And we underperform the classic Scandinavian welfare states by even more, even in the quality of our market institutions.</p><p><!--wp:paragraph-->
<!--/wp:paragraph-->
<!--wp:paragraph-->
<!--/wp:paragraph-->
<!--wp:paragraph-->
<!--/wp:paragraph-->
<!--wp:paragraph-->
<!--/wp:paragraph-->
<!--wp:paragraph-->
<!--/wp:paragraph-->
<!--wp:list-->
<!--/wp:list-->
<!--wp:paragraph-->
<!--/wp:paragraph-->
<!--wp:paragraph-->
<!--/wp:paragraph-->
<!--wp:paragraph-->
<!--/wp:paragraph-->
<!--wp:image {"align":"center","id":8979,"sizeSlug":"full","linkDestination":"none"}-->
<!--/wp:image-->
<!--wp:paragraph-->
<!--/wp:paragraph-->
<!--wp:paragraph-->
<!--/wp:paragraph--></p><p>Sure, we have to be careful as we go about strengthening our social policies. We don’t need to just expand social programs, but to reform them in fundamental ways that make them more work-friendly and affordable while also offering better income security. (<a href="http://tiny.cc/iCa">Here is how</a>.) We need to prioritize neither expanding nor shrinking the federal budget, but rather making intelligent changes that keep fiscal policy sustainable. (<a href="https://www.niskanencenter.org/rules-for-sustainable-fiscal-policy-three-perspectives/">Here are some rules</a>.) Those are things that I think Prof. Mankiw and I largely agree on. What we disagree on is that in striving to become a “major social welfare state,” or to build a better system of social insurance, or whatever we want to call it, Americans will have to sacrifice everything else they hold dear.</p><p><i>Originally published by Niskanen Center September 21, 2021</i></p>
<!--/wp:paragraph-->Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-87463424454793165002022-04-12T08:35:00.000-07:002022-04-12T08:35:05.732-07:00 Four Perspectives on Individual Freedoms and Climate Change<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjKNKO2klS9gNBWUx5yxoJphOIpPu62bCba0C5LI2-Aj7errRnJ3bal3l2wQhuuxz0ft4MF8vBIWM4X6JHXllFgtoO7hPzy80_Oys5EKqaKhabbgKSwJECzqtb9OQ5sKURF56UGIBTXpKcYinq_zTNP1UWAsJouFIIplSjJytlGZFhqrozxlekJHEbRFw" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="" data-original-height="600" data-original-width="1000" height="192" src="https://blogger.googleusercontent.com/img/a/AVvXsEjKNKO2klS9gNBWUx5yxoJphOIpPu62bCba0C5LI2-Aj7errRnJ3bal3l2wQhuuxz0ft4MF8vBIWM4X6JHXllFgtoO7hPzy80_Oys5EKqaKhabbgKSwJECzqtb9OQ5sKURF56UGIBTXpKcYinq_zTNP1UWAsJouFIIplSjJytlGZFhqrozxlekJHEbRFw" width="320" /></a></div><br />On April 12, 2022, the University of British Columbia, Okanagen, sponsored an on-line symposium, "A Wicked Problem: Individual Freedoms and Climate Change." <a href="https://docs.google.com/presentation/d/1KQjBzOdVAGVmQoKXJxZwxC9rD0ZMIxG-/edit?usp=sharing&ouid=101991481538692369777&rtpof=true&sd=true">Here is a link</a> to the slideshow of my presentation at the conference, which discusses four perspectives on the problem:<p></p><p></p><ul style="text-align: left;"><li>Carbon pollution as a violation of the nonaggression principle</li><li>Applying Lockean property rights to the climate problem</li><li>Climate change as a coordination problem</li><li>A Hayekian perspective: Prices without markets or markets without prices?</li></ul><p></p>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-85140692776626552122021-09-24T08:09:00.002-07:002021-09-24T08:09:37.011-07:00Fighting Poverty in America: What Can We Do Better?<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigGfukx3h3PJnqMd7WJY2H9Akye3_rF1hl1J8kkBL_ittamtYvgzbtalsCYB7G51Erl6dnGUxf7BFhetbvsii_8LhzyLLa3EVoMaEiZlivuo5A6ZTnRfAPZIl49d124eJWayUFVaVTEFai/" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="" data-original-height="699" data-original-width="1010" height="221" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigGfukx3h3PJnqMd7WJY2H9Akye3_rF1hl1J8kkBL_ittamtYvgzbtalsCYB7G51Erl6dnGUxf7BFhetbvsii_8LhzyLLa3EVoMaEiZlivuo5A6ZTnRfAPZIl49d124eJWayUFVaVTEFai/" width="320" /></a></div><p></p><p>The United States spends some $850 billion per year on poverty programs, yet the official poverty rate has not fallen much, if at all, over the past 40 years. What could we do better?</p><p><a href="https://docs.google.com/presentation/d/14vvs787jcUBzKT6ev5UDxUrm3goDfI99/edit?usp=sharing&ouid=101991481538692369777&rtpof=true&sd=true">This slideshow</a>, originally presented at a meeting of the Northport MI Lions Club on September 23, 2021, argues that with better policy design, we could greatly reduce the poverty rate without spending any more than we do today. The slideshow is suitable for classroom presentation and may be used without further permission.</p><p>The slideshow emphasizes three major problems with the design of current poverty policies:</p><p></p><ul style="text-align: left;"><li>Spending is fragmented among many separate programs, each designed to help a particular group or meet a particular need.</li><li>Programs have high benefit reduction rates, which severely reduce work incentives, especially for families just crossing the line from poverty into self-sufficiency.</li><li>Many programs have strict work requirements that have the ostensible objective of encourage poor people to help themselves by getting a job. However, in practice, work requirements don't work and often throw families into deeper poverty than before.</li></ul><div>I recommend three broad categories of policy change that could improve the performance of antipoverty efforts even in a baseline case where total spending does not increase:</div><div><ul style="text-align: left;"><li>Consolidate programs and cash out in-kind assistance.</li><li>Expand the kind of wage bonuses embodied in the Earned Income Tax Credit.</li><li>Introduce a permanent child benefit that is paid monthly to all families with children regardless of employment status.</li></ul><div><i>Related reading:</i></div></div><div><ul style="text-align: left;"><li><i><a href="https://www.niskanencenter.org/a-social-safety-net-for-an-age-of-uncertainty/">A social safety net for an age of uncertainty</a></i></li><li><i><a href="https://www.niskanencenter.org/new-research-revives-debate-over-a-poverty-trap/">New research on the poverty trap</a></i></li><li><i><a href="https://www.milkenreview.org/articles/earning-it-why-work-requirements-dont-work">Why work requirements don't work</a></i></li></ul></div><p></p><p><br /></p><p><br /></p>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-38717251301750173202021-08-29T08:16:00.000-07:002021-08-29T08:16:29.852-07:00Guaranteed Income for the 21st Century Aims to End Poverty As We Know It<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgApkUKtzLVxTsGCStQkSN6JxaY21bjsOukvyikkmvwBbE6s8rPoWfLUYKdnyOIRAm1ru42ypsKgi4moGbgQsygWnE0WfjtvIiwUQxpIGTSbwaH64LRiqqsMljdzgn43CN2hQdVzKlM3XaE/" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="" data-original-height="507" data-original-width="960" height="169" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgApkUKtzLVxTsGCStQkSN6JxaY21bjsOukvyikkmvwBbE6s8rPoWfLUYKdnyOIRAm1ru42ypsKgi4moGbgQsygWnE0WfjtvIiwUQxpIGTSbwaH64LRiqqsMljdzgn43CN2hQdVzKlM3XaE/" width="320" /></a></div><p></p><p>In a promising contribution to the debate over poverty
policy, the Institute on Race and Political Economy at the New School has
released a major welfare reform proposal that it calls a Guaranteed Income for
the 21st Century. Details of the proposal (abbreviated GI21 in what follows)
are set out in a report written by Naomi Zewde, Kyle Strickland, Kelly
Capatosto, Ari Glogower, and Darrick Hamilton. The proposal makes a full-scale
assault on America’s social protection gap. It includes several features that
the Niskanen Center has long championed, such as an emphasis on cash
assistance, broad eligibility, and payment in monthly installments with
appropriate provisions for the unbanked. Although the proposal is not
budget-neutral, its estimated cost of $876 billion per year is considerably
less than that of several other proposals for a universal basic income.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">All proposed reforms of the social safety net face a set of
tradeoffs among the goals of income security, affordability, and work
incentives. This commentary will examine how GI21 deals with those tradeoffs,
beginning with the areas where it is strongest and then turning to aspects of
the plan that could benefit from some further thought.<span></span></p><a name='more'></a><o:p></o:p><p></p>
<p class="MsoNormal"><b>Income security and affordability<o:p></o:p></b></p>
<p class="MsoNormal">The first priority of Guaranteed Income for the 21st
Century, clearly, is income security. “Our goal here,” Zewde et al. write,
“cannot be to simply reduce poverty, but instead must be to abolish absolute
poverty as we know it.” To that end, GI21 calls for a cash grant of $12,500 per
year for each adult in a household and $4,500 for each child, payable in
monthly installments. For single-parent families, that schedule of payments
approximates the 2021 poverty guidelines from the Department of Health and
Human Services ($12,880 for a single adult with an allowance of $4,540 for each
additional family member, whether child or adult). For two-parent households
with children, the GI21 schedule comes in well above the official poverty
level.<o:p></o:p></p>
<p class="MsoNormal">Not surprisingly, the goal of completely eliminating poverty
is costly. The CBO projects that the federal government will spend a total of
$812 billion on means-tested poverty programs in 2021, of which about
two-thirds will go to healthcare programs and one-third to income support. The
$876 billion estimated cost of GI21 would more than double that. However, as
Zewde et al. point out, the cost of GI21 is modest compared to that of other
basic income proposals, such as that of Andrew Yang ($2.8 to $3 trillion) or
one discussed by The Architecture of a Basic Income Miranda Perry Fleischer and
Daniel Hemel ($1.8 trillion).<o:p></o:p></p>
<p class="MsoNormal">The relative affordability of the GI21 basic income plan
comes from the fact that it is structured as a negative income tax rather than
a truly universal basic income. As such, the basic grants are subject to a
phase-out that begins at $10,000 of earned income for families with one adult
and tapers off to zero at $50,000. For two-parent families, the phaseout starts
at $15,000 and reaches zero at $70,000. For families whose incomes rise during
the year, overpayments are subject to recapture, following a mechanism similar
to that used for income-based premium subsidies under the Affordable Care Act.
Several safeguards minimize the chance that families with rising incomes will
find themselves unexpectedly in debt to a program that was designed to benefit
them.<o:p></o:p></p>
<p class="MsoNormal">Administratively, GI21 is characterized as “a substantial
overhaul and extension” of the Earned Income Tax Credit (EITC) – a program on
which the U.S. government currently spends some $88 billion a year. As such,
its implementation is assigned to what its authors call “the most powerful
fiscal tool” of the U.S. government, namely the tax code. That might raise the
eyebrows of some observers, such as Niskanen’s Sam Hammond, who sees the
Internal Revenue Service as a “broken home in need of repair” rather than the
federal government’s most capable agency. Presumably, though, a sufficiently
generous appropriation from Congress could get the IRS up to speed to run such
a large new program. <o:p></o:p></p>
<p class="MsoNormal"><b>Work incentives<o:p></o:p></b></p>
<p class="MsoNormal">On the whole, I find that the GI21 proposal places less
emphasis on work incentives than on income security and affordability, but the
topic is not neglected altogether. Work incentives for households with the
lowest incomes are protected to the extent that the phaseout of benefits does
not begin until earnings rise to a threshold of $10,000 for households with one
adult and $15,000 for those with two adults. Once those thresholds are reached,
however, households in the phaseout ranges ($10,000 to $50,000 for one adult
and $15,000 to $70,000 for two) would lose a significant amount in benefits for
each extra dollar earned. Because the phaseout ranges vary only with the number
of adults, while the basic grant increases with the number of children, the
resulting benefit reduction rates increase with family size. Table 1 shows the
amount by which benefits are reduced for each added dollar of earned income
within the phaseout range for various family configurations, as I calculate
them:<o:p></o:p></p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUw0aoFJCvqRht2etKb68VP9oPkG1bGy9N3G-Yhw0bYlcDg-h270LXydVSpxFYAR5DOJoKJLB8f_Fft9Irz65rgQYcxt210j7NULVPWwsoe4yy2-rJJMJOa_3iyMu1Z5WtsmO-Ra5g4eBF/" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="262" data-original-width="288" height="291" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUw0aoFJCvqRht2etKb68VP9oPkG1bGy9N3G-Yhw0bYlcDg-h270LXydVSpxFYAR5DOJoKJLB8f_Fft9Irz65rgQYcxt210j7NULVPWwsoe4yy2-rJJMJOa_3iyMu1Z5WtsmO-Ra5g4eBF/w320-h291/image.png" width="320" /></a></div><p class="MsoNormal">Furthermore, the full impact of GI21 on work incentives
depends not only on the benefit reduction rate, but also on payroll and income
taxes. The sum of the benefit reduction rate and the rates of those taxes is
known as the effective marginal tax rate (EMTR). For example, a single parent
with one child and income between $10,000 and $50,000 would face a benefit
reduction rate of 42.5 percent plus a payroll tax of 7.65 percent, for an
effective marginal tax rate of 50.15 percent. Households with higher incomes
would also potentially be exposed to income taxes. For example, households with
two parents and two children, and an income approaching $70,000, would probably
face an income tax rate of 12 percent. Their combined EMTR would thus be 61.8 +
7.65 + 12, or 81.45 percent. That means they would keep less than 19 cents in
take-home pay for each dollar earned – and less than that if they lived in one
of the 42 states that has its own income tax.<o:p></o:p></p>
<p class="MsoNormal">The impact of income taxes on work incentives only kicks in
at the high end of the phaseout range and could be mitigated by minor changes
in tax law that could be included in legislation implementing GI21. However,
exempting GI21 beneficiaries from the payroll tax would be more problematic.
Doing so would affect the whole structure of the Social Security system,
including the financial health of its faltering trust fund and even the
eventual eligibility of GI21 participants for retirement benefits. In what
follows, I will assume that GI21 beneficiaries are exposed to payroll taxes but
not income taxes.<o:p></o:p></p>
<p class="MsoNormal">Zewde et al. recognize that high EMTRs can potentially
affect work incentives, but their treatment of the issue is dismissive. In a
brief text box, they cite a 2006 paper by Nada Eissa and Hilary W. Hoynes, to
the effect that “empirical research finds that the EITC phaseout does not
significantly reduce the hours worked by taxpayers already participating in the
labor market.” However, the conclusions I draw from that paper are not quite so
sanguine.<o:p></o:p></p>
<p class="MsoNormal">To study the effects of EMTRs on work behavior, Eissa and
Hoynes used data from a 1993 expansion of the EITC, which raised the benefit-
reduction rate for some EITC recipients from 14 percent to 21 percent. The
authors discuss possible reasons why empirical studies of the EITC reforms fail
to show the negative effect on hours worked that standard labor market theory
would predict. Like Zewde et al., they consider lack of workers’ control over
hours to be part of the explanation. However, they also say that “it is not
unreasonable to consider [the reduction in hours worked] too small to be
identified empirically, especially given the somewhat crude comparison-of-means
approach typically used.” In my opinion, the inconclusive results may also be
due, at least in part, to “range compression” in the sample, that is, to the
narrow range (from the single digits to the low twenties) over which
benefit-reduction rates vary under the current version of the EITC. A policy
that exposed workers to benefit-reduction rates such as those shown in Table 1
would be much more likely to have measurable negative impacts on hours worked.<o:p></o:p></p>
<p class="MsoNormal">But the potential reduction in hours worked by people who
already have jobs is not the only issue, or even the most important one. Eissa
and Hoynes, like other researchers, emphasize that the labor response to
benefit reductions has two components, one being an effect on hours worked and
the other an effect on the likelihood of entering the labor market at all.
Empirical work shows the latter to be by far the more important of the two. As
Eissa and Hoynes put it, <o:p></o:p></p>
<p class="MsoNormal"></p><blockquote>A consistent finding is that labor supply responses are
concentrated along the extensive (entry) margin, rather than the intensive
(hours worked) margin. This distinction has important implications for the design
of tax-transfer programs and for the welfare evaluation of tax reforms.</blockquote><o:p></o:p><p></p>
<p class="MsoNormal">The entry effect is especially strong as it affects second
earners in two-adult households. Consider a household composed of two parents
and two children, in which one parent has a full-time job at $15 an hour –
enough to bring them above the poverty level, but not fully into the middle
class. Suppose now that the other parent wants to take a half-time job at $12
an hour to add a little resilience to a paycheck-to-paycheck family budget.
Under GI21 (assuming that the income tax is waived but the payroll tax is not)
Parent #2, facing an EMTR of 69.5 percent, would bring home just $3.66 an hour.
Costs of commuting and work clothes, let alone child care, would wipe out that
$3.66 in a hurry. Why bother?<o:p></o:p></p>
<p class="MsoNormal">The empirical results reported by Eissa and Hoynes confirm
the impact of increased benefit-reduction rates on labor force participation by
second earners. Specifically, they estimate that the EITC expansion of 1993
lowered the rate of labor market participation of married women by 1 percentage
point. That may not sound like much, but keep in mind that the 1993 expansion
increased the EITC benefit-reduction rate by just 7 percentage points. GI21, in
contrast, would increase the benefit reduction rate for married women with two
children from 21 percent under today’s EITC to 61.8 percent. The impact of GI21
on the labor force participation of second earners would presumably be
significantly greater than in 1993.<o:p></o:p></p>
<p class="MsoNormal"><b>Interaction with other poverty programs<o:p></o:p></b></p>
<p class="MsoNormal">So far, we have looked at the work-incentive effects of GI21
in isolation. However, the analysis is incomplete without recognizing that GI21
intends not to replace other poverty programs, but to supplement them. As Zewde
et al. write, <o:p></o:p></p>
<p class="MsoNormal"></p><blockquote>This program is designed to supplement and bolster the
existing social safety net and should not be thought of as a replacement for
other in-kind government support programs. While many of our existing social
supports help to address specific essential needs, unconditional cash grants
provide families with the opportunity to take care of urgent needs or
emergencies of any kind, or to invest in their careers or their families. This
maintenance of other social safety net programs helps to ensure that our
program enables individual progress and wealth building, and bolsters support
for those in need and who have historically been excluded from economic
opportunity.</blockquote><o:p></o:p><p></p>
<p class="MsoNormal">On the face of it, this appears to mean that people who
receive GI21 benefits could use them flexibly to meet any urgent needs or to
build wealth while continuing to receive in-kind benefits such as Supplemental
Nutrition Assistance Program (SNAP) funds for food needs, Medicaid for health
care needs, housing vouchers for shelter, and so on, and perhaps other forms of
cash benefits as well, such as Temporary Assistance for Needy Families (TANF).
Insofar as the intent is to further strengthen the effects of GI21 on income
security, that is all well and good, but it is also important to consider the
effects on affordability and work incentives. Those effects, in turn, depend on
exactly how the supplementary nature of GI21 would actually be implemented – a
point on which the report by Zewde et al. sheds little light.<o:p></o:p></p>
<p class="MsoNormal">I see two possibilities. One is that existing programs would
not be eliminated to make way for GI21, but<span style="mso-spacerun: yes;">
</span>guaranteed-income payments would affect eligibility and benefits for
those programs in the same way as earned income does now. Another is that the
enabling legislation would direct that GI21 benefits be disregarded when
calculating eligibility and benefits for other programs. Either option raises
potential problems.<o:p></o:p></p>
<p class="MsoNormal">First suppose that there is no disregard, so that GI21
benefits are counted the same as earned income. In that case, given that GI21
benefits alone equal or exceed the federal poverty level, it seems that few
people would actually qualify for SNAP, housing vouchers, and other programs,
and that those who did would receive only minimal benefits. Furthermore, to the
extent that GI21 succeeded in its intended goal of facilitating wealth
building, some beneficiaries would also fail the asset tests for Medicaid and
other programs that had them.<o:p></o:p></p>
<p class="MsoNormal">From the point of view of affordability, a reduction in the
number of beneficiaries of existing programs is a plus. Obviously, however, a
no-disregard rule would reduce the degree to which GI21 enhanced beneficiaries’
financial security. In that sense, the no-disregard option seems inconsistent
with the language of the paragraph quoted above.<o:p></o:p></p>
<p class="MsoNormal">On the other hand, disregarding GI21 benefits for purposes
of other poverty programs would raise a different set of problems. The most
serious would be the impact on work incentives for households that qualified
simultaneously for GI21, SNAP, TANF, and other programs that each have their
own benefit reduction rates.<o:p></o:p></p>
<p class="MsoNormal">Consider SNAP, a program that is available to almost all
households with low incomes. The typical benefit-reduction rate for SNAP is 24
percent of income, after considering a standard deduction from earned income.
If that rate were added to the rates shown in Table 1, and if payroll taxes
were also counted, a single person eligible for both SNAP and GI21 would face a
EMTR of 62.95 percent once they reached the phaseout range for GI21 ($10,000 of
earned income). A couple with two children in the phaseout range (over $15,000
of earned income) would face a combined benefit-reduction rate of 93.45
percent. <o:p></o:p></p>
<p class="MsoNormal">TANF is less widely available than SNAP. Only about 23
percent of all poor families receive aid from that program. However, for those
families that are eligible, TANF interacts with SNAP in complex ways that
produce much higher benefit-reduction rates than either program alone. A report
from the Agriculture Department estimates that the typical combined
benefit-reduction rate for families eligible for both TANF and SNAP is 70
percent. Without a disregard of GI21 benefits, all families who were eligible
for all three programs (GI21, TANF, and SNAP) and who had incomes in the
phaseout range would face combined benefit-reduction rates in excess of 100
percent, even without considering payroll taxes. <o:p></o:p></p>
<p class="MsoNormal">Although TANF is available only to a minority of families,
its interaction with GI21 is particularly problematic. The whole rationale of
TANF in the first place was based on the principle of welfare-to-work. To that
end, TANF subjects its beneficiaries to strict work requirements. But if you
combine work requirements with a mix of income-support programs that have an
effective marginal tax rate of 100 percent or more, you get the absurdity that
people are required to work, but are paid nothing for doing so. <o:p></o:p></p>
<p class="MsoNormal">Poverty experts caution against exaggerating the effects of
additive benefit-reduction rates, noting that some of the highest combined
rates quoted by welfare critics involve improbable combinations of programs.
For example, a report titled “It Pays to Work” from the Center on Budget and
Policy Priorities (CBPP) estimates that “only about 3 percent of single mothers
with two children and earnings below 150 percent of the poverty line receive
the EITC, SNAP, and either TANF or housing aid (or both) and are in the
earnings range where these benefits all phase down simultaneously — and
consequently face marginal tax rates above 80 percent.”<o:p></o:p></p>
<p class="MsoNormal">For more realistic combinations of earnings and benefits,
the CBPP report argues, work incentives are higher. It uses the example of a
single mother of two children who is eligible for the EITC, the Child Tax
Credit, and SNAP. Based on 2016 benefit levels, such a person would have an
income of $6,132 if not working, $16,786 if working half-time at a minimum-wage
job for $7.25 per hour, and $25,882 if working full-time at a minimum-wage job.
The figures include the effect of payroll taxes. The result is that the
family’s total income including benefits actually rises 40 percent faster than
earned income for half-time work and 20 percent faster than earned income for
the transition from half-time to full-time work. For such a household, it truly
would pay to work.<o:p></o:p></p>
<p class="MsoNormal">But there is a catch: The favorable work incentives in the
CBPP example arise largely from the fact that the household in question is in
the phase-in range of the EITC. If we replace the existing version of the EITC
with GI21, which has no phase-in bonus, a lower phaseout threshold, and higher
phaseout rates, the picture changes dramatically. Now, even if GI21 benefits
are disregarded in calculating SNAP, the single mother of two used in the CBPP
example has a total disposable income of $27,632 if she does not work, $34,595
if she works half-time at a minimum wage job, and $37,322 if she works
full-time. The incentive for half-time work is still there; she would keep 92
percent of her income from the first 1,000 hours of work. However, moving to
full-time work would put her in the phaseout bracket of GI21, so she would keep
just $2,727, or 34 percent, of the extra $7,540 she earned. If her wage were
$10 per hour, instead of the minimum wage, then the full increase in wages when
moving from half-time to full-time work would be subject to the GI21 phaseout.
In that case she would keep just 12 percent of her added earnings. (All of
these numbers could vary from state to state, according to local SNAP rules.)<o:p></o:p></p>
<p class="MsoNormal">In short, whether or not GI21 benefits are disregarded, and
even for favorable cases, such as the one suggested by the CBPP, effective
marginal tax rates would be far higher and work incentives far lower under GI21
than under common existing combinations of EITC with other programs.<o:p></o:p></p>
<p class="MsoNormal"><b>Suggested modifications <o:p></o:p></b></p>
<p class="MsoNormal">None of the problems identified above should be considered
fatal to the aims of GI21. It is my impression that the version of that program
outlined in Zewde et al. is not meant as a complete blueprint, but rather, a
catalyst for further thought. Here are my suggestions for possible
modifications as the concept of a Guaranteed Income for the 21st Century is
developed further.<o:p></o:p></p>
<p class="MsoNormal"></p><ul style="text-align: left;"><li>First, more thought needs to be given to the way GI21 would
interact with current tax law and existing poverty programs. Among other
things, the program should include some mechanism to make sure that people who
are subject to the GI21 phaseout are not also subject to income taxes. Also,
the degree to which GI21 benefits would count as earned income for existing
means-tested programs needs to be clarified. That is the case not only for
programs aimed at the poor, such as SNAP, TANF, and Medicaid, but also for
middle-class benefits such as premium subsidies under the ACA.</li><li>A second, more far-reaching possibility would be to make
GI21 an outright substitute for most existing cash and in-kind poverty
programs, rather than an add-on. The concept of allowing GI21 to cover urgent
spending needs while SNAP, housing vouchers, and other in-kind programs provide
a backup sounds nice, but in practice, it would be unworkable. If GI21 benefits
were not disregarded, so few people would qualify for the other programs that
it would not be worth the administrative expense of maintaining them. If GI21
benefits were disregarded, then the combined benefit-reduction rates of
multiple programs would be extremely injurious to work incentives. However,
programs that address needs that are not best addressed through cash grants,
such as access to affordable health care, substance abuse, and domestic
violence, would still be needed. </li><li>Third, since GI21 is framed as a reform of the existing
EITC, consideration should be given to retaining some key features of the EITC
that the current version of GI21 proposes to eliminate.</li></ul><o:p></o:p><p></p>
<p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Benefit reduction rates during the phaseout should be held
closer to rates under the existing EITC than to those in Table 1. One partial
step toward doing that would be to allow the upper limit of the phaseout range
to rise as the number of children in a family increases. In that way, the
benefit-reduction rates would not rise, or not rise so sharply, as family size
increases.<o:p></o:p></p>
<p class="MsoNormal">Consideration should be given to retaining a phase-in range
with a positive wage bonus, as with the current EITC. However, unlike the
current EITC, the phase-in bonus should start from a substantial basic benefit
that would be received even by households with no earned income.<o:p></o:p></p>
<p class="MsoNormal">To further smooth the transition from nonemployment to work,
the phase-in and phaseout ranges could (optionally) be connected by a plateau
rather than a single benefit peak, as is the case under the current EITC. The
higher the eventual phaseout rate, the more important it would be to have the
flat segment.<o:p></o:p></p>
<p class="MsoNormal">A version of GI21 with all of these features would look very
much like an approach that I call Integrated Cash Assistance (ICA). Figure 1
provides a schematic comparison of a hypothetical ICA with GI21 as described by
Zewde et al. and with the existing version of the EITC.<o:p></o:p></p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3HcQj2m27kTw7iDHNAaenwzTJo5HHSALmVMe2wG032gQuXxggd44N1exm2Dd9E6DdERkWPb4RcgTtOIM4BgPdLas9uoLws1RYhe-K5B9ziIZHcQgAGMyLSVMBbOiaN-rUHOpBkNIkv9Sj/" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="432" data-original-width="1164" height="149" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3HcQj2m27kTw7iDHNAaenwzTJo5HHSALmVMe2wG032gQuXxggd44N1exm2Dd9E6DdERkWPb4RcgTtOIM4BgPdLas9uoLws1RYhe-K5B9ziIZHcQgAGMyLSVMBbOiaN-rUHOpBkNIkv9Sj/w400-h149/image.png" width="400" /></a></div><br /><p class="MsoNormal">The three programs shown in Figure 1 balance the basic
tradeoffs of poverty policy in different ways:<o:p></o:p></p>
<p class="MsoNormal"></p><ul style="text-align: left;"><li><o:p> </o:p>The EITC by itself scores well for work incentives and
affordability, but it falls short on income security in that it offers little
or no assistance to either childless or nonworking parents. If rated in
combination with other existing programs, it offers better income support, but
it is less affordable and, because of additive benefit reductions, it has
weaker work incentives.</li><li>GI21 does excellently in terms of income support. It is more
affordable than truly universal basic income programs that have no phaseout.
However, with no phase-in and a steep phaseout, it rates poorly for work
incentives, especially if it supplements rather than replaces other programs.</li><li>ICA, with a positive phase-in and a gradual phaseout, has
strong work incentives, especially if it replaces existing income support
programs rather than being added on top of them. The version of ICA in Figure 1
is drawn to have approximately the same affordability as the combination of
GI21 plus the other existing forms of income support that would continue. On
static scoring, it would offer somewhat weaker income support than GI21 to
households with very low earned incomes, but it would still do better than the
existing combination of poverty programs. If scored dynamically, including the
effect of work incentives, it could well provide more total
earned-plus-unearned income to the target low-income population as a whole than
GI21 would do.</li></ul><p></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><b>Conclusions<o:p></o:p></b></p>
<p class="MsoNormal">As a long-time supporter of cash assistance to poor families
without work requirements, I welcome the addition of Guaranteed Income for the
21st Century to the menu of policies offered as improvements over today’s
broken safety net. It is clear that GI21 would provide better income support
than what we have now, and its budgetary cost, while far from negligible, would
plausibly be less than that of competing proposals for universal basic income
or universal guaranteed jobs. <o:p></o:p></p>
<p class="MsoNormal">In my opinion, the initial version of GI21, as presented in
the report by Zewde et al., does have some weaknesses. I see the two most
serious as the inadequate consideration given to the program’s interaction with
existing tax policies and welfare programs, and its less-than-thorough
consideration of work incentives. I am sure that further thought will be given
to those issues as GI21 is fleshed out more fully. I look forward to more from
the team at the Institute for Race and Political Economy.<o:p></o:p></p><p class="MsoNormal"><i><a href="https://www.niskanencenter.org/guaranteed-income-for-the-21st-century-a-proposal-with-promise/">Reposted </a>with permission from Niskanen Center. Photo courtesy of <a href="https://pixabay.com/photos/loaf-bread-crumbs-crumbs-poverty-2542308/">Pixabay</a>.</i></p><div class="separator" style="clear: both; text-align: center;"><br /></div><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br />Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-66140855571154596552021-08-24T09:16:00.000-07:002021-08-24T09:16:42.315-07:00Is the Phillips Curve Back?<p>Anyone who has been following the U.S. monthly economic data
lately has noticed that the rate of inflation has been rising over the past
year as the unemployment rate has fallen. Figure 1 shows the numbers: </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLK5OSJwscoG_8VLWWDJzX1ez5QoVhbb4qzElDFTIH0nwhlCRZ6VBMgz2eLzPKh_1QqzkFgstDBUiQa_tMBMHiofHOnj83f5j4WUo0fz9-jyZMqXCKfZ2Psmhd2rk4pzYVLrl-NagX34lf/s608/P210616-1a.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="549" data-original-width="608" height="361" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLK5OSJwscoG_8VLWWDJzX1ez5QoVhbb4qzElDFTIH0nwhlCRZ6VBMgz2eLzPKh_1QqzkFgstDBUiQa_tMBMHiofHOnj83f5j4WUo0fz9-jyZMqXCKfZ2Psmhd2rk4pzYVLrl-NagX34lf/w400-h361/P210616-1a.png" width="400" /></a></div><p></p>
<p class="MsoNormal">To those old enough to remember, this chart looks ominously
like the first inflationary surge of the Kennedy-Johnson years: </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJldwbMcZ3sSQu1O4DsdtzrB7nfMLqgJARd6XfD3RpMVmOLNvmhBBKoaGROfSZBrOYoEHjb0xgVjluYKZoCbZsM3euw1IVuihoYqfjYWakxl6fB7J2MpIrlz5zJCa519xOrVmdcftXMiRl/s584/P210616-2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="553" data-original-width="584" height="379" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJldwbMcZ3sSQu1O4DsdtzrB7nfMLqgJARd6XfD3RpMVmOLNvmhBBKoaGROfSZBrOYoEHjb0xgVjluYKZoCbZsM3euw1IVuihoYqfjYWakxl6fB7J2MpIrlz5zJCa519xOrVmdcftXMiRl/w400-h379/P210616-2.png" width="400" /></a></div><br /><p></p>
<p class="MsoNormal">Or even more ominously, Figure 1 looks a bit like this chart
from a 1958 article by A. W. Phillips, which later became famous as the
“Phillips curve.”</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjW8aJqRZrBvOvHGQDHJ1gpi6rKa-Y6GCWO80ZKQiPuA-3jAnHk3vA6Q1j2lxACzwV4G-pl1wInD6C9-32E7gDn3xK9NfDoHnq3koCMicrAa5FI_iQCDPWJPhp4JShoFC5yiSb-AG-jHuD7/s480/P210616-3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="458" data-original-width="480" height="381" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjW8aJqRZrBvOvHGQDHJ1gpi6rKa-Y6GCWO80ZKQiPuA-3jAnHk3vA6Q1j2lxACzwV4G-pl1wInD6C9-32E7gDn3xK9NfDoHnq3koCMicrAa5FI_iQCDPWJPhp4JShoFC5yiSb-AG-jHuD7/w400-h381/P210616-3.png" width="400" /></a></div><p class="MsoNormal">So, are we in for runaway inflation unless we slam on the
brakes and send unemployment soaring again? You might think so from the
headlines inspired by recent CPI reports, but the answer is “no,” or at least,
“no time soon.” </p>
<p class="MsoNormal">To see why, we need to understand just what the dreaded
Phillips curve is, why falling unemployment brought soaring inflation in the 1960s
and 1970s, and why it is far less likely to do so now. That will require a
detour into a bit of economic theory, then a review of the history of inflation
and unemployment over the past six decades, and then an analysis of the
psychological underpinnings of economic behavior. Here we go.<span></span></p><a name='more'></a><o:p></o:p><p></p>
<p class="MsoNormal"><b>The dynamics of the Phillips curve</b></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">When the Phillips curve first came to widespread attention
in the late 1950s and early 1960s, it was interpreted by many as a static
policy menu. You could get unemployment down to a very low level if you were
willing to tolerate a bit of inflation, or you could stop inflation in its
tracks if you were willing to tolerate a bit more unemployment. By the late
1960s, however, the idea of a fixed Phillips menu was called into question by
Milton Friedman and Edmund Phelps. In their view, the inverse relationship
between inflation and unemployment was only a short-run phenomenon. In the long
run, the Phillips curve could shift up or down under the influence of changing
inflation expectations. The next two figures contrast the simple, static
Phillips curve with its dynamic version.<o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p>Figure 4 shows the simple, static version of the Phillips
curve. The vertical black line in the figure represents the so-called natural
rate of unemployment,that is, the rate that prevails when the economy is
neither in an unsustainable boom nor in a slump, and when there is neither
upward nor downward pressure on the rate of inflation.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZ920UxbtHUZ43vlthNcBmZxNrCYhcix3k7bpU_MdQgzf6Haeqt9I4htRGqW-90UqaNF5_wVauASMj1ikGDFoC6yb_Nz2mpUvrEbxSjdyJQ-dUcFmCSOeHxBrg9L8gAMWOAsuXQeXv1IE6/s716/P210616-4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="711" data-original-width="716" height="398" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZ920UxbtHUZ43vlthNcBmZxNrCYhcix3k7bpU_MdQgzf6Haeqt9I4htRGqW-90UqaNF5_wVauASMj1ikGDFoC6yb_Nz2mpUvrEbxSjdyJQ-dUcFmCSOeHxBrg9L8gAMWOAsuXQeXv1IE6/w400-h398/P210616-4.png" width="400" /></a></div><p class="MsoNormal">Suppose that initially, the economy is at Point A and has
been there long enough that everyone has come to expect that situation as
normal. Next, suppose there is a temporary surge in the aggregate demand for
all goods and services, caused by expansionary monetary or fiscal policy.
Employers will respond to the surge in demand either by increasing their output
or increasing their prices, or (most likely) some combination of the two. To
increase their output, firms will need more workers. As more jobs open up,
unemployed workers, whether new entrants or those who are between jobs, will be
able to find work more quickly than usual. Shorter average spells of
unemployment reduce the unemployment rate, which is the ratio of unemployed
workers to the size of the labor force, both employed and unemployed. As firms
increase their output and prices, and as previously unemployed workers find
jobs more quickly, the economy will move up and to the left along the Phillips
curve toward Point B.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p>So far, we have assumed that the increase in demand is only
temporary. If so, as soon as the surge in demand has run its course, the whole
process will reverse and the economy will move back down along the Phillips
curve to Point A. But the key insight of Friedman and Phelps was that the
dynamics of prices and employment change when movements in aggregate demand are
no longer temporary and unexpected. Figure 5 shows how that works. </p><p class="MsoNormal"><o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiunPDY823vTEd7GgqHIdNmPbpGMtqbbeu4l-8MTGUWrF-vbg2jTdndyvNZNHLUW6x4jXl3lWZ9664hepxZR4VaRRaEKs0_YE0rfAvQ_9ZWAS2-wf3j48UkI7BiD05BJKLFyRuB0w54kCWw/s717/P210616-5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="693" data-original-width="717" height="386" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiunPDY823vTEd7GgqHIdNmPbpGMtqbbeu4l-8MTGUWrF-vbg2jTdndyvNZNHLUW6x4jXl3lWZ9664hepxZR4VaRRaEKs0_YE0rfAvQ_9ZWAS2-wf3j48UkI7BiD05BJKLFyRuB0w54kCWw/w400-h386/P210616-5.png" width="400" /></a></div><p></p><p class="MsoNormal">This time, suppose that after the economy moves from A to B,
aggregate demand continues to increase rather than falling back to its original
level. As time goes by, both firms and workers find that the conditions that
brought them to point B, where inflation is 4 percent and unemployment is 2
percent, are not sustainable. Workers will see that the previous year’s
inflation has eroded their cost of living. Employers will find that prices of
nonlabor inputs (which, after all, are just the outputs of other firms) have
gone up, eroding their profits. Encouraged by the ongoing growth of demand,
however, firms find they can maintain a high rate of output and raise their
prices by enough to make up both for the higher wages that workers ask for and
the higher costs of inputs. As a result, the economy moves from B to C.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p>In effect, once firms and workers come to expect the 4
percent inflation experienced at Point B, the whole short-run Phillips curve
shifts up from SRP1 to SRP2. But once the economy reaches Point C, inflation
expectations rise still more, pushing the short-run Phillips curve further
upward to a position like SRP3. As long as policymakers keep boosting the rate
of growth of aggregate demand with expansionary monetary and fiscal policy,
unemployment can be kept low, but only at the expense of ever-faster inflation. </p>
<p class="MsoNormal">Suppose, though, that at the moment the economy reaches
Point C, the Fed, deciding that inflation is too high to tolerate, raises
interest rates enough to stop the upward drift of the Phillips curve. That will
take away the incentive for firms to maintain output and employment at such a
high level. The economy will begin to move down and to the right along the short-run
Phillips curve SRP3. If demand remains constrained, the economy will move past
the natural-rate-of-unemployment, represented by point D, to a point like E. </p>
<p class="MsoNormal">Once unemployment is above the natural rate, the dynamics of
the system will reverse. With demand weaker, firms will slow the rate at which
they raise prices and wages. Workers, seeing that jobs are hard to find, will
not demand such generous wage increases. The short-run Phillips curve will
begin to move down again, and the economy will move toward a point like F, with
high unemployment but a falling rate of inflation. From there, if policymakers
get the timing right, they can give just the nudge to aggregate demand that is
needed to move the economy back to a soft landing at Point A, where we started. </p>
<p class="MsoNormal">In short, in the dynamic version of the model, the long-run
Phillips curve is a vertical line at the natural level of unemployment. In the
long run, unemployment cannot be held far above or far below its natural level
at any constant rate of inflation. But as the rate of aggregate demand rises
and falls over time, the economy does not move smoothly up and down along the
long-run Phillips curve. Instead, it makes a series of clockwise loops, with
periods of low unemployment and accelerating inflation balanced by periods of
higher unemployment and slowing inflation.<o:p></o:p></p>
<p class="MsoNormal"><b>The stop-go era</b></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Simple though it is, the shifting Phillips curve model
corresponds remarkably well to the actual behavior of the U.S. economy from the
1960s through the early 1990s. As shown in Figure 6, over that period, the
economy traced a series of clockwise loops that look much like the stylized
version shown in Figure 5. </p><p class="MsoNormal"><o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYF7Az9hW2mr47ftv_WmbTubjoCRiTSAxNloBgxivrb7dsa4wPDlC_D0HUpQlLy0XZjhxyCj1idQRDRjzW_2d4oMmEDsdLcahpZU3FwclAushBjQn5QLcfiXkh7Ozt9HDbU8E7iSB-Xv7_/s608/P210616-6.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="561" data-original-width="608" height="369" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYF7Az9hW2mr47ftv_WmbTubjoCRiTSAxNloBgxivrb7dsa4wPDlC_D0HUpQlLy0XZjhxyCj1idQRDRjzW_2d4oMmEDsdLcahpZU3FwclAushBjQn5QLcfiXkh7Ozt9HDbU8E7iSB-Xv7_/w400-h369/P210616-6.png" width="400" /></a></div><p></p><p class="MsoNormal">This behavior of the economy has been described as a
“stop-go” cycle because it reflects alternating episodes of expansionary and
contractionary monetary and fiscal policy. The first two loops show that in the
1960s and 1970s, there was an upward bias to the cycle. Policymakers were slow
to apply the brakes as the cycles approached their peaks, and quick to
accelerate again well before inflation had fallen back to the rate it started
from. Because the average rate of inflation and average rate of unemployment
both increased from cycle to cycle, this pattern was sometimes called
“stagflation” – a term I have never liked, since “stagnation” seems to imply
that the economy was standing still, when instead it was looping crazily out of
control. </p>
<p class="MsoNormal">Not until the appointment of Paul Volcker as Federal Reserve
Chair by President Carter in 1979, and the subsequent election of Ronald
Reagan, were the deceleration phases of the cycles carried through strongly enough
to bring inflation below the rates of 1972 and 1976, years when the process of
disinflation was abandoned before it was complete. </p>
<p class="MsoNormal"><b>From Stop-Go to the Great Moderation and the Great Recession</b><o:p></o:p></p>
<p class="MsoNormal">Just as it seemed that the stop-go cycle and the shifting Phillips
curve model might become permanent features of the U.S. economy, the picture
changed dramatically. As Figure 7 shows, from the early 1990s to late 2007, the
U.S. economy entered a phase that became known as the Great Moderation. During
that period, inflation moved within a remarkably narrow range, never more than
3.4 percent or less than 1.5 percent. The unemployment rate was similarly
constrained, ranging from slightly under 4 to barely over 6 percent. The
economy had never before (or since) come so close to the goal of simultaneous
full employment and price stability.<o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHJwLohRjNYF3qUgn1mBFUea7q1XzmCcuz7IIMTT1vvFgJnP0WfTjpAM8UUByYpOlRvo4TJ-lJWd1eLx4QhdQvDsmeOjZQFOI-iBcqDpKFt56RAqbg2AhDT6i1DqAgL_Sji5O4HtXrOJo4/s602/P210616-7.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="562" data-original-width="602" height="374" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHJwLohRjNYF3qUgn1mBFUea7q1XzmCcuz7IIMTT1vvFgJnP0WfTjpAM8UUByYpOlRvo4TJ-lJWd1eLx4QhdQvDsmeOjZQFOI-iBcqDpKFt56RAqbg2AhDT6i1DqAgL_Sji5O4HtXrOJo4/w400-h374/P210616-7.png" width="400" /></a></div><br /><p class="MsoNormal">The Great Recession, which officially began in late 2007 and
deepened dramatically during the financial crisis of 2008, brought the Great
Moderation to an end. Unemployment reached a monthly peak of 10 percent in
October 2009. Inflation, however, remained within a narrow range even in 2018
and 2019, when the unemployment rate fell below 4 percent for the first time
since the mid-1960s. </p>
<p class="MsoNormal"><b>The role of expectations</b><o:p></o:p></p>
<p class="MsoNormal">The patterns of inflation and unemployment in Figure 7
differ from those in Figure 6 not only in their limited range, but also in
their dynamics. Whereas the stop-go era was characterized by a series of
clockwise loops, that pattern disappeared after the early 1990s. To the extent
there is any regularity at all to the squiggles in Figure 7, they look like a
pair of blue and red bow ties. Note especially that the right-hand sides of
each bow tie trace out counterclockwise loops – a pattern that is fundamentally
inconsistent with both the observations shown in Figure 6 and with the theory
of the shifting Phillips curve that was represented in Figure 5. What happened? </p>
<p class="MsoNormal">The answer is that there was a change in the way that firms
and workers formed their expectations of inflation. The Friedman-Phelps
shifting Phillips curve model is based on what economists call adaptive
expectations. That means that market participants form their expectations of
future inflation on the basis of what they have observed in the recent past.
Figure 5 assumes a very simple form of adaptive expectations in which each
year’s short-run Phillips curve intersects the long-run Phillips curve at that
year’s expected rate of inflation, and each year’s expected rate of inflation
is equal to the previous year’s observed rate of inflation. </p>
<p class="MsoNormal">In contrast, the behavior of the economy since the early
1990s reflects anchored expectations. In this period, the Fed avoided abrupt,
unexpected policy changes, and was very explicit about doing so. The resulting
“anchor,” then, was the Fed’s clearly communicated intention to hold inflation
at or close to a target rate of 2 percent, come what may. </p>
<p class="MsoNormal">With the expected rate of inflation anchored at 2 percent,
the Phillips curve stopped shifting. Subject to small random shocks, and with some
lags, the economy moved within a narrow range of inflation and unemployment. In
that regard, the outcome was more like what would be expected with a fixed
Phillips curve like the one in Figure 4. In fact, it could be said that
expectations were anchored strongly enough that the short-run Phillips curve
itself became flatter, so that even large variations in unemployment, such as
those observed during the Great Recession, did not cause comparably large
variations in inflation. </p>
<p class="MsoNormal">Former Federal Reserve Chair Ben Bernanke summed the point
up nicely in a 2007 speech to a workshop at the National Bureau of Economic
Research: </p>
<p class="MsoNormal"></p><blockquote>The extent to which [inflation expectations] are anchored
can change, depending on economic developments and (most important) the current
and past conduct of monetary policy. In this context, I use the term “anchored”
to mean relatively insensitive to incoming data. So, for example, if the public
experiences a spell of inflation higher than their long-run expectation, but
their long-run expectation of inflation changes little as a result, then
inflation expectations are well anchored. If, on the other hand, the public
reacts to a short period of higher-than-expected inflation by marking up their
long-run expectation considerably, then expectations are poorly anchored.</blockquote><o:p></o:p><p></p>
<p class="MsoNormal"><b>What lies ahead and what to watch</b></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Bernanke’s remarks tell us what we need to know to answer
the questions we began with: Is the Phillips curve back? And when should we
start to worry about inflation?</p>
<p class="MsoNormal">The answer is that the shifting Phillips curve is not back,
nor do we need to worry about inflation, so long as inflation expectations
remain anchored. As long as they do, we may well see some increases in the
price level as the economy recovers from the pandemic, but those are likely to
remain transitory. And expectations will remain anchored, as long as employers,
workers, and financial markets remain confident that policymakers are serious
about holding the average inflation over an appropriate time horizon to a
target level within a percentage point or so of the 2 percent that we have become
accustomed to over the last three decades. </p>
<p class="MsoNormal">“Anchored” does not mean that the Fed has to be ready to
stomp on the brakes at the first sign that monthly CPI figures go above 2
percent. The Fed has made it clear that it will allow some catch-up relative to
the very low inflation rates of 2020. We can also expect it to disregard
transitory blips in the CPI caused by things like the recent jump in used-car
prices. In fact, the Fed pays little attention at all to the headline-making
CPI, preferring to look at other indicators that better reflect underlying
inflation trends. </p>
<p class="MsoNormal">So, can we go to bed at night, sure that all is well? Not
quite. Even if the Fed is determined to do the right thing, it is going to be
technically hard for it to provide just the right degree of stimulus or
constraint over the coming months. The United States has not experienced an
economic shock like the pandemic for many decades. Among other things, that
means that the Fed’s models and forecasts may not be accurately calibrated for
what is happening right now. </p>
<p class="MsoNormal">Furthermore, in an ideal world, the Fed would not have to do
the whole job of managing inflation and unemployment by itself. Economic
textbooks tell us that policymakers are best able to guide the evolution of
aggregate demand when they have two levers to pull: monetary policy and fiscal
policy. Unfortunately, U.S. fiscal policy is politicized and paralyzed.
Congress is as likely to do the wrong thing – too much fiscal stimulus, or too
much austerity, or first the one and then the other – as it is to behave
prudently. That will make the Fed’s job harder.<o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p>But even the kind of bungled fiscal policy that complicated
the recovery from the Great Recession is unlikely to lead to anything
resembling the kind of stop-go instability that we saw in the 1960s and 1970s.
Not, at least, if expectations remain anchored.</p><p class="MsoNormal"><i><a href="https://www.niskanencenter.org/is-the-phillips-curve-back-when-should-we-start-to-worry-about-inflation/">Previously posted </a>by Niskanen Center. Figure 1 has been updated for this repost. </i></p><p class="MsoNormal"><o:p></o:p></p>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-5777427552965174112021-05-20T05:40:00.000-07:002021-05-20T05:40:08.424-07:00America's Social Protection Gap and What to Do About It<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8_JJIlkFJpd1kHDXzbGqBWGwUghfsvDnI8eWgyF8Jeds6PZf4LlqTpzHBtPiGE7bTYnAIbpavegfm1kLxkmfJjRoutWPEbt5uobSYVcJk9LC-nS3SYlbrZ1M7TAcC-HS6KTdXly5ASTpr/" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="" data-original-height="497" data-original-width="500" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8_JJIlkFJpd1kHDXzbGqBWGwUghfsvDnI8eWgyF8Jeds6PZf4LlqTpzHBtPiGE7bTYnAIbpavegfm1kLxkmfJjRoutWPEbt5uobSYVcJk9LC-nS3SYlbrZ1M7TAcC-HS6KTdXly5ASTpr/" width="241" /></a></div>Around the world, liberal democracies take pride in the freedom and prosperity of their citizens. And not just prosperity for the prosperous. They also pursue social protection policies that guarantee a minimum standard of prosperity for even the most disadvantaged. In previous writings, I have focused on <a href="https://www.niskanencenter.org/quality-of-government-a-statistical-portrait/">quality of government</a> in liberal democracies and on policies that engender <a href="https://www.niskanencenter.org/trust-and-quality-of-government-in-a-polarized-age/">social and political trust</a>. This commentary turns to social protection policies, entering an area in which the United States struggles to keep up with the standards set by its liberal-democratic peers. <p></p><!-- wp:paragraph -->
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>The first section discusses just which countries can be counted among that peer group. The second explores three quantitative indicators of social protection and shows the degree to which the United States lags behind. A conclusion argues that a policy of faster and fairer growth could allow the United States to close its social protection gap.</p>
<!-- /wp:paragraph -->
<!-- wp:heading -->
<h2><strong>Who are our liberal democratic peers?</strong></h2>
<!-- /wp:heading -->
<!-- wp:paragraph -->
<p>My starting point in classifying countries by their degree of liberal democracy, as in earlier work, is the concept of <em>liberal rights practices</em>. In his book, <a href="https://www.kevinvallier.com/books/trust-in-a-polarized-age/"><em>Trust in a Polarized Age</em></a><em>, </em>Kevin Vallier defines liberal rights practices as rights that are “recognized in constitutional law, exercised regularly by the people, and embodied in public policy.” That approach makes it possible to treat liberal rights practices not just as values or aspirations, but as observable characteristics of public policy to which it is possible to assign numerical scores. </p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>Vallier lists five liberal rights practices, namely, democratic constitutionalism, markets and private property rights, freedom of association, electoral democracy, and social protection policies. My approach covers a conceptually similar range of practices, but with modifications to terminology and content as needed to better fit the data. Full definitions and data are presented in an <a href="http://tiny.cc/LRP21">online appendix</a>.</p>
<!-- /wp:paragraph -->
<!-- wp:list -->
<ul><li><strong><em>Quality of governance</em></strong><em> </em>focuses on government institutions rather than policy outcomes. It includes measures of executive constraints, government integrity, rule of law, and government effectiveness.</li><li><strong><em>Quality of market institutions</em></strong> covers property rights, contract enforcement, investor protections, and quality of regulation.</li><li><strong><em>Personal freedoms</em></strong><em> </em>pertain to policies and institutions that guarantee freedom of association, freedom of speech, freedom from discrimination, and agency, a term that Legatum uses to the ability of people to act in accordance with their own desires, based on indicators such as freedom of movement, women’s rights, and due process in criminal law.</li><li><strong><em>Procedural democracy</em></strong><em> </em>is democracy in the narrow sense of regular and fair elections with open participation. Procedural democracy is often associated with personal freedoms and quality government, but those outcomes are not part of the definition of democracy in this sense.</li><li><strong><em>Social protection policies</em></strong><em> </em>are government policies that ensure that basic needs are met, including cash support and other policies, both on-budget and off-budget, that mitigate extreme inequality and ensure acceptable minimum levels of food, shelter, medical care, and communications.</li></ul>
<!-- /wp:list -->
<!-- wp:paragraph -->
<p>In what follows, I refer to the first four of these categories as <em>basic liberal rights practices. </em>Each country is assigned a score, LRP*, which is an equally weighted average of the standardized scores for quality of governance, quality of market institutions, personal freedoms, and procedural democracy<em>.</em> Vallier includes the fifth item, social protection policies, in his definition of liberal rights practices, for reasons discussed below. However, this commentary turns his definition into a question: To what extent is it actually true that governments that are liberal democracies in other respects also have strong social protection policies? <span></span></p><a name='more'></a><p></p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>The Legatum Institute’s <a href="https://www.prosperity.com/">Prosperity Index</a>, together with a few other sources, provide data on basic liberal rights practices for 164 countries. I divide those countries into four groups, as follows:</p>
<!-- /wp:paragraph -->
<!-- wp:list -->
<ul><li><strong><em>Highly liberal democracies.</em></strong> This group consists of 28 countries with LRP* scores that are at least one full standard deviation above the mean for all of the 164 countries. </li><li><strong><em>Mostly liberal democracies.</em></strong> These 14 countries have LRP* scores greater than a half but less than one full standard deviation above the mean. All highly and mostly liberal countries have positive standardized scores (above the global mean) for all four basic liberal rights practices.</li><li><strong><em>Partly liberal democracies.</em></strong> These 31 countries have positive standardized scores (above the global mean) for the summary measure LRP* and for procedural democracy. A number of them have negative (below the mean) scores for one or more of quality of governance, quality of market institutions, and personal freedom.</li><li><strong><em>Not liberal democracies.</em></strong> The remaining 91 countries in the sample are not liberal democracies in that they have either negative LRP* scores or negative procedural democracy scores or both. Only four of these are liberal but not democratic: Hong Kong, Singapore, Malaysia, and Armenia. Another 19 are democratic but not liberal. The remaining 72 countries have negative standardized scores for both LRP* and procedural democracy. With very few exceptions, those illiberal, undemocratic countries have negative scores for all four of the basic liberal rights practices. </li></ul>
<!-- /wp:list -->
<!-- wp:paragraph -->
<p>Table 1 lists the 42 highly liberal and mostly liberal countries that are the main focus of this commentary, along with their scores for basic liberal rights practices (LRP*).</p>
<!-- /wp:paragraph -->
<!-- wp:image {"align":"center","id":8261,"sizeSlug":"large","linkDestination":"none"} -->
<div class="wp-block-image"><figure class="aligncenter size-large"><img alt="" class="wp-image-8261" src="https://www.niskanencenter.org/wp-content/uploads/2021/05/canva-photo-editor-111.png" /></figure></div>
<!-- /wp:image -->
<!-- wp:paragraph -->
<p>Figure 1 shows a plot of all 164 countries by gross national income (GNI) per capita and standardized LRP* score. The 28 highly liberal countries are shown as dark red dots and the 14 mostly liberal countries are shown in red. The blue dots represent the partly liberal and not liberal countries whose economies are not dominated by oil and gas. The blue trendline is drawn to fit the red and blue groups as a whole. Along that trendline, the LRP* scores are strongly correlated with GNI per capita (R = 0.84). A separate red trendline is drawn for the highly liberal countries alone. The United States falls well below both the red and blue trendline, showing that although it is highly liberal, it is still less liberal than would be expected given its income.</p>
<!-- /wp:paragraph -->
<!-- wp:image {"id":8265,"sizeSlug":"large","linkDestination":"none"} -->
<figure class="wp-block-image size-large"><img alt="" class="wp-image-8265" src="https://www.niskanencenter.org/wp-content/uploads/2021/05/canva-photo-editor-112.png" /></figure>
<!-- /wp:image -->
<!-- wp:paragraph -->
<p>A group of 24 countries whose economies are all heavily dependent on oil and gas, are subject to the so-called “<a href="https://en.wikipedia.org/wiki/Resource_curse">resource curse</a>” or “curse of riches.” They have far lower LRP* scores than would be expected for their levels of income. </p>
<!-- /wp:paragraph -->
<!-- wp:heading -->
<h2><strong>Social protection policies of liberal democracies</strong></h2>
<!-- /wp:heading -->
<!-- wp:paragraph -->
<p>The social protection policies of the United States and other liberal democracies are the central focus of this commentary. This section explores three approaches to measuring the strength of those policies and determining their relationship to the four basic liberal rights practices.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p><strong><em>Social protection spending</em></strong><em>. </em>Social protection spending is an obvious starting point. The International Labor Organization’s <a href="https://www.social-protection.org/gimi/gess/ShowWiki.action?id=594#tabs-3">World Social Protection Report</a> provides data on social protection spending for 147 of the 164 countries shown in Figure 1. Figure 2 charts social protection spending as a share of GNI against GNI per capita. Highly liberal democracies are shown in dark red and mostly liberal democracies in bright red. All other countries are shown in blue.</p>
<!-- /wp:paragraph -->
<!-- wp:image {"align":"center","id":8266,"sizeSlug":"large","linkDestination":"none"} -->
<div class="wp-block-image"><figure class="aligncenter size-large"><img alt="" class="wp-image-8266" src="https://www.niskanencenter.org/wp-content/uploads/2021/05/canva-photo-editor-113.png" /></figure></div>
<!-- /wp:image -->
<!-- wp:paragraph -->
<p>It is clear from the chart that social protection spending and GNI per capita are positively correlated (R = 0.63). The blue trendline is drawn for all countries, and the red trendline for highly liberal democracies alone. It is clear that highly liberal countries, by and large, have social protection spending that is higher than would be predicted from their income alone. The United States, where social protection spending is less than would be expected for a country of its relatively high income, is one of the few mostly or highly liberal democracies that lie below the blue trendline. </p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>The conclusions based on visual inspection of the chart are confirmed by a multiple regression in which social protection spending is the response variable while GNI per capita and LRP* are controls. The multiple correlation between social spending and the two controls is strong and highly significant (R = 0.75, p < 0.0001; lower p indicates a greater level of statistical confidence). The partial correlation of GNI per capita with social protection spending, controlling for LRP*, is R = 0.18 (p = 0.014; the partial correlation of a variable X with Z, controlling for Y, measures the influence of X on Z after accounting for the effect of Y on Z.) The partial correlation of basic liberal rights practices with social protection spending, controlling for GNI, is 0.52 (p < 0.0001). All in all, these results show that both liberal rights practices and income significantly influence social spending, but the influence of LRP* is stronger than that of GNI per capita.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>On-budget spending alone, however, does not give a complete picture of social protection policy. One reason is that some countries use off-budget policies to pursue the objectives of social protection. For example, some countries, instead of paying for universal health care from government budgets, require mandatory private health insurance for all but the poorest households. Others use a variety of tax incentives to encourage spending for social purposes such as health care, retirement saving, and charity. Such measures can reduce their reported social protection spending in comparison with countries that emphasize on-budget social protection.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>The OECD, whose 36 members include most of the countries classified here as highly liberal, provides a more detailed set of data that includes both on-budget (public) social spending and off-budget (private) social spending that is mandated or encouraged by tax breaks. Figure 3 summarizes the data. With private social spending included, the United States moves from twelfth to second in the OECD ranking. Switzerland and the Netherlands, both of which have mandatory private health insurance, also move up the rankings.</p>
<!-- /wp:paragraph -->
<!-- wp:image {"align":"center","id":8267,"sizeSlug":"large","linkDestination":"none"} -->
<div class="wp-block-image"><figure class="aligncenter size-large"><img alt="" class="wp-image-8267" src="https://www.niskanencenter.org/wp-content/uploads/2021/05/unnamed-32.png" /></figure></div>
<!-- /wp:image -->
<!-- wp:paragraph -->
<p>Within the OECD, both public and private social spending have positive and statistically significant correlations with country scores for basic liberal rights practices. The correlation for public social spending is higher than that for private. Not surprisingly, the correlation is higher still for the total of public and private social spending (R = 0.59).</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>Even so, high social spending, whether public or private, does not guarantee that all disadvantaged persons are actually protected. One reason is that funds may be spent inefficiently. For example, a report from the <a href="https://www.commonwealthfund.org/series/mirror-mirror-comparing-health-systems-across-countries">Commonwealth Fund</a> finds that although U.S. public and private spending on health care is far higher than that of other OECD countries, the United States falls well short of its liberal, high-income peers on several measures of health outcomes.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>Another reason why high private social protection spending may not protect the disadvantaged is that the spending itself may be biased toward people who are relatively well-off to begin with. That is clearly the case for the United States. Consider OECD data in the category it calls “tax breaks for social purposes,” which accounts for much of private social spending. For the United States, the largest item in that category is <a href="https://www.niskanencenter.org/whats-wrong-with-employer-sponsored-health-insurance/">employer-sponsored health insurance</a>. However, low-wage workers are less likely to be covered than high-wage workers, and they receive less generous coverage if they are. Another big line-item in the OECD data, employer contributions to private retirement plans, also disproportionately benefits higher-wage workers. (For data, see Slide 3 in <a href="https://www.ebri.org/docs/default-source/policy-forum-documents/70_4smith0512.pdf?sfvrsn=a44c332f_2">this slideshow</a> from the Tax Policy Center.) The tax deductibility of charitable contributions is a third big line item that the OECD counts toward private social protection spending. In the United States, however, <a href="https://www.niskanencenter.org/charitable-deduction/">only about 20 percent of “charitable” contributions</a> actually go toward help for the poor. Much of the rest goes to supporting such causes as opera houses, sports programs at elite universities, and noncharitable salaries and other expenses of religious organizations.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>In short, data on social spending are just a starting point for international comparisons of social protection policies. For a more complete picture, we turn now to direct measures of income distribution and of the degree to which basic needs are satisfied. </p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p><em><strong>Gini indexes.</strong></em><strong><em> </em></strong>Gini indexes of income distribution, provide important clues about the effectiveness of social protection policies. A Gini index is a score for the distribution of income (or any other variable) that varies from 0 to 100. The index would be zero in the case of perfect equality and 100 in the case of absolute inequality, that is, if one member of a group had everything and all the others had nothing. </p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>Several sources offer estimates of Gini indexes. However, as <a href="https://www.brookings.edu/opinions/how-much-do-we-really-know-about-inequality-within-countries-around-the-world/">Laurence Chandy and Brina Seidel</a> note in a recent study from the Brookings Institution, there are problems with the reliability of Gini data from some of the most widely cited sources, such as the World Bank. One of the most serious problems is that the surveys on which those estimates are based tend to understate the incomes of high earners. Chandy and Seidel offer an alternative set of Gini estimates that correct for the undercounting of high incomes. Their estimates pertain to the distribution of income after accounting for the effects of taxes and transfers.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>Figure 4 plots the Chandy-Seidel Gini estimates against our measure of basic liberal rights practices for 122 countries for which both sets of data are available. The dark red dots represent highly liberal democracies, the bright red dots mostly liberal democracies, and the blue dots partly liberal and illiberal countries.</p>
<!-- /wp:paragraph -->
<!-- wp:image {"align":"center","id":8268,"sizeSlug":"large","linkDestination":"none"} -->
<div class="wp-block-image"><figure class="aligncenter size-large"><img alt="" class="wp-image-8268" src="https://www.niskanencenter.org/wp-content/uploads/2021/05/canva-photo-editor-114.png" /></figure></div>
<!-- /wp:image -->
<!-- wp:paragraph -->
<p>The blue dots are widely scattered, but across all countries, the arched blue quadratic trendline shows a statistically significant tendency for countries with very high or very low liberal rights scores to have somewhat more equal income distributions than those in the middle. Among countries that are not liberal democracies, Eswatini (formerly known as Swaziland), Nigeria, and Namibia have the most unequal income distributions while Egypt and Cambodia are the most equal.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>Within the red mostly and highly liberal groups, the relationship between liberal rights practices and income equality is tighter (R = -0.75). More liberal countries tend to exhibit greater equality. Norway, Finland, and Sweden have the lowest Gini indexes within these groups. South Africa (abbreviated ZAF) is by far the most unequal in the bright red, mostly liberal group. Within the dark red highly liberal group, the United States, Israel, and Portugal have the least equal distributions of income. The amount by which a country’s Gini score exceeds what is predicted by its LRP* score – its <em>residual</em>, to use the statistical term – is shown by its distance above or below the trend line. Notably, the United States has the largest residual of any country in its highly liberal peer group. </p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p><strong><em>Basic needs</em></strong><em>. </em>We turn now to a third way to measure the effects of social protection policies, the degree to which the basic needs of citizens are satisfied in liberal democracies. Abraham Maslow’s five-level hierarchy of needs provides a convenient checklist for organizing human needs. The Legatum Institute’s dataset includes 11 variables that pertain to the two lowest levels of needs in Maslow’s hierarchy, including measures of shelter, nutrition, basic services, health care, longevity, and security from crime. The measures focus on satisfaction of needs at a basic level, rather than the average level of satisfaction; for example, the percentage of the population without adequate shelter rather than the average square feet of living space.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>Not surprisingly, the satisfaction of basic needs increases with GNI per capita, but it is also true that more liberal countries tend to better satisfy basic needs than would be expected based on income alone. That is confirmed by multiple regression analysis, which shows that both GNI per capita and LRP* are positively and significantly related to an average of the 11 Legatum basic need scores. However, the United States is an underperformer within its peer group. Among the 28 highly liberal countries, the United States ranks fifth in GNI per capita but 27th in terms of satisfaction of basic needs. The only highly liberal democracy that does less well in satisfying basic needs is Uruguay, the poorest member of the highly liberal group, with a GNI per capita less than a third that of the United States. </p>
<!-- /wp:paragraph -->
<!-- wp:heading -->
<h2><strong>Trust, and why social protection policies matter</strong></h2>
<!-- /wp:heading -->
<!-- wp:paragraph -->
<p>The data reviewed above are consistent with the hypothesis that countries with high quality of governance, market-friendly economic institutions, strong personal freedoms, and functioning procedural democracies also tend to have stronger social protection policies, as measured by social protection spending, Gini indexes of income equality, and satisfaction of basic needs. For completeness, however, it is worth looking at least briefly at the political theory, as well as the statistics, behind the concept of social protection policies as a liberal rights practices.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>To do so, we need to raise the issue of trust. The central theme of Vallier’s book is that social trust, political trust, and liberal democracy are linked in a virtuous cycle. “Since social trust creates good governance and good governance creates political trust,” Vallier writes, “social trust creates political trust by proxy.” To close the circle, he argues that liberal rights practices encourage trustworthy behavior, thereby creating conditions that favor political trust and build general social trust. </p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>This, too, is a hypothesis that can be tested. The Legatum database includes two pertinent indicators of trust. What Vallier calls “social trust” corresponds to the Legatum indicator “generalized interpersonal trust,” which is based on the percentage of people in a given country who answer “Trusted” to the question, “Generally speaking, would you say most people can be trusted, or you can't be too careful. Vallier’s “political trust,” or trust in government, corresponds to a second Legatum indicator based on the percentage of percentage of people responding "Yes" to the survey question, "Do you have confidence in national government?"</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>To a certain extent, the data uphold Vallier’s contention that liberal rights practices, social trust, and political trust are mutually reinforcing. However, there are some important caveats.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>For one thing, the hypothesized relationship among the trust variables and liberal rights practices does not appear to hold for less liberal countries. For countries below the rating of mostly liberal, neither interpersonal trust nor trust in government is significantly correlated with LRP*. As I have discussed <a href="https://www.niskanencenter.org/trust-and-quality-of-government-in-a-polarized-age/">elsewhere</a> under the heading of “the trust-in-government paradox,” that finding is due in large part to the fact that a number of countries with very low LRP* scores, such as Uzbekistan and Rwanda, have among the world’s highest trust-in-government scores.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>In contrast, among mostly and highly liberal countries, an increase in either of the two trust variables, holding the other constant, is, as Vallier hypothesizes, associated with stronger liberal rights practices. The partial correlation of trust in government and LRP*, controlling for interpersonal trust, is R = 0.64, and the partial correlation of interpersonal trust and LRP*, controlling for trust in government, is R = 0.84, both statistically significant. However, although there is a positive bilateral correlation between the two trust variables (R = 0.56), the partial correlation of interpersonal trust with trust in government, controlling for LRP*, is close to zero (R = 0.05). Perhaps that is what Vallier has in mind when he says that social trust creates political trust “by proxy” rather than directly.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>The scatterplot in Figure 5 provides a closer look at just what is going on. As before, bright red dots are the mostly liberal countries and dark red dots the highly liberal ones.</p>
<!-- /wp:paragraph -->
<!-- wp:image {"align":"center","id":8269,"sizeSlug":"large","linkDestination":"none"} -->
<div class="wp-block-image"><figure class="aligncenter size-large"><img alt="" class="wp-image-8269" src="https://www.niskanencenter.org/wp-content/uploads/2021/05/canva-photo-editor-115.png" /></figure></div>
<!-- /wp:image -->
<!-- wp:paragraph -->
<p>Although the positive slope of the trendline shows that the liberal countries do tend to have higher scores for both trust variables, the fit is not very tight. In reality, the relationship between trust and liberalism involves many other variables and complex channels of causation. For example, casual inspection of Figure 5 suggests that within Europe, there is a gradient toward greater trust and liberalism from south to north. That is confirmed by a significant correlation (R = 0.5) for European countries’ LRP* scores and the latitudes of their capital cities. But it is not just colder winters that make countries liberal. Years of research by <a href="https://us.macmillan.com/books/9780374710453">Joseph Henrich</a> and colleagues have uncovered a wide variety of historical, cultural, psychological and religious factors that help explain why liberal values and institutions grew deeper roots in the north of Europe than in the south. </p>
<!-- /wp:paragraph -->
<!-- wp:heading -->
<h2><strong>Conclusions: How to close the gap</strong></h2>
<!-- /wp:heading -->
<!-- wp:paragraph -->
<p>The data reviewed above are consistent with the hypothesis that countries with high quality of governance, market-friendly economic institutions, strong personal freedoms, and functioning procedural democracies also tend to have stronger social protection policies, as measured by social protection spending, Gini indexes of income equality, and satisfaction of basic needs. These findings justify Vallier’s contention that social protection policies should themselves be considered a liberal rights practice along with the four “basic” practices measured by the LRP* indicator. </p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>However, the data also show that the United States systematically underperforms its peers when it comes to effective social protection policies. According to a report on “<a href="https://www.dni.gov/files/ODNI/documents/assessments/GlobalTrends_2040.pdf">Global Trends</a>” just released by the U.S. National Intelligence Council, that poses a threat we should not ignore. In the years ahead, the report warns, “relationships between societies and their governments are likely to face persistent tensions because of a growing mismatch between what publics expect and what governments deliver.” The report sees that widening gap as a threat to freedom and democracy and an opening for the spread of illiberal forms of governance.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>The response of the previous administration was to try to speed up economic growth with a program of tax cuts and deregulation. However, faster growth alone will not be enough to close the gap, especially if it comes at the expense of social protections. As Brink Lindsey and Samuel Hammond argue in a recent white paper from the Niskanen Center, what we need is <a href="https://www.niskanencenter.org/faster-growth-fairer-growth-policies-for-a-high-road-high-performance-economy/"><em>Faster Growth and Fairer Growth</em></a><em>. </em>It is a false dichotomy, they argue, to say that we must choose either a dynamic market economy or a slow-growth welfare state, weighted down by a bloated bureaucracy. The opposite is true, they maintain. Within the framework of liberal democracy, faster and fairer growth are complementary. </p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>A program of faster and fairer growth would strengthen social protection policies in ways that also remove barriers to growth. For example, such a program would modernize welfare policies to close coverage gaps and strengthen work incentives. It would enhance productivity and improve people’s ability to support themselves by strengthening education, training, and job security. It would bolster families with child allowances and fix health insurance with universal coverage, leading to a healthier workforce. Further impetus to growth could come from supply-side reforms to increase competition, reduce barriers to new housing, shrink a bloated financial sector, and reform immigration to encourage the entry of energetic and talented workers.</p>
<!-- /wp:paragraph -->
<!-- wp:paragraph -->
<p>Legislation now before Congress, or soon to be submitted, contains many constructive ideas for promoting faster and fairer growth. Let’s pass the good bits, winnow out the bad ones, and build on the result. America should be a leader, not a laggard, within the club of liberal democracies.</p><p><i>Previously posted at <a href="https://www.niskanencenter.org/americas-social-protection-gap-and-what-to-do-about-it/">NiskanenCenter.org</a></i></p>
<!-- /wp:paragraph -->Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-528960494043452502021-04-02T04:46:00.000-07:002021-04-02T04:46:52.295-07:00What Does Vaccination Have To Do with Freedom?<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1SYDWdQmU0u6jgYieVLrne0IIck1CJ_HgwV3eHJA-_YMWuJr8PC2Fmkj9TMG22lvJ3GG9Zx2fJfbBhyphenhyphenC7dGFUtxPQTpX1iOr88NZo84p6jHTCTZ0jhz3MUZg6ZCw1mPdgcX78OVmGKCnM/s635/P210327-1.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="425" data-original-width="635" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1SYDWdQmU0u6jgYieVLrne0IIck1CJ_HgwV3eHJA-_YMWuJr8PC2Fmkj9TMG22lvJ3GG9Zx2fJfbBhyphenhyphenC7dGFUtxPQTpX1iOr88NZo84p6jHTCTZ0jhz3MUZg6ZCw1mPdgcX78OVmGKCnM/s320/P210327-1.png" width="320" /></a></div><p>How did getting vaccinated for Covid-19 get mixed up with
freedom? I was pondering that as I read a piece in <a href="https://thehill.com/homenews/house/543732-house-gop-holdouts-muddle-trump-vaccine-message">The
Hill</a> about Trump’s recent interview on Fox News. “I would recommend it to a
lot of people that don't want to get it. And a lot of those people voted for
me, frankly,” Trump said, before going on to add, “We have our freedoms, and we
have to live by that. And I agree with that also.”</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The Hill went on to quote Rep. Andy Biggs (R-Ariz.),
chairman of the House Freedom Caucus, as saying “As long as we still live in a
free country, then we can make those individual decisions.”<o:p></o:p></p>
<p class="MsoNormal">But, while some people insist on their fundamental freedom
to refuse vaccination, others answer, “You might have the freedom to get your
bad knee replaced or not, but you don’t have the freedom to refuse the Covid
vaccine because you don’t have the freedom to infect <i>me</i>.” Seems like there
are two completely different ideas of freedom here, no? How does that work?<o:p></o:p></p>
<p class="MsoNormal">Part of the problem, I think, is the English language’s
inadequate vocabulary of freedom. While I was thinking about this, another item
popped up in my inbox – a link to an article from the Russian opposition news
outlet <a href="https://meduza.io/en/feature/2021/03/17/how-russians-see-freedom-differently?utm_source=email&utm_medium=briefly&utm_campaign=2021-03-18">Meduza</a>.
Written by the philosopher Nikolai Plotnikov, it bore the title “How Russians
See ‘Freedom’ Differently.” <o:p></o:p></p>
<p class="MsoNormal">Russians, as Plotnikov pointed out, have two words for
freedom, <i>volya</i> and <i>svoboda. </i>Having lived several years in Russia
myself, I was aware that those two words existed, but I had never thought much
about their political implications. <i>Volya</i>, the older of the two words,
means roughly “free will.” It calls to mind an unconstrained life on the open
steppe, perhaps the image of the folk hero Stenka Razin, leader of a
seventeenth century Cossack uprising against the Russian nobility. In Plotnikov’s
view, whereas <i>volya </i>is something inherently Russian, <i>svoboda</i> is
something Western, a concept of civic freedom. <i>Svoboda</i>, he says, “is
inconceivable without respect for others’ freedom.”<o:p></o:p></p>
<p class="MsoNormal">In Russian popular usage, <i>volya</i> and <i>svoboda</i>
don’t always quite line up with Plotnikov’s somewhat academic version of their
meanings. You have, for example, <i>svobodny</i> clothing, meaning comfortable,
and <i>volny</i> clothing, meaning a bid indecent. But this isn’t a Russian
language lesson. What matters here is the usefulness of Plotnikov’s distinction
for understanding the American vaccination debate. When an American like Rep. Biggs
asserts his freedom to remain unvaccinated, he is thinking <i>volya.</i> His
neighbor who says, “No, you don’t have the freedom to infect <i>me,</i>” is thinking
<i>svoboda.</i><o:p></o:p></p>
<p class="MsoNormal">To be sure, English also has two words, but our “freedom”
and “liberty” don’t line up like that. As far as I can see, they are synonyms
that both mean <i>svoboda.</i> When Americans need to make Plotnikov’s
distinction, they either have to use circumlocutions or risk being imperfectly
understood. <o:p></o:p></p>
<p class="MsoNormal">I’ve seen American libertarians struggle with this problem,
hampered by the limits of our language. Orthodox libertarians definitely think
in terms of civic freedom, <i>svoboda.</i> Their touchstone is the
nonaggression principle – the maxim that it is impermissible to initiate
physical harm against another person. Use of force is permissible only in
self-defense. To refuse the vaccine and then sneeze in your neighbor’s face is
clearly a violation of the nonaggression principle. Yet, others who call
themselves libertarians glory in the right to be rude and crude, the right to
hate, the right to do whatever they want whatever social standards say. Some of
them don’t scruple at embracing Naziism, white supremacy, and other unsavory ideologies
that, historically, are anything but nonviolent. Writing for the orthodox
libertarian Foundation for Economic Education a few years ago, <a href="https://fee.org/articles/against-libertarian-brutalism/">Jeffrey Tucker</a>
struggled for a term and came up with “brutalist libertarianism” – a good try,
although it never caught on. Plotnikov makes it clear, though, that Tucker’s
brutalist libertarians differ from the orthodox in that they think in terms of <i>volya</i>
more than <i>svoboda.</i><o:p></o:p></p>
<p class="MsoNormal" style="margin-top: 12.0pt;">So, next time you are confused when
some of your neighbors assert their right to forego vaccination in the name of
freedom, while others, also invoking freedom, insist that everyone has a duty
to be vaccinated, you can blame it on our English language. Even though, <a href="https://www.babbel.com/en/magazine/language-most-words">by some counts</a>,
English has more words than any other language, it lacks a clear distinction
between <i>volya</i> and <i>svoboda.</i> But then, English is a free language in
that, unlike French, has no <i>Académie anglaise</i> to tell us <a href="https://theculturetrip.com/europe/france/paris/articles/20-english-words-rejected-by-the-academie-francaise/">what
words we can and cannot use</a>. Who knows, maybe <i>volya</i> and <i>svoboda</i>
will catch on yet, as have other Russian terms like <i>sputnik</i> and <i>kompromat</i>.<o:p></o:p></p><p class="MsoNormal" style="margin-top: 12.0pt;"><i>Previously posted at <a href="https://ordinary-times.com/2021/03/22/what-does-getting-vaccinated-have-to-do-with-freedom/">Ordinary Times</a>. Reposted by permission.</i></p>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-21184090601668715062021-03-27T07:25:00.000-07:002021-03-27T07:25:57.800-07:00The Best Opening for a New Third Party is the Liberal Center<p> </p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWddzwEoO402cOkRhYU5piX1XOG59YAlVUc8dMPtw0cNTOK-LxAaFFCtRg5Y5UoXWS8ZznfZcqf44a-ORsnhs8kOVSCjSBDEYyufo-xGJjHE9lxAeuwv9zB1NmNZ43zafTzrJjOZC3Hu_h/s640/P210327-2.png" style="clear: right; display: inline; float: right; margin-bottom: 1em; margin-left: 1em; text-align: center;"><img border="0" data-original-height="401" data-original-width="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWddzwEoO402cOkRhYU5piX1XOG59YAlVUc8dMPtw0cNTOK-LxAaFFCtRg5Y5UoXWS8ZznfZcqf44a-ORsnhs8kOVSCjSBDEYyufo-xGJjHE9lxAeuwv9zB1NmNZ43zafTzrJjOZC3Hu_h/s320/P210327-2.png" width="320" /></a>Writing for the New York Times, <a href="https://www.nytimes.com/2021/03/15/opinion/us-third-party-liberals.html">Bret
Stephens</a> tells us<span style="mso-spacerun: yes;"> </span>why the new party
that <a href="https://news.gallup.com/poll/329639/support-third-political-party-high-point.aspx">62
percent of Americans</a> say we need must be a centrist one, and why it must be
liberal. Not “liberal” as used in the United States to describe progressive
populism, but liberal in the classical sense of support for democracy, the rule
of law, and the Bill of Rights. That, he says, is the neglected territory of
American politics. It’s the place he thinks most Americans still are,
temperamentally and morally, and might yet return to if given the choice.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">He is right about all that. But then he almost spoils it
with one churlish phrase: “By ‘liberal,’” he says, “I don’t mean big-state
welfarism.” Perhaps that is just a sop to his conservative fans, but to me it
suggests a misunderstanding of the type of governments and social policies that
underpin the freedom and prosperity of the world’s other liberal democracies.<o:p></o:p></p>
<p class="MsoNormal"><b>If you favor liberal democracy, focus on the quality, not
the size of government<o:p></o:p></b></p>
<p class="MsoNormal">Stevens yearns for a party anchored in the liberal values of
freedom, democracy, and the rule of law. The best book about liberalism that I
have read recently is Kevin Vallier’s <a href="https://www.kevinvallier.com/books/trust-in-a-polarized-age/"><i>Trust in
a Polarized Age</i></a>. Vallier is a pragmatist, less interested in ideology
than in what he calls <i>liberal rights practices,</i> the actual nuts and
bolts that make freedom and democracy work. He identifies five of these: freedom
of association, markets and private property rights, democratic
constitutionalism, electoral democracy, and social welfare programs. Setting
social welfare programs aside for a moment, let’s look at the relationship
between the size of government and Vallier’s other four liberal rights
practices in countries around the world.<span style="mso-spacerun: yes;"> <span></span></span></p><a name='more'></a><span style="mso-spacerun: yes;">
</span><o:p></o:p><p></p>
<p class="MsoNormal">Figure 1 charts the strength of liberal rights practices (excluding
social policy) and size of government for 164 countries. The score for liberal
rights practices that I use summarizes data on personal freedoms, quality of
government, and procedural democracy. Quality of government, in turn, is a
summary measure of liberal traits such as protection of property rights, rule
of law, government integrity. The horizontal axis uses standardized values to
show how far above or below the mean each country scores on liberal rights
practices. Size of government is measured on the vertical axis by government
expenditures as a percentage of GDP. (See <a href="https://www.niskanencenter.org/quality-of-government-a-statistical-portrait/">here</a>
and <a href="https://www.niskanencenter.org/trust-and-quality-of-government-in-a-polarized-age/">here</a>
for details on data sources and methodology.)<o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgU6pJYUd9zQ-s_7swkYwjEbq-u2f7FAyHzPpVWbpsvADXt8ABigtvLZq4Y1nhMiJpz2jVnJXbQzCdsM956MY73KKyVYmHbpLs0tY_R7w_8dLV1O0PNniq1PVNQ6VaXgTEMZW4a7_NPHZX0/s620/P210317-1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="554" data-original-width="620" height="358" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgU6pJYUd9zQ-s_7swkYwjEbq-u2f7FAyHzPpVWbpsvADXt8ABigtvLZq4Y1nhMiJpz2jVnJXbQzCdsM956MY73KKyVYmHbpLs0tY_R7w_8dLV1O0PNniq1PVNQ6VaXgTEMZW4a7_NPHZX0/w400-h358/P210317-1.png" width="400" /></a></div><div class="separator" style="clear: both; text-align: left;"><p class="MsoNormal">The red dots represent 33 “highly liberal” countries that
score in the top quartile for each of the three major components of liberal
rights practices. Those countries cluster in the upper-right-hand quadrant of
the diagram. The United States is close to the center of the highly liberal
group in terms of quality of government, personal freedoms, and procedural
democracy. The size of government in the U.S. is a little smaller than would be
expected for its degree of liberalism, but it not really very far below the
trend lines for the world as a whole (blue) or the highly liberal club (red).
Only two countries, Switzerland and Ireland, have both higher scores for
liberalism and smaller governments. <o:p></o:p></p>
<p class="MsoNormal">The lesson? If you want to build a new party around the
classical liberal rights practices of freedom, and democracy and quality of
government, be realistic about the size of government you need to get those
things. The world may be full of big, bad governments, but small, good
governments are a rarity. <o:p></o:p></p>
<p class="MsoNormal"><b>Better social policy should be a key promise of any
liberal third party<o:p></o:p></b></p>
<p class="MsoNormal">Let’s turn now to Vallier’s fifth liberal rights practice,
social policy. Later in the same paragraph that begins with his sour reference
to “welfarism,” Stephens softens his tone. He proposes that his proposed
liberal third party should support “Respect for the free market, bracketed by
sensible regulation and cushioned by social support.” He is right about that. <o:p></o:p></p>
<p class="MsoNormal">I don’t have a simple measure of the amount of cushioning that
each country’s social support system does, but I do have one of the <i>need</i>
for such cushioning. Figure 2 shows liberal rights practices vs. Gini indexes
of income inequality. The Gini index has a range from 0 to 1, with lower values
showing greater equality, higher values greater inequality. <o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuws4bovgcqg1G4FNVVP8QojIWBOodKEpWZx_BL0K3ewX_dLa4QG-bQYplKkatW8TTJR3lSEAKUmVHhTgeOi0l_j0RnGZCrj2Fyo6SzK6D5MpEprzEF3N0BxP9TxyVYkbV3xIfPubkSHeQ/s633/P210317-2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="564" data-original-width="633" height="356" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuws4bovgcqg1G4FNVVP8QojIWBOodKEpWZx_BL0K3ewX_dLa4QG-bQYplKkatW8TTJR3lSEAKUmVHhTgeOi0l_j0RnGZCrj2Fyo6SzK6D5MpEprzEF3N0BxP9TxyVYkbV3xIfPubkSHeQ/w400-h356/P210317-2.png" width="400" /></a></div> <p></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">If a country has a high Gini index before any remedial
actions are undertaken, that shows a need for social policy. If it still has a
high Gini index after social policies are enacted, that means those policies
aren’t working. This chart shows the latter. The fact that the United States
has the second-highest Gini index among its highly liberal peers shows that its
social policies aren’t working. But we knew that, didn’t we?<o:p></o:p></p>
<p class="MsoNormal">Advocacy for better social policy has been at the center of Niskanen
Center’s mission since its founding. If you want to see what an effective
social policy for the United States would look like, one that is respectful of
the free market and backed by sensible regulations, read what my colleagues Brink
Lindsey and Sam Hammond write in <a href="https://www.niskanencenter.org/faster-growth-fairer-growth-policies-for-a-high-road-high-performance-economy/"><i>Faster
Growth, Fairer Growth</i></a><i>. </i>The new child benefits in the
just-enacted American Rescue Plan, which Niskanen Center has vigorously backed,
are a good illustration of what a centrist liberal party might push for.<o:p></o:p></p>
<p class="MsoNormal"><b>Must better social policy mean bigger government?<o:p></o:p></b></p>
<p class="MsoNormal">Let’s put the pieces together now. The United States has an
exceptionally small government among the thirty-three-nation liberal elite
shown in the charts. It also has exceptionally weak social policy. Does that
mean that a better social policy would necessarily cause government spending to
soar?<o:p></o:p></p>
<p class="MsoNormal">Not necessarily. The central pillars of U.S. social policy
are not really too small, in terms of the amount of tax dollars spent on them.
The problem is more that they are too fragmented and that they let too many
people fall through the cracks. Our healthcare problems don’t stem from too
little government spending, but from fact that despite spending more than any
other major country, we still leave millions of people without affordable
access to medical services. <o:p></o:p></p>
<p class="MsoNormal">Theoretically, we could do better in both areas even within
the limits of current spending. I have spelled out at length how that could be
done, with <a href="https://www.niskanencenter.org/universal-catastrophic-coverage/">universal
catastrophic coverage</a> for healthcare and <a href="https://www.niskanencenter.org/a-social-safety-net-for-an-age-of-uncertainty/">integrated
cash assistance</a> for social support. The catch is that those proposals
require not just adding new programs on top of what we have, but completely
clearing the slate and starting over from scratch.<o:p></o:p></p>
<p class="MsoNormal">Realistically, given the way American democracy works, that
is not going to happen. Even with Stephen’s new centrist liberal party in full
control of the House, the Senate, and the White House, we would be much more
likely to get piecemeal reforms, like the new child benefits. The sum of such
reforms, even if the most dysfunctional parts of current policies were
replaced, could very well mean pushing the size of the U.S. government up
toward the median for the world’s highly liberal democracies. If some hedge
fund managers lose their treasured carried-interest deductions in the process,
so be it.<o:p></o:p></p>
<p class="MsoNormal">The bottom line: Bret Stephens is right to say that the place
we most need a third party is at the neglected center of American politics.
That is where the voters are. That is where the ideas are. The moderate wings
of the existing Democratic and Republican parties both overlap that center, but
neither party is really equipped, either philosophically or organizationally,
to actually occupy the territory. <o:p></o:p></p>
<i>Previously posted at NiskanenCenter.com. Photo courtesy of <a href="https://pixabay.com/photos/direction-road-look-right-arrow-654123/">Pixabay</a>. </i></div><br /><p class="MsoNormal"><br /></p>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-61216698510440609362021-02-25T12:06:00.001-08:002021-02-25T12:06:27.874-08:00Carbon Pricing and its Green Critics<div class="separator" style="clear: both; text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglcynPxpmTENfZK1tfz53LykP67gNZGH-ezoHoVUDyj3uDbw0hORjlNDJmfUe6FNlAf-KDMnRaKC4jore4MdcT8iISKI_AH4zWmEDJMxYGPv7E5rh4OOS35XIHjiS-AIs8N2D-plcCGJwD/s1000/P210217-1.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="493" data-original-width="1000" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglcynPxpmTENfZK1tfz53LykP67gNZGH-ezoHoVUDyj3uDbw0hORjlNDJmfUe6FNlAf-KDMnRaKC4jore4MdcT8iISKI_AH4zWmEDJMxYGPv7E5rh4OOS35XIHjiS-AIs8N2D-plcCGJwD/s320/P210217-1.png" width="320" /></a></div></div><p class="MsoNormal"><span>Carbon pricing is firmly entrenched as the go-to climate policy for economists, yet many with training in other sciences and social sciences remain skeptical. As </span><a href="https://twitter.com/greenprofgreen/status/1351162687485583365">one critic</a><span> </span><span>puts it, “Of the policy tools in the carbon toolbox, carbon pricing is the tiny flathead screwdriver used to fix glasses.” </span></p><p class="MsoNormal">In my view, the skeptics have the wrong analogy. Instead of a tiny
screwdriver, I like to think of carbon pricing as the drip irrigation of
climate policy. Israeli farmers have shown how drip irrigation, used together with a suite of other policies, such as <span style="font-family: inherit;">reusing
treated sewage, finding and fixing leaks early, and engineering crops for harsh conditions, can make the desert bloom. Similarly, carbon pricing, although working quietly and largely out of sight, can serve as an integral part of a whole set of measures, such as performance standards, regulatory reform, and green industrial policy, which together can achieve the goal of deep decarbonization.</span></p><p class="MsoNormal">So why all the skepticism? Here are what I see as the main points at issue between the proponents of carbon pricing and their critics.<span></span></p><a name='more'></a><p></p><p class="MsoNormal"><b>Has carbon pricing really been tried?</b></p>
<p class="MsoNormal">In truth, most critics do not reject the concept of carbon
pricing altogether, but they see it as having much less practical value than
most economists do. According to <a href="https://iopscience.iop.org/article/10.1088/1748-9326/abdae9/meta">Jessica
Green</a>, (originator of the “tiny screwdriver” analogy), carbon pricing,
where tried, has had only modest effects.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Green supports her conclusion with a broad meta-analysis
based on previous studies of pricing in Europe and North America. She finds
aggregate emission reductions from carbon pricing to lie "mostly in a range of 0
percent and 2 percent per year.” <o:p></o:p></p>
<p class="MsoNormal">Supporters of carbon pricing reply that there is nothing
surprising in those findings, since most of the case-studies Green reviews have
been half-hearted at best. A <a href="https://www.tandfonline.com/doi/full/10.1080/14693062.2018.1492897">similar
study</a> revealed found that existing policies impose prices averaging $8 to
$12 per ton of CO2, at best a third of the “social cost of carbon” that
economists think they should aim for. What is more, those schemes, on average,
cover less than half of each countries’ emissions. Even the most dedicated carbon
price enthusiasts agree that more would be needed to achieve the holy grail of
“deep decarbonization” – getting emissions down to net zero by the middle of
the century.<o:p></o:p></p>
<p class="MsoNormal">But skeptics argue that just raising the price charged for
emissions is not enough. They see pricing as inherently incapable of achieving
transformative change. Pricing might be able to tweak efficiency at the
margins, but in a paper last year, <a href="https://www.pnas.org/content/117/16/8664">Daniel Rosenbloom</a> and
several co-authors “question whether efficiency should be an overriding
priority of climate policy.” In another recent essay, <a href="https://doi.org/10.1016/j.joule.2018.11.018">Anthony Patt and Johan Lilliestam</a>
argue that carbon pricing “made sense as our primary tool against climate
change when our climate policy ambitions were limited” but no longer do when
the goal is complete transformation of the world’s energy system. <o:p></o:p></p>
<p class="MsoNormal">But deep decarbonization and efficiency should not be viewed
as alternatives. On the contrary, ignoring efficiency makes transformative
change harder, not easier. To see why, let’s take a closer look at the drip
irrigation analogy by contrasting the Israeli and Soviet approaches to growing
crops in an arid climate.<o:p></o:p></p>
<p class="MsoNormal">From the very start, efficiency has been the hallmark of the
<a href="https://www.haaretz.com/science-and-health/how-israel-can-help-a-thirsty-world-1.5392651">remarkable
Israeli success</a>, with drip irrigation as its signature technology. Those
modest black plastic pipes work together with a whole suite of complementary
policies, such as reusing treated sewage for farming, finding and fixing leaks
early, engineering crops to thrive in onerous conditions, discouraging
gardening, and making efficient toilets mandatory. Although individually, some
of these policies make only incremental contributions, together they have been
truly revolutionary. <o:p></o:p></p>
<p class="MsoNormal">Contrast that with the Soviet approach to growing cotton in
Central Asia. If Soviet planners were good at anything, it was mobilizing mobilize
vast resources on a clear goal, and damn the cost. In the 1960s, the they put
that strategy to work to grow cotton in the Central Asian desert. Their first
step was to dam the two great rivers that flowed through the region, pouring
millions of tons of concrete to channel the water through a network of open
canals and flood the cotton fields. The result: Lots of water wasted, lots of
low-quality cotton (for a while), followed by salinization of the soil and
diminished yields. That project was transformative, too, but not in a good way.
It caused the almost complete disappearance of the Aral Sea, once the world’s
fourth largest inland body of water, which had <a href="http://www.columbia.edu/~tmt2120/environmental%20impacts.htm">regulated
the local climate</a>. That, in turn, brought hotter, dryer weather,
desertification, dust storms, and the death of a once-rich fishery.<o:p></o:p></p>
<p class="MsoNormal"><b>Picking all the apples<o:p></o:p></b></p>
<p class="MsoNormal">And what of the concern that carbon pricing, however
efficient, encourages only incremental changes? Time to switch to a different
metaphor, courtesy of pricing skeptics Patt and Lilliestam: “Carbon taxes
stimulate a search for low-hanging fruit. That ceases to matter when we know we
must eventually pick all of the apples on the tree. Metaphorically we need a
ladder.” <o:p></o:p></p>
<p class="MsoNormal">The ladder they have in mind is a mix of green industrial
policy, regulations, and subsidies for low-carbon technologies. My reply is
that the glamorous lure of transformative technologies is no reason to disdain
the low-hanging fruit. Yes, we eventually want to pick all the apples on the
tree, but Patt and Lilliestam’s version of the metaphor is incomplete. <o:p></o:p></p>
<p class="MsoNormal">Suppose you buy a house that has an apple tree in the
backyard. The first day after you move in, you notice that the apples are ripe,
but you can only reach the lowest branches. You call Home Depot. If you learn
they can deliver a ladder tomorrow, you may as well wait until it gets there
and pick the all the apples at one go. But suppose, instead, that they are out
of ladders and won’t have any until next year. What then? You make a down
payment and reserve a ladder for delivery next fall. Then you go out and pick
all the apples you can reach now. Why let them rot on the tree? <o:p></o:p></p>
<p class="MsoNormal">The delayed ladder scenario is a good depiction of where we
are with climate change. Even the most ambitious programs, like the recent <a href="https://environmenthalfcentury.princeton.edu/sites/g/files/toruqf331/files/2020-12/Princeton_NZA_Interim_Report_15_Dec_2020_FINAL.pdf">Net
Zero America</a> proposal from Princeton University, do not aim to get to net
zero in less than 30 years or so. Meanwhile, because of the persistent nature
of CO2, even marginal decreases in emissions in the near term will mean a lower
total atmospheric concentration, and permanently lower global temperatures, at
the time emissions finally fall to zero.<o:p></o:p></p>
<p class="MsoNormal"><b>Politics<o:p></o:p></b></p>
<p class="MsoNormal">All of the papers reviewed here emphasize that carbon
pricing faces daunting political resistance. Rosenbloom et al.: “Carbon pricing
has also attracted political resistance among the broader public, as it is
perceived to challenge long-standing practices and livelihoods, such as
car-based and suburban lifestyles, write Rosenbloom and his colleagues.” Patt
and Lilliestam go even further: “We disagree about the need for higher carbon
prices, and indeed view carbon taxes and permit fees as a dangerous political
distraction.” As a case in point, Green notes that Washington state had two
ballot initiatives proposing a carbon tax in 2016 and 2018, both of which
failed due to “heavy investments from fossil fuel industry.” <o:p></o:p></p>
<p class="MsoNormal">But it is disingenuous for climate activists to blame the
defeat of the Washington referendums entirely on the fossil fuel industry or on
suburbanites determined to protect their car-based lifestyles. The fact is that
Washington’s green organizations either opposed the referendums outright or
gave only lukewarm support, especially in 2016, when the chances of passage
were best. (See two long analyses for Vox by David Roberts for a detailed post
mortem on the <a href="https://www.vox.com/2016/10/18/13012394/i-732-carbon-tax-washington">2016</a>
and <a href="https://www.vox.com/energy-and-environment/2018/9/28/17899804/washington-1631-results-carbon-fee-green-new-deal">2018</a>
referendums.)<o:p></o:p></p>
<p class="MsoNormal">What is more, political pushback is not limited to
price-based policies. Almost any kind of climate action gets its share, and
from all sides. On the right, we saw that the Trump administration’s withdrawal
from the Paris Agreement was <a href="https://climatecommunication.yale.edu/publications/paris_agreement_by_state/">supported
by a large share of conservative Republicans</a>. On the green side of the
spectrum, environmentalists in Oregon and Idaho, seeing threats to wildlife and
the beauty of the landscape, <a href="https://www.nwpb.org/2019/11/15/opponents-of-proposed-eastern-oregon-to-idaho-transmission-line-file-federal-lawsuit/">sued
to stop</a> a new transmission line intended to help utilities meet a pledge
for 100 percent clean power. Still other regulatory measures draw pushback that
is hard to classify as right or left. Try reading some of the hundreds of
thousands of Google hits for “I hate low-flow showerheads!” <o:p></o:p></p>
<p class="MsoNormal">In my view, the lesson to be drawn here is that we are still
in the early days when it comes to designing policies that are both
economically effective and politically feasible. Available policy choices span
the spectrum in both respects. What we need is to start with the policies that
generate the least political pushback per ton of carbon saved, but we don’t
know exactly what those are.<o:p></o:p></p>
<p class="MsoNormal">Fortunately, there are lots of promising ideas. One widely
discussed idea for mitigating political resistance to carbon pricing is to use
some or all of the revenue from pricing schemes to compensate key
constituencies. The <a href="https://citizensclimatelobby.org/">Citizens’
Climate Lobby</a>, for example, proposes to rebate the entire proceeds of a
carbon tax equally to everyone. Other plans limit payouts more narrowly to
low-income households, which tend to spend a higher share of their budgets on
home heating, gasoline, and other types of energy. Targeting rebates on
low-income households would leave more revenue available for other policies that
would help build political support, such as job-creating infrastructure
projects or research to help industries transition more smoothly to a
zero-emissions future. (<a href="https://www.niskanencenter.org/when-does-it-will-hurt-the-poor-outweigh-its-good-for-the-environment/">See
here</a> for a full discussion of the compensation issue, with charts and
sources.)<o:p></o:p></p>
<p class="MsoNormal">Proper policy sequencing is another idea for reducing
political resistance to carbon pricing. <a href="https://www.researchgate.net/publication/321036614_Policy_sequencing_toward_decarbonization">Jonas
Meckling, Thomas Sterner, and Gernot Wagner</a> make a case for beginning with
green industrial policies such as support for research and development,
subsidies, loan guarantees, and direct mandates. Such policies, even on a
modest scale, would build support for adding carbon pricing to the mix later.
One reason is that they would build a constituency among producers of
low-carbon goods and services, who would then back carbon prices to boost demand
for their products. Another reason is that early investments in research would
help low-carbon technologies move “up the learning curve and down the cost
curve,” so that the incentive effects of carbon prices, when they were
introduced, would produce greater gains at a lower cost. Early investment in
infrastructure would also help. For example, a price incentive for wind and
solar power would become more effective once a transmission network was in
place to move it from where it was most cheaply generated to where it was most
in demand.<o:p></o:p></p>
<p class="MsoNormal">Danny Cullenward and David Victor, authors of <a href="https://politybooks.com/bookdetail/?isbn=9781509541799"><i>Making Climate
Policy Work</i></a><i>,</i> suggest a sectoral variant of policy sequencing.
Recognizing both the theoretical appeal of carbon pricing and the reality of
political resistance, they suggest that pricing should be introduced first in
sectors like electric power, where political resistance is relatively low.
Other sectors (transportation, for example), “where the public is inordinately
sensitive to sticker prices,” should, in their view, be handled with nonprice
strategies, at least initially. Cullenward and Victor also make a persuasive
case that in terms of results achieved per unit of political resistance, carbon
pricing works better in the form of carbon taxes than cap-and-trade.<o:p></o:p></p>
<p class="MsoNormal"><b>The case for a mixed strategy<o:p></o:p></b></p>
<p class="MsoNormal">Textbook presentations sometimes leave the impression that climate
policy should consist solely of setting the right price for carbon (possibly a
very high one) and then letting the market do the rest. In practice, however,
there is a strong case for a mixed strategy that combines carbon pricing with
appropriate regulatory reforms and green industrial policy. That case is
especially strong when political realities are considered and when the goal is
deep decarbonization at the earliest feasible date. <o:p></o:p></p>
<p class="MsoNormal"><a href="https://reader.elsevier.com/reader/sd/pii/S0301421518304063">Endre
Tvinnereim and Michael Mehling</a> are among those who make a strong case
for a mixed strategy. They do not argue against carbon pricing in principle,
but rather to caution against placing too much faith in it. Over time, they go
on to say, as tolerance for higher prices increase, pricing may unleash more of
its potential. Meanwhile, they say, “the presence of a price on carbon
emissions can send an omnibus signal that policy makers are serious about
tackling global warming, and that long-term investments need to be made with
expectations of future carbon constraints in mind.” <o:p></o:p></p>
<p class="MsoNormal">An intriguing new working paper by two of Mehling’s MIT
colleagues, <a href="http://ceepr.mit.edu/news/220">Emil G. Dimanchev and
Christopher R. Knittel</a>, clarifies the case for a mixed policy. Those
authors, like many before them, find that a pure carbon pricing policy is more
cost-effective than one based on standards alone. However, using both theory
and modeling, they add an important twist. They find that beginning from
complete reliance on standards, the benefit of adding a carbon price to the mix
is large at first, and then gradually diminishes. That, they say, demonstrates
that even a modest carbon price can have large efficiency benefits. Whereas
Cullenward and Victor argues that regulations, not pricing, “do the majority of
the work” in mixed policy regimes, Dimanchev and Knittel stand that view on its
head. Their work suggests that the modest pricing component is exactly what
allows the regulatory part of existing mixed regimes to work effectively.<o:p></o:p></p>
<p class="MsoNormal">In short, skeptics that rule out pricing altogether or limit
it to the margins of policy go too far. I my opinion, Green’s “tiny
screwdriver” characterization inadequately accounts for the synergistic
interactions between carbon pricing, green industrial policies, and appropriate
regulations. I also strongly disagree with Patt and Lilliestam’s
characterization of carbon pricing as nothing but a “dangerous political
distraction.” On the contrary, it seems to me that the need for wholesale
transition is a reason for enthusiastically supporting the use of every weapon
in the decarbonization arsenal. <o:p></o:p></p>
<i><span face=""Calibri",sans-serif" style="font-size: 11pt; line-height: 107%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">Based on a longer version published at </span></i><span face=""Calibri",sans-serif" style="font-size: 11pt; line-height: 107%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;"><a href="https://www.niskanencenter.org/getting-to-zero-carbon-pricing-and-its-green-critics/"><i>NiskanenCenter.org</i></a><i>.
Photo courtesy of </i><a href="https://commons.wikimedia.org/wiki/File:Dripirrigation.png"><i>Wikimedia
Commons</i></a></span>
<!--/wp:html-->Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-72206743310797098932021-02-15T08:06:00.001-08:002021-02-15T08:06:42.197-08:00Economic and Personal Freedom: Test Driving Cato's Human Freedom Index<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkNZBXsQXDii2a9wWQG0nYnQtlyUOSuEBxPMx-l3ucI6z7_wbE0vN-6k6cTn8yDedHxI4jPylxbL9TgcmVGnJDtP8uxYvqVVm0aGHXEKhELvAr7pMvrDmpTXYtt4XRHqRVf_2tNxbAC-Pu/s1021/P210215-1.png" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="831" data-original-width="1021" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkNZBXsQXDii2a9wWQG0nYnQtlyUOSuEBxPMx-l3ucI6z7_wbE0vN-6k6cTn8yDedHxI4jPylxbL9TgcmVGnJDtP8uxYvqVVm0aGHXEKhELvAr7pMvrDmpTXYtt4XRHqRVf_2tNxbAC-Pu/s320/P210215-1.png" width="320" /></a></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p style="text-align: left;"><span style="background-color: white; color: #1e1e1e; font-family: "Noto Serif"; font-size: inherit; white-space: pre-wrap;">December saw the release of the 2020 edition of the </span><a href="https://www.cato.org/human-freedom-index-new" style="background-color: white; box-sizing: inherit; color: #0073aa; font-family: "Noto Serif"; font-size: inherit; outline: 0px; transition: none 0s ease 0s; white-space: pre-wrap;">Human Freedom Index</a><span style="background-color: white; color: #1e1e1e; font-family: "Noto Serif"; font-size: inherit; white-space: pre-wrap;">, published jointly by the Cato Institute and the Fraser Institute. The index is a massive effort that combines an </span><a href="https://www.fraserinstitute.org/studies/economic-freedom" style="background-color: white; box-sizing: inherit; color: #0073aa; font-family: "Noto Serif"; font-size: inherit; outline: 0px; transition: none 0s ease 0s; white-space: pre-wrap;">Economic Freedom Index</a><span style="background-color: white; color: #1e1e1e; font-family: "Noto Serif"; font-size: inherit; white-space: pre-wrap;"> developed by the Fraser Institute with a separate index of personal freedom compiled by Cato. The freedom indexes and the data behind them are a treasure trove for data junkies like me. This commentary takes the data for a test drive by exploring a key finding of the Cato-Fraser report: that economic freedom and personal freedom go hand in hand.</span></p></blockquote><div style="background-color: white; box-sizing: inherit; color: #1e1e1e; font-family: "Noto Serif"; outline: 0px;"><div style="box-sizing: inherit; outline: 0px;"><div style="box-sizing: inherit; outline: 0px;"><div class="block-editor-block-list__layout is-root-container" style="box-sizing: inherit; outline: 0px; position: relative;"><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="60664fbe-b4c6-425a-b484-8908a344d477" data-title="Paragraph" data-type="core/paragraph" id="block-60664fbe-b4c6-425a-b484-8908a344d477" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; text-align: left; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><span style="font-size: medium;">Economic and personal freedom: A first look</span></span></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="233b86c6-2f8b-4021-a21f-a8dfa4a8ee11" data-title="Paragraph" data-type="core/paragraph" id="block-233b86c6-2f8b-4021-a21f-a8dfa4a8ee11" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The Human Freedom Index comprises 76 individual indicators, divided into 12 groups. Five of the groups cover economic freedom: Size of government; legal system and property rights (LSPR); sound money; freedom of trade; and regulation. The remaining seven groups cover personal freedom, including rule of law; safety and security; freedom of movement; religion; association, assembly, and civil society; expression and information; and identity and relationships. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="6ac43136-ff1c-4083-87a9-a59552cb561b" data-title="Paragraph" data-type="core/paragraph" id="block-6ac43136-ff1c-4083-87a9-a59552cb561b" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Figure 4 in the freedom report is a scatter plot that shows a strong correlation between economic and personal freedom. My version of the chart looks like this:</p><figure aria-label="Block: Image" class="wp-block-image block-editor-block-list__block wp-block size-large wp-block" data-block="f201ed05-2eff-480b-89b7-3f7816492ae3" data-title="Image" data-type="core/image" id="block-f201ed05-2eff-480b-89b7-3f7816492ae3" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative;" tabindex="0"><div class="components-resizable-box__container" style="box-sizing: border-box; display: inline-block; flex-shrink: 0; height: auto; max-height: 1305.89px; max-width: 1450px; min-height: 20px; min-width: 22.2071px; outline: 0px; position: relative; user-select: auto; width: auto;"><img alt="This image has an empty alt attribute; its file name is image1.png" src="https://www.niskanencenter.org/wp-content/uploads/2021/02/image1.png" style="border: none; box-sizing: inherit; display: block; height: inherit; max-width: 100%; width: inherit;" /><span style="box-sizing: inherit;"></span></div><div class="components-drop-zone" style="border-radius: 2px; border: 2px solid var(--wp-admin-theme-color); box-sizing: inherit; inset: 0px; opacity: 0; outline: 0px; position: absolute; transition: opacity 0.3s ease 0s, background-color 0.3s ease 0s, visibility 0s ease 0.3s; visibility: hidden; z-index: 40;"></div></figure><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="cfed8f54-a2f9-46cc-8ef9-3510f14152bc" data-title="Paragraph" data-type="core/paragraph" id="block-cfed8f54-a2f9-46cc-8ef9-3510f14152bc" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="font-size: inherit;">The points in the diagram cluster around a positively sloping trendline, showing that countries with freer economies, by and large, tend also to enjoy greater personal freedom. Statistically, differences in economic freedom account for just over half of the variance in personal freedom.</span><span style="font-size: 13.3333px;">[1]</span> Sweden has the highest personal freedom score, while Hong Kong has the highest economic freedom score.<span style="font-size: 13.3333px;">[2]</span><span style="font-size: inherit;"> </span></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="7521adc9-67df-4061-aaeb-767ddc124c41" data-title="Paragraph" data-type="core/paragraph" id="block-7521adc9-67df-4061-aaeb-767ddc124c41" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The analysis section that follows explores what goes on behind the scenes to produce the striking relationship between economic and personal freedom. In a concluding section, I make several suggestions for strengthening the economic freedom portion of the index. Readers who are willing to take my conclusions at face value without examining the statistical details of how I reach them can skip the analysis section and go directly to the conclusions.<span></span></p><a name='more'></a><p></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="7521adc9-67df-4061-aaeb-767ddc124c41" data-title="Paragraph" data-type="core/paragraph" id="block-7521adc9-67df-4061-aaeb-767ddc124c41" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><b><span style="font-size: medium;">Analysis</span></b></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="7521adc9-67df-4061-aaeb-767ddc124c41" data-title="Paragraph" data-type="core/paragraph" id="block-7521adc9-67df-4061-aaeb-767ddc124c41" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="font-size: inherit;">The Cato Human Freedom Index covers 162 countries in all, but many countries lack data for one or more of the 76 individual indicators in the data set. Group scores for those countries are estimated based on the remaining indicators within each group for which data are available. In my analysis, I will frequently want to dig below the group scores to the individual indicators. For that reason, I will use only the subsample of 107 countries for which there are no missing data. Those countries are shown as solid dots in Figure 1. Countries represented by empty dots are missing data for one or more indicators. The fit between the two types of freedom for the 107-country subsample (R</span><sup style="box-sizing: inherit; font-size: inherit;">2</sup><span style="font-size: inherit;"> = 0.48) is slightly less close than that for the 162 countries as a whole (R</span><sup style="box-sizing: inherit; font-size: inherit;">2</sup><span style="font-size: inherit;"> = 0.51), but the difference is not statistically significant.</span><span style="font-size: 13.3333px;">[3]</span><span style="font-size: inherit;"> </span></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="371f5930-f5ca-45e1-a203-34f7890973a8" data-title="Paragraph" data-type="core/paragraph" id="block-371f5930-f5ca-45e1-a203-34f7890973a8" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The fact that the summary score for economic freedom accounts for half of the cross-country variance in personal freedom can be considered a strong result, especially in the social sciences, which deal with notoriously variable human behavior and hard-to-measure concepts. However, that top-line result by no means exhausts the explanatory power of the available data. We need to dig deeper, exploring the separate economic freedom groups and the individual indicators within them.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="710519de-1bc1-4036-b0fc-c6fc5fa97fa8" data-title="Paragraph" data-type="core/paragraph" id="block-710519de-1bc1-4036-b0fc-c6fc5fa97fa8" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="font-size: inherit;">As a first step, we can use the five economic freedom groups as separate control variables in a multiple regression, with personal freedom as the response variable. When we do so, the share of the cross-country variance in personal freedom jointly explained by economic freedom rises from just half to nearly three-quarters (R<sup style="box-sizing: inherit;">2</sup> = 0.74). The regression results show that the five economic freedom groups are not all of equal importance. Each of the group scores except regulation has at least a marginally significant effect on personal freedom, but nearly all of the effect comes from two groups, legal systems and property rights (LSPR) and international trade. The regression coefficient for sound money is negative; that is, personal freedom tends to be higher in countries where the score for the sound money group is lower.</span><span style="font-size: 13.3333px;">[4]</span> (An <a href="http://tiny.cc/gaobtz" style="box-sizing: inherit; color: #0073aa; font-size: inherit; outline: 0px; transition: none 0s ease 0s;">Online Supplement</a> to this report gives complete results for these and other statistical tests and regressions. See sheet OS1 for the results cited in this paragraph.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="8af88ace-db91-4f26-a729-3b9320fb3b7e" data-title="Paragraph" data-type="core/paragraph" id="block-8af88ace-db91-4f26-a729-3b9320fb3b7e" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The above results further vindicate the notion that economic freedom and personal freedom are strongly related, but there is more to learn. The next step is to examine the individual indicators within each economic freedom group to see which of them contribute most to the relationship, and how.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="d8258fdd-8e6e-4a50-9b2d-c7f5cf71f9dc" data-title="Paragraph" data-type="core/paragraph" id="block-d8258fdd-8e6e-4a50-9b2d-c7f5cf71f9dc" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Size of government. </em></span>The first group, which measures the size of government, comprises five indicators: government consumption expenditures, transfer payments, top marginal tax rates, government investment, and government ownership of assets. We can begin by applying some standard tests to see whether these indicators form a coherent group – colloquially speaking, whether they are all “apples” or whether they mix “apples” and “oranges.”</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="6f108a46-f743-4acd-812e-7b574cef234f" data-title="Paragraph" data-type="core/paragraph" id="block-6f108a46-f743-4acd-812e-7b574cef234f" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">One such test is called Cronbach’s alpha, a statistic ranging from 0 to 1 that measures how closely related items in a set of indicators are to one another. A typical application of Cronbach’s alpha might be to evaluate a set of questions designed to predict whether a job applicant would do well in a sales position. If adding a new item to the questionnaire increases the value of alpha, that item is likely to improve predictions. If adding a question reduces alpha, the questionnaire is likely to be more useful without it. There is no magic value of Cronbach’s alpha that makes a set of indicators reliable, but as a rule of thumb, a value of 0.70 or better can be considered encouraging. Very high values of alpha, 0.90 or above, may indicate that there is redundancy among the items. For example, an alpha of 0.95 for the sales questionnaire might mean that a version with fewer questions could predict job performance just as well. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="8dd45ef7-1a20-4540-b9c4-f3e591c55caa" data-title="Paragraph" data-type="core/paragraph" id="block-8dd45ef7-1a20-4540-b9c4-f3e591c55caa" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Principal component analysis is another technique that is useful in the search for patterns in large data sets. If the variables in a data set are closely related, a single principal component, or a small number of such components, can be used in place of the complete set with little loss of information. If the items in the original data set are not closely related to one another, they cannot usefully be reduced to one or a few principal components.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="072e6e76-a972-4d9f-9e58-3c68ab500479" data-title="Paragraph" data-type="core/paragraph" id="block-072e6e76-a972-4d9f-9e58-3c68ab500479" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">In the case of the “size of government” group, Cronbach’s alpha is very low (α = 0.25), raising a red flag as to its statistical coherence. The first principal component accounts for about half of the variation in the data within this group and the second principal component about 25 percent. Government consumption, transfers, and tax rates affect the components differently from government investment and ownership, suggesting, figuratively, that the first three are “apples” while the last two are “oranges.” </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="4acfb8f8-17ee-43fa-ba97-751e00ded0f8" data-title="Paragraph" data-type="core/paragraph" id="block-4acfb8f8-17ee-43fa-ba97-751e00ded0f8" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">It is important to point out that Cronbach’s alpha does not measure the quality or usefulness of the individual indicators, but only the extent to which they form a statistically coherent group. If they do form such a group, then a summary score for the group, such as a simple average or weighted average, will be useful for analytical purposes. If the items in the group are unrelated, an average score is not likely to tell us much, even if we could learn a great deal from some of the individual elements in the group. In this case, the “size of government” group does not appear to be tightly consistent, suggesting that using the group score in place of the individual variables carries a risk of degrading the explanatory power of the data.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="6d749f8e-3252-4c52-8a96-daf1f7e3b7d8" data-title="Paragraph" data-type="core/paragraph" id="block-6d749f8e-3252-4c52-8a96-daf1f7e3b7d8" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Multiple regression analysis confirms that impression. A regression using the five individual indicators from the size of government group along with the summary scores for the other four groups as control variables produces a multiple R<sup style="box-sizing: inherit;">2</sup> of 0.82, a significant increase from the R<sup style="box-sizing: inherit;">2 </sup>of 0.74 when only the group scores were used. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="4221deb5-7741-4e65-be6c-d4e6a10271d7" data-title="Paragraph" data-type="core/paragraph" id="block-4221deb5-7741-4e65-be6c-d4e6a10271d7" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Of the five components of size of government, only state ownership of assets has a significant positive association with personal freedom. In fact, state ownership alone has more explanatory power than the size of government group score. Accordingly, I will use it in place of the group score for size of government in further regressions discussed below.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="f60835f0-9d99-4074-9e3c-e209451f84d4" data-title="Paragraph" data-type="core/paragraph" id="block-f60835f0-9d99-4074-9e3c-e209451f84d4" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Before leaving the size of government group, it is worth looking briefly at the signs of the coefficients obtained in the above regressions. In the regression using only the five group scores as controls, the coefficient for the size of government group is positive and marginally significant. Keep in mind that the score is constructed so that a <em style="box-sizing: inherit;">higher</em> value means a <em style="box-sizing: inherit;">smaller</em> government, so the positive coefficient for the group score is consistent with the libertarian <em style="box-sizing: inherit;">a priori</em> that larger government means less freedom. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="c864c4e1-f5a2-44cb-9618-4497afeb59ea" data-title="Paragraph" data-type="core/paragraph" id="block-c864c4e1-f5a2-44cb-9618-4497afeb59ea" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">In regressions using the five individual components of size of government separately, most of the coefficients are not significantly different from zero. Even so, the sign of a statistically insignificant coefficient still carries some information. A positive sign means that the relationship of that control variable with the response variable is at least somewhat more likely to be positive than negative, and vice versa. It is noteworthy, then, that the signs for the three fiscal indicators (government consumption, transfer payments, and top marginal tax rate) are all negative. That suggests that the libertarian <em style="box-sizing: inherit;">a priori</em> is more likely to be false than true for <em style="box-sizing: inherit;">fiscal</em> measures of the size of government, even though indicators of government <em style="box-sizing: inherit;">ownership </em>are positively related to personal freedom. (See <a href="http://tiny.cc/gaobtz" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">OS2</a> for details of these statistical findings regarding size of government.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="61197eb3-68f0-4e2f-803f-52ef42d369d7" data-title="Paragraph" data-type="core/paragraph" id="block-61197eb3-68f0-4e2f-803f-52ef42d369d7" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Legal system and property rights.</em></span><em style="box-sizing: inherit;"> </em>The LSPR group includes eight indicators, measuring judicial independence, impartiality of courts, protection of property rights, integrity of the legal system, contract enforcement, reliability of police, and regulatory costs of property sales. In contrast to the “size of government” group, the LSPR group has a high degree of statistical reliability. Cronbach’s alpha is a strong 0.93. That increases slightly, to 0.96, if the last two indicators (police and property sales) are dropped. Evidently, there is some redundancy in this group. Multiple regression analysis does not find any one component of LSPR to stand out from the others. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="9ee669a7-dedf-4a66-93a1-fecf125a60ac" data-title="Paragraph" data-type="core/paragraph" id="block-9ee669a7-dedf-4a66-93a1-fecf125a60ac" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Some readers will recognize that the first six indicators in the Cato/Fraser LSPR group closely parallel a variable that I have called “<a href="https://www.niskanencenter.org/quality-of-government-a-statistical-portrait/" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">quality of government</a>” in my own earlier work. LSPR, or quality of government, whichever you call it, has a robust positive association with personal freedom across a wide variety of data sources, country samples, and model specifications. In fact, the bilateral R<sup style="box-sizing: inherit;">2</sup> for LSPR and personal freedom, with no other control variables, is 0.68, greater than the bilateral R<sup style="box-sizing: inherit;">2</sup> for personal freedom and the whole Economic Freedom Index. (See <a href="http://tiny.cc/gaobtz" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">OS3</a>.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="65fea3f1-35c2-4b2c-81b7-722b03622998" data-title="Paragraph" data-type="core/paragraph" id="block-65fea3f1-35c2-4b2c-81b7-722b03622998" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="font-size: inherit;">Useful though the LSPR group is, researchers should note that its group score is not a simple average of its eight components. Instead, it is subjected to a <em style="box-sizing: inherit;">gender legal rights adjustment – </em>a score ranging from 0 to 1 that reflects the degree to which women have the same access to the legal system and property rights as men do.</span><span style="font-size: 13.3333px;">[5]</span> Let L be a country’s unadjusted average of the eight LSPR components; G be its gender legal rights score; and L* its adjusted legal rights score. We can then write the adjustment as L* = (L + LG)/2. The logic behind this functional form for the adjustment is that if, say, a country’s men have a 100 percent chance of getting a fair trial, and women have only a 50 percent chance of getting a fair trial in the same court, then the chance that randomly chosen person could get a fair trial in that court would be 75 percent. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="d2e2f877-e788-4826-bdab-39e320df6a21" data-title="Paragraph" data-type="core/paragraph" id="block-d2e2f877-e788-4826-bdab-39e320df6a21" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The idea of taking gender equality into account when evaluating a country’s legal system and property rights is a sound one, but the adjusted score should be used with caution. Depending on the purpose at hand, it might be more appropriate to treat the gender legal rights score and the unadjusted score as separate control variables, or to use the multiplicative term LG as a separate control, or to use some technique such as principal component analysis to determine the appropriate weight that should be placed on the individual LSPR components and the gender legal rights score.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="9780e21d-ca86-4e44-97ac-e0e1322b2a2b" data-title="Paragraph" data-type="core/paragraph" id="block-9780e21d-ca86-4e44-97ac-e0e1322b2a2b" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Consider just one example of the issues raised by the gender legal rights adjustment. Suppose we conduct multiple regressions using LSPR and the other four group scores as controls. If the response variable for the regression is personal freedom, the resulting R<sup style="box-sizing: inherit;">2</sup> is higher when the LSPR control is the adjusted group score than when it is unadjusted. However, when the response variable is GDP per capita, the R<sup style="box-sizing: inherit;">2</sup> is higher for the unadjusted score. In all cases, the coefficient for the LSPR variable is positive and highly significant. (See <a href="http://tiny.cc/gaobtz" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">OS8</a> for these results.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="7cc7bbe2-e4d9-4885-86a3-cc2ac099bc43" data-title="Paragraph" data-type="core/paragraph" id="block-7cc7bbe2-e4d9-4885-86a3-cc2ac099bc43" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Although I did not pursue the issue exhaustively, I can think of several reasons why the adjusted LSPR “works better” for personal freedom than for GDP.</p><ul aria-label="Write list…" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="5d0bbeab-a41c-4f71-9aaa-2d4d7dcf0c4b" data-title="List" data-type="core/list" id="block-5d0bbeab-a41c-4f71-9aaa-2d4d7dcf0c4b" role="textbox" style="box-sizing: inherit; font-size: 16px; list-style-image: initial; list-style-position: initial; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; padding: 0px 0px 0px 1.3em; position: relative; white-space: pre-wrap;" tabindex="0"><li style="box-sizing: inherit; margin-bottom: initial;">Some underlying indicators seem to be shared by the personal freedom and economic freedom components of the Human Freedom Index, as published by Cato. For example, both the gender legal rights adjustment score and the personal freedom score contain component indicators related to women’s travel rights. There may be others that are less obvious.</li><li style="box-sizing: inherit; margin-bottom: initial;">There may be confounding variables. For example, Gulf oil states, which tend to have low GLR scores, have high GDPs but low personal freedom scores. Perhaps further control variables such as resource-intensity of GDP or cultural variables would help explain the disparity.</li><li style="box-sizing: inherit; margin-bottom: initial;">It is possible that some LSPR component scores may already be implicitly adjusted for gender disparities. For example, Saudi Arabia has significantly lower scores for impartial courts, protection of property rights, and enforcement of contracts than does the United States. Do those differences reflect the fact that even men’s property rights, etc. are not as well protected in Saudi Arabia, or did the sources for the underlying data already down-score Saudi Arabia because such rights are well-protected only for Saudi men? It would require some detailed examination of the methodologies underlying the source data to be sure.</li></ul><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="d5b8a9e3-ccd3-44bd-b828-e67736b51882" data-title="Paragraph" data-type="core/paragraph" id="block-d5b8a9e3-ccd3-44bd-b828-e67736b51882" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Sound money. </em></span>The sound money group suffers from both statistical and conceptual problems. Its four component indicators include the rate of M1 money growth (that is, the most liquid assets), the standard deviation of inflation, the rate of inflation, and freedom to own foreign currency.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="947eb429-9ef2-4954-9ebd-e9444d1fa1c6" data-title="Paragraph" data-type="core/paragraph" id="block-947eb429-9ef2-4954-9ebd-e9444d1fa1c6" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Like size of government, sound money lacks statistical reliability. Cronbach’s alpha for the group is a weak 0.38. The foreign currency item is the worst fit. (It is a better fit with the international trade group, and should perhaps be moved.) After dropping that item, alpha rises to 0.66, better but still a little on the low side. Factor analysis confirms that it is questionable to group ownership of foreign currency with the other three sound-money indicators. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="69887664-82c0-449c-bbc1-9476aa46c284" data-title="Paragraph" data-type="core/paragraph" id="block-69887664-82c0-449c-bbc1-9476aa46c284" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">A further problem with the sound money group is the focus on M1 money growth as a key aspect of monetary policy. Although I do not know all the historical details, it is my impression that the focus on M1 is a carry-over from the early days of the economic freedom project, when it was influenced by the then-fashionable Chicago school monetarism. Today, few serious monetary economists pay much attention at all to M1, or to the growth other monetary aggregates. When the effects of the other variables in the “sound money” group are considered, differences in the rate of M1 money growth account for just 11 percent of the cross-country variations in inflation rates in our sample. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="df65e9c5-b4a9-4735-acc9-e07f388efbe5" data-title="Paragraph" data-type="core/paragraph" id="block-df65e9c5-b4a9-4735-acc9-e07f388efbe5" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The standard deviation of inflation appears to be statistically significant in some model configurations, but I would add a word of caution when interpreting this variable. A look at the distribution of scores shows that many of the countries with the most volatile inflation (that is, the lowest scores for this component) are heavily dependent on natural resource exports. It seems likely to me that the volatility of their inflation rates is not due to unsound domestic monetary policy, but rather, to volatility of global commodity prices, which are transmitted to domestic inflation via exchange rates.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="dca0eb80-efe2-4781-abab-a7748116b3de" data-title="Paragraph" data-type="core/paragraph" id="block-dca0eb80-efe2-4781-abab-a7748116b3de" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Still another weakness of the sound money group is its implicit assumption that the optimal rate of inflation is zero. Today, inflation targeting by central banks of the world’s major economies aims for a rate of about 2 percent per year, plus or minus a point or so, while those in some developing countries set a somewhat higher target. There is good evidence that rates of inflation below 2 percent are at least as “unsound” as excessive inflation when it comes to macroeconomic stability and growth. The median inflation rate in our 107-country sample was 2.6 percent as of 2018, well within the safe range, and just 21 countries had inflation over 5 percent. In short, excessive money growth and inflation are serious concerns for relatively few countries in today’s world.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="275024c5-7776-4711-97e6-33a82ea65d30" data-title="Paragraph" data-type="core/paragraph" id="block-275024c5-7776-4711-97e6-33a82ea65d30" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Interestingly, despite these problems, “sound money” does have some explanatory power with respect to personal freedom. In multiple regressions structured in several different ways, the group score for sound money has a consistent and statistically significant <em style="box-sizing: inherit;">negative</em> effect on personal freedom; that is, personal freedom seems to be higher where money is <em style="box-sizing: inherit;">less </em>sound, according to the Fraser definition. All four sound-money components also have negative coefficients if treated as separate controls. (See <a href="http://tiny.cc/gaobtz" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">OS4</a> for details.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="3fec15ed-cddc-4c93-b882-22ac677b8239" data-title="Paragraph" data-type="core/paragraph" id="block-3fec15ed-cddc-4c93-b882-22ac677b8239" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Free trade. </em></span>The freedom of trade group covers nine separate indicators related to tariff and nontariff barriers to trade as well as freedom of international movement of visitors and capital. These variables form a statistically reliable group, with a Cronbach’s alpha of 0.77. The indicators are divided into four subgroups, representing tariffs, nontariff barriers, black-market exchange rates, and restraints on movement of people and capital. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="15ac7ac2-7ad2-4628-8a78-ba2c10596393" data-title="Paragraph" data-type="core/paragraph" id="block-15ac7ac2-7ad2-4628-8a78-ba2c10596393" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Multiple regressions that break the group score for free trade into its four subgroups, or into its nine individual indicators, give results that are not significantly better than using the group score alone. (See <a href="http://tiny.cc/gaobtz" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">OS5</a>.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="a8c4f23c-a1a5-4075-b1b6-caeb0d2a0925" data-title="Paragraph" data-type="core/paragraph" id="block-a8c4f23c-a1a5-4075-b1b6-caeb0d2a0925" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Regulation</em></span><em style="box-sizing: inherit;">. </em>The regulation group of the Economic Freedom Index includes 15 separate indicators divided into three subgroups, which pertain to regulation of credit markets, labor markets, and business regulation in general. Like size of government and sound money, the regulation group suffers from both statistical and conceptual problems. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="84e16d16-0371-42e2-8de3-ee05dc79ae4f" data-title="Paragraph" data-type="core/paragraph" id="block-84e16d16-0371-42e2-8de3-ee05dc79ae4f" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Starting with the credit market subgroup, a Cronbach’s alpha of just 0.19 raises an immediate red flag. The first indicator in the subgroup measures the extent of state ownership of banks. Even if one is not a fan of state ownership of banks, it seems odd to call it “regulation.” Perhaps it might more sensibly go in the size of government group, along with state ownership of other assets. The second indicator in the subgroup is called “private sector credit,” but in fact, it is a purely macroeconomic indicator that shows the ratio of the government budget deficit to gross saving. Again, whether you think more government borrowing is good or bad, why call it regulation? The third indicator in the credit market group purports to measure the extent of interest rate controls, with high values indicating that interest rates are mostly market-determined. That sounds reasonable, but there are some oddities. For example, the indicator is calculated in a way that takes points off if real interest rates on bank deposits are negative, yet, in today’s low-inflation world, negative real deposit rates are commonplace even in the most stable and market-oriented of economies.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="284775d7-5922-4898-9697-d11f0dada2ef" data-title="Paragraph" data-type="core/paragraph" id="block-284775d7-5922-4898-9697-d11f0dada2ef" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The labor market subgroup also has a low alpha, just 0.32. Most of the indicators in this subgroup are standard measures of regulation of wages, hours, and hiring and firing, but it also includes a measure of military conscription. Again, why call that “regulation”? If anything, I would call conscription a <em style="box-sizing: inherit;">per se</em> violation of human rights and move it to the personal freedom index, rather than count it as economic freedom. Dropping the conscription indicator raises the alpha score for this group to a slightly better 0.45.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="807a4ca7-1cba-45b0-9969-aea7186988f3" data-title="Paragraph" data-type="core/paragraph" id="block-807a4ca7-1cba-45b0-9969-aea7186988f3" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The business regulation group has the best alpha score, at 0.66, but even that is far from impressive. One outlier in this group is an indicator pertaining to the impartiality of public administration, which has lower values where nepotism, cronyism, favoritism, and bribery are more prevalent. That indicator turns out to have considerable explanatory value, as we will see in a moment. However, I think it would make more sense to move it to the legal system and property rights group. A quick check indicates that it is a better fit there than in the regulation group, not just conceptually but also statistically.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="3f0875af-258e-4cda-b46e-2848508338bc" data-title="Paragraph" data-type="core/paragraph" id="block-3f0875af-258e-4cda-b46e-2848508338bc" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Factor analysis provides further evidence of the statistical incoherence of the regulation group. If a group of indicators are, in some conceptual sense, all measuring the same thing, we expect one principal component to explain most of the variance in the group, with lesser contributions, if any, from additional components. For example, within the well-ordered LSPR group, the first principal component explains 64 percent of the variance, and the first and second principal components together explain 76 percent. In the regulation group, in contrast, the first principal component explains just 25 percent of the variance, and it takes seven components to reach a 75 percent explanatory power. On the whole, it is my impression that the regulation group of the Economic Freedom Index does not just combine apples and oranges – it combines apples, oranges, pears, pineapples, cherries, bananas, and raspberries into an incoherent fruit salad.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="c4a79dd0-1598-4ddc-ab5e-9259e93bb706" data-title="Paragraph" data-type="core/paragraph" id="block-c4a79dd0-1598-4ddc-ab5e-9259e93bb706" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">It is not surprising, then, that the group score for regulation has little power to explain cross-country differences in personal freedom. A multiple regression that uses LSPR, state ownership of assets, trade, sound money, and the overall regulation score as controls accounts for 80 percent of the variance in personal freedom. In that regression, the coefficients are statistically significant for the first four controls, but not for the “regulation” score. Splitting the regulation group into its three subgroups raises the explanatory power only slightly, to an R<sup style="box-sizing: inherit;">2</sup> of 0.81. None of the three regulation sub-scores has a statistically significant coefficient.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="23d9e6d7-be96-4296-b59e-9024d1327b4f" data-title="Paragraph" data-type="core/paragraph" id="block-23d9e6d7-be96-4296-b59e-9024d1327b4f" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="font-size: inherit;">Interestingly, though, running the regression with 19 controls – LSPR, government ownership, trade, and money plus the 15 individual indicators of the regulation group – increases its R<sup style="box-sizing: inherit;">2</sup> by 7 points, to 0.88.</span><span style="font-size: 13.3333px;">[6]</span> A closer look shows why that is the case. Of the 15 regulation indicators, nine have negative effects on personal freedom while six have positive effects. When indicators with negative and positive coefficients are averaged together to get the overall regulation score and the three subgroup scores, they tend to cancel each other out, reducing the overall R<sup style="box-sizing: inherit; font-size: inherit;">2</sup>. When they are separated, even though their coefficients are not all individually significant, they produce a significant increase in the R<sup style="box-sizing: inherit; font-size: inherit;">2</sup> for the regression as a whole. In the 19-control regression, the only indicators from the regulation group that are individually statistically significant are those that measure the burden of regulation and the impartiality of public administration, both of which have positive signs. (See <a href="http://tiny.cc/gaobtz" style="box-sizing: inherit; color: #0073aa; font-size: inherit; outline: 0px; transition: none 0s ease 0s;">OS6</a> for details.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="c9d08f09-110d-4180-868a-c14381725d75" data-title="Paragraph" data-type="core/paragraph" id="block-c9d08f09-110d-4180-868a-c14381725d75" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Economic freedom and prosperity. </em></span>The preceding section has shown that while there is a strong overall relationship between economic and personal freedom, not all elements of the Economic Freedom Index play an equal role. Some individual economic indicators and groups of indicators have no statistically significant effects, and some have effects opposite those that the designers of the index apparently expected when they put it together. That leaves us with the question of whether the problems identified above are unique to the relationship between economic freedom and personal freedom, or whether, instead, they carry over to other applications of the Economic Freedom Index.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="426fb71f-e95b-4bb5-ba9e-3241d87b9540" data-title="Paragraph" data-type="core/paragraph" id="block-426fb71f-e95b-4bb5-ba9e-3241d87b9540" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">As a check on those findings, then, I applied the same approach to another relationship highlighted in the human freedom report, that between economic freedom and prosperity. Prosperity has various meanings; to keep things simple, I used GDP per capita at purchasing power parity. Within the 107-country sample, countries in the top quartile by economic freedom have an average GDP per capita of $57,350, more than 13 times higher than the $4,248 of those in the bottom quartile.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="e3e63235-4996-4ac3-88e9-34184cb73147" data-title="Paragraph" data-type="core/paragraph" id="block-e3e63235-4996-4ac3-88e9-34184cb73147" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The bilateral R<sup style="box-sizing: inherit;">2</sup> for economic freedom and GDP per capita is 0.42. That increases to 0.67 for a multiple regression with the five economic freedom group scores used as controls. As in the case of personal freedom, the legal systems and property rights group has by far the strongest association with GDP per capita. Size of government group score has a small and marginally significant negative influence (that is, higher GDP in countries with larger governments), in contrast to its marginally significant positive effect on personal freedom. The group score for freedom of international trade has no significant impact on GDP, but when the elements of the trade group are broken out, several individual indicators have significant positive effects. Neither the sound money group nor the regulation group have significant relationships to prosperity, as measured by GDP per capita.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="c1de798f-c0fd-4cd9-ad52-2afdaac699cc" data-title="Paragraph" data-type="core/paragraph" id="block-c1de798f-c0fd-4cd9-ad52-2afdaac699cc" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">While not conclusive, this exercise suggests that the statistical and conceptual problems that mar the size of government, sound money, and regulation groups are not unique to the relationship of economic freedom with personal freedom. (See <a href="http://tiny.cc/gaobtz" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">OS7</a> for further findings regarding economic freedom and GDP per capita.)</p><h2 aria-label="Write heading…" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="8c0be97b-1f58-41f3-8f23-1b32ce0afeb5" data-title="Heading" data-type="core/heading" id="block-8c0be97b-1f58-41f3-8f23-1b32ce0afeb5" role="textbox" style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit;"><span style="font-size: medium;">Conclusions</span></span></h2><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="c73599d5-caa5-4172-bcf8-1569b13c4c86" data-title="Paragraph" data-type="core/paragraph" id="block-c73599d5-caa5-4172-bcf8-1569b13c4c86" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Considering all of the above, what have we learned from our analysis of the Cato/Fraser Human Freedom Index? Very broadly, we find strong support in the data for the top-line claim that economic freedom is positively associated with personal freedom. Beyond that, here are some other key takeaways and some recommendations for further development of each of the components of the Economic Freedom Index:</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="f5dd3e57-aa05-4373-8ef4-8f0b4b4a43e8" data-title="Paragraph" data-type="core/paragraph" id="block-f5dd3e57-aa05-4373-8ef4-8f0b4b4a43e8" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">1. “Legal system and property rights” stands out as the most important group of indicators within the Economic Freedom Index. Over a wide variety of statistical tests and model configurations, the LSPR group is strongly related to personal freedom, a finding that is consistent with <a href="https://www.niskanencenter.org/quality-of-government-a-statistical-portrait/" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">previous work</a> using different data. As noted above, researchers should pay careful attention to the gender legal rights adjustment when working with this group.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="a0ad6a36-8ce8-4a85-a243-fda25c64e93a" data-title="Paragraph" data-type="core/paragraph" id="block-a0ad6a36-8ce8-4a85-a243-fda25c64e93a" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">2. Free trade is also important. However, the trade group needs a thorough review for statistical consistency. The indicators for standard deviation of tariffs, black-market exchange rates, and openness to visitors are especially problematic. A simpler trade component focused more narrowly on traditional tariff and nontariff barriers could well be more useful for many purposes.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="98971f83-03d8-4faf-8b45-04c72fd5a7d4" data-title="Paragraph" data-type="core/paragraph" id="block-98971f83-03d8-4faf-8b45-04c72fd5a7d4" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">3. The sound money group has serious statistical and conceptual problems. Its emphasis on M1 money growth is out of step with contemporary thinking about monetary policy. The implicit assumption that the optimal inflation rate is zero is at odds both with empirical evidence and the actual practice of the world’s most respected central banks. The usefulness of the standard deviation of inflation rates is questionable in light of the fact that for many countries, the year-to-year variability of inflation depends more on trends in global commodity prices and market exchange rates than on monetary policy. Consideration should be given to dropping “sound money” entirely from the Economic Freedom Index.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="53035f32-e710-4f6b-aab2-3a96017270aa" data-title="Paragraph" data-type="core/paragraph" id="block-53035f32-e710-4f6b-aab2-3a96017270aa" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">4. The size of government component also has major problems. The biggest one: The assumption that larger government is necessarily inimical to freedom and prosperity is strongly called into question by the Cato/Fraser data themselves, as well as <a href="https://www.niskanencenter.org/quality-of-government-a-statistical-portrait/" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">studies based on other data sources</a>. The relationship between the size of government and other variables should be a question open to investigation, not an ideologically driven <em style="box-sizing: inherit;">a priori</em> that is baked into the structure of the index. Beyond that conceptual weakness, more consideration needs to be given to the statistical consistency of the various indicators within the size of government group.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="0791863e-1911-4700-ab4f-b7680b32e8b0" data-title="Paragraph" data-type="core/paragraph" id="block-0791863e-1911-4700-ab4f-b7680b32e8b0" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">5. The regulation component, as currently structured, is the least useful part of the Economic Freedom Index. The 15 indicators of which it is currently composed have little or no statistical and conceptual coherence. About half of them appear to be positively related to measures of personal freedom and prosperity and half of them negatively related. When they are averaged together, the regulation score as a whole becomes statistically meaningless. I would recommend that this section be completely rethought. I would begin by asking some fundamental questions about why we should be suspicious of regulation in the first place. Does a particular regulation facilitate or inhibit coordination? Does it facilitate or inhibit innovation? Does it facilitate or inhibit rent-seeking? Does it increase or decrease exposure to risks beyond individual control? Can objectives like protection of consumers, workers, or the environment be more effectively accomplished by common-law tort litigation, or can a regulatory approach sometimes reduce transaction costs? Is a particular category of regulation objectionable because of its aims, or only objectionable because it is poorly implemented, corruptly enforced, or lacking in scientific basis? Addressing such questions would provide a stronger foundation for reorganizing the regulation group and identifying the kinds of regulation most likely to undermine freedom and prosperity.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="f5064c23-f16e-4e50-a39c-9d04192a96a4" data-title="Paragraph" data-type="core/paragraph" id="block-f5064c23-f16e-4e50-a39c-9d04192a96a4" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">As readers of my earlier work will know, I am enthusiastic about the empirical study of economic and social institutions. The Human Freedom Index is an important contribution to that field of research. However, there is much room for improvement, especially in the economic freedom components. I hope that in the future, the researchers at the Cato and Fraser Institutes will continue to improve this important project.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="f5064c23-f16e-4e50-a39c-9d04192a96a4" data-title="Paragraph" data-type="core/paragraph" id="block-f5064c23-f16e-4e50-a39c-9d04192a96a4" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><i>Previously posted at <a href="http://NiskanenCenter.org">NiskanenCenter.org</a>. Photo courtesy of <a href="http://Pixabay.com">Pixabay.com</a></i></p><div aria-label="Block: Separator" class="block-editor-block-list__block wp-block wp-block" data-block="72e2fadd-8dae-4dc1-81b3-faac5a0c9777" data-title="Separator" data-type="core/separator" id="block-72e2fadd-8dae-4dc1-81b3-faac5a0c9777" role="group" style="box-sizing: inherit; font-size: 16px; margin: 0px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; padding-bottom: 0.1px; padding-top: 0.1px; position: relative;" tabindex="0"><hr class="wp-block-separator" style="border-bottom: 2px solid rgb(143, 152, 161); border-image: initial; border-left: none; border-right: none; border-top: none; box-sizing: inherit; margin-left: auto; margin-right: auto; max-width: 100px;" /></div><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="cc4f53ee-4e3f-4e44-9a6e-3acceaead5fb" data-title="Paragraph" data-type="core/paragraph" id="block-cc4f53ee-4e3f-4e44-9a6e-3acceaead5fb" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="font-size: 13.3333px;">[1]</span><span style="font-size: inherit;"> The strength of the statistical relationship between two variables is measured by the correlation coefficient, R. R = 0 indicates no relationship; R = 1 indicates a perfect direct relationship; and R = -1 indicates a perfect inverse relationship. The square of the correlation coefficient, R<sup style="box-sizing: inherit;">2</sup>, can be interpreted as the percent of the variance in one variable that is statistically accounted for by differences in the other variable. For the simple relationship between the summary measures of economic and personal freedom, R = 0.71 and R<sup style="box-sizing: inherit;">2</sup> = 0.51. Correlation does not imply causation.</span></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="8bf6ed3d-2ecb-41f0-bdc9-6ebf1e951417" data-title="Paragraph" data-type="core/paragraph" id="block-8bf6ed3d-2ecb-41f0-bdc9-6ebf1e951417" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="font-size: 13.3333px;">[2] </span><span style="font-size: inherit;">The data underlying the 2020 Human Freedom Index were collected, for the most part, in 2018. It appears likely that both personal and economic freedom in Hong Kong have decreased since then.</span></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="3403c25c-8b6f-4e20-94a3-ed72d04d7a63" data-title="Paragraph" data-type="core/paragraph" id="block-3403c25c-8b6f-4e20-94a3-ed72d04d7a63" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="font-size: 13.3333px;">[3] </span><span style="font-size: inherit;">The statistical significance of a correlation coefficient or other statistic means the probability that a given value could occur by chance, given the size of the sample and properties of the distribution of the data. Significance is typically cited as a “p” value. For example, p < 0.01 means there is less than a 1 percent chance that the measured value of the statistic could occur by chance. In this commentary, the phrase “insignificant” or “not significant” means p > 0.05; “marginally significant” means 0.05 > p > 0.01; “significant” means 0.01 > p > 0.001; and “highly significant” means p < 0.001.</span></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="6405ea43-c701-481c-84cc-e14cbd88f88d" data-title="Paragraph" data-type="core/paragraph" id="block-6405ea43-c701-481c-84cc-e14cbd88f88d" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="font-size: 13.3333px;">[4] </span><span style="font-size: inherit;">Somewhat confusingly, all indicators in the Economic Freedom Index are scaled from 0 to 10 in a way that treats a score of 10 as “most free,” given the libertarian presuppositions regarding freedom that drive the way the data are structured. That is fine for something like “judicial independence,” where a score of 10 means a high level of independence, as we would expect. But it is important to keep in mind that a high score for “government consumption expenditure” indicates a <em style="box-sizing: inherit;">small</em> share of government consumption in GDP; a high score for “rate of inflation” means a <em style="box-sizing: inherit;">low</em> rate of inflation; a high score for “minimum wage” means a <em style="box-sizing: inherit;">low</em> minimum wage; and so on for many other variables.</span></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="70d6aece-b512-479e-a39e-219200fe2242" data-title="Paragraph" data-type="core/paragraph" id="block-70d6aece-b512-479e-a39e-219200fe2242" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><sup style="box-sizing: inherit;">[5] </sup>The gender legal rights adjustment was developed by Rosemarie Fike of Texas Christian University. Fike, “Adjusting for Gender Disparity in Economic Freedom and Why It Matters,” in <em style="box-sizing: inherit;">Economic Freedom of the World: 2017 Annual Report</em>, James Gwartney, Robert Lawson, and Joshua Hall (Fraser Institute: 2017), 189–211.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="3c54099c-ca5a-42f9-a377-ff53e0b4d0b0" data-title="Paragraph" data-type="core/paragraph" id="block-3c54099c-ca5a-42f9-a377-ff53e0b4d0b0" role="textbox" style="box-sizing: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="font-size: 13.3333px;">[6] </span><span style="font-size: inherit;">Part of the increase reflects a tendency for R<sup style="box-sizing: inherit;">2 </sup>to rise automatically as the number of controls increases, regardless of whether they contain new information. Adjusted for that, the increase is closer to 5 percentage points.</span></p><div style="font-size: 16px;"><br /></div><div class="block-list-appender" style="box-sizing: inherit; font-size: 16px; outline: 0px; position: relative;" tabindex="-1"></div></div></div></div></div><div style="background-color: white; box-sizing: inherit; color: #1e1e1e; font-family: "Noto Serif"; font-size: 16px; outline: 0px; position: fixed;" tabindex="0"></div>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-22836413797716512612021-02-02T08:48:00.002-08:002021-02-02T08:48:45.160-08:00The Case Against Premature Fiscal Austerity<p> </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwbSiHoJOsBmwC5cV27dr9HFeo6SDSwNw9Kttu1d4aQUKwrCV6TMpRjqUujMI96WAaDGbDuwF69ynG__UwemOum9fBdTy4XEFS_zRgP0Z3niWK7Uwoc4jPFwvDke9XhwMc0jxSxCDwZfn8/s1276/P210128-1.png" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="682" data-original-width="1276" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwbSiHoJOsBmwC5cV27dr9HFeo6SDSwNw9Kttu1d4aQUKwrCV6TMpRjqUujMI96WAaDGbDuwF69ynG__UwemOum9fBdTy4XEFS_zRgP0Z3niWK7Uwoc4jPFwvDke9XhwMc0jxSxCDwZfn8/s320/P210128-1.png" width="320" /></a></div><p class="MsoNormal">A new Congress has convened. Soon the battle of the budget
will begin. On one side will be the advocates of stimulus, who think the economy
needs help to recover fully from the damage done by the pandemic. On the other
side will be the deficit hawks, refreshed after their long slumber during the
Trump administration. </p>
<p class="MsoNormal">The case for a sharp turn toward fiscal austerity rests in
large part on the idea that we are at the edge of a precipice, poised for a
plunge into insolvency, default, hyperinflation, and who knows what other
disasters. A new book from the Cato Institute, A Fiscal Cliff conveniently
gathers the views of fiscal conservatives into a single volume. This commentary
reviews some of the most common arguments for fiscal austerity and explains why
they don’t hold up. <span></span></p><a name='more'></a><p></p>
<p class="MsoNormal"><b>How high is the debt ratio, really?</b><o:p></o:p></p>
<p class="MsoNormal">The signature chart of fiscal conservatives, one that
appears no fewer than four times in A Fiscal Cliff, shows a soaring ratio of
federal debt to GDP. An up-to-date version is shown in Figure 1. The blue line
tracks the most widely used measure of federal debt, federal debt held by the
public (FDHP), based on historical data and projections from the Congressional
Budget Office (CBO). </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwEyT0hcOJCY92SBX1olPhhiaLF0QzXRpquWUUGO7_MjmccsCcumqGW6jHyszotXcE7sP6GYC5V4pnn0-mvVafhKkdzDY-i8PZrRxJ3tktE57IC3OtMrelmrbRjfTKxx_JoGd4I0Gn0sNP/s767/P210104-1.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="513" data-original-width="767" height="268" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwEyT0hcOJCY92SBX1olPhhiaLF0QzXRpquWUUGO7_MjmccsCcumqGW6jHyszotXcE7sP6GYC5V4pnn0-mvVafhKkdzDY-i8PZrRxJ3tktE57IC3OtMrelmrbRjfTKxx_JoGd4I0Gn0sNP/w400-h268/P210104-1.png" width="400" /></a></div><div class="separator" style="clear: both; text-align: center;"><span style="text-align: left;"><br /></span></div><div class="separator" style="clear: both; text-align: justify;"><span style="text-align: left;">The historical peak of the debt ratio, 106.1 percent, was
reached in 1946. By 1974, a combination of real economic growth and inflation
had shrunk the ratio to 23 percent. After that, it moved within a fairly narrow
range until 2007, and then began rising rapidly again. The CBO projects that
the debt ratio will exceed its wartime high by 2023. Just how alarming is that,
really?</span></div><p class="MsoNormal" style="text-align: left;">In part, the answer depends on which measure of the debt
ratio we use. As the bipartisan Committee for a Responsible Federal Budget
notes, the version based on federal debt held by the public is widely accepted
as “the most economically meaningful measure of debt.” However, a primer on
federal debt published by the Congressional Budget Office (CBO) offers several
alternatives. </p>
<p class="MsoNormal">Some fiscal conservatives, including John Merrifield, an
editor of A Fiscal Cliff and the author of an overview chapter, prefer to cite
the gross debt. That measure, which includes money the federal government owes
to itself (for example, in the form of treasury securities held by the Social
Security Trust Fund) was about 28 percent higher than the FDHP as of 2020, as
shown by a red data point in Figure 1. The reasoning behind a preference for
the gross debt appears to be that the Social Security trust fund and similar
funds reflect promises to pay benefits in the future, so they should be counted
along with other financial obligations of the government. </p>
<p class="MsoNormal">However, I see problems with that reasoning. For one thing,
although the government should, of course, think carefully when making
promises, promises to pay future benefits are not analogous to those made when
issuing securities. The owner of a security has an actual legal claim against
the treasury. A failure to honor that claim would be a default. In contrast,
future Social Securities beneficiaries have only an expectation, not a legal
claim. They hope that Congress will not change the benefit formulas before
their turn comes to collect, but such changes have been made in the past, so
they can’t be sure. Ironically, some of the very fiscal conservatives who treat
the trust funds as financial obligations are among those who urge Congress to
renege on its promises by “reforming” Social Security. Significantly, they do
not refer to their proposed reforms as “defaults.” </p>
<p class="MsoNormal">Furthermore, even if we were to count promises of future
benefits as legal obligations of the government, the quantity of securities in
the trust funds are not an accurate measure of those obligations. Suppose, for
example, that Congress were to change Social Security to a simple pay-as-you-go
basis. Instead of placing social security taxes in a trust fund when collected
and holding them in the form of securities until they are paid out, those taxes
would be deposited in the treasury’s general account at the Fed, along with
other revenues. Benefits would not change, but would be paid out of the
treasury general account instead of from the trust fund, as they are now. Any
securities remaining in the trust fund would be moved to the balance sheet of the
treasury, where they would now appear as both assets and liabilities and be
canceled out. The whole operation would in no way change the annual federal tax
burden, annual government spending, or the deficit. It would have no effect
whatsoever on financial markets. But, if applied not just to Social Security
but to all similar funds, it would immediately cut the value of the
government’s gross debt by 30 percent. </p>
<p class="MsoNormal">No wonder, then, that the CBO itself warns that “gross
federal debt is a poor indicator of the government’s overall financial
position.” </p>
<p class="MsoNormal">As the CBO explains, if we want a measure of the debt that
is more economically accurate than the FDHP, we would end up with a lower, not
a higher number. One such alternative nets out government financial assets,
such as the outstanding balances on student loans. As of 2020, that lowers the
debt ratio by about 10 percent, as shown in Figure 1. A further adjustment
recognizes that the Federal Reserve is de facto a part of the federal
government, and thus excludes its large holdings of treasury securities from
“debt held by the public.” Adjusting for both government assets and the Fed’s
securities holdings reduces the 2020 value of the federal debt to 65 percent of
GDP. Figure 1 shows only the 2020 values of the alternative debt measures, but
because both student loans and the Fed’s portfolio of securities have grown
rapidly in recent years, showing full historical values would reduce the
apparent rate of growth of the debt ratio as well as its current value. </p>
<p class="MsoNormal"><b>Do we even care about the debt ratio?</b><o:p></o:p></p>
<p class="MsoNormal">Rather than quibbling over whether debt held by the public
overstates or understates the government’s financial liabilities, perhaps we
should ask the more fundamental question of whether the debt ratio is a
meaningful measure of fiscal sustainability in the first place. In a recent
paper, economists Jason Furman and Lawrence Summers argue that it is not. The
problem with the debt ratio, say Furman and Summers, is that it compares the
stock of debt with the flow of GDP. But that is not how we normally think about
our finances either as borrowers or as lenders. </p>
<p class="MsoNormal">Suppose you are a young person on the first rung of a
promising career, and you are looking to buy your first home. Of course, you
are not going to pay cash – you will take out a mortgage. Accordingly, what you
want to consider in deciding how much house you can afford is not the ratio of
the mortgage principal to your current annual income (a stock-to-flow
comparison), but rather, the ratio of your monthly payments to your monthly
income (a flow-to-flow comparison). </p>
<p class="MsoNormal">The payment-to-income ratio is also what the bank will look
at. The 28/36 rule is a widely-used flow-to-flow formula that says monthly
mortgage payments should not exceed 28 percent of a borrower’s income, and that
total debt service, including car loans and credit cards, should not exceed 36
percent of income. </p>
<p class="MsoNormal">Figure 2 shows what a flow-to-flow comparison looks like for
the federal government. The peak of federal interest outlays as a share of GDP
came in the 1980s and early 1990s, at a time when the debt ratio was less than
half what it is today. The trend from 2007, projected forward to 2020 and
beyond, shows not a further increase in the ratio, but a return to normal, or
even a little below what was normal for the post-WWII period. There is no sign
of an impending fiscal cliff like the one that looks so alarming in Figure 1.<o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdJ6RodoygFlD_6ea5YKJxbYJvFhhdNv9WmTW2n9ll3blLgejWhignKlO1FQdfaHm67f5EvvMcczi0TEXGARYQRi6RL28EGCiX__Bak2VCjemQQPnscr0KNk0mETM5jcgXDHgsxbYScxUB/s758/P210104-2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="490" data-original-width="758" height="259" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdJ6RodoygFlD_6ea5YKJxbYJvFhhdNv9WmTW2n9ll3blLgejWhignKlO1FQdfaHm67f5EvvMcczi0TEXGARYQRi6RL28EGCiX__Bak2VCjemQQPnscr0KNk0mETM5jcgXDHgsxbYScxUB/w400-h259/P210104-2.png" width="400" /></a></div><br /><p></p>
<p class="MsoNormal">“Every family in
America has to balance their budget. Washington should, too,” John Boehner
liked to say when he was Speaker of the House, a sentiment often echoed by
fiscal conservatives. By that standard, the debt service burden of the federal
budget looks pretty modest in comparison to the 28/36 rule that is considered
prudent for households. Federal interest outlays, which the CBO now pegs at
about 2 percent of GDP and expects to decline toward 1 percent, figures out to
just 5 to 10 percent of federal receipts. Furman and Summers consider 2 percent
of GDP to be a reasonable standard for the long run. The budget in the
twenty-first century is comfortably within that range so far. </p>
<p class="MsoNormal"><b>What are the risks?</b><o:p></o:p></p>
<p class="MsoNormal">But, warn fiscal conservatives, what would happen if
interest rates rose? If we combined the high interest rates of the 1980s with
today’s higher debt ratios, debt service costs would soar. Can we take that
chance? The response has several parts. </p>
<p class="MsoNormal">First, the smart money says that is not going to happen.
What pushed the interest rate so high in the 1980s was high expected inflation.
Market-based data – not the estimates of some government economist but the real
market bets of people who are putting their own money on the line – show that
investors don’t expect inflation even to reach the Fed’s target rate of 2
percent over the next ten years. Wall Street is behaving as if 1980s-style
interest rates are about as big a worry as an asteroid strike. </p>
<p class="MsoNormal">Second, there are sound structural reasons to justify market
expectations of low inflation and low interest rates. Furman and Summers point
to increased saving driven by lengthening life expectancy and rising
inequality, and also to decreased private-sector borrowing demand driven by
changes in technology and corporate behavior. In fact, they consider a further decline
in interest rates to be as likely as even a modest increase. </p>
<p class="MsoNormal">Third, we need to consider economic growth. Just as your
home mortgage becomes more manageable as your income grows over your career,
growth of GDP makes government debt management easier. Without getting too
technical about it, as long as the rate of growth of GDP is higher than the
rate of interest (either adjusting both variables for inflation, or adjusting
neither), the debt is not going to explode. And, as Figure 3 shows, that has
been the case for most of the past half-century. (See here for the detailed
mathematics of deficits and debts.) </p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_v5Y1CN_7bvUCA0idXtpb5v8TS3BMypfvaS6UsH3q_6b6EaI4OiK1e3wzPUrmfkygOuDeuCcUh3yljrFm4Xb7qGOub1Q8ltiIkP_MBnLazJRVAkjBrKZkBy-eVuXQ44o5nLoDclvjJ9HJ/s714/image.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="476" data-original-width="714" height="266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_v5Y1CN_7bvUCA0idXtpb5v8TS3BMypfvaS6UsH3q_6b6EaI4OiK1e3wzPUrmfkygOuDeuCcUh3yljrFm4Xb7qGOub1Q8ltiIkP_MBnLazJRVAkjBrKZkBy-eVuXQ44o5nLoDclvjJ9HJ/w400-h266/image.png" width="400" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><p class="MsoNormal">Fiscal conservatives warn of inflation and a debt crisis,
but the very measures they propose to avoid those risks – capping spending and
balancing the budget -- have risks of their own. Economic policy, now as
always, is a matter of balancing one set of risks against another. </p>
<p class="MsoNormal">In the short run, the obvious risk is that of undertaking
austerity prematurely, when aggregate demand is weak and the economy is still
operating well below its potential. It is especially important to maintain an
expansionary fiscal stance in periods when the Fed’s interest rate target is at
its lower bound of 0 or close to it. Failure of fiscal policy to support
aggregate demand at a time when zero interest rates render conventional
monetary policy impotent virtually guarantees a slower recovery. A slow
recovery, in turn, is more likely to widen than to narrow the budget deficit. </p>
<p class="MsoNormal">That is just where we are, entering 2021. After its December
2020 meeting, the Federal Open Market Committee announced its intention “to
keep the target range for the federal funds rate at 0 to 1/4 percent and
expects it will be appropriate to maintain this target range until labor market
conditions have reached levels consistent with the Committee's assessments of
maximum employment and inflation has risen to 2 percent and is on track to
moderately exceed 2 percent for some time.” A commentary from the Cleveland Fed
notes that the FOMC expects inflation to remain at or below 2 percent at least
through the end of 2021. A survey of private securities dealers in New York
shows even lower inflation expectations, in the range of 1.7 to 1.8 percent,
through 2022. </p>
<p class="MsoNormal">Eventually, the economy will recover from the current
pandemic-induced recession. At that point, the balance of risks will change.
The biggest risk will then come not from inadequate fiscal stimulus, but from
an inappropriate way of achieving the appropriate deficit target. </p>
<p class="MsoNormal">That risk comes from another side to fiscal conservatism,
one that often hides behind all the noise about the size of the deficit and the
national debt. That is an insistence that the desired deficit target always be
achieved through cuts on the spending side of the budget, not through
adjustments to revenues. Such a one-sided view of budget balance risks
undermining the state capacity that is essential to support healthy, long-run
economic growth. My Niskanen colleagues Brink Lindsey and Samuel Hammond put it
this way in a recent manifesto, “Faster Growth, Fairer Growth:”<span style="mso-spacerun: yes;"> </span> </p>
<p class="MsoNormal"></p><blockquote>[T]he private sector functions at its best when it is
enabled and supported by a strong, capable, effective public sector. It needs
government to write and enforce the rules that align private profit-seeking
with the public welfare. It needs government to fund or supply the public goods
— education, infrastructure, research and development — that enable people to
participate in the marketplace at a high level and push the whole system to new
heights by advancing the frontiers of knowledge and technology. It needs
government to provide social insurance against various hazards of life —
poverty, sickness, and joblessness — and thus protect well-being against
downside risks, prevent the mass waste of human potential that would otherwise
occur, and sustain support for economic dynamism even in the face of its
incessant disruptions of people’s plans and expectations. </blockquote><p></p>
<p class="MsoNormal">Fiscal conservatives’ goal of shrinking the government until
it is “small enough to drown in a bathtub” completely misunderstands the role
of the state in a modern economy. As I have detailed elsewhere, the evidence is
overwhelming that quality of government, not size of government, is the key to
freedom and prosperity. Around the world, high quality governments tend on the
whole to be somewhat larger rather than smaller. <o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p>Do we need fiscal rules? Absolutely. In a dissenting chapter
included in A Fiscal Cliff, I outline a set of rules that would guarantee
long-run fiscal sustainability while leaving room for cyclical stimulus or
restraint as needed, and permitting a government whose size is determined by
the country’s actual needs rather than driven by ideology. (An updated version
of the chapter is available on the Niskanen Center website.) </p>
<p class="MsoNormal">For far too long, successive presidential administrations
and Congresses have made tax and spending decisions with little regard for
either appropriate short-term demand management or long-term growth and
fairness. But naïve calls for fiscal austerity are not the answer. We do not
face a fiscal cliff – we face a deficit of clear thinking about the proper size
of government in a liberal democracy and the proper way to achieve the
sustainable prosperity that we all want and deserve.<o:p></o:p></p><p class="MsoNormal"><i>Previously posted at <a href="https://www.niskanencenter.org/the-case-against-fiscal-austerity/nter.org">NiskanenCenter.org</a>. Image courtesy of <a href="https://pixabay.com/photos/savings-budget-investment-money-2789137/">Pixabay</a>.</i></p>
<p class="MsoNormal"><o:p> </o:p></p><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br />Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com2tag:blogger.com,1999:blog-2938311055760665357.post-25933275431782859322021-01-02T05:33:00.001-08:002021-01-02T05:33:34.280-08:00Trust and Quality of Government in a Polarized Age<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDPfdTobn0jEB9bRT7vOHPOfzX6HE09Ec_j57ceQTvRyKMxlL6KtAV_NOMuTdWbb6YQL9wRhuDj4qJZuUx6vFJbh6u1VuP9e4df_RMMfQme37Dz-kfGYtxoN4PO2RqKM2dryDcMCv9dyg4/s367/P201211-1s.png" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="331" data-original-width="367" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDPfdTobn0jEB9bRT7vOHPOfzX6HE09Ec_j57ceQTvRyKMxlL6KtAV_NOMuTdWbb6YQL9wRhuDj4qJZuUx6vFJbh6u1VuP9e4df_RMMfQme37Dz-kfGYtxoN4PO2RqKM2dryDcMCv9dyg4/s320/P201211-1s.png" width="320" /></a></div><span style="background-color: white; color: #1e1e1e; font-family: "Noto Serif"; font-size: inherit; white-space: pre-wrap;">Kevin Vallier’s new book, </span><a href="https://www.kevinvallier.com/books/trust-in-a-polarized-age/" style="background-color: white; box-sizing: inherit; color: #0073aa; font-family: "Noto Serif"; font-size: inherit; outline: 0px; transition: none 0s ease 0s; white-space: pre-wrap;"><em style="box-sizing: inherit;">Trust in a Polarized Age</em></a><em style="background-color: white; box-sizing: inherit; color: #1e1e1e; font-family: "Noto Serif"; font-size: inherit; white-space: pre-wrap;">,</em><span style="background-color: white; color: #1e1e1e; font-family: "Noto Serif"; font-size: inherit; white-space: pre-wrap;"> has a clear message: Trust matters. If we want to combat the increasing political polarization that is bane of our times, we need to tend to the institutions on which trust depends, and which themselves, in turn, depend on trust. </span><p></p><div style="background-color: white; box-sizing: inherit; color: #1e1e1e; font-family: "Noto Serif"; outline: 0px;"><div style="box-sizing: inherit; outline: 0px;"><div style="box-sizing: inherit; outline: 0px;"><div class="block-editor-block-list__layout is-root-container" style="box-sizing: inherit; outline: 0px; position: relative;"><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="0f353cde-8e1c-47f5-a515-bc1703db2c8b" data-title="Paragraph" data-type="core/paragraph" id="block-0f353cde-8e1c-47f5-a515-bc1703db2c8b" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">By trust, Vallier means two things: <em style="box-sizing: inherit;">Social trust</em>, “that trust which each member of a society has that other members of her society will generally follow publicly recognized moral rules,” and <em style="box-sizing: inherit;">political trust, </em>“that trust which each member of a society has that governmental institutions will follow fair procedures and produce positive results.” (p. 6) He sees the two as joined in a virtuous circle through the intermediary of good government: “Since social trust creates good governance and good governance creates political trust, social trust creates political trust by proxy.” And to close the circle, he maintains that institutions of good government, by enforcing trustworthy behavior, create conditions that favor political trust and build general social trust. (p. 214) </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="d78cafa4-b4bb-494b-ac9d-eb053aecac18" data-title="Paragraph" data-type="core/paragraph" id="block-d78cafa4-b4bb-494b-ac9d-eb053aecac18" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">By good governance, Vallier means <em style="box-sizing: inherit;">liberal</em> governance – in the sense of classical liberalism, not the American usage that makes liberalism a synonym for the political left. Yet, Vallier does not defend liberalism as an ideology. He focuses more pragmatically on five key <em style="box-sizing: inherit;">liberal rights practices</em>: freedom of association, markets and private property rights, social welfare programs, democratic constitutionalism, and electoral democracy. (p 277) His message is that if we embed these liberal rights practices in our institutions, trust will follow, polarization will recede, and a world in which politics is not war will become possible.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="4299c460-41fa-4bdc-a1bb-b0d4a0136076" data-title="Paragraph" data-type="core/paragraph" id="block-4299c460-41fa-4bdc-a1bb-b0d4a0136076" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">As someone engaged in <a href="https://www.niskanencenter.org/quality-of-government-a-statistical-portrait/" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">empirical research on the quality of government</a>, I found this all intensely interesting. Although Vallier’s book is primarily a work of political philosophy, I could hardly wait to fire up my spreadsheets to investigate the many hypotheses he suggests. Do trust, quality of government, and liberal rights practices really matter? Do they matter everywhere, or only in countries that are already liberal? The answer is that trust and good governance do matter, but the story is not always a simple one. Some of the patterns are quite complex, so the results reported in this commentary should be considered preliminary.<span></span></p><a name='more'></a><p></p><h3 style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em auto; max-width: 580px; overflow-wrap: break-word; position: relative; text-align: left; white-space: pre-wrap;"><span style="box-sizing: inherit;"><span style="font-size: medium;">The data</span></span></h3><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="4ceaafb2-8065-4438-93f4-508960d81b65" data-title="Paragraph" data-type="core/paragraph" id="block-4ceaafb2-8065-4438-93f4-508960d81b65" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">To test hypotheses, we need data. The principal data set I have used in my previous research comes from the <a href="https://www.prosperity.com/about/resources" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">Legatum Institute</a>, a London-based think tank whose mission is “to create the pathways from poverty to prosperity, by fostering open economies, inclusive societies and empowered people.” The data include 294” indicators,” organized into 65 “elements,” nesting in 12 “pillars” and three “domains.” The data cover 168 countries, of which I was able to use 165, dropping Cuba, Somalia, and Syria due to the unavailability of supplementary data from other sources. Here are brief descriptions of the main var<i>iables used in what follows.<a href="https://www.niskanencenter.org/wp-admin/post.php?post=7448&action=edit#endnote1" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;"><sup style="box-sizing: inherit;">[1]</sup></a> (For details, see Legatum’s <a href="https://www.prosperity.com/download_file/view/3920/1692" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">methodology report</a>.)</i></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="4ceaafb2-8065-4438-93f4-508960d81b65" data-title="Paragraph" data-type="core/paragraph" id="block-4ceaafb2-8065-4438-93f4-508960d81b65" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><b style="font-size: inherit;"><i>Trust. </i></b><span style="font-size: inherit;">The Legatum database includes seven indicators pertaining to trust. Six of them are institutional – trust in government, the judiciary, local police, politicians, financial institutions, and the military, plus a measure of generalized interpersonal trust. In this commentary, I will use only the first and the last of these indicators.</span></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="ca723df5-3c4e-418d-b73e-5cff6c267a47" data-title="Paragraph" data-type="core/paragraph" id="block-ca723df5-3c4e-418d-b73e-5cff6c267a47" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><em style="box-sizing: inherit;"><span style="box-sizing: inherit; font-weight: 600;">Trust in government</span></em> is represented by the percentage of people responding "Yes" to a Gallup World Survey question, "Do you have confidence in national government?" I will treat this variable as corresponding to what Vallier calls “political trust.” <em style="box-sizing: inherit;">Generalized interpersonal</em> trust is the percentage of people responding "Most people can be trusted" to the question "Generally speaking, would you say most people can be trusted, or you can't be too careful?” Legatum pieces together data from several survey sources to get this indicator. I treat it as a measure of what Vallier calls “social trust.” Undoubtedly, the other four trust indicators raise many points of interest, but space precludes examining them in detail here.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="eb38bcc7-0b59-4102-8fb1-df38fc91c468" data-title="Paragraph" data-type="core/paragraph" id="block-eb38bcc7-0b59-4102-8fb1-df38fc91c468" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Quality of government. </em></span>As I use the term, <em style="box-sizing: inherit;">quality of government</em> is a somewhat narrower concept than “good governance,” as Vallier uses the term. The intent of the narrow approach is to focus on the impartiality, integrity, and technocratic competence of the government institutions. It is not meant to measure the moral worth of government actions or the desirability of policy outcomes. The summary measure of quality of government is an average of eight elements from the Legatum database: rule of law, government integrity, protection of property rights, contract enforcement, protection of investor rights, executive constraints, government effectiveness, and regulatory quality.<a href="https://www.niskanencenter.org/wp-admin/post.php?post=7448&action=edit#endnote1" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;"><sup style="box-sizing: inherit;">[2]</sup></a> </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="85e99425-0362-4134-b298-6716ec6e7786" data-title="Paragraph" data-type="core/paragraph" id="block-85e99425-0362-4134-b298-6716ec6e7786" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Procedural democracy</em></span><em style="box-sizing: inherit;">. </em>The strength of a country’s procedural democracy is measured by an average of seven indicators pertaining to the electoral process and participation provided by <a href="https://freedomhouse.org/reports/freedom-world/freedom-world-research-methodology" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">Freedom House</a>. These seven indicators are a subset of the full range of data on political procedures, human rights and civil liberties that Freedom House uses to rate countries as “Free,” “Partly Free,” of “Not Free.” </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="f36c12e3-5d10-45e3-ba4e-3c74598645bb" data-title="Paragraph" data-type="core/paragraph" id="block-f36c12e3-5d10-45e3-ba4e-3c74598645bb" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Personal freedom</em></span><em style="box-sizing: inherit;">. </em>The measure of personal freedom used here is built up from Legatum elements that pertain to freedom of assembly and association, freedom of speech and information, absence of legal discrimination, and something that Legatum calls “agency.” The “agency” element, in turn, is built up from indicators of freedom of movement, forced labor, women’s rights, criminal justice, and related items. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="8b753b4c-f5f4-4ad7-9d95-0ec3aa4e2e58" data-title="Paragraph" data-type="core/paragraph" id="block-8b753b4c-f5f4-4ad7-9d95-0ec3aa4e2e58" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The personal freedom and democracy scores used here not only measure different things; they measure different <em style="box-sizing: inherit;">kinds</em> of things. The democracy variable pertains to government institutions, namely, the degree to which they conform to liberal democratic procedures. The personal freedom score pertains to the outcomes, namely, the degree to which countries with high-quality, democratic institutions allow citizens to live their lives as they wish, without subjection to arbitrary authority. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="9f7a0671-afb9-4784-997d-ce848ca32b53" data-title="Paragraph" data-type="core/paragraph" id="block-9f7a0671-afb9-4784-997d-ce848ca32b53" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Despite that conceptual difference, freedom and democracy are highly correlated for the sample of 165 countries that we are looking at. Cross-country differences in democracy account for about 85 percent of the variance in personal freedom.<a href="https://www.niskanencenter.org/wp-admin/post.php?post=7448&action=edit#endnote1" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;"><sup style="box-sizing: inherit;">[3]</sup></a> </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="d560479e-dc34-4f98-bd7f-50af3088ed3b" data-title="Paragraph" data-type="core/paragraph" id="block-d560479e-dc34-4f98-bd7f-50af3088ed3b" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Basic needs. </em></span>The degree of satisfaction of basic needs is measured by an average of several elements from the Legatum database, including measures health care systems, preventive interventions, physical health, longevity, basic services, connectedness, material resources, nutrition, protection from harm, shelter, and protection from crime. This measure of need satisfaction has somewhat of an egalitarian bias. Many of the underlying indicators focus on the share of a population who achieve minimal standards, rather than averages for the whole population, for example, the share of households that have running water. Satisfaction of basic needs is positively, but not perfectly correlated with GDP per capita. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="d560479e-dc34-4f98-bd7f-50af3088ed3b" data-title="Paragraph" data-type="core/paragraph" id="block-d560479e-dc34-4f98-bd7f-50af3088ed3b" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; font-size: inherit; font-weight: 600;"><em style="box-sizing: inherit;">Liberal rights practices</em></span><em style="box-sizing: inherit; font-size: inherit;">. </em><span style="font-size: inherit;">The Legatum data do not provide a direct measure of what Vallier calls liberal rights practices. Still, several of the variables listed above include components that relate directly or indirectly to those practices. </span></p><ul aria-label="Write list…" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="f2a7cd42-3de0-4db5-826e-29aef3d9c39b" data-title="List" data-type="core/list" id="block-f2a7cd42-3de0-4db5-826e-29aef3d9c39b" role="textbox" style="box-sizing: inherit; font-size: 16px; list-style-image: initial; list-style-position: initial; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; padding: 0px 0px 0px 1.3em; position: relative; white-space: pre-wrap;" tabindex="0"><li style="box-sizing: inherit; margin-bottom: initial;">Quality of government includes several elements that represent practices essential for the protection of property rights and the operation of markets, including rule of law, contract enforcement, protection of property rights, protection of investor rights, and regulatory quality.</li><li style="box-sizing: inherit; margin-bottom: initial;">Procedural democracy pertains to the electoral selection of government officials and rights to participate in elections. </li><li style="box-sizing: inherit; margin-bottom: initial;">Personal freedom focuses on freedom of speech, freedom of assembly, and agency.</li></ul><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="7bd03576-4739-4cb4-aeff-b90d39d42e93" data-title="Paragraph" data-type="core/paragraph" id="block-7bd03576-4739-4cb4-aeff-b90d39d42e93" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">In some of the following sections, use the three main components as separate variables. In other sections, I break those components down further into the constituent variables. In still other places, it is convenient to have a single, summary variable to represent the overall strength of a country’s liberal rights practices.<a href="https://www.niskanencenter.org/wp-admin/post.php?post=7448&action=edit#endnote1" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;"><sup style="box-sizing: inherit;">[4]</sup></a> </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="7bd03576-4739-4cb4-aeff-b90d39d42e93" data-title="Paragraph" data-type="core/paragraph" id="block-7bd03576-4739-4cb4-aeff-b90d39d42e93" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><span style="box-sizing: inherit; color: inherit;"><span style="box-sizing: inherit;"><span><i><b>Country Groups.</b></i> </span></span></span><span style="color: inherit;">At several points, I will break the full sample of 165 countries down into country groups according to the strength of their liberal rights practices. The first group, which I refer to as “highly liberal,” comprises thirty-three countries that fall in the top quartile for their quality of government freedom, and democracy. A second group, which I call “liberal,” comprises 51 countries–the 33 highly liberal countries plus 18 others–that have above-average scores for overall liberal rights practices and for each of its three main components, quality of government, democracy, and personal freedom. I will refer to the remaining 113 countries as “nonliberal.” </span></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="d3f272f0-b355-427b-b15d-95db25dc0009" data-title="Paragraph" data-type="core/paragraph" id="block-d3f272f0-b355-427b-b15d-95db25dc0009" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">A list of all 164 countries by group with values of key variables for all of them can be found in <a href="http://tiny.cc/QoGtrust" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">Table 1</a> of the <a href="http://tiny.cc/QoGtrust">Online Supplement</a>.</p><h3 style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;"><span style="box-sizing: inherit; font-size: medium;">An overview, and some picture puzzles</span></h3><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="717c9caf-cee3-4ecd-bd4d-fb6f5d8861db" data-title="Paragraph" data-type="core/paragraph" id="block-717c9caf-cee3-4ecd-bd4d-fb6f5d8861db" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The obvious place to begin was to run some summary regressions to see if trust in government and interpersonal trust are indeed associated with each other and with liberal rights practices, as Vallier suggests. They are, but not as strongly as one might think, and more strikingly, they do not always even have the expected signs. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="832ffdf8-f090-49e3-8119-decc23d1b415" data-title="Paragraph" data-type="core/paragraph" id="block-832ffdf8-f090-49e3-8119-decc23d1b415" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Consider a regression that uses the overall measure of liberal rights practices as the response variable and the two trust variables as the controls for the full sample of 164 countries. The trust variables jointly account for just over a quarter of the cross-country variations in liberal rights practices. However, while interpersonal trust is directly related to liberal rights practices, as expected, trust in government is related inversely. There is a clear tendency for trust in government to be <em style="box-sizing: inherit;">higher</em> in governments that have <em style="box-sizing: inherit;">lower</em> scores for liberal rights practices–finding we will return to shortly. Regressions using each of the main components of liberal rights practices (quality of government, democracy, and personal freedom) separately as response variables yield similar findings. (For readers interested in details, full statistical results, can be found in an <a href="http://tiny.cc/QoGtrust" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">Online Supplement</a> . The results in this paragraph are in Sheet S1 of the supplement.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="63ed2937-da43-4fb6-afca-2d8bbcada8df" data-title="Paragraph" data-type="core/paragraph" id="block-63ed2937-da43-4fb6-afca-2d8bbcada8df" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Vallier’s model of trust and governance allows for bidirectional causality. As he puts it, “democratic constitutionalism helps to create real social and political trust, and creates conditions whereby social and political trust manifest various positive feedback loops” (p. 215). Such bidirectional causality, suggests that the regressions could instead be posed in reverse, with the two kinds of trust as the response variables and liberal rights practice as the controls. In multiple regressions with the trust variables as controls, the three liberal rights variables jointly account for about a third of the cross-country variance in interpersonal trust, with quality of government and personal freedom contributing positively to but democracy contributing negatively. When the response variable is trust in government, the liberal rights variables jointly account for about a quarter of the variance. The quality of government contributes positively and both personal freedom and democracy contribute negatively. (<a href="http://tiny.cc/QoGtrust">Online Supplement</a>, S1.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="ab26731b-31e9-4967-84a5-f62bfca27c37" data-title="Paragraph" data-type="core/paragraph" id="block-ab26731b-31e9-4967-84a5-f62bfca27c37" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">In sum, although these preliminary results support the general hypothesis that “trust matters,” not all the pieces seem to fit together neatly. It does not seem to be the case that each kind of trust reinforces the other, nor is not true in every case that liberal rights practices both reinforce and are reinforced by trust. Furthermore, the preliminary results may be subject to various kinds of statistical bias and do not include other variables that may affect the relationships in question.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="57867ea6-fb6f-42ea-a7f3-cb9e3c2dd8fe" data-title="Paragraph" data-type="core/paragraph" id="block-57867ea6-fb6f-42ea-a7f3-cb9e3c2dd8fe" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"> We need to dig into the data more deeply. Some scatter plots will help to spotlight areas for further investigation. Figures 1 and 2 compare countries’ scores for liberal rights practices compared to their scores for trust. Figure 1 places trust in government on the vertical axis and liberal rights practices on the horizontal. Figure 2 is otherwise the same but puts interpersonal trust on the vertical axis. In both figures, all of the variables are standardized, so that zero represents the mean for that variable and the units on the axes indicate the number of standard deviations above or below the mean.<a href="https://www.niskanencenter.org/wp-admin/post.php?post=7448&action=edit#endnote1" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;"><sup style="box-sizing: inherit;">[5]</sup></a> The charts are color coded. Green points represent the 33 “highly liberal” countries. Red and green points together represent the 51 “liberal” countries, and blue points represent the 113 “nonliberal” countries.<a href="https://www.niskanencenter.org/wp-admin/post.php?post=7448&action=edit#endnote1" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;"><sup style="box-sizing: inherit;">[16]</sup></a> Selected points are labeled to help give a general idea of where various kinds of countries fit in. The data needed to identify any non labelled point or locate any country not already flagged can be found in Table 1 of the <a href="http://tiny.cc/QoGtrust">Online Supplement</a>.</p><div class="wp-block" data-align="center" style="box-sizing: inherit; font-size: 16px; margin-left: auto; margin-right: auto; max-width: 580px; outline: 0px;"><figure aria-label="Block: Image" class="wp-block-image block-editor-block-list__block size-large" data-block="8e2362b6-2517-43f8-bfa7-260852b99b2d" data-title="Image" data-type="core/image" id="block-8e2362b6-2517-43f8-bfa7-260852b99b2d" role="group" style="box-sizing: inherit; margin: 0px auto; overflow-wrap: break-word; position: relative; text-align: center;" tabindex="0"><div class="components-resizable-box__container" style="box-sizing: border-box; display: inline-block; flex-shrink: 0; height: auto; max-height: 1362.21px; max-width: 1450px; min-height: 20px; min-width: 21.289px; outline: 0px; position: relative; user-select: auto; width: auto;"><img alt="This image has an empty alt attribute; its file name is image2-e1608241941185.png" src="https://www.niskanencenter.org/wp-content/uploads/2020/12/image2-e1608241941185.png" style="border: none; box-sizing: inherit; display: block; height: inherit; max-width: 100%; width: inherit;" /><span style="box-sizing: inherit;"></span></div><div class="components-drop-zone" style="border-radius: 2px; border: 2px solid var(--wp-admin-theme-color); box-sizing: inherit; inset: 0px; opacity: 0; outline: 0px; position: absolute; transition: opacity 0.3s ease 0s, background-color 0.3s ease 0s, visibility 0s ease 0.3s; visibility: hidden; z-index: 40;"></div></figure></div><div class="wp-block" data-align="center" style="box-sizing: inherit; font-size: 16px; margin-left: auto; margin-right: auto; max-width: 580px; outline: 0px;"><figure aria-label="Block: Image" class="wp-block-image block-editor-block-list__block size-large" data-block="2a7daf6a-30f8-423b-be47-177871e697d9" data-title="Image" data-type="core/image" id="block-2a7daf6a-30f8-423b-be47-177871e697d9" role="group" style="box-sizing: inherit; margin: 0px auto; overflow-wrap: break-word; position: relative; text-align: center;" tabindex="0"><div class="components-resizable-box__container" style="box-sizing: border-box; display: inline-block; flex-shrink: 0; height: auto; max-height: 1365.04px; max-width: 1450px; min-height: 20px; min-width: 21.2448px; outline: 0px; position: relative; user-select: auto; width: auto;"><img alt="This image has an empty alt attribute; its file name is unnamed-15.png" src="https://www.niskanencenter.org/wp-content/uploads/2020/12/unnamed-15.png" style="border: none; box-sizing: inherit; display: block; height: inherit; max-width: 100%; width: inherit;" /><span style="box-sizing: inherit;"></span></div><div class="components-drop-zone" style="border-radius: 2px; border: 2px solid var(--wp-admin-theme-color); box-sizing: inherit; inset: 0px; opacity: 0; outline: 0px; position: absolute; transition: opacity 0.3s ease 0s, background-color 0.3s ease 0s, visibility 0s ease 0.3s; visibility: hidden; z-index: 40;"></div></figure></div><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="57513d69-b272-4851-8d27-1ef0b8d71243" data-title="Paragraph" data-type="core/paragraph" id="block-57513d69-b272-4851-8d27-1ef0b8d71243" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The two charts have some strong similarities. In both charts, the 33 highly liberal countries (green) are clustered tightly around their respective trendlines. In both cases the trendlines are positively sloped, indicating that stronger liberal rights practices are associated with greater trust. The same holds true for the 51 liberal countries, although the fit around the red trendlines, which are based on all 51 countries in the green and red groups, is not quite as tight. Multiple regression analysis shows that trust in government and interpersonal trust jointly accounts for an impressive 70 percent of the variance in liberal rights practices for the liberal group and 80 percent of the variance for the highly liberal group. (Online Supplement S2.) In short, the relationships between trust and governance for these countries look very much like one would expect from reading Vallier’s book. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="4dbbb154-eddd-49a9-90e3-bb73998548eb" data-title="Paragraph" data-type="core/paragraph" id="block-4dbbb154-eddd-49a9-90e3-bb73998548eb" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The 113 nonliberal countries represented by the blue dots are another matter. They are scattered over a wide range of values for both trust in government and interpersonal trust. The blue trendlines in Figures 1 and 2 show slight negative slopes, but the correlations are statistically insignificant in both charts. The significant inverse correlation between trust in government and liberal rights practices for the full 164-country sample that was found in the preliminary regressions discussed above turns out to arise entirely from the fact that a majority of the liberal and highly-liberal countries have below-average trust scores. That is clearly visible because the red and green dots cluster predominantly in the lower-right quadrant of Figure 1. In contrast, the green dots (but not the red) cluster more strongly in the upper-right quadrant of Figure 2, accounting for the positive relationship between interpersonal trust and liberal rights practices for the full 164-country sample found in the preliminary regressions.</p><h3 style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em auto; max-width: 580px; overflow-wrap: break-word; position: relative; text-align: left; white-space: pre-wrap;"><span style="box-sizing: inherit; font-size: medium;">Interpersonal Trust vs. Trust in Government</span></h3><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="760702d1-d6f8-4d79-88f7-80d2619bfcee" data-title="Paragraph" data-type="core/paragraph" id="block-760702d1-d6f8-4d79-88f7-80d2619bfcee" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Figures 1 and 2 reveal a lot, but before proceeding, we need to look at one important relationship that they do not show clearly, namely, that between the two types of trust. Vallier confidently posits that “Since social trust creates good governance and good governance creates political trust, social trust creates political trust by proxy.” If so, we would expect our measures of interpersonal trust and trust in governance to be strongly correlated with each other. However, as Figure 3 shows, that is not consistently the case.</p><div class="wp-block" data-align="center" style="box-sizing: inherit; font-size: 16px; margin-left: auto; margin-right: auto; max-width: 580px; outline: 0px;"><figure aria-label="Block: Image" class="wp-block-image block-editor-block-list__block size-large" data-block="bc7df519-3a0d-4b7f-89a4-3468d914593b" data-title="Image" data-type="core/image" id="block-bc7df519-3a0d-4b7f-89a4-3468d914593b" role="group" style="box-sizing: inherit; margin: 0px auto; overflow-wrap: break-word; position: relative; text-align: center;" tabindex="0"><div class="components-resizable-box__container" style="box-sizing: border-box; display: inline-block; flex-shrink: 0; height: auto; max-height: 1305px; max-width: 1450px; min-height: 20px; min-width: 22.2222px; outline: 0px; position: relative; user-select: auto; width: auto;"><img alt="This image has an empty alt attribute; its file name is image3-4-e1608241978660.png" src="https://www.niskanencenter.org/wp-content/uploads/2020/12/image3-4-e1608241978660.png" style="border: none; box-sizing: inherit; display: block; height: inherit; max-width: 100%; width: inherit;" /><span style="box-sizing: inherit;"></span></div><div class="components-drop-zone" style="border-radius: 2px; border: 2px solid var(--wp-admin-theme-color); box-sizing: inherit; inset: 0px; opacity: 0; outline: 0px; position: absolute; transition: opacity 0.3s ease 0s, background-color 0.3s ease 0s, visibility 0s ease 0.3s; visibility: hidden; z-index: 40;"></div></figure></div><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="856bfc7e-e92b-46e0-b751-0cd71e6e458d" data-title="Paragraph" data-type="core/paragraph" id="block-856bfc7e-e92b-46e0-b751-0cd71e6e458d" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">This figure plots standardized scores for interpersonal trust on the horizontal axis and trust in government on the vertical axis. The size of the bubbles for each country is proportional to their score for overall liberal rights practices. Solid bubbles show positive (above average) standardized scores for liberal rights practices, and empty bubbles show negative (below-average) scores.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="41b46c5a-c957-4b11-9b88-653e402dab0d" data-title="Paragraph" data-type="core/paragraph" id="block-41b46c5a-c957-4b11-9b88-653e402dab0d" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">For the entire sample, differences in interpersonal trust account for just 5 percent of the variance in trust in government. For nearly half of all countries, the standardized values for interpersonal trust and trust in government do not even have the same sign. The relationships are slightly stronger within the groups,as shown by the positively sloped trendlines in Figure 3, but are far from impressive. For the green, highly liberal group, interpersonal trust accounts for about a third of the variance in trust in government.; for the liberal group (red plus green), less than a fifth; and for the blue, nonliberal group, only a tenth. (<a href="http://tiny.cc/QoGtrust">Online supplement</a> S3)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="170862eb-d559-4515-a4f9-3bc76def5459" data-title="Paragraph" data-type="core/paragraph" id="block-170862eb-d559-4515-a4f9-3bc76def5459" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Furthermore, as we have seen, the relationship between the trust variables and liberal rights practices are far from consistent. For the sample as a whole, liberal rights practices are related directly to interpersonal trust but inversely to trust in government. When we look at pairs of countries that fall close to one another in the chart, the result is some strange bedfellows.For example, the United States, a prosperous, highly liberal country, has positive interpersonal trust and negative trust in government scores that do not differ much from impoverished, highly illiberal Yemen. Brazil and Venezuela, which share a geographical border but are far apart in terms of liberalism and prosperity, have nearly identical negative scores for both types of trust. With its top-notch ratings for liberalism and prosperity, Switzerland is roughly matched for its high levels of both kinds of trust by poor, authoritarian Burundi.</p><h3 style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em auto; max-width: 580px; overflow-wrap: break-word; position: relative; text-align: left; white-space: pre-wrap;"><span style="box-sizing: inherit; font-size: medium;">The trust-in-government paradox</span></h3><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="70adce2d-e587-4f3e-bd87-6a1b4d12b521" data-title="Paragraph" data-type="core/paragraph" id="block-70adce2d-e587-4f3e-bd87-6a1b4d12b521" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">At this point, practical considerations force a decision. Together, the three charts offer a wealth of intriguing features for further investigation, but time and space dictate that this commentary has a finite length. With that in mind, I will reluctantly set aside detailed examination of what is going on within the liberal group of countries for another day, and focus instead on what is the most surprising of our preliminary findings: The fact that so many of even the most illiberal countries in the blue group have above-average, and sometimes far-above-average trust in government. I will refer to this tendency for the citizens of so many impoverished, badly-run countries to place so much trust in their governments as the <em style="box-sizing: inherit;">trust-in-government paradox</em>.<a href="https://www.niskanencenter.org/wp-admin/post.php?post=7448&action=edit#endnote1" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;"><sup style="box-sizing: inherit;">[7]</sup></a></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="d42b55be-dcf9-4214-bc46-6c7489f4f06d" data-title="Paragraph" data-type="core/paragraph" id="block-d42b55be-dcf9-4214-bc46-6c7489f4f06d" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Some “obvious” ideas regarding factors that might gain high trust for low-quality governments turn out to not stand up. A good first guess would be that some nonliberal governments might gain public trust by meeting basic needs for shelter, nutrition, and so on better than others that are equally nonliberal. However, there turns out to be no statistically significant bivariate correlation between trust in government and need satisfaction for the nonliberal countries. Similarly, there are no significant bivariate correlations of trust in government with measures of war, terrorism, overall security, or GDP per capita. And perhaps surprisingly, there is no significant bivariate correlation between trust in government and the equality of income distribution, as measured by a Gini index, for either nonliberal or highly liberal countries. (Greater equality is positively associated with greater interpersonal trust in both liberal and nonliberal countries, however.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="520b23c0-5aea-4e29-a005-9495be7a73c8" data-title="Paragraph" data-type="core/paragraph" id="block-520b23c0-5aea-4e29-a005-9495be7a73c8" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">We also find no significant bivariate correlation within the nonliberal group between trust in government and our overall measure of liberal rights practices. However, that finding deserves a closer look. A multiple regression with trust in government as the response variable and liberal rights practices broken down into three separate controls measuring the quality of government, personal freedom, and democracy gives a clearer picture. Those three controls jointly account for a quarter of the cross-country variance in trust in government. The increase in explanatory power is explained by the fact that quality of government, other things being equal, is associated with higher trust in government. In contrast,personal freedom is associated with lower trust. The democracy variable has no statistically significant effect. (<a href="http://tiny.cc/QoGtrust">Online Supplement</a> S4.) </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="9eb28444-3138-426f-b82c-46cc37fb9338" data-title="Paragraph" data-type="core/paragraph" id="block-9eb28444-3138-426f-b82c-46cc37fb9338" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Looking more deeply still, we find that just two of the elements within the quality of government component account for all of its explanatory power for the nonliberal countries. (In contrast, all eight elements of quality of government are positively correlated with trust in government for the highly liberal group of countries.) One of the significant elements is rule of law, a measure of whether laws, regardless of their nature, are applied evenhandedly to all. The implication is that even handed application even of inherently illiberal laws and regulations (for example, restrictions on freedom of religion or travel) produces less distrust of government than arbitrary enforcement of laws that might, on their face, seem more liberal.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="2bd48a35-8848-4575-9f49-33a83f5b42fd" data-title="Paragraph" data-type="core/paragraph" id="block-2bd48a35-8848-4575-9f49-33a83f5b42fd" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">The other significant variable in the quality group is quality of regulation. At first, I was surprised to see that, since “quality of regulation,” in the U.S. context, calls to mind esoteric matters like whether the EPA uses the best available science in regulating the lead content of drinking water. However, a closer look at the underlying data makes me think that in the context of less developed countries, “quality of regulation” has a much less technocratic meaning and instead, mostly means freedom from red tape–things like how hard it is to get a building permit or whether a food stand is likely to be hassled by health inspectors demanding petty bribes. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="6c6cc908-bc3c-48a4-a062-084a970754a8" data-title="Paragraph" data-type="core/paragraph" id="block-6c6cc908-bc3c-48a4-a062-084a970754a8" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Within the personal freedom group, all four elements –official discrimination, agency, freedom of assembly, and freedom of speech– have significant negative bilateral correlations with trust in government. Of these, the freedom of speech and assembly variables are slightly more influential. (In contrast, within the highly liberal group, all four elements are positively associated with trust in government.)</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="5596539f-5cec-4899-8f2a-7df1b7fd527e" data-title="Paragraph" data-type="core/paragraph" id="block-5596539f-5cec-4899-8f2a-7df1b7fd527e" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Even broken down this way, variables from the liberal rights practice group explain at most 30 percent of the variance of trust in government. However, an inspection of bilateral correlations for additional variables reveals some other factors that also matter:</p><ul aria-label="Write list…" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="3a5dc958-01ed-4021-b84d-8bf7478b3c62" data-title="List" data-type="core/list" id="block-3a5dc958-01ed-4021-b84d-8bf7478b3c62" role="textbox" style="box-sizing: inherit; font-size: 16px; list-style-image: initial; list-style-position: initial; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; padding: 0px 0px 0px 1.3em; position: relative; white-space: pre-wrap;" tabindex="0"><li style="box-sizing: inherit; margin-bottom: initial;">A broad measure of education has only a weak correlation with trust in government, but the broad measure conceals conflicting tendencies. Among nonliberal countries, digital literacy tends to improve trust in government, while average years of adult education reduces trust. (In the highly liberal group, all education-related indicators tend to increase both trust in government and interpersonal trust, with an especially large effect for digital literacy.)</li><li style="box-sizing: inherit; margin-bottom: initial;">Individual elements in the basic needs category have small and mostly negative effects on trust in government for countries in the nonliberal group. However, protection from property crime, and even more, protection from violent crime, are exceptions, having moderately strong, positive effects on trust in government. (Among highly liberal countries, satisfaction of all kinds of basic needs is strongly correlated with both kinds of trust.)</li><li style="box-sizing: inherit; margin-bottom: initial;">The growth rate, but not the level, of GDP per capita, has a marginally favorable effect on trust in government among nonliberal countries. (Among highly liberal countries, it is just the reverse: the level, but not the growth rate, of GDP is positively correlated with trust in government.)</li><li style="box-sizing: inherit; margin-bottom: initial;">Interpersonal trust has a small but significant positive bilateral correlation with trust in government, but the effect disappears completely in multiple regressions.</li></ul><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="180be19b-ed0b-459e-a4c7-62d63a5ab6ee" data-title="Paragraph" data-type="core/paragraph" id="block-180be19b-ed0b-459e-a4c7-62d63a5ab6ee" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">These suggestive bilateral correlations can be further tested by running a multiple regression that uses trust in government as the response variable, and for controls, uses regulatory quality, rule of law, freedom of assembly, freedom of speech, digital literacy, years of adult education, protection from property crime, protection from violent crime, and growth rate of GDP. Those nine control variables jointly account for more than half of the variance in trust in government, roughly twice as much as can be accounted for by liberal rights practices alone. The biggest surprise in the regression results (at least to me) is that years of adult education have the strongest effect on government trust of any of the variables–and that the effect is negative. (<a href="http://tiny.cc/QoGtrust">Online Supplement </a>S4).</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="34d8be90-abfc-4285-8ef1-4df08b1da2a4" data-title="Paragraph" data-type="core/paragraph" id="block-34d8be90-abfc-4285-8ef1-4df08b1da2a4" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">What accounts for the other half of the variance, that is, for the remainder of the trust-in-government paradox? Some of the explanations may simply lie in bad data. If the data are corrupted by measurement error, all observed correlations will decrease, even if the underlying causal relationships are valid. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="e4151070-e0b9-4302-922d-98febed2bd84" data-title="Paragraph" data-type="core/paragraph" id="block-e4151070-e0b9-4302-922d-98febed2bd84" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">In part, measurement error likely reflects the difficulties of gathering information in some countries, whether they are data like GDP, which come from official sources, or privately collected survey data. Places where there is active civil conflict or the central government does not control its entire territory are especially problematic. We get a hint of such an effect if we drop 13 such countries from the sample.<a href="https://www.niskanencenter.org/wp-admin/post.php?post=7448&action=edit#endnote1" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;"><sup style="box-sizing: inherit;">[8]</sup></a> Doing so increases the share of the variance of trust in government that is explained by the nine-control multiple regression by about four percentage points.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="c36926da-653a-4085-8938-95fbbb5da999" data-title="Paragraph" data-type="core/paragraph" id="block-c36926da-653a-4085-8938-95fbbb5da999" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">In the case of survey data, another possible source of measurement error may be the reluctance of people in authoritarian countries to provide truthful answers to researchers, especially when the question is, “Do you have confidence in your central government.” The significant negative correlation between freedom of speech and expressed trust in government within the nonliberal group of countries suggests such an effect.<a href="https://www.niskanencenter.org/wp-admin/post.php?post=7448&action=edit#endnote1" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;"><sup style="box-sizing: inherit;">[9]</sup></a></p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="b1c1d566-da74-44bf-b44c-09fa3baf5735" data-title="Paragraph" data-type="core/paragraph" id="block-b1c1d566-da74-44bf-b44c-09fa3baf5735" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Finally, it is fair to presume that country-specific effects play a role in generating trust in government in many of the nonliberal countries in our sample. Rwanda’s citizens may trust their government, whatever its faults, simply because it has prevented return of the genocide of the 1990s. Citizens of China may trust the government because of the country’s remarkable growth record. Russians may trust their government, at least in part, because of its proficiency in the arts of propaganda.</p><h3 style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em auto; max-width: 580px; overflow-wrap: break-word; position: relative; text-align: left; white-space: pre-wrap;"><span style="box-sizing: inherit; font-size: medium;">What have we learned? What questions remain?</span></h3><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="f9836455-ef08-47e8-bd03-dd7ac131ea64" data-title="Paragraph" data-type="core/paragraph" id="block-f9836455-ef08-47e8-bd03-dd7ac131ea64" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">This study has by no means squeezed every drop of information from the available data. Even so, we have learned much of interest about trust and quality of government. Among our findings:</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="84522b2a-5946-423a-a425-ffc935c68035" data-title="Paragraph" data-type="core/paragraph" id="block-84522b2a-5946-423a-a425-ffc935c68035" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">1. Within the groups of liberal and highly liberal countries, especially the 33 highly liberal ones, the main relationships hypothesized by Vallier appear to hold true, at least on first inspection: Trust creates conditions in which liberal rights practices can flourish and those practices, in turn, reinforce both interpersonal trust and trust in government.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="b02204e8-db7c-42bb-a354-251d15ab8eb7" data-title="Paragraph" data-type="core/paragraph" id="block-b02204e8-db7c-42bb-a354-251d15ab8eb7" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">2. The picture is much more mixed among the 113 nonliberal countries. Even within this group, interpersonal trust correlates positively with liberal rights practices, but trust in government correlates inversely. Breaking liberal rights practices down into components, quality of government correlates positively with trust in government, but democracy and personal freedom correlate negatively with trust in government. In fact, of all countries, trust in government is strongest in some of the least liberal–something I have called the “trust in government paradox.”</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="b8d85dfe-1b40-4917-8d9d-1323e7995de1" data-title="Paragraph" data-type="core/paragraph" id="block-b8d85dfe-1b40-4917-8d9d-1323e7995de1" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">3. Among the factors that contribute to high trust in government among nonliberal countries are strong rule of law, high quality of regulation, lower scores for freedom and democracy, strong protection from crime, higher economic growth rates, higher levels of digital literacy, and lowe<em style="box-sizing: inherit;">r </em>average years of adult education. Those factors jointly account for a little over half of the cross-country variance in levels of trust in government among the nonliberal countries.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="f4601392-c8fe-445c-b406-acee47e13f87" data-title="Paragraph" data-type="core/paragraph" id="block-f4601392-c8fe-445c-b406-acee47e13f87" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">4. Most countries characterized by the combination of high trust in government and low levels of liberal rights practices offer only low to moderate satisfaction of basic needs. Countries with high standards of living and high quality of government combined with low scores for freedom and democracy and high trust in government are quite rare. Singapore and Hong Kong are the only convincing examples. Mainland China might be seen as an aspiring but still distant candidate. The least illiberal oil states, such as the UAE and Qatar, also share some characteristics of this group.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="a072ed62-6b75-4a22-b2fc-0ae883fd2bce" data-title="Paragraph" data-type="core/paragraph" id="block-a072ed62-6b75-4a22-b2fc-0ae883fd2bce" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">However, those findings leave many important questions unanswered, especially with regard to the highly liberal countries, which deserve more attention than they have received in this commentary. After all, Vallier’s book, which inspired this whole data-mining project, is primarily concerned with whether today’s highly liberal countries can maintain the high standards of government they have achieved rather than why poor, badly governed countries are the way they are.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="fd2b8e8e-86d1-4df9-bc3f-e16325e44201" data-title="Paragraph" data-type="core/paragraph" id="block-fd2b8e8e-86d1-4df9-bc3f-e16325e44201" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Among the issues worth exploring is the relationship between trust in government and interpersonal trust in highly liberal countries. For example, why is it that among the 33 highly liberal countries, 21 have trust-in-government scores below the average for the full 164-country sample, whereas only 7 have below-average interpersonal trust. Does that mean that distrust of government is actually a healthy thing in liberal democracies, at least up to a point? How do education, the satisfaction of basic needs, and other types of trust and social capital affect the strength of liberal institutions? What is the importance of having a strong social safety net, something that Vallier considers a key liberal rights practice, but which this commentary has almost entirely ignored?</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="3cd34133-8108-4c4d-8625-28486ba9f322" data-title="Paragraph" data-type="core/paragraph" id="block-3cd34133-8108-4c4d-8625-28486ba9f322" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">Finally, it would be interesting to know if the dots in our charts are scattered at random, or whether they are pulled toward a limited number of stable equilibria? Does the highly liberal group itself represent an equilibrium, in the sense that temporary shocks trigger restorative mechanisms, or is liberal democracy inherently fragile? Is the prosperous, well-governed, but illiberal Singapore model an alternative equilibrium toward which other rich countries could aspire, or is it the product of an inimitable set of circumstances? Are the high-trust and low-trust configurations among poor, nonliberal countries distinct equilibria, or just the endpoints of a continuum?</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="27ba935a-d0e4-4685-ae89-85bbc2a5ed2c" data-title="Paragraph" data-type="core/paragraph" id="block-27ba935a-d0e4-4685-ae89-85bbc2a5ed2c" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0">There is plenty of material here for further exploration.</p><div aria-label="Block: Separator" class="block-editor-block-list__block wp-block wp-block" data-block="eda19cce-82fc-4163-9fc4-9e14a8d9c0ef" data-title="Separator" data-type="core/separator" id="block-eda19cce-82fc-4163-9fc4-9e14a8d9c0ef" role="group" style="box-sizing: inherit; font-size: 16px; margin: 0px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; padding-bottom: 0.1px; padding-top: 0.1px; position: relative;" tabindex="0"><hr class="wp-block-separator" style="border-bottom: 2px solid rgb(143, 152, 161); border-image: initial; border-left: none; border-right: none; border-top: none; box-sizing: inherit; margin-left: auto; margin-right: auto; max-width: 100px;" /></div><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="127c7098-1a52-4d6f-843c-1a26e7567707" data-title="Paragraph" data-type="core/paragraph" id="block-127c7098-1a52-4d6f-843c-1a26e7567707" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><sup style="box-sizing: inherit;">[1]</sup> I have used five-year averages for most of the variables. In doing so, I was motivated partly by problems in the underlying data, such as random measurement error and use of older values when new observations are missing. Also, many of the response variables examined here seem likely to respond only slowly to changes in relevant control variables. In a majority of cases, correlations among variables are stronger when five-year averages are used rather than observations for the most recent year. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="95742a4a-efc0-4a40-b5ff-5f405bec839f" data-title="Paragraph" data-type="core/paragraph" id="block-95742a4a-efc0-4a40-b5ff-5f405bec839f" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><sup style="box-sizing: inherit;">[2]</sup>In a <a href="https://www.niskanencenter.org/quality-of-government-a-statistical-portrait/" style="box-sizing: inherit; color: #0073aa; outline: 0px; transition: none 0s ease 0s;">previous study</a>, I included Legatum’s <em style="box-sizing: inherit;">political accountability</em> element, a measure of procedural democracy, as a component of quality of government. Here I treat procedural democracy separately. Readers of that study will recognize the quality of government used here as the variable “QoG8” in that previous work.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="c2e05103-3f6e-4ed9-a749-1aba3e368a4a" data-title="Paragraph" data-type="core/paragraph" id="block-c2e05103-3f6e-4ed9-a749-1aba3e368a4a" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><sup style="box-sizing: inherit;">[3]</sup>In saying “X accounts for such-and-such a percentage of the variance in Y,” I refer to the statistic “R<sup style="box-sizing: inherit;">2</sup>,” the square of the correlation coefficient for the two variables. An R<sup style="box-sizing: inherit;">2</sup> of 1 means that the value of X is perfectly proportional to the value of Y. An R<sup style="box-sizing: inherit;">2</sup> of 0 means the two variables are entirely unrelated. For example, if the two variables for height and weight of a group of students have a correlation coefficient R of 0.9 and an R<sup style="box-sizing: inherit;">2 </sup>of 0.81, that means that 81 percent of the variation in the students’ weights is statistically associated with differences in their heights. Correlation does not necessarily imply causation.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="15f98661-1abe-49f6-914a-78e236c36993" data-title="Paragraph" data-type="core/paragraph" id="block-15f98661-1abe-49f6-914a-78e236c36993" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><sup style="box-sizing: inherit;">[4]</sup>The overall measure of liberal rights practices, developed using a principal components approach, is a weighted average of the underlying indicators of quality of government, freedom, and democracy. It captures about 75 percent of the variance in the full set of underlying indicators.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="5c352668-54ba-4950-9e68-4f7ff1abba7b" data-title="Paragraph" data-type="core/paragraph" id="block-5c352668-54ba-4950-9e68-4f7ff1abba7b" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><sup style="box-sizing: inherit;">[5]</sup>As help in interpreting the normalized scores, keep in mind that when a variable is normally distributed, about 68 percent of observations fall within 1 standard deviation of the mean and 95 percent within two standard deviations. </p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="4dd1a845-9e70-4736-b32c-0dd1908c472e" data-title="Paragraph" data-type="core/paragraph" id="block-4dd1a845-9e70-4736-b32c-0dd1908c472e" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><sup style="box-sizing: inherit;">[6]</sup> The seventeen countries represented by blue dots that lie to the right of the vertical axis have higher than average overall scores for liberal rights practices but do not count among the 51-liberal countries because they score below average on at least one of the three liberal rights components. For example, Singapore has very high quality of government, but negative standardized scores for both democracy and personal freedom.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="94881348-356d-4d2f-9f9c-7e35c0880c0c" data-title="Paragraph" data-type="core/paragraph" id="block-94881348-356d-4d2f-9f9c-7e35c0880c0c" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><sup style="box-sizing: inherit;">[7]</sup>For purposes of this section, the sample is reduced from 164 to 152 countries due to missing Gini data for some countries. All 51 liberal and highly liberal countries are included along with 101 illiberals.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="23a54c82-aae0-4799-8a95-1d3232ff52b1" data-title="Paragraph" data-type="core/paragraph" id="block-23a54c82-aae0-4799-8a95-1d3232ff52b1" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><sup style="box-sizing: inherit;">[8]</sup>The 13 countries are Mali, Ukraine, Colombia, Pakistan, Yemen, Nigeria, Myanmar, Democratic Republic of Congo, Sudan, Iraq, Central African Republic, and South Sudan.</p><p aria-label="Paragraph block" aria-multiline="true" class="block-editor-block-list__block wp-block rich-text block-editor-rich-text__editable wp-block" data-block="89541979-a146-49fa-8626-d2240b7ba6d1" data-title="Paragraph" data-type="core/paragraph" id="block-89541979-a146-49fa-8626-d2240b7ba6d1" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px auto; max-width: 580px; overflow-wrap: break-word; position: relative; white-space: pre-wrap;" tabindex="0"><sup style="box-sizing: inherit;">[9]</sup>Additionally, technical issues may also affect the strength of measured statistical relationships among variables. For example, this study has not thoroughly explored possible nonlinear structural relationships among variables, or corrected for the fact that not all variables are normally distributed. Furthermore, the use of five-year averages for most variables, while useful in revealing long-term relationships, may conceal noteworthy transient relationships between trust and other variables caused by business cycles, natural disasters, or short-lived violent conflicts.</p><div style="font-size: 16px;"><br /></div><div class="block-list-appender" style="box-sizing: inherit; font-size: 16px; outline: 0px; position: relative;" tabindex="-1"></div></div></div></div></div><div style="background-color: white; box-sizing: inherit; color: #1e1e1e; font-family: "Noto Serif"; font-size: 16px; outline: 0px; position: fixed;" tabindex="0"></div>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-59810826159524468572020-12-11T11:32:00.001-08:002020-12-11T11:33:23.041-08:00Why Libertarian Environmentalists Should Take Locke Seriously<p> </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitpKdLsThp5xoahKZ9liTq2NIMrlF3lfPQ5QtcVuZQduU_pCjbxEljxzeDx36l5Mlklo1px4Czljm_Vn_ea2RHnMaWunxrzp8lHbZs25SLdVYHmyQc80HdptIhZCiBFu_THzPENY8qZmBL/s654/P201211-1.png" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="344" data-original-width="654" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitpKdLsThp5xoahKZ9liTq2NIMrlF3lfPQ5QtcVuZQduU_pCjbxEljxzeDx36l5Mlklo1px4Czljm_Vn_ea2RHnMaWunxrzp8lHbZs25SLdVYHmyQc80HdptIhZCiBFu_THzPENY8qZmBL/s320/P201211-1.png" width="320" /></a></div><p></p><p class="MsoNormal">In an well-argued essay, <a href="https://scholarlycommons.law.case.edu/faculty_publications/30/?utm_source=scholarlycommons.law.case.edu%2Ffaculty_publications%2F30&utm_medium=PDF&utm_campaign=PDFCoverPages">Jonathan
Adler</a> argues that libertarian environmentalists ought to take property
rights seriously. No writer has had a greater impact on classical liberal and
libertarian thinking about property than John Locke. It follows that any
would-be free market environmentalist must take Locke seriously. And not just
Locke’s theory of property. His theory of government, as laid out in his 1690 <a href="https://www.gutenberg.org/files/7370/7370-h/7370-h.htm"><i>Second
Treatise</i></a>, is equally important. In what follows, I will argue that considering
Locke’s ideas on both property and government leads to conclusions that justify
even stronger policy actions that Adler advocates.<o:p></o:p></p>
<p class="MsoNormal"><b>Locke on property<o:p></o:p></b></p>
<p class="MsoNormal">Locke states the essence of his theory of property in this famous
passage:<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">Though the earth, and all inferior
creatures, be common to all men, yet every man has a property in his own
person: this no body has any right to but himself. The labour of his body, and
the work of his hands, we may say, are properly his. Whatsoever then he removes
out of the state that nature hath provided, and left it in, he hath mixed his
labour with, and joined to it something that is his own, and thereby makes it
his property. It being by him removed from the common state nature hath placed
it in, it hath by this labour something annexed to it, that excludes the common
right of other men: for this labour being the unquestionable property of the
labourer, no man but he can have a right to what that is once joined to, at
least where there is enough, and as good, left in common for others.” (Chap. 5,
sec. 27)<o:p></o:p></p>
<p class="MsoNormal">A few pages later, Locke makes it clear that the principle
for acquiring property applies not just to acorns gathered in the woods, but to
the land itself:<span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">As much land as a man tills,
plants, improves, cultivates, and can use the product of, so much is his property.
He by his labour does, as it were, inclose it from the common. (Chap. 5, sec.
32)<span></span></p><a name='more'></a><o:p></o:p><p></p>
<p class="MsoNormal">From these passages we can distill three rights and three
corresponding duties:<o:p></o:p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span><i>Rights:<o:p></o:p></i></p>
<p class="MsoListParagraphCxSpFirst" style="margin-left: 0.75in; mso-add-space: auto; mso-list: l1 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->to property in one’s own person<o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="margin-left: 0.75in; mso-add-space: auto; mso-list: l1 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->to property in the fruits of one’s own labor<o:p></o:p></p>
<p class="MsoListParagraphCxSpLast" style="margin-left: 0.75in; mso-add-space: auto; mso-list: l1 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->to property in land and natural resources taken
from the commons by first use<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;"><i>Duties:<o:p></o:p></i></p>
<p class="MsoListParagraphCxSpFirst" style="margin-left: 0.75in; mso-add-space: auto; mso-list: l2 level1 lfo2; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->to abstain from harming others in their persons<o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="margin-left: 0.75in; mso-add-space: auto; mso-list: l2 level1 lfo2; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->to abstain from taking or harming the property
of others<o:p></o:p></p>
<p class="MsoListParagraphCxSpLast" style="margin-left: 0.75in; mso-add-space: auto; mso-list: l2 level1 lfo2; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->to leave enough and as good for others when
taking from the commons <o:p></o:p></p>
<p class="MsoNormal">The rights and duties are inseparable; anyone who wants to claim
the former is obligated to uphold the latter. <o:p></o:p></p>
<p class="MsoNormal">These rights and duties were reflected in the English common
law of Locke’s day. Violation of the duty not to harm others in their persons corresponds
to the common law torts of <i>assault</i> (threatening or attempting to inflict
offensive physical contact) and <i>battery</i> (carrying out a threat to harm).
Violation of the second duty, when it pertains to personal property, is <i>theft.</i>
Interference with others’ use of their land by knowingly entering it without
permission is the common law offense of <i>trespass</i>. Actual harm is not an
essential element of trespass – any interference with the owner’s right to
exclusive possession and enjoyment of property qualifies. <o:p></o:p></p>
<p class="MsoNormal">Locke’s third right is that of acquiring property from the
commons by mixing one’s labor with it. Locke included the right to gather acorns
from common land or to draw water from a stream, and also the right to take
possession of unused land by “mixing one’s labor” with it, that is, plowing it,
putting animals to graze on it, building on it, and so on. The broadest term to
describe that process is <i>acquisition by first use</i>. When applied to land,
the process was known in Locke’s day as <i>enclosure</i>, which calls to mind
building a fence to keep out other people’s cattle or sheep, although a
physical barrier would not be strictly required. Today, acquisition by first
use is often called <i>homesteading.</i> I will use the terms “acquisition by
first use,” “enclosure,” and “homesteading” interchangeably.<o:p></o:p></p>
<p class="MsoNormal">Over the years, acquisition by first use has sometimes been
extended to abstract as well as tangible forms of property. For example, in the
United States, in the early days of radio, the government reserved certain
frequencies for marine and military use but left others up for grabs. As
stations multiplied, interference became a problem. Courts determined that the
first user of a frequency had homesteaded it and that use by others of the same
frequency constituted trespass. That system, however, proved cumbersome and was
replaced by today’s regulatory approach. (See <a href="https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1469&context=yjreg"><span color="windowtext">Pablo T. Spiller and Carlo Cardilli</span></a>, Yale
Journal on Regulation, 1999.) <o:p></o:p></p>
<p class="MsoNormal">Locke refers to violation of his third duty, failure to leave
enough and as good for others when taking from the commons, as <i>engrossment</i>.
At that time, the common law applied that term to certain commercial practices
that would now be known as “monopolizing” or “cornering the market.” Locke uses
“engrossment” more broadly to include unjustly acquiring most or all of
something at the expense of other holders of common rights. In one of his
clearest statements on the subject, he writes: <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">It will perhaps be objected to
this, that if gathering the acorns, or other fruits of the earth, &c. makes
a right to them, then any one may ingross as much as he will. To which I
answer, Not so. The same law of nature, that does by this means give us
property, does also bound that property too. … As much as any one can make use
of to any advantage of life before it spoils, so much he may by his labour fix
a property in: whatever is beyond this, is more than his share, and belongs to
others. (Ch. 5, sec. 31)<o:p></o:p></p>
<p class="MsoNormal">Engrossment of land, as opposed to nuts or game, would occur
if a person claimed more land than they could “improve, cultivate, or use the
product of.” (Ch. 5, Sec. 32)<o:p></o:p></p>
<p class="MsoNormal">One implication of the engrossment proviso is obvious: The
whole or a disproportionate part of the land cannot be enclosed, or privatized,
by the first individual who happens to come along. (Think of a European
explorer standing on the Atlantic coast of North America and claiming a swath
of property that extends westward all the way to the Pacific.) Less obviously,
it means that the “mixing one’s labor” principle can never be used to enclose
the entirety of any commons even if each person who comes along takes only that
modest amount that he or she can use personally. <o:p></o:p></p>
<p class="MsoNormal">Instead, at some point a scarcity constraint is reached
beyond which enclosing even one more small parcel fails to leave “enough and as
good for others.” Beyond that point further enclosure may occur but, if so, it
must proceed using some different mechanism that requires the consent of all
who hold rights-in-common to the unenclosed remainder. In that regard, Locke
contrasts the situation of a country like the America of his day, where he
believed that unused or underused land existed in abundance, with that of
England, where the scarcity constraint had already been reached. In the latter
case, he writes, <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">In land that is common in England,
or any other country, where there is plenty of people under government, who
have money and commerce, no one can inclose or appropriate any part, without
the consent of all his fellow commoners; because this is left common by
compact, i.e. by the law of the land, which is not to be violated. … Besides,
the remainder, after such enclosure, would not be as good to the rest of the
commoners, as the whole was when they could all make use of the whole; whereas
in the beginning and first peopling of the great common of the world, it was
quite otherwise. (Ch. 5, sec. 35)<o:p></o:p></p>
<p class="MsoNormal">It is not that Locke thinks the remaining land is better
used when held in common than when held privately. Quite the contrary. Just a
few paragraphs later, he asserts that one acre of enclosed land is as
productive as 10 or even a hundred held in common (Ch. 5, Sec. 37). Still, once
the scarcity constraint is reached, if any part of the commons that remains is
to be privatized, that must happen by the consent of all the tenants in common.
<o:p></o:p></p>
<p class="MsoNormal">But what rules should govern their giving of consent, and if
the land is to continue to be held in common, how should it be managed? <o:p></o:p></p>
<p class="MsoNormal"><b>Locke on government<o:p></o:p></b></p>
<p class="MsoNormal">One possible rule would be to handle everything through
private negotiation. That could be done through contracts under which each of the
remaining common owners agrees to cede their claims to any newly enclosed
parcel in exchange for compensation from its owners. If the value of the land
really increases through enclosure, it should theoretically be possible to
obtain that consent. <o:p></o:p></p>
<p class="MsoNormal">Such an approach could well be practicable if the number of
parties is relatively small, and could lead to privatization of more of the
land than the rule of first-use would allow. Even then, however, some common
property would remain, either because agreement on further enclosures could not
be reached, or because the nature of the property in question made actual
enclosure impossible.<o:p></o:p></p>
<p class="MsoNormal">Once private negotiations had run their course, the
remaining common property, and any further enclosures, could be managed by a
committee of the whole, under a rule of unanimous consent. However, that is not
what Locke recommends. Instead, he recommends establishment of a government
empowered to devise the new set of rules for the protection of property that
has been privatized through first use and for management of any remaining
commons. <o:p></o:p></p>
<p class="MsoNormal">Locke, after all, was not an anarchist. He believed that it
was not only legitimate but prudent for free individuals to pursue their mutual
interests by joining together under a common government. But the kind of
government Locke supported would be limited in important ways.<o:p></o:p></p>
<p class="MsoNormal">First, its principal purpose – in fact, its <i>only</i>
purpose – would be protection of property: “Government has no other end but the
preservation of property” (Ch. 7, Sec. 94). “The great and chief end, therefore,
of men's uniting into commonwealths, and putting themselves under government,
is the preservation of their property” (Ch. 9, Sec. 124). (Importantly, under
the principle of self-ownership, “property” for Locke included not just the
lands and homes of the landed rich, but the personal security and livelihoods
of everyone.)<o:p></o:p></p>
<p class="MsoNormal">Second, Locke prescribed what would later come to be called a
<i>liberal</i> government. Such a government would be characterized by separation
of executive and legislative powers. It would also follow the rule of law, that
is, of “settled standing rules, indifferent, and the same to all parties” (Ch.
7, Sec. 87). To ensure just enforcement of the law, no one should be the judge
in their own case. <o:p></o:p></p>
<p class="MsoNormal">Third, recognizing that it would be impracticable to secure
the actual consent of every citizen for every decision, Locke understood that the
ordinary business of government should be conducted by majority rule. Even so, the
actions of government should command at least the tacit support of all citizens
( Ch. 8, Sec. 199-120). By tacit consent, Locke meant that anyone who accepts
the benefits of living under a government, whether those benefits take the form
of protection of property or simply the use of public highways, must assent to
be governed by all the laws of that government without picking and choosing. <o:p></o:p></p>
<p class="MsoNormal">Locke’s justification for the establishment of such a
government is largely pragmatic. He recognized that government involved a
tradeoff between the freedoms of the state of nature and the benefits of a more
settled way of living:<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">For being now in a new state,
wherein<span style="mso-spacerun: yes;"> </span>he is to enjoy many
conveniencies, from the<span style="mso-spacerun: yes;"> </span>labour,
assistance, and society of others in the same community, as well as protection
from its whole strength; he is to part also with as much of his natural
liberty, in providing for himself, as the good, prosperity, and safety of the
society shall require; which is not only necessary, but just, since the other
members of the society do the like. (Ch. 9, Sec. 130)<o:p></o:p></p>
<p class="MsoNormal">Such, then, are Locke’s views regarding property and
government. If we take them seriously, what do they tell us about the issues we
face today?<o:p></o:p></p>
<p class="MsoNormal"><b>Implications for climate policy<o:p></o:p></b></p>
<p class="MsoNormal">Figure 1 shows emissions and concentrations of carbon
dioxide in the earth’s atmosphere since the beginning of the Industrial Revolution
(<a href="https://www.climate.gov/news-features/understanding-climate/climate-change-atmospheric-carbon-dioxidewh"><span color="windowtext">Climate.gov</span></a>). The relationship between the
two lines in the chart reflects the fact that emissions of carbon dioxide, the
most important greenhouse gas (GHG), stay in the atmosphere for a long time –
300 to 1,000 years (<a href="https://climate.nasa.gov/news/2915/the-atmosphere-getting-a-handle-on-carbon-dioxide/#:~:text=Carbon%20dioxide%20is%20a%20different,timescale%20of%20many%20human%20lives.">NASA)</a>.
I will organize the following discussion of climate policy around four stylized
stages of development, based loosely on the figure. The exact data and
historical dates are less important that the more general economic and
environmental relationships. <span style="mso-spacerun: yes;"> </span><o:p></o:p></p><p class="MsoNormal"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJPiNOigp-qfafjji3wiRGVepoOa-RVjU5_QiK349wNUY07UPiDddhuP9ZrstiI7LLWFk7kp1Q_Yp75K5sOqQN6-VKFrbvMnifgdjtJzbbG654LpAKOhrETtNBXD3uYGN7oIseMWMhAggo/s661/P201103-1.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="399" data-original-width="661" height="241" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJPiNOigp-qfafjji3wiRGVepoOa-RVjU5_QiK349wNUY07UPiDddhuP9ZrstiI7LLWFk7kp1Q_Yp75K5sOqQN6-VKFrbvMnifgdjtJzbbG654LpAKOhrETtNBXD3uYGN7oIseMWMhAggo/w400-h241/P201103-1.png" width="400" /></a></div><p class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo3; text-indent: -0.25in;"><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]--><b><i>Stage</i></b><i> 0:</i> Any anthropogenic GHG
emissions are so low as to be undetectable against the background of natural
processes. They are absorbed by natural sinks and do not cause any cumulative
rise in GHG concentrations in the atmosphere. <o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]--><b><i>Stage 1:</i></b> The rate of GHG emissions
exceeds the absorptive capacity of natural sinks. Ongoing emissions cause
atmospheric concentrations to rise, but concentrations remain too low to cause
any significant harm.<o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]--><b><i>Stage 2:</i></b> GHG concentrations reach
a level that begins to cause nontrivial harm to sensitive populations who are
particularly exposed to sea level rise, droughts, storms or other climate effects.
However, during this stage the aggregate benefits of emission-causing
activities exceed the harms at the margin.<o:p></o:p></p>
<p class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo3; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]--><b><i>Stage 3:</i></b> GHG concentrations reach
the point that the aggregate harms caused by further anthropogenic emissions significantly
exceed the benefits.<o:p></o:p></p>
<p class="MsoNormal">Stage 0 is strictly hypothetical. If there ever was such a
stage, it presumably ended before Figure 1 begins. <a href="http://www.realclimate.org/index.php/archives/2018/10/pre-industrial-anthropogenic-co2-emissions-how-large/"><span color="windowtext">Some research</span></a> suggests that emissions from
early farming and deforestation began to cause measurable anthropogenic effects
thousands of years ago. Whether that is so or not, Stage 1 appears to have
gotten well underway early in the Industrial Revolution, with the first
large-scale use of coal as a fuel. For the sake of discussion, we can think of Stage
2 as having started sometime in the nineteenth or early twentieth century, and
Stage 3 sometime more recently. <o:p></o:p></p>
<p class="MsoNormal">I realize that some readers may insist that we have not yet
reached Stage 3, so we don’t have to do anything yet, but I would invite them
to stay with the discussion. One reason is that, as Adler makes clear, is that the
harms done by anthropogenic climate change require redress already during Stage
2, when they do not yet exceed benefits such as low waste-disposal costs or the
availability of cheap fossil fuels. Furthermore, it seems to me that even those
libertarians who are most skeptical of climate science should be prepared, <i>arguendo</i>,
to give some thought to the kind of policy response they would endorse if and
when Stage 3 did arrive. </p>
<p class="MsoNormal">The stages are briefly described in Table 1, along with
names for the transitions from each stage to the next. <o:p></o:p></p>
<table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: none; mso-border-alt: solid windowtext .5pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 1184;">
<tbody><tr style="mso-yfti-firstrow: yes; mso-yfti-irow: 0;">
<td colspan="3" style="border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 467.5pt;" valign="top" width="623">
<p align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 0in; text-align: center;"><b><i>Table 1: Stylized Stages of Anthropogenic Climate
Effects<o:p></o:p></i></b></p>
</td>
</tr>
<tr style="mso-yfti-irow: 1;">
<td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 49.25pt;" valign="top" width="66">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Stage 0<o:p></o:p></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 292.5pt;" valign="top" width="390">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">No GHG
accumulation, no harms<o:p></o:p></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 125.75pt;" valign="top" width="168">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p>
</td>
</tr>
<tr style="mso-yfti-irow: 2;">
<td style="background: rgb(217, 217, 217); border-top: none; border: 1pt solid windowtext; mso-background-themecolor: background1; mso-background-themeshade: 217; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 49.25pt;" valign="top" width="66">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p>
</td>
<td style="background: rgb(217, 217, 217); border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-background-themecolor: background1; mso-background-themeshade: 217; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 292.5pt;" valign="top" width="390">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p>
</td>
<td style="background: rgb(217, 217, 217); border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-background-themecolor: background1; mso-background-themeshade: 217; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 125.75pt;" valign="top" width="168">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><i><span style="color: black; mso-color-alt: windowtext;">Scarcity threshold</span><o:p></o:p></i></p>
</td>
</tr>
<tr style="mso-yfti-irow: 3;">
<td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 49.25pt;" valign="top" width="66">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Stage 1<o:p></o:p></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 292.5pt;" valign="top" width="390">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Increases in
GHG emission rates cause GHG concentrations to rise but no harm occurs.<o:p></o:p></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 125.75pt;" valign="top" width="168">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p>
</td>
</tr>
<tr style="mso-yfti-irow: 4;">
<td style="background: rgb(217, 217, 217); border-top: none; border: 1pt solid windowtext; mso-background-themecolor: background1; mso-background-themeshade: 217; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 49.25pt;" valign="top" width="66">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p>
</td>
<td style="background: rgb(217, 217, 217); border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-background-themecolor: background1; mso-background-themeshade: 217; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 292.5pt;" valign="top" width="390">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p>
</td>
<td style="background: rgb(217, 217, 217); border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-background-themecolor: background1; mso-background-themeshade: 217; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 125.75pt;" valign="top" width="168">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><i><span style="color: black; mso-color-alt: windowtext;">Threshold of harm</span><o:p></o:p></i></p>
</td>
</tr>
<tr style="mso-yfti-irow: 5;">
<td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 49.25pt;" valign="top" width="66">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Stage 2<o:p></o:p></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 292.5pt;" valign="top" width="390">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Increases in
GHG concentrations cause harm to some sensitive populations but benefits of
additional emissions outweigh harms.<o:p></o:p></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 125.75pt;" valign="top" width="168">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p>
</td>
</tr>
<tr style="mso-yfti-irow: 6;">
<td style="background: rgb(217, 217, 217); border-top: none; border: 1pt solid windowtext; mso-background-themecolor: background1; mso-background-themeshade: 217; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 49.25pt;" valign="top" width="66">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p>
</td>
<td style="background: rgb(217, 217, 217); border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-background-themecolor: background1; mso-background-themeshade: 217; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 292.5pt;" valign="top" width="390">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p>
</td>
<td style="background: rgb(217, 217, 217); border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-background-themecolor: background1; mso-background-themeshade: 217; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 125.75pt;" valign="top" width="168">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><i><span style="color: black; mso-color-alt: windowtext;">Cost-benefit threshold</span><o:p></o:p></i></p>
</td>
</tr>
<tr style="mso-yfti-irow: 7; mso-yfti-lastrow: yes;">
<td style="border-top: none; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 49.25pt;" valign="top" width="66">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Stage 3<o:p></o:p></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 292.5pt;" valign="top" width="390">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;">Further
increases in GHG concentrations cause harms in excess of benefits.<o:p></o:p></p>
</td>
<td style="border-bottom: 1pt solid windowtext; border-left: none; border-right: 1pt solid windowtext; border-top: none; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0in 5.4pt; width: 125.75pt;" valign="top" width="168">
<p class="MsoNormal" style="line-height: normal; margin-bottom: 0in;"><o:p> </o:p></p>
</td>
</tr>
</tbody></table>
<p class="MsoNormal"><o:p> </o:p>Let’s turn now to a discussion of how, under Lockean
principles, human impacts on the climate should be managed as we move through
the stages.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><b><i>Stage 1. </i></b>We will begin here, since Stage 0 is
of no real economic interest. If there ever was such a stage, the waste
disposal capacity of the atmosphere would not have been a scarce good; anyone
could use as much as they wanted with no effect on anyone else.<o:p></o:p></p>
<p class="MsoNormal">Things get interesting only when the scarcity threshold is
passed and greenhouse gas concentrations begin to rise. Because CO2 persist in
the atmosphere for centuries, each newly emitted ton uses up part of the
remaining capacity of the atmosphere to absorb the gas without harm. For that
reason, any first-use appropriation of emission rights would be like the enclosure
of a portion of a common field – a <i>fixed-quantity appropriation. </i>In
contrast, a first-use claim to draw water from a river would allow withdrawals
year after year at a given rate – a <i>fixed-rate appropriation</i>.<o:p></o:p></p>
<p class="MsoNormal">The difference between fixed-quantity and fixed-rate
appropriations seems to have been missed by libertarians who rely on Murray Rothbard’s
analysis of air pollution. According to Rothbard, “If a factory owned by A
polluted originally unused property, up to a certain amount of pollutant X,
then A can be said to have homesteaded a pollution easement of a certain degree
and type.” (<a href="https://mises.org/library/law-property-rights-and-air-pollution-0">Rothbard,
1982</a>, p. 146.)<o:p></o:p></p>
<p class="MsoNormal">The context makes it clear that he is thinking of a
fixed-rate appropriation, which would allow A to continue to emit X pollution year
after year. However, Rothbard was writing about less persistent forms of air
pollution like smoke or the emissions that cause acid rain. A CO2 easement, in
contrast, would have to be of the fixed-quantity variety, giving the right to
emit a certain number of tons of CO2 or equivalent. A perpetual fixed-rate easement
of any finite size would eventually to exhaust the capacity of the atmosphere
to absorb wastes harmlessly.<a href="file:///C:/Users/Ed/Documents/DolanEcon%20Blog/Drafts/Niskanen/TANSTAAFL%202021/dd_edits_Taking%20Locke%20Seriously%20final.docx#_ftn1" name="_ftnref1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span face=""Calibri",sans-serif" style="font-size: 11pt; line-height: 107%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: minor-latin;">[1]</span></span><!--[endif]--></span></span></a>
But even if homesteading were limited to fixed-quantity easements, GHG
concentrations would, over time, reach a point beyond which any additional
emissions began to cause harm. At that point, Stage 2 would begin.<o:p></o:p></p>
<p class="MsoNormal"><b><i>Stage 2. </i></b>As soon as Stage 2 begins, two things
happen. First, there is a change not just in the magnitude of the effect of one
person’s GHG emissions on others, but also in the kind of effect. Luc Bovens
points out the difference in a paper on grandfathering of emission rights (<a href="https://philpapers.org/archive/BOVALDv1">Bovens, 2011</a>, p. 14). In
Stage 1, emissions by one person adversely affect others only to the extent
that they reduce the remaining waste disposal capacity of the air, thereby using
up potential opportunities for others to emit the same kinds of greenhouse
gasses in the future. Beyond that point, further emissions would violate
Locke’s third duty, the duty not to engross. In contrast, once Stage 2 gets
underway, any emissions begin to cause direct harms in the form of flooding,
crop damage, extreme weather, and other climate-related phenomena. Those harms
are different in kind from the benefits of low-cost waste disposal to emitters.
Those further emissions violate the first two of Locke’s duties rather than the
third.<o:p></o:p></p>
<p class="MsoNormal">Second, once emissions begin to harm others directly, even
if the harm to the persons and property of pollution victims is (by assumption)
less than the benefit to polluters, there can be no further first-use claims to
emission rights. All of the fixed-quantity rights that were legitimately
homesteaded during Stage 1 will have been, or will soon be, used up. At that
point, the whole earth would be in the position that Locke described for the
England of his day, in which “no one can inclose or appropriate any part,
without the consent of all his fellow-commoners.”<o:p></o:p></p>
<p class="MsoNormal">Importantly, though, obtaining such consent for further
emissions should still be possible, since the benefits of further emissions exceed
the costs. What is required is for the government, in its role as protector of
property and manager of the remaining commons, to develop appropriate rules to
facilitate the process.<o:p></o:p></p>
<p class="MsoNormal">For GHG emissions, rules to facilitate private negotiation
are not likely to be enough. Such emissions are not comparable to, say, local
particulate pollution from an iron smelter. Even if such a local polluter could
no longer renew a fixed easement, it might be possible to negotiate a
compensation agreement with victims. But, given that the harms done by GHG emissions
are spread worldwide, private negotiations would be impracticable.<o:p></o:p></p>
<p class="MsoNormal">Fortunately, Lockean principles do not require that
everything be done by private negotiation. The government could step in to set
administrative or market-oriented rules. We will have more to say on about
various alternative rules later, but whatever the details, as long as the
government operated under appropriate liberal safeguards, including rules that
are fixed and are the same for all, its actions would be consistent with
Lockean principles.<a href="file:///C:/Users/Ed/Documents/DolanEcon%20Blog/Drafts/Niskanen/TANSTAAFL%202021/dd_edits_Taking%20Locke%20Seriously%20final.docx#_ftn2" name="_ftnref2" style="mso-footnote-id: ftn2;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span face=""Calibri",sans-serif" style="font-size: 11pt; line-height: 107%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: minor-latin;">[2]</span></span><!--[endif]--></span></span></a><o:p></o:p></p>
<p class="MsoNormal">If everything went well, emissions could continue to increase
under the Stage 2 rules until they reached the cost-benefit threshold that
marks the beginning of Stage 3. Beyond that point, it would not be worthwhile for
polluters to pay enough to compensate victims, so emissions would fall toward
net zero. Atmospheric concentrations would stabilize, and eventually, with long
lags for some effects like sea-level rise, the climate would stabilize, too.<o:p></o:p></p>
<p class="MsoNormal"><b><i>Stage 3. </i></b>Unfortunately, it appears that things
have not developed according to this happy scenario. High transaction costs have
stymied private deal-making. Courts have failed to block unjustified emissions.
The government has not balanced the interests of winners and losers in a fair
and efficient manner. Also, to some extent, emissions have grown beyond the
cost-benefit threshold simply because not enough people (or not the right ones)
realized what was happening until it was too late. As a result, at least
according to the conventional view of matters, we are already deep into Stage
3. What next?<o:p></o:p></p>
<p class="MsoNormal">The key difference between Stage 3 and Stage 2 is that the
harm done by any additional emissions now exceeds the benefits. To return from
where we are to the cost-benefit threshold, let alone to the threshold of harm,
will require substantial reductions in total emissions. Doing so raises many
questions, including which sources should make the reductions, how fast the
process should proceed, and what policy instruments should be used to reach emission
targets. What help with the answers, if any, can Locke provide?<o:p></o:p></p>
<p class="MsoNormal">Consider, first, the question of which sources should reduce
emissions. One view is that existing sources should be protected, or
“grandfathered,” when emission quotas are set. If so, those sources would be
allowed to continue polluting unless and until they are bought out with cash
payments, or subsidies for installation of emission-reducing technologies, or
in some other way. However, I see major problems with the grandfathering of
emission rights for greenhouse gasses. <o:p></o:p></p>
<p class="MsoNormal">One problem, already mentioned, is that any first-use easements
homesteaded during Stage 1 would have been for fixed quantities only, not for
perpetual emissions at a fixed rate. As such they would long since have been
used up. The same goes for any emission rights granted by negotiation or by
government action during Stage 2.<o:p></o:p></p>
<p class="MsoNormal"><a href="https://books.google.com/books?id=cFG4AwAAQBAJ">Leigh
Raymond (2014)</a> raises a different issue that further weakens the argument
for grandfathering. According to Raymond, Locke’s argument in favor of
acquisition by first use is strongest when applied to appropriations that are
both <i>tangible</i> and <i>beneficial</i>. The classic example would be
building a fence to enclose a small portion of a large common pasture. The
fence is tangible, and the act enclosure is beneficial, in that it incentivizes
pasture improvements and disincentivizes overgrazing. Locke himself, we
remember, considered enclosed land to be 10 or more times as productive as
unimproved commons.<o:p></o:p></p>
<p class="MsoNormal">In contrast, an emission easement established by
homesteading is neither tangible nor beneficial. An easement removes a part of
the airshed from the commons legally, but not functionally. The easement fails
the functional test because there is no fence or other barrier to prevent emissions
and whatever harm they cause spread over the whole planet. Meanwhile, the owner
of the easement gains the advantage of low-cost waste disposal while others
suffer the costs of climate change. The imbalance between private benefits and
public costs means that the airshed will continue to be used just as inefficiently
as before the easement was claimed. Emissions are likely to continue far beyond
the point where costs exceed benefits.<o:p></o:p></p>
<p class="MsoNormal">Taking all of this into account, little remains of the case for
favoring current sources when setting targets for reductions of emissions. At
most, some temporary grandfathering might be allowed to give industry and
commerce sufficient time to adjust smoothly, or to build a coalition in support
of a new emissions-management regime. But I can find nothing in Locke that points
to a natural right for polluters to continue to do harm after they have done
more than enough already.<o:p></o:p></p>
<p class="MsoNormal"><b>The Lockean case for carbon pricing<o:p></o:p></b></p>
<p class="MsoNormal">We cannot find all the answers to climate policy in the
pages of Locke’s <i>Second Treatise</i>. There are many practical issues for
which his principles provide little guidance. Those would include setting
optimal target levels for GHG emissions and concentrations, determining the
speed with which they should be achieved, striking a balance between mitigation
and adaptation, and others. But there is one final area on which Locke’s views do
have a bearing. <o:p></o:p></p>
<p class="MsoNormal">We have argued that homesteading of pollution easements
fails Raymond’s tangible-and-beneficial test because it removes the polluted
portions of the airshed from the commons in legal terms, but not functionally. But
what if it were somehow possible to remove emission rights from the commons
functionally, but not legally? That could be done by putting a price on GHG
emission. In that case, the requirement to pay for each unit of pollution would
act as functional deterrent for emissions even while the atmosphere itself
remained a global commons in legal terms.<o:p></o:p></p>
<p class="MsoNormal">One way to do that would be with a cap-and-trade approach.
The government would carry out its duty to protect people and their property from
the harms of climate change by auctioning off a specified number of marketable
permits, each allowing a fixed quantity of emissions. In effect, it would be
leasing a part of the community’s common airshed to private parties while
retaining legal ownership.<o:p></o:p></p>
<p class="MsoNormal">Functionally, holders of the permits would treat them like
private property. They could use the permits themselves to lower their
waste-disposal costs or they could resell them to others who valued them more
highly. The buyers might even include conservation organizations who would buy
permits to hold them unused. <o:p></o:p></p>
<p class="MsoNormal">Alternatively, the government could impose a fee or tax per
ton of CO2-equivalent. The result would be very much the same, both legally and
functionally, as a cap-and-trade system. The only real difference would be the
terms on which the government leased out emission rights. Instead of auctioning
off a predetermined quantity of pollution rights, and allowing the market to
set the price, the government would set the price and allow the market to
determine the quantity.<o:p></o:p></p>
<p class="MsoNormal">Either version of emission pricing would at least partially
meet Raymond’s criterion of tangibility. Although the physical airshed would
remain unenclosed, the permits themselves would be discrete, scarce, and
tradeable. Either version would meet the criterion of benefit by ensuring that
certificates ended up in the hands of those who value them most, and either
would incentivize both consumers and producers to adopt clean technologies.<o:p></o:p></p>
<p class="MsoNormal">Furthermore, the proceeds of a permit auction or pollution
fee could be used to compensate the victims of climate change for harm done to
their persons and property. That could be done either directly, by distributing
cash, or indirectly, by lowering taxes that people would otherwise have to pay
to maintain the government with its police, courts, and other institutions of
property protection. <o:p></o:p></p>
<p class="MsoNormal">Readers may object that if emissions pricing were
implemented during Stage 3, the proceeds of permit sales or pollution fees would,
by assumption, be insufficient to compensate for the harm done. That is true. Yes,
it would have been better to establish a pricing regime during Stage 2 – one with
parameters tight enough to ensure that we would never reach Stage 3. But that
did not happen.<o:p></o:p></p>
<p class="MsoNormal">But even if, as consensus thinking has it, we are already
deep into Stage 3, emission pricing is still attractive. Although the goal is
now not just to roll back the rate of emissions, but also the concentrations of
GHGs in the atmosphere, there are limits on how fast this should happen. Too
ambitious a program could disrupt supplies of investment goods needed for clean
energy, carbon capture, and seawall construction. It could lead to
overinvestment in existing, imperfect, abatement technologies without giving
time to develop more effective alternatives. A pricing scheme would allow the
flexibility needed to balance the speed of achieving any given emission target
against the cost of doing so, and could complement other forms of regulation
and public investment.<o:p></o:p></p>
<p class="MsoNormal"><b>What we have learned<o:p></o:p></b></p>
<p class="MsoNormal">In conclusion, what have we learned from our close
examination of Locke’s views of property and government? What are their
implications for climate policy? Here is a summary:<o:p></o:p></p>
<p class="MsoNormal">1. Locke puts property at the center of his political
theory. He starts with self-ownership, a concept that is the basis of what we
call “human rights” in the modern world. He extends ownership to the products
of labor and to land appropriated from the commons by first use. Rights to
property are matched by corresponding duties not to harm others or their
property, and to leave enough and as good for others when taking from the
commons.<o:p></o:p></p>
<p class="MsoNormal">2. Locke sees protection of property, including protection
of the freedoms and human rights implied by self-ownership, as the central
purpose of government. But not just any government will do. A legitimate
government must conform to the principles that later came to be known as
liberalism, including majority rule, separation of powers, and rule of law.<o:p></o:p></p>
<p class="MsoNormal">3. Locke freely mixes deontic and consequentialist arguments
in support of his views on property and government. He defends the institution
of property as a natural right, but also points to the superior productivity of
private, as opposed to common, ownership. He sees government as a pragmatic
compromise in which people give up a part of the absolute freedoms that they
enjoy in the state of nature, receiving enhanced security and prosperity in
return.<o:p></o:p></p>
<p class="MsoNormal">4. Locke’s views on the duty not to harm and the
government’s role in protecting persons and property include no exceptions for
harms resulting from air pollution, climate change, or any other kind of
environmental externality.<o:p></o:p></p>
<p class="MsoNormal">5. Locke’s views on appropriation by first use provide
polluters with little or no defense. Rothbard (1982) interprets Locke in a way
that entitles uncontested polluters to have “homesteaded an easement” to a
certain rate of pollution. Perhaps in preindustrial times, polluting the air
might legitimately have been compared to taking a drink from an abundantly
flowing stream. In the modern world, however, the binding constraint on polluters
is not Locke’s duty to leave “as much and as good” for others, but rather, the
duty not to cause harm to others and their property. As Adler points out, that
constraint comes into play as soon as anthropogenic climate change first begins
to cause harm to others, even if, in aggregate, those harms do not yet exceed aggregate
benefits. <o:p></o:p></p>
<p class="MsoNormal">6. The resource at issue in climate change is the ability of
the earth’s atmosphere to absorb greenhouse gases. That resource cannot be
physically partitioned, so it remains an unenclosed commons. Once legitimate
first-use claims have been exhausted, Locke assigns the duty of managing any remaining
unenclosed commons to the government. Price-based management mechanisms would
be fully consistent with Locke’s thinking.<o:p></o:p></p>
<p class="MsoNormal">The bottom line: Neither the deontic nor the
consequentialist side of Locke’s reasoning supports the <i>laissez-faire</i>
approach to climate change favored by many libertarians. If we take Locke
seriously, there is a clear role for government in the productive management of
our global climate commons – one that can and should be exercised in a way consistent
with the principles of liberal government.</p>
<div style="mso-element: footnote-list;"><!--[if !supportFootnotes]--><br clear="all" />
<hr align="left" size="1" width="33%" />
<!--[endif]-->
<div id="ftn1" style="mso-element: footnote;">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Ed/Documents/DolanEcon%20Blog/Drafts/Niskanen/TANSTAAFL%202021/dd_edits_Taking%20Locke%20Seriously%20final.docx#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span face=""Calibri",sans-serif" style="font-size: 10pt; line-height: 107%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: minor-latin;">[1]</span></span><!--[endif]--></span></span></a>
Writing elsewhere, Rothbard (<a href="https://mises.org/library/ethics-liberty">1998</a>,
p. 244) rejected the Lockean proviso against engrossment, saying that “if
latecomers are worse off, well then that is their proper assumption of risk in
this free and uncertain world.” However, even rejection of the proviso would
only permit a finite increase in the number of fixed-quantity easements that
polluters were allowed to claim by first use. It would still not allow
perpetual fixed-rate easements.<o:p></o:p></p>
</div>
<div id="ftn2" style="mso-element: footnote;">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Ed/Documents/DolanEcon%20Blog/Drafts/Niskanen/TANSTAAFL%202021/dd_edits_Taking%20Locke%20Seriously%20final.docx#_ftnref2" name="_ftn2" style="mso-footnote-id: ftn2;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span face=""Calibri",sans-serif" style="font-size: 10pt; line-height: 107%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: minor-latin;">[2]</span></span><!--[endif]--></span></span></a>
This assumes that there is just one government in the world. Multiple national
governments would complicate the process, requiring international negotiations
and international compensation payments. Bovens (2011) discusses those issues,
but they lie beyond the scope of this commentary.<o:p></o:p></p><p class="MsoFootnoteText"><i><span style="font-size: x-small;"><span style="background-color: white; color: #292929; font-family: charter, Georgia, Cambria, "Times New Roman", Times, serif; letter-spacing: -0.063px;">Previously posted at </span><a class="bn jk" href="https://www.niskanencenter.org/taking-locke-seriously-of-government-property-rights-and-climate-change/" rel="noopener nofollow" style="-webkit-tap-highlight-color: transparent; background-color: white; box-sizing: inherit; font-family: charter, Georgia, Cambria, "Times New Roman", Times, serif; letter-spacing: -0.063px;"><span class="jl" style="box-sizing: inherit;">NiskanenCenter.org</span></a><span style="background-color: white; color: #292929; font-family: charter, Georgia, Cambria, "Times New Roman", Times, serif; letter-spacing: -0.063px;">. Photo Credit: </span><a class="bn jk" href="https://commons.wikimedia.org/wiki/File:John-Locke-660x350-1412917543.jpg" rel="noopener nofollow" style="-webkit-tap-highlight-color: transparent; background-color: white; box-sizing: inherit; font-family: charter, Georgia, Cambria, "Times New Roman", Times, serif; letter-spacing: -0.063px;">Godfrey Kneller</a><span style="background-color: white; color: #292929; font-family: charter, Georgia, Cambria, "Times New Roman", Times, serif; letter-spacing: -0.063px;">, Public domain, via Wikimedia Commons</span>. </span></i></p>
</div>
</div>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-31203958559300317602020-11-12T12:14:00.000-08:002020-11-12T12:14:10.704-08:00What's Wrong with Libertarian Environmentalism<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixQvTmuj9rg_jXbirKNUOv9jUsh1DpV0ruJIa-2r3S0uvgFwLt1pfFFlaSdFd2XFg7fFEz4Xs8Bcm8ALugMLt6WX-D1rvVoiiDTHAfsBokHz3QEJ8Uyf7nA0XzVb1OwQP_qZh6nVA42Sqv/s1253/P201111-1.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="549" data-original-width="1253" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixQvTmuj9rg_jXbirKNUOv9jUsh1DpV0ruJIa-2r3S0uvgFwLt1pfFFlaSdFd2XFg7fFEz4Xs8Bcm8ALugMLt6WX-D1rvVoiiDTHAfsBokHz3QEJ8Uyf7nA0XzVb1OwQP_qZh6nVA42Sqv/s320/P201111-1.png" width="320" /></a></div><p class="is" style="background: white; margin-top: 0in;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">In <a href="http://tomgpalmer.com/wp-content/uploads/papers/friedman-whatswrong-cr-v11n3.pdf">an essay</a> in <em style="box-sizing: inherit;">Critical Review</em> a
few years back, Jeffrey Friedman had a go at explaining what’s wrong with
libertarianism. His sixty-page argument can be summed up in a single sentence:
“Philosophical libertarianism,” he wrote, “founders on internal contradictions
that render it unfit to make libertarians out of anyone who does not have
strong consequentialist reasons for libertarian belief.”<span><o:p></o:p></span></span></span></p>
<p class="is" data-selectable-paragraph="" id="f896" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">The
conflict between the philosophical a<span id="rmm" style="box-sizing: inherit;"><span id="rmm" style="box-sizing: inherit;"><span id="rmm" style="box-sizing: inherit;"><span id="rmm" style="box-sizing: inherit;"><span id="rmm" style="box-sizing: inherit;"><span id="rmm" style="box-sizing: inherit;"><span id="rmm" style="box-sizing: inherit;"><span id="rmm" style="box-sizing: inherit;">n</span></span></span></span></span></span></span></span>d
consequentialist sides of libertarianism is nowhere more sharply on display
than when applied to environmental issues. This commentary explores the dilemma
of libertarian environmentalism and the ways–none of them entirely
successful–in which its practitioners try to escape it.<span></span></span></span></p><a name='more'></a><span style="font-family: times;"><o:p></o:p></span><p></p>
<p class="is" data-selectable-paragraph="" id="4093" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="font-family: times;"><strong style="box-sizing: inherit;"><span style="color: #292929; letter-spacing: -0.05pt;">What kind of libertarianism?</span></strong><span style="color: #292929; letter-spacing: -0.05pt;"><o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="bc22" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">The
kind of libertarianism that Friedman had in mind is the orthodox version that finds
its clearest expression in the works of Murray Rothbard. In his 1973 manifesto <em style="box-sizing: inherit;"><span style="text-decoration: none;"><a href="https://mises.org/library/new-liberty-libertarian-manifesto">For a New Liberty</a></span></em><em style="box-sizing: inherit;">, </em>Rothbard explains the essence of the doctrine:<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="8533" style="background: white; box-sizing: inherit; margin-top: 0in; word-break: break-word;"><i><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;"></span></span></i></p><blockquote><i><span style="font-family: times;">The libertarian creed rests upon one
central axiom: that no man or group of men may aggress against the person or
property of anyone else. This may be called the “nonaggression axiom.”
“Aggression” is defined as the initiation of the use or threat of physical
violence against the person or property of anyone else.</span></i></blockquote><i><span style="font-family: times;"><o:p></o:p></span></i><p></p>
<p class="is" data-selectable-paragraph="" id="49e6" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Rothbard’s
“nonaggression axiom” is now more commonly called the “nonaggression
principle,” often shortened to “the NAP.” The NAP is an unequivocally <em style="box-sizing: inherit;">deontic</em> principle in that it defines actions as
permitted or forbidden without reference to their consequences. Nonetheless,
Rothbard wants to assure us that everything will work out for the best if we
scrupulously adhere to the NAP. If we honor the non-aggression axiom, the
result is a free market economy. And,<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="967c" style="background: white; box-sizing: inherit; margin-top: 0in; word-break: break-word;"><i><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;"></span></span></i></p><blockquote><i><span style="font-family: times;">it so happens that the free-market
economy, and the specialization and division of labor it implies, is by far the
most productive form of economy known to man, and has been responsible for
industrialization and for the modern economy on which civilization has been
built. This is a fortunate utilitarian result of the free market, but it is
not, to the libertarian, the prime reason for his support of this system. That
prime reason is moral and is rooted in the natural-rights defense of private
property we have developed above. Even if a society of despotism and systematic
invasion of rights could be shown to be more productive than what Adam Smith
called “the system of natural liberty,” the libertarian would support this
system. Fortunately, as in so many other areas, the utilitarian and the moral,
natural rights and general prosperity, go hand in hand.</span></i></blockquote><i><span style="font-family: times;"><o:p></o:p></span></i><p></p>
<p class="is" data-selectable-paragraph="" id="b337" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Half
a century later, the belief that free markets lead to prosperity remains strong
among orthodox libertarians. “Freedom of exchange and market coordination
provide the fuel for economic progress,” we read in the first paragraph of the
website for the Cato Institute’s <a href="https://www.cato.org/economic-freedom-world">Economic Freedom of theWorld</a> project. “Libertarians believe that people will be both freer
and more prosperous if government intervention in people’s economic choices is
minimized,” Writes David Boaz in a <a href="https://www.cato.org/publications/commentary/key-concepts-libertarianism">2019commentary</a> for the Cato Institute<em style="box-sizing: inherit;">. </em>“Advancing
economic freedom is the imperative for dynamic economic expansion and true
progress, no matter what a country’s current level of development may be,” we
read in an introduction to the Heritage Foundation’s 2020 I<a href="https://www.heritage.org/index/book/chapter-4">ndex of EconomicFreedom</a>.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="f082" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">With
this in mind, then, let’s turn from libertarianism in the abstract to
libertarian environmentalism.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="883a" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="font-family: times;"><strong style="box-sizing: inherit;"><span style="color: #292929; letter-spacing: -0.05pt;">Principles of environmental libertarianism</span></strong><span style="color: #292929; letter-spacing: -0.05pt;"><o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="06ef" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Here
is how Rothbard explains the principles of libertarian environmentalism in a
section devoted to air pollution in <em style="box-sizing: inherit;">For a New
Liberty</em>:<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="01d5" style="background: white; box-sizing: inherit; margin-top: 0in; word-break: break-word;"><i><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;"></span></span></i></p><blockquote><i><span style="font-family: times;">The vital fact about air pollution is that
the polluter sends unwanted and unbidden pollutants — from smoke to nuclear
radiation to sulfur oxides — through the air and into the lungs of innocent
victims, as well as onto their material property. All such emanations which
injure person or property constitute aggression against the private property of
the victims. Air pollution, after all, is just as much aggression as committing
arson against another’s property or injuring him physically. Air pollution that
injures others is aggression pure and simple.</span></i></blockquote><i><span style="font-family: times;"><o:p></o:p></span></i><p></p>
<p class="is" data-selectable-paragraph="" id="0c86" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">And
what is the remedy?<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="7061" style="background: white; box-sizing: inherit; margin-top: 0in; word-break: break-word;"><i><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;"></span></span></i></p><blockquote><i><span style="font-family: times;">The remedy is simply for the courts to
return to their function of defending person and property rights against
invasion, and therefore to enjoin anyone from injecting pollutants into the
air.</span></i></blockquote><i><span style="font-family: times;"><o:p></o:p></span></i><p></p>
<p class="is" data-selectable-paragraph="" id="e3e8" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Reduced
to a syllogism, the orthodox libertarian doctrine is that <em style="box-sizing: inherit;">aggression is forbidden, pollution is aggression. Therefore,
pollution is forbidden.</em><o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="59e1" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">This,
like the rest of orthodox libertarianism, is a deontic doctrine. There is no
balancing of interests here between the harm done to the victim and the benefit
(in the form, say, of lower waste-disposal costs) received by the polluter. The
only question before the court is whether an aggression occurred. If you accuse
me of polluting your property, I might offer the defense that I did not do it,
or that you cannot prove that I did it, or that what I did was so trivial that
a reasonable person would not consider it an aggression at all. But if the
court does not accept my contention that no aggression occurred, then I can,
regardless of the balance of costs and benefits, properly be enjoined from
continuing to pollute.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="f59d" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Rothbard
is very clear about this. The courts must defend persons and their property
against invasion and must therefore “enjoin anyone from injecting pollutants
into the air.” As for concerns that such an injunctive remedy would be a brake
on progress or would drive up costs, Rothbard replies,<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="b419" style="background: white; box-sizing: inherit; margin-top: 0in; word-break: break-word;"><i><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;"></span></span></i></p><blockquote><i><span style="font-family: times;">The argument that such an injunctive
prohibition against pollution would add to the costs of industrial production
is as reprehensible as the pre-Civil War argument that the abolition of slavery
would add to the costs of growing cotton, and that therefore abolition, however
morally correct, was “impractical.”</span></i></blockquote><p><span style="font-family: times;"><span style="background-color: white; color: #292929; letter-spacing: -0.05pt;">That brings us to the central problem: Self-identified
libertarians often stand in the front ranks of those who oppose regulatory
limits on pollution or effective action against climate change. Yet, if they
followed their professed moral beliefs to their logical conclusion, it seems
they should instead be among the most zealous in campaigning against all
pollution, and damn the cost. As philosopher </span><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2443030" style="-webkit-tap-highlight-color: transparent; background-color: white; box-sizing: inherit; letter-spacing: -0.05pt;">MattZwolinski</a><span style="background-color: white; color: #292929; letter-spacing: -0.05pt;"> writes in a draft entry for the </span><em style="background-color: white; box-sizing: inherit; color: #292929; letter-spacing: -0.05pt;">Routledge
Handbook of Environmental Ethics</em><span style="background-color: white; color: #292929; letter-spacing: -0.05pt;">:</span> </span></p><i><span style="font-family: times;"><o:p></o:p></span></i><p></p>
<p class="is" data-selectable-paragraph="" id="06c1" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><i><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;"></span></span></i></p><blockquote><i><span style="font-family: times;">The libertarian commitment to property
rights is so absolute, and so far-reaching in its implications, that it
actually flips our initial worry about the doctrine on its head. Once we
consider the full implications of respect for libertarian property rights, it
is clear that the real problem with libertarianism isn’t that it’s not
sensitive enough to environmental considerations, but that it is too sensitive
by far.</span></i></blockquote><p></p>
<p class="is" data-selectable-paragraph="" id="77d3" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">We
see here the environmental manifestation of the clash between the philosophical
and consequentialist sides of libertarianism described by Friedman. The
philosophical libertarian says, “Pollution is aggression. No pollution!” But
what is to be done when zealous enforcement of property rights threatens to
undermine that other cherished doctrine, the belief that free markets promote
prosperity?<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="398c" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="font-family: times;"><strong style="box-sizing: inherit;"><span style="color: #292929; letter-spacing: -0.05pt;">Wriggling out from the libertarian dilemma</span></strong><span style="color: #292929; letter-spacing: -0.05pt;"><o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="6eee" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">I
have identified five ways in which various writers try to resolve the tension
between the deontic and consequentialist sides of libertarian environmentalism.
One is to blame government failure, rather than market failure, for observed
environmental problems. A second is to deny that the apparent victims of
pollution are actually the owners of the property rights they claim to be
violated. A third approach is to erect procedural barriers that make it
impossible, in practice, for pollution victims to obtain redress for the harms
they suffer. A fourth is to fall back on consequentialism. And a fifth is to
argue the validity of the science behind the claim that harm has occurred. Here
are some examples of each of the modes of escape.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="afd5" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="font-family: times;"><em style="box-sizing: inherit;"><b><span style="color: #292929; letter-spacing: -0.05pt;">Blame the government.</span></b></em><em style="box-sizing: inherit;"><span style="color: #292929; letter-spacing: -0.05pt;"> </span></em><span style="color: #292929; letter-spacing: -0.05pt;">In a chapter contributed to <em style="-webkit-tap-highlight-color: transparent; box-sizing: inherit; color: inherit;"><span style="text-decoration: none;"><a href="https://www.fraserinstitute.org/studies/economics-and-the-environment-a-reconciliation">Economics and the
Environment: A Reconciliation</a></span></em><em style="box-sizing: inherit;"><a href="https://www.fraserinstitute.org/studies/economics-and-the-environment-a-reconciliation">,</a> </em>Walter
Block explains several ways in which the government either causes pollution or
short-circuits potential private remedies. At the top of the list, he points to
the “The defanging of nuisance laws, to which property owners historically
could appeal if they were polluted or in other ways interfered with.” Among the
justification for the weakening of the common law regarding nuisances, he
points to the doctrine that individuals cannot obtain relief for nuisances
caused by entities like railroads that operate under government license or for
nuisances that are necessary concomitants of economic growth or progress.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="98ef" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">As
another example, the free market environmental organization <a href="https://www.perc.org/about-us/what-we-do/">PERC</a> campaigns
against what it sees as poor environmental stewardship on public lands. While
not completely rejecting government ownership, PERC advocates market-oriented
management techniques such as <a href="http://perc.org/2015/06/23/charter-forests-a-new-management-approach-for-national-forests/">charter forests</a>, <a href="http://perc.org/2016/01/21/managing-conflicts-over-western-rangelands/">conservationleasing</a>, and “<a href="http://perc.org/2017/12/06/leave-no-trace/">pay-to-play</a>”
fees for hikers and campers.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="ee88" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">There
is a valid point here. Making the government responsible for environmental
protection is no guarantee that the environment will actually be protected.
Government failure is a reality, and corruption of public institutions by
private interests is a problem throughout the world. On the other hand, the
alternative of leaving environmental protection to a set of common law courts
acting under the common law doctrines of trespass and nuisance is not a sure
guarantee of protection either, as the next mode of escape shows.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="4c9d" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="font-family: times;"><em style="box-sizing: inherit;"><b><span style="color: #292929; letter-spacing: -0.05pt;">Procedural barriers</span></b></em><em style="box-sizing: inherit;"><span style="color: #292929; letter-spacing: -0.05pt;">. </span></em><span style="color: #292929; letter-spacing: -0.05pt;">As we have seen, Murray Rothbard’s 1973
manifesto <em style="box-sizing: inherit;">For a New Liberty </em>identifies pollution as a
violation of the non-aggression principle. Victims are offered remedies under
the common law doctrines of trespass and nuisance. That would seem to make
Rothbard a firm ally of environmentalists. However, in a more detailed <a href="https://mises.org/library/law-property-rights-and-air-pollution-0">1982paper</a>, Rothbard adds a number of procedural hurdles that effectively eviscerate
tort law as a remedy to environmental harms:<o:p></o:p></span></span></p>
<ul style="text-align: left;"><li><span style="background-color: white; color: #292929; font-family: times; letter-spacing: -0.05pt; text-indent: -0.25in;">In the case of pollutants like
carbon dioxide or methane that are not detectable by human senses, plaintiffs
must prove not just that an invasion has taken place, but that it has caused
actual harm to the plaintiff.</span></li><li><span style="background-color: white; color: #292929; font-family: times; letter-spacing: -0.05pt; text-indent: -0.25in;">Plaintiffs must prove a strict
causal connection between any harm they suffer and emissions from a specific
source. For example, proving harm to crops from acid rain, in general, is not
enough; the plaintiff would have to prove that the harm is caused by emissions
from a specific power plant or steel mill against whom a tort action is
undertaken.</span></li><li><span style="background-color: white; color: #292929; font-family: times; letter-spacing: -0.05pt; text-indent: -0.25in;">Joinder on either side of a
pollution case is strictly limited. Each polluter must be sued individually
unless it can be proved that several of them acted in concert. Rothbard also
places strict limits on the ability of plaintiffs to join together in class
actions.</span></li><li><span style="font-family: times;"><span style="color: #292929; letter-spacing: -0.05pt;">The burden of proof rests with
plaintiffs, and proof must be beyond reasonable doubt, not merely by the
preponderance of evidence.<o:p></o:p></span></span></li></ul>
<p class="is" data-selectable-paragraph="" id="0423" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Rothbard
acknowledges that these restrictions would make it next to impossible for
pollution victims to prevail in court in many cases. But, he approvingly quotes
a source saying that if there is any way out, “it must not come at the expense
of throwing out proper standards of proof, and conferring unjust special
privileges on plaintiffs and special burdens on defendants.”<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="f5d5" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="font-family: times;"><em style="box-sizing: inherit;"><b><span style="color: #292929; letter-spacing: -0.05pt;">Argument from ownership. </span></b></em><span style="color: #292929; letter-spacing: -0.05pt;">In a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2772753">paperon the nonaggression principle</a>, Zwolinski notes that the NAP is not really
a stand-alone principle since it presupposes a theory of property. In the
simplest case, if you jump out from behind a bush and grab someone by the
collar, it makes all the difference in the world whether you are a property
owner apprehending a trespasser or a trespasser assaulting the property owner.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="a0ae" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">What
is more, Zwolinski continues, a legal title registered with the state is not
enough for a libertarian. What matters is who is <em style="box-sizing: inherit;">morally</em> entitled
to claim ownership over what. For example, suppose that an authoritarian
government conducted a program of ethnic cleansing and then distributed the
property of the outcasts to cronies or to landless peasants of the favored
ethnic group. In such a case, the new “owner,” title or no, would have no moral
right to defend the property against trespass should the rightful owner return.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="8dd5" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">The
question then becomes, how can one gain a morally legitimate title to real
property? For Rothbard, that can happen either by purchase from a previous
legitimate owner, or by Lockean homesteading — a process by which one “mixes
one’s labor” with previously unowned property.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="ba49" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Although
the term “homesteading” calls to mind the appropriation of unused land for
farming or grazing purposes, Rothbard extends it to more subtle kinds of
property rights. In his essay on air pollution, he writes:<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="a074" style="background: white; box-sizing: inherit; margin-top: 0in; word-break: break-word;"><i><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;"></span></span></i></p><blockquote><i><span style="font-family: times;">It should be clear that the same theory
[i.e. homesteading] should apply to air pollution. If A is causing pollution of
B’s air, and this can be proven beyond a reasonable doubt, then this is
aggression and it should be enjoined and damages paid in accordance with strict
liability, unless A had been there first and had already been polluting the air
before B’s property was developed. For example, if a factory owned by A
polluted originally unused property, up to a certain amount of pollutant X,
then A can be said to have homesteaded a pollution easement of a certain degree
and type.</span></i></blockquote><i><span style="font-family: times;"><o:p></o:p></span></i><p></p>
<p class="is" data-selectable-paragraph="" id="9c00" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">This
approach makes a certain degree of sense in cases where the scope of the
pollution is limited. For example, suppose I establish a pig farm in a sparsely
populated area, where there is no one around to object to the aroma. Years
later, you build a house on land that you buy from a nearby farmer. My
first-in-time rights to raise smelly pigs are considered a reasonable common
law defense (“<a href="https://connect.michbar.org/envlaw/reports/deskbook/chapter13#_Toc325550981" style="-webkit-tap-highlight-color: transparent; box-sizing: inherit; color: inherit;">coming
to the nuisance</a>”) against any nuisance suit that you might bring.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="ac90" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Can
we stretch this defense to pollution on a larger scale, such global warming
caused by carbon dioxide emissions? As far as I know, Rothbard, who died in
1995, never addressed that issue directly. In the years since, those who have
applied a Rothbardian or a Lockean property-rights framework to climate change
have come to differing conclusions. <a href="https://scholarlycommons.law.case.edu/cgi/viewcontent.cgi?article=1029&context=faculty_publications">JohnathanAdler</a> has argued that if property rights are to be taken seriously, legal
action under tort law will not be enough. <a href="https://philpapers.org/archive/BOVALDv1">Luc Bovens</a>, without
specifically citing Rothbard, asserts that carbon emitters’ Lockean rights of
first use should be given due consideration in setting climate policy. Still,
he thinks the remedy should be sought through some form of emissions trading
rather than through tort law. Hardcore Rothbardians remain unconvinced,
however, as Block explains in <a href="https://mises.org/library/comment-dolan-austrian-economics-and-environmentalism">response</a> to
one of my articles on the subject.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="dc69" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="font-family: times;"><em style="box-sizing: inherit;"><b><span style="color: #292929; letter-spacing: -0.05pt;">Retreat to consequentialism</span></b></em><em style="box-sizing: inherit;"><span style="color: #292929; letter-spacing: -0.05pt;">. </span></em><span style="color: #292929; letter-spacing: -0.05pt;">Both Rothbard’s procedural restrictions on
environmental tort suits and his doctrine of pollution homesteading are
implicitly consequentialist. Both appear to stem from the fear that making it
too easy to enjoin environmental aggressions would impose costs on polluters
and the consumers of their products that exceed the harm suffered by pollution
victims. Other libertarian writers, however, embrace consequentialism more
explicitly.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="0390" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">In
fact, libertarian environmental consequentialism is far from uncommon, even in
settings where pledges of allegiance to the NAP are otherwise <em style="box-sizing: inherit;">de rigueur</em>. For example, <a href="https://mises.org/wire/fear-global-warming-markets-offer-our-best-chance-survival">RyanMcMaken</a>, a senior editor at the Mises Institute, frankly urges a
cost-benefit approach as an antidote to what he sees as the extremism of those
who warn of a climate apocalypse. Putting words in the mouths of climate
activists, he has them asking, “what use is cost-benefit analysis when you’re
faced with the apocalypse?” He answers, “In real life, where more rational
heads–on occasion–prevail, the costs of any proposed government action must be
considered against the costs of the alternatives.”<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="d243" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">In
another example, I<a href="https://www.cato.org/sites/cato.org/files/pubs/pdf/pa-609.pdf">ndurGoklany</a>, in a policy analysis for the Cato Institute, argues against
aggressive climate action because “either focused adaptation or broad pursuit
of sustainable development would provide far greater benefits than even the
deepest mitigation — and at no greater cost than that of the barely effective
Kyoto Protocol.” So it might. But, if anthropogenic emissions and the resulting
sea level rise harm even a few people, such as those who live on low-lying
Pacific islands, they constitute a violation of the NAP. That would be true
even if there were positive <em style="box-sizing: inherit;">net</em> benefits
for the world’s entire population in pursuing the “warmer but richer” strategy
that Goklany advocates.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="688e" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Even
Block, usually a NAP hardliner, lapses into cost-benefit mode when it suits
him. Writing of the Exxon Valdez disaster in <em style="box-sizing: inherit;">Economics and
the Environment</em>, he says “The obtainable ideal is to reduce the
incidence of disasters of this sort to optimal levels. … It is not efficient to
decrease oil spills to such a degree that this process actually costs more than
it saves.” What happened to the Rothbardian dictum that holding down the cost
of growing cotton is not an adequate defense of slavery?<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="cf91" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="font-family: times;"><em style="box-sizing: inherit;"><b><span style="color: #292929; letter-spacing: -0.05pt;">Argue the science.</span></b></em><em style="box-sizing: inherit;"><span style="color: #292929; letter-spacing: -0.05pt;"> </span></em><span style="color: #292929; letter-spacing: -0.05pt;">A final way to resolve the tension between
the deontic and consequentialist sides of libertarian environmentalism,
especially common in climate change, is to argue the science. If it can be
shown that human activity is having no effect on the climate or that its
effects are not harmful, then there is no tension to resolve. With that in
mind, some free-market organizations have gone so far as to maintain full-time
climate scientists on their staff. <a href="https://cei.org/content/patrick-j-michaels">Patrick J. Michaels</a>,
a climatologist who serves as Director of the Center for the Study of Science
at the Cato Institute, is an example.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="de8d" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">In
an <a href="https://cei.org/content/scientific-case-vacating-epas-carbon-dioxide-endangerment-finding">April2020 analysis</a>, Michaels presents a scientific case for vacating the EPA’s
2009 “endangerment finding.” That finding, which determined that the buildup of
greenhouse gases (GHGs) in the atmosphere endangers public health and welfare,
was used during the Obama administration to support various regulations of
emissions. Michaels’ reanalysis of the models and data used to support that
finding concludes, instead, that increased GHG concentrations have a “negative
cost,” that is, a net benefit, “under almost all modeled circumstances.”<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="387c" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Michaels
makes three main points in his critique of the endangerment finding. First, he
argues that widely used climate models, especially some of the 2000-vintage
models used to support the EPA’s original finding, overstate the amount of
warming that would occur from any given increase in GHG concentrations. Second,
he argues that the EPA understates the beneficial effects of increased
atmospheric carbon dioxide on plant growth, including rice, soybeans, and
grassland. Third, he favors the use of a higher discount rate than that used by
the EPA. A higher discount rate would mean giving higher weight to near-future
benefits and near-term avoided costs of climate mitigation and less weight to
further-future harms from sea-level rise or droughts.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="0743" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">There
is nothing wrong <em style="box-sizing: inherit;">per se </em>with
arguing about climate science, which is, after all, not a monolith. The <a href="https://climate.nasa.gov/faq/17/do-scientists-agree-on-climate-change/">widelyquoted claim</a> that 97 percent of scientists agree about climate change
pertains only to the low-threshold proposition that human activity is, to some
degree, contributing to global warming. That question would be like asking
economists whether they think prices to some degree influence consumer behavior.
The question leaves plenty of room for disagreement about the speed of change
and its effects on specifics like crop yields, storm intensity, and sea-level
rise.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="fb83" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">But
libertarians, like anyone else, need to be careful. For one thing, they need to
guard against confirmation bias. Consider, for example, Michaels’ analysis of
the EPA’s endangerment finding. Key parameters in his analysis — the
sensitivity of climate to changes in GHG concentrations, the benefits of CO2
for plant growth, and the appropriate discount rate — are all subject to
uncertainty. Reputable, published, peer-reviewed research includes substantial
ranges of values for each of them. Behind those key variables are other studies
that give ranges of values for the inputs to the models from which estimates of
the key variables are derived, and so on.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="5e82" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">The
suspicion of confirmation bias arises whenever a researcher consistently
emphasizes values that lie near the convenient tail of each distribution — the
high end or the low end, whichever strengthens support for the desired
conclusion. In judging whether confirmation bias is present, it is also fair
for a reader to ask whether a given analyst’s conclusions might be influenced
by the source of funding for the research in question. Of course, the same
cautions that apply to libertarians also apply to climate activists on the left
or journalists who write about climate, none of whom are immune to confirmation
bias.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="589f" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Still,
some objections to arguments from science apply more strongly to libertarians
than to others. In particular, anything that science has to say about whether
the costs of mitigating climate harms are greater or less than the benefits is
irrelevant. For example, suppose Michaels is right that benefits from increased
crop yields outweigh harm done by sea-level rise in the near term. Even so,
flooded-out Pacific islanders would still have a valid case against
methane-emitting Chinese rice farmers in a common-law court that operated under
orthodox libertarian principles. Appealing to science is no excuse for letting
consequentialism back in the window after having thrown it out the door.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="b227" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="font-family: times;"><strong style="box-sizing: inherit;"><span style="color: #292929; letter-spacing: -0.05pt;">Conclusions</span></strong><span style="color: #292929; letter-spacing: -0.05pt;"><o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="1186" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Libertarians
can run from the dilemma they have constructed for themselves, but they can’t
hide. To stand true to their commitment to the non-aggression principle, they
would need to snuff out environmental externalities more aggressively than the
most fervent Green New Dealers. Libertarians can legitimately blame some
environmental destruction on the government. However, once they have curbed those
abuses (and more power to them), they still have to confront private pollution
from steel mills, mines, agricultural pesticides, cars and many other sectors
of the market economies they know and love.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="2403" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">Hiding
behind legal formalisms like homesteading of pollution easements and strict
rules for proof of causation amounts to preserving the letter of the NAP while
abandoning its spirit. Retreating to cost-benefit analysis means discarding the
distinctive deontic absolutes of libertarianism in favor of garden-variety
utilitarianism. Scientific arguments are admissible as long as they are
credible, but grasping at fringe theories just because they are convenient is
not playing by the rules.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="ed42" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">And
where is a libertarian environmentalist to go, once the Rothbardian orthodoxy
is revealed as untenable? The obvious fallback is a less dogmatic classical
liberalism. The liberalism of, say, Friedrich Hayek. Hayek maintained a strong
presumption in favor of free markets, but acknowledged that they do not offer
the answer to every problem, including that of environmental externalities, and <a href="https://books.google.com/books?id=eTve6XEUbYIC&pg=PA40&lpg=PA40&dq=Where,+for+example,+it+is+impracticable+to+make+the+enjoyment+of+certain+services+dependent+on+the+payment+of+a+price,+competition+will+not+produce+the+services;+and+the+price+system+becomes+similarly+ineffective&source=bl&ots=zQRLYEEPal&sig=ACfU3U0GYzUExavFf7syQDcJLuGX8RJyPw&hl=en&sa=X&ved=2ahUKEwj6z8qly5nlAhVRj54KHTrDBhAQ6AEwAXoECAcQAQ#v=onepage&q=Where%2C%20for%20example%2C%20it%20is%20impracticable%20to%20make%20the%20enjoyment%20of%20certain%20services%20dependent%20on%20the%20payment%20of%20a%20price%2C%20competition%20will%20not%20produce%20the%20services%3B%20and%20the%20price%20system%20becomes%20similarly%20ineffective&f=false">expressedwillingness </a>to consider alternatives.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="853c" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="color: #292929; letter-spacing: -0.05pt;"><span style="font-family: times;">In
short, when faced with something like climate change, it is better to seek
effective solutions, even solutions that call on help from the government, than
to pretend that no problem exists.<o:p></o:p></span></span></p>
<p class="is" data-selectable-paragraph="" id="7cdd" style="-webkit-text-stroke-width: 0px; background: white; box-sizing: inherit; font-variant-caps: normal; font-variant-ligatures: normal; margin-top: 0in; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-break: break-word; word-spacing: 0px;"><span style="font-family: times;"><em style="box-sizing: inherit;"><span style="color: #292929; letter-spacing: -0.05pt;">Previously published by </span></em><span style="color: #292929; letter-spacing: -0.05pt;"><em style="box-sizing: inherit;"><span style="text-decoration: none;"><a href="https://www.niskanencenter.org/whats-wrong-with-libertarian-environmentalism/">Niskanen Center</a></span></em><em style="box-sizing: inherit;"><a href="https://www.niskanencenter.org/whats-wrong-with-libertarian-environmentalism/">.</a> Photo courtesy of </em><a href="http://Pixabay.com."><em style="box-sizing: inherit;"><span style="text-decoration: none;">Pixabay.com</span></em><em style="box-sizing: inherit;">.</em></a><o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto;"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><o:p><span style="font-family: times;"> </span></o:p></span></p>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com1tag:blogger.com,1999:blog-2938311055760665357.post-14814136934497613322020-11-10T10:20:00.001-08:002020-11-10T10:20:52.797-08:00Bipartisan Rules to Meet the Coming Fiscal Policy Challenge<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7DZz7i_5Vez-D_ZspttjTNtTiVFm9QB5MxWpGGEV5L6caGkHccrnrq8qTVdZfXky1UhngcNKKfiNjbB4ja7igSMpSBgFVMD_r5oCntfcu7BzS8BSEicBEAGXc-PT7wKjb0q8P_ldo2-lt/s1280/P201109-1.png" style="clear: right; display: inline; float: right; margin-bottom: 1em; margin-left: 1em; text-align: center;"><img border="0" data-original-height="389" data-original-width="1280" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7DZz7i_5Vez-D_ZspttjTNtTiVFm9QB5MxWpGGEV5L6caGkHccrnrq8qTVdZfXky1UhngcNKKfiNjbB4ja7igSMpSBgFVMD_r5oCntfcu7BzS8BSEicBEAGXc-PT7wKjb0q8P_ldo2-lt/s320/P201109-1.png" width="320" /></a>President-elect Joe Biden will face serious fiscal policy challenges as soon as he takes office. A hoped-for V-shaped recovery from the
Covid-19 pandemic has turned into a something that looks more like a
long-tailed Nike swoosh. Business closings, mostly classed as temporary back in
March and April, are, increasingly, proving to be permanent. Short-term
unemployment is falling, but long-term unemployment and involuntary part-time
work are increasing. Evictions and foreclosures loom over <a href="https://www.milkenreview.org/articles/the-bottom-falls-out-for-the-bottom-class">cash-poor working-classfamilies</a>, who are estimated to have accumulated as much as <a href="https://www.wsj.com/articles/struggling-rental-market-could-usher-in-next-american-housing-crisis-11603791000">$70 billion</a> in back
rent owed. Meanwhile, <a href="https://www.politico.com/news/2020/10/02/danger-sign-state-local-government-job-losses-grow-as-congress-stalls-on-relief-425546">state and local governments</a>, whose spending is
constrained by balanced-budget rules, are laying off teachers and fire
fighters. The <a href="https://apnews.com/article/donald-trump-global-trade-north-america-china-united-states-c6d5a4d935d8d3bca966d2395deee68d">trade deficit</a> remains high and the Fed has no room left to cut
rates to stimulate investment.</p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">In a normal world, such a situation would cry out for fiscal
stimulus. Ominously, however, the deficit hawks of the Republican party, who
slept through the badly timed and budget-busting Tax Cuts and Jobs Act of 2017,
are starting to stir. They said “No” to any last-minute stimulus before the
2020 election, and their appetite for austerity will be ravenous once they are
fully awake. If Republicans hold their majority in Congress, they will have a
major role in determining policy in 2021, so little is going to get done
without at least a scintilla of bipartisanship.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">“But,” you say … “Aren’t the budget hawks right this time? Just
look at the numbers!”<o:p></o:p></span></p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhptmm4pC0_n7Mnnvxnvl-Hctv2upm99PiAkUHc5pX276f-ntO9Mj_1kQpvtc91or6fUjY6yDAVKKDsmr3y9OFROxFLQYMUd0p9cBsS8jiSMmLrLPYCcRDjsI2aesMqU-EoSNJ4tjsJN3wc/s783/P201027-1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="511" data-original-width="783" height="261" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhptmm4pC0_n7Mnnvxnvl-Hctv2upm99PiAkUHc5pX276f-ntO9Mj_1kQpvtc91or6fUjY6yDAVKKDsmr3y9OFROxFLQYMUd0p9cBsS8jiSMmLrLPYCcRDjsI2aesMqU-EoSNJ4tjsJN3wc/w400-h261/P201027-1.png" width="400" /></a></div><br /><p class="MsoNormal">Yes, they are right to point out that under current policies, as
measured by the <a href="https://www.cbo.gov/publication/56516#:~:text=By%20the%20end%20of%202020,percent%20of%20GDP%20by%202050.">Congressional Budget Office,</a> the federal debt is rising fast.
It is about to exceed its previous record as a percentage of GDP and it is
projected to go on rising for the next 30 years. But those raw numbers tell us
little of use for fiscal policy. A rational set of budget rules neither
automatically precludes nor condones large budget deficits or a debt ratio that
rises over time. To understand what a rational set of budget rules would actually
look like, read on.<span></span></p><a name='more'></a><p></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><b>Procedural rules are not enough</b><o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Congress does have rules to guide fiscal policy. The 1974 Budget
Act specified a set of procedural rules that Congress is supposed to follow
each year in passing a budget. However, Congress has passed the full set of
appropriations bills on schedule only three times in the past 40 years.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Even more problematic is the failure to align annual tax and
spending decisions, whether made on time or not, with long-run goals of
stability and economic growth. Attempts to address that problem have proved
inadequate.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Consider the debt ceiling, first enacted more than 100 years ago.
Even if we could accurately determine the point beyond which debt becomes
excessive (we cannot), the ceiling in its current form is unworkable. Since it
is set in nominal terms, with no allowance for inflation or growth of the
economy, Congress must vote periodically to raise it. That creates
opportunities for various factions to disrupt the budgeting process with
brinkmanship over extraneous issues, even though everyone knows that the
consequence of not raising the ceiling — default on the debt — would be so dire
as to make the whole process a charade.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">A more recent type of rule, known as pay-as-you-go, or PAYGO, has
fared little better. PAYGO has taken several forms since it was first
established in 1990, but the underlying idea is to require that tax cuts or new
spending be offset by tax increases or spending cuts elsewhere in the budget.
In case the necessary offsets are not made, sequestration — mandatory cuts to
already authorized programs — can be invoked to prevent an increase in the
deficit. In practice, however, Congress can, and does, waive PAYGO rules
whenever it wants to. For example, it used a waiver to allow the 2017 tax cut
to go into effect despite the resulting increase in the deficit.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><b>Long-term rules for fiscal policy</b><o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">If procedural rules are not enough, what would work better? The
answer is that if we want a more responsible fiscal policy, we will need to
rely less on the short-term impulses of politicians and more on policy rules
that target stable, sustainable growth. Here are three suggestions.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><i>Rule 1: First, do no harm.</i><o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">The economic equivalent of this classic medical maxim is to aim
for cyclical neutrality, that is, one that that manages taxes and spending in a
way that avoids prolonging expansions or deepening recessions.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">At first glance, it might seem that the ideal neutral policy would
be to keep the budget in balance at all times. A balanced budget amendment
aimed at doing just that Is a perennial favorite of congressional
conservatives. In reality, though, nothing could be worse. As I explained in an
<a href="https://www.niskanencenter.org/balanced-budget-amendment/">earlier commentary</a>, a balanced budget amendment would be profoundly
procyclical. To keep the budget in absolute balance year-in and year-out would
require tax increases or spending cuts during downturns and spending increases
or tax cuts when the economy was at or above full employment. That would be the
exact opposite of “do no harm.”<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">In contrast, a cyclically neutral rule would take full advantage
of so-called automatic stabilizers to moderate the business cycle. Automatic
stabilizers are elements of the budget that provide fiscal stimulus during a
recession or restraint during an expansion. Examples include the tendency of
unemployment benefits to increase and income tax receipts to decrease during a
recession.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">One form of such a rule would be to hold the primary structural
balance of the budget at a constant target value over time. The primary
structural balance differs from the ordinary way of measuring the federal
deficit or surplus in two ways:<o:p></o:p></span></p>
<p class="MsoNormal"></p><ul style="text-align: left;"><li><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">The “structural” part means that the actual surplus in any year
is adjusted to reflect the levels of tax receipts and spending that would
prevail, under current law, if the economy were at full employment. During a
recession, the actual balance is below the structural balance (that is, further
toward deficit) because automatic stabilizers reduce tax revenue and increase
spending on income transfers. When the economy is running hot, the actual
balance is above the structural balance (that is, further toward surplus).</span></li><li><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">The “primary” part of the term means that interest payments on
the national debt are disregarded. Although interest payments are a form of
government outlay, in the short run, they are not under the control of
policymakers. Instead, for any given level of debt, federal interest
expenditures are largely determined by market interest rates.</span></li></ul><p></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">The target for the primary structural balance could be set at
zero, at a small surplus, or at a moderate deficit. The choice depends in part
on variables like the economy’s long-run rate of growth relative to market
interest rates, and also on whether policymakers want to hold total debt steady
as a share of GDP, to allow it to grow gradually, or to decrease it. I have lay
out the details of the math behind the choice of targets in a chapter for the
book <i><a href="https://www.cato.org/books/fiscal-cliff">A Fiscal Cliff</a></i> published recently by the Cato Institute. (For another
version, see <a href="https://www.slideshare.net/dolaneconslide/tutorial-is-the-government-debt-out-of-control">this slideshow</a>).<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">To skip over the equations, at present, and for the foreseeable
future, long-term real interest rates in the United States are well below
long-term growth of real GDP. Under those conditions, a budget surplus is not
necessary to reduce the debt ratio in the long run. A zero primary structural
balance, or even a small deficit of, say, half a percent of GDP, would be
sufficient to achieve cyclical neutrality while ensuring that the current rapid
growth of the debt ratio would slow over time and, eventually, decrease.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><i>Rule 1a: Emergency exceptions</i><o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">In the second quarter of 2020, the economic shock of the Covid-19
pandemic drove the unemployment rate to nearly 15 percent and cut 9 percent
from real GDP. Under those conditions, automatic stabilizers alone would have
caused a sharp increase in the federal deficit. However, the stimulus produced
by automatic stabilizers alone would not have been enough to ensure a quick
recovery.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">The fact is that when the economy encounters a shock so much
larger than that of the typical business cycle, we need a degree of fiscal
stimulus greater than what primary structural balance rule would permit. At the
same time, however, it we need some safeguard that would prevent waiving the
rule for purely political reasons. How could that be done?<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">One possible emergency exception would be to allow extra fiscal
stimulus during periods when interest rates fall to the zero bound, rendering
conventional monetary stimulus ineffective. This time around, the Fed cut its
benchmark interest rate to zero on March 16, very early in the pandemic. Under
the suggested emergency exception, that would have provided room for the CARES
Act and other stimulus measures used to counter the effects of the Covid-19
recession. At the same time, the rule would not have permitted the excessive
stimulus of the 2017 tax cuts, undertaken at a time when the economy was
nearing a cyclical peak and interest rates were well within positive territory.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><i>Rule 2: Microeconomic aspects of fiscal policy should be
consistent with macro targets</i><o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Fiscal policy has both a macroeconomic and a microeconomic side.
Rule 1, which calls for cyclical neutrality, serves the macroeconomic goals of
stability and growth. Microeconomic issues concerning the structure of taxes
and the composition of spending are also important, but they, too, should be
approached in a manner that does no macroeconomic harm.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">In particular, tax reform, whether aimed at removing perverse
incentives or improving distributional equity, should be carried out in a way
that is revenue-neutral over the business cycle. Once again, the Tax Cuts and
Jobs Act of 2017 provides a pertinant example. Whether viewed from a
conservative or a progressive perspective, a good case can be made on
microeconomic grounds for reducing the U.S. corporate tax rate, which was then
then highest in the world. However, the economy did not need additional fiscal
stimulus at a time when unemployment was low and growth was strong. Instead,
cuts to admittedly distortionary corporate-profits taxes should have been
offset by increasing other less distortionary taxes, such as the <a href="https://www.niskanencenter.org/it-is-time-to-rethink-the-capital-gains-tax-preference/">capital gainstax</a>, or even by introducing a value added tax or carbon tax.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Like its distant cousin PAYGO, Rule 2 would require Congress to
consider impacts on the deficit when passing tax or spending legislation.
However, it differs from PAYGO in two important ways. First, it would be
symmetrical, in that it would not only bar inappropriate fiscal stimulus when
the economy is near full employment, but also premature austerity of the kind
that was implemented half-way through the recovery from the Great Recession.
Second, the degree of offset for tax cuts and spending increases would vary
with the business cycle. The required offset would be less than 100 percent
near the bottom of the cycle and greater than 100 percent at or near the peak.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><i>Rule 3: Fiscal rules should be neutral with respect to the size of
government.</i><o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Conservatives often propose that any fiscal rule should place a
constraint on the overall size of government. For example, a <a href="https://www.congress.gov/bill/112th-congress/senate-joint-resolution/10/text">2011 version</a> of a
balanced budget amendment proposed capping federal expenditures at 18 percent
of GDP. Such a constraint would be a mistake. Instead, any rule governing the
path of the deficit or surplus over the business cycle should be neutral as to
the size of government as well as neutral with regard to the cycle itself.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">In reality, there is little evidence to support the idea that
small government is necessarily good government. On the contrary, <a href="https://www.niskanencenter.org/quality-of-government-a-statistical-portrait/">the availableevidence</a> shows that broad measures of freedom and prosperity all tend to be
higher in countries where governments are larger, not smaller, relative to GDP.
Overall, quality of government, as measured by such things as the rule of law,
protection of property rights, and government integrity, is more important for
freedom and prosperity than the size of government.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">What is more, even if one believes, contrary to the evidence, that
a smaller government is better, building that objective into a fiscal policy
rule would inject a contentious ideological motive into the debate over how
best to manage deficits and debts. A rule that is neutral to government size
leaves the question of the size of government open to democratic debate, with
the proviso that new structural spending must be paid for.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><b>The bottom line</b><o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">The Covid-19 pandemic has revealed a need to rethink many aspects
of economic policy. The case for reform is especially strong in the case of
budget rules. The purely procedural rules that we have now, such as the debt
ceiling and PAYGO, are so full of loopholes as to make them meaningless. Overly
rigid alternatives, such as a proposed balanced budget amendment, would do more
harm than good, especially when the economy is hit by a shock as large as that
encountered in 2020. Yet between rules that are too rigid and rules that are so
weak as to be ineffective, there is a golden mean.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Those who are in charge of fiscal policy could learn a lot about
the proper balance between rules and discretion by heeding the example of the
Fed. For years, there have been economists who have urged the Fed to follow a
more rules-based policy and others who resisted those urgings. <a href="https://www.bostonfed.org/-/media/Images/discretionmonpol2017/mishkin-paper.pdf">FredericMishkin</a>, a former member of the Fed’s Board of Governors, has argued that rules
vs. discretion is not an either-or choice. Instead, Mishkin sees the Fed as
moving toward a regime of “constrained discretion” — one that pays attention to
rules but permits departures from the rules in response to unexpected economic
shocks. He argues that as long as such a regime is backed by transparent
communication of policy goals and actions, it can avoid the disadvantages both
of pure discretion and of overly rigid rules. In fact, constrained discretion
is already the Fed’s <a href="https://www.federalreserve.gov/monetarypolicy/policy-rules-and-how-policymakers-use-them.htm">all-but-official policy</a>.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Within the context of a primary structural budget rule, there are
other things we could do to enhance the ability of our economy to withstand
major shocks. In particular, a lot could be done to strengthen existing
automatic stabilizers. For example, it would be a good idea to extend
unemployment benefits to gig workers. The CARES Act tried to do that, but the
effort was not fully successful. A permanent version of payroll protection,
perhaps modeled on the German Kurtzarbeit system, would also be helpful. Finally,
a healthcare system that did not link insurance coverage to employment would
remove yet another source of financial stress to people thrown out of work in a
recession.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">Now is the right time to start thinking about a better way to
handle the next crisis.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><i>Based on a previous post at <a href="https://www.niskanencenter.org/we-need-new-rules-to-meet-the-fiscal-policy-challenges-of-the-year-ahead/">NiskanenCenter.org</a>. Photo courtesy of
<a href="http://Pixabay.com">Pixabay.com</a>.</i><o:p></o:p></span></p>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-81543235772932077492020-11-05T06:34:00.000-08:002020-11-05T06:34:01.834-08:00A CBO Roadmap to Near-Universal Healthcare<p> </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBaX6DzKv8FFGu72oSzlPIn6Y5vNO_0NiA2DLK5cOxSoj5LfRnfPUglHr1w8IUwMwfB0f0l-kIl0x_v-DgBV0zXns09wai2x2bTxKaA2vPut8WzH5Xe9ZDVlKZjoffLWevKXK8Bc99d7J8/s1189/P190330-2p.png" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="669" data-original-width="1189" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBaX6DzKv8FFGu72oSzlPIn6Y5vNO_0NiA2DLK5cOxSoj5LfRnfPUglHr1w8IUwMwfB0f0l-kIl0x_v-DgBV0zXns09wai2x2bTxKaA2vPut8WzH5Xe9ZDVlKZjoffLWevKXK8Bc99d7J8/s320/P190330-2p.png" width="320" /></a></div><p></p><p>On October 1, the Congressional Budget Office released a detailed report, <a href="https://www.cbo.gov/publication/56620">Policies to Achieve Near-Universal Health Insurance Coverage</a>. The report outlines four broad approaches to the long-sought goal of universal, affordable access to healthcare for all Americans. The CBO cautiously aims only for near-universal coverage, which it defines as coverage for at least 99 percent of the population. The report argues that 100 percent coverage is unattainable, since some people would inevitably decline to participate–even if they were eligible at no cost–on religious grounds or because they did not want to bring themselves to the attention of authorities, among other reasons.</p><!--wp:paragraph-->
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Each of the four approaches offers potential improvements over what we now have under the ACA, and ways out of the unthinkable chaos of a court-ordered end to the ACA, with no viable replacement. The alternatives range from a Sanders-like single-payer plan bold enough to appeal to the most progressive Democrats, to others that are sufficiently market-oriented to pass judgement with any but the most curmudgeonly Republicans. One of the CBO’s alternatives squarely hits the sweet spot of radical moderation– the Niskanen Center’s hallmark.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Here is a brief outline of the four approaches, with some pros and cons of each. <span></span></p><a name='more'></a><p></p><p><strong>Approach 1: A partially subsidized, add-on default plan.</strong> </p>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>This approach expands the alternatives already available under the ACA by adding a default plan that would be available to everyone not otherwise eligible for subsidized coverage, while leaving existing policy largely unchanged in other respects. The default plan would include both premium subsidies and cost sharing, with zero cost to the poorest participants. The default plan could be operated either directly by the government or by one or more private insurance companies. Although the CBO does not explicitly say so, Alternative 1 is essentially the approach endorsed by presidential candidate <a href="https://www.niskanencenter.org/joe-bidens-healthcare-plan-an-update/">Joe Biden</a> and the Democratic Party in the 2020 election.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p><strong><em>Pros</em></strong><em>. </em>Approach 1 would require a minimum of changes to existing law. One such change would eliminate the “coverage gap” for people with incomes below 100 percent of the federal poverty level (FPL) in states that have not expanded Medicaid. Another change would remove the so-called “firewall,” which is a rule that prevents people with a credible offer of employer-sponsored insurance (ESI) from taking advantage of subsidies and cost-sharing reductions available on ACA exchanges. Eliminating the firewall would moderate the many <a href="https://www.niskanencenter.org/whats-wrong-with-employer-sponsored-health-insurance/">negative effects of tying health insurance to jobs</a>. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>The CBO argues that it would be impracticable to keep the firewall in pace while administering a subsidized default plan. However, under Approach 1, large employers would still be required to offer health insurance, ESI tax benefits would be retained, and ESI would continue to be a major coverage source.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p><strong><em>Cons. </em></strong>Approach 1 would leave Medicaid and CHIP intact. That would leave the healthcare system for people with low incomes highly fragmented, both from state to state and by income, with <a href="https://www.niskanencenter.org/health-care-decentralization/">adverse consequences</a> for continuity of coverage and labor mobility. The Covid-19 pandemic has already shown how widespread job losses disrupt coverage, requiring many people to attempt the switch from ESI to Medicaid. Unfortunately, millions have reportedly fallen through the cracks and ended up with no coverage.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Also, even though it makes the fewest changes to existing law, the CBO warns that Approach 1 would pose the greatest administrative challenges of any of the proposals. One challenge would be monitoring everyone to determine who is or isn’t ‘ eligible for coverage other than the default plan. Another challenge would lie in collecting premiums, or taxes instead of premiums, from people whose default coverage is partially but not fully subsidized. Still, another problem would be notifying eligible people for default coverage, and ensuring that they actually enroll. Point-of-service enrollment could partly alleviate this problem, but that, too, has its administrative challenges.</p><p><strong>Approach 2: A partially-subsidized default plan that replaces Medicaid and the exchanges</strong></p>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>Like Approach 1, this strategy would introduce a partially-subsided default program with zero premium for people below the FPL. However, in this case, the default program would fully replace Medicaid, CHIP, and the nongroup policies currently offered on ACA exchanges. Medicare and TRICARE would continue as they now operate. Like Approach 1, it would eliminate the firewall but would continue to require large employers to offer ESI coverage. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p><strong><em>Pros. </em></strong>The big advantage of Approach 2 would be its defragmentation of healthcare coverage for the low-income population. Coverage, without change of doctors, networks, or costs, would continue smoothly in case of change in employment, loss of employment, or change in state of residence. Approach 2 offers flexibility concerning public vs. private insurers. The most likely variant for default coverage would be a Medicare-like public option with competing private plans along the lines of Medicare Advantage. ESI would continue to be mandatory for large employers, but the firewall would be eliminated. With a good public option in place, the voluntary exit rate from employer-based coverage would likely be greater than under Approach 1.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p><strong><em>Cons</em></strong><em>. </em>Because it is only partly subsidized, Approach 2 would suffer from some of the same administrative complexities as Approach 1. To get to near-universal coverage, middle- and upper-income beneficiaries would have to pay a premium or premium-equivalent tax. Computing the appropriate premium or tax would not be a trivial matter. It would be necessary to take household income into account, and regional and/or age-related risk factors and possibly tobacco use. Getting everyone enrolled would be another administrative headache. It would probably be necessary to have a point-of-service enrollment mechanism with some kind of retrospective premium for people who did not voluntarily enroll in advance in the default program or an alternative. That could create unpleasant financial shocks for people not eligible for full subsidies. </p><p><strong>Approach 3: Default coverage through a fully-subsidized benchmark plan</strong></p>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>This approach would represent a more far-reaching transformation of the American system of health insurance. The big difference between Approach 3 and Approach 2 is that everyone would automatically be enrolled in a benchmark plan for which there would be no premium or premium-equivalent tax. The cost of the benchmark plan would be covered from general taxation. The benchmark plan would include income-based deductibles and copays, and could be offered either by public or private insurers.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p><strong><em>Pros</em></strong><em>. </em>Alternative 3 would move the United States toward a universal coverage system similar to those of other high-income countries in place of the patchwork system that exists under the ACA. Default enrollment in a zero-premium benchmark plan would be much easier to administer than a system based on mandatory premiums or premium-equivalent taxes. It would not be necessary to know people’s income at the time of enrollment. Anyone who did not enroll in advance (and there would be little reason not to do so) could be enrolled at a point of service, such as a hospital emergency room or community clinic, with no unpleasant surprises or retroactive premiums.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Approach 3 would effectively break the link between employment and health insurance. Employers would not be required to offer coverage. Depending on the benchmark plan’s generosity, some employers might continue to offer add-on benefits, such as help with deductibles, or to pay for vision and dental care if not covered by the benchmark plan. There would be no tax advantage but some employers might see extended coverage as a useful employee retention device.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>The cost of Approach 3 would depend largely on the design of the benchmark plan. The Federal budget burden would be least if the benchmark plan included substantial income-based cost-sharing, as would be the case under a system such as the <a href="https://www.niskanencenter.org/universal-catastrophic-coverage/">Universal Catastrophic Coverage</a> recommended by Niskanen Center. The CBO report explains how a Niskanen-style UCC approach would fit with its Approach 3 as follows:</p>
<!--/wp:paragraph-->
<!--wp:quote-->
<blockquote class="wp-block-quote"><p>One variant would be to benchmark premium subsidies to a catastrophic plan with high levels of first-dollar cost sharing, such as a high-deductible plan. However, under the catastrophic plan, there would be no cost sharing for the treatment of chronic conditions and preventive services, such as vaccinations and prenatal care. Deductibles would vary on the basis of household income, and individuals whose income was below a certain level would not have a deductible. People could use their subsidy to enroll in a catastrophic plan at no cost or they could use their subsidy toward the cost of a more generous plan offered through a marketplace of private plans if they paid the additional premium. Under this variant, there also could be a public option in the marketplace. </p></blockquote>
<!--/wp:quote-->
<!--wp:paragraph-->
<p>Alternatively, the benchmark plan could be something more generous, with cost-sharing that was less dependent on income, something like traditional Medicare or an ACA gold plan. As in other approaches, such a plan could be administered in a public, private, or hybrid version.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p><strong><em>Cons</em></strong><em>. </em>This plan would require more people to change their source of insurance coverage. If a more generous form of benchmark plan were adopted, Alternative 3 would require higher federal expenditures than alternatives 1 or 2. Even so, this approach would fall short of the universal first-dollar coverage that many progressives prefer. </p><p><strong>Approach 4: A Single-payer system</strong></p>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>In this approach, everyone would receive comprehensive coverage from a single public insurance plan. There would be no premiums. Cost-sharing would either be eliminated entirely or much reduced compared to most of today’s insurance options. The single-payer system would replace all existing government plans, including traditional Medicare, Medicaid, CHIP, TRICARE, and the rest. There would be little if any role for private health insurance.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p><strong><em>Pros.</em></strong><strong> </strong>Bernie Sanders’ Medicare for All plan is the best-known proposal of this type. The popularity of Sanders’ plan stems in large part from the fact that it would fully relieve American families of the financial burden of major illnesses and injuries. A single-payer plan would, in many ways, be the simplest to administer. Backers argue that savings in administrative costs would substantially ease the burden on the federal budget. It would also make life easier for doctors, hospitals, and families, who now must find their way through a maze of different payment rules from different private and public insurers.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p><strong><em>Cons. </em></strong>Even after administrative savings, a true single-payer system would be the most expensive option. Some critics are concerned that with no “skin in the game” in the form of deductibles or copays, patients would greatly increase their consumption of services. Some research supports that conjecture, but some also suggests that patients make poor choices when faced with high out-of-pocket costs. Rather than choosing good health care values, some studies suggest that they may forgo needed care because of the cost– but then spend on unnecessary care or treatments that are doubtfully cost-effective. Whatever the case, it is clear that a single-payer system would need to rely more on administrative and less on market-based cost controls than would the other alternatives.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>There are many unknowns about how a true single-payer system would operate in this country. Senator Sanders himself often says he wants America to have universal healthcare “like other rich countries,” but the fact is, <a href="https://www.niskanencenter.org/please-stop-calling-sanders-health-care-plan-single-payer/">no other country has anything like Medicare for All</a>. The healthcare systems of other rich countries are very diverse in their structures. Even the most generous systems elsewhere require more by way of cost-sharing than would Medicare for All, and most do not have coverage that is as broad, especially for things like dental, vision, and long-term care. Also, many of Europe’s best systems, such as those in The Netherlands, Switzerland, and even the U.K., leave more of a role for private insurance companies. Some rely entirely on compulsory purchases of private coverage.</p><p><strong>Conclusions</strong></p>
<!--/wp:heading-->
<!--wp:paragraph-->
<p>The CBO has done an excellent job of laying out the options. Nearly every pending healthcare bill or think-tank proposal fits somewhere within the CBO’s four alternatives. In keeping with its mandate of political neutrality, the CBO expresses no preference for one approach over another.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>There is only one major point on which I disagree with the CBO report. That concerns their contention that implementing any of their four approaches would require additional federal tax revenue to achieve deficit neutrality. I do not think that is true for the UCC variant of Approach 3.</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>The problem is that the CBO has not asked the right question. Rather than setting a plan and then asking, “Could we afford it?” The right question is, “How generous a plan could we buy with the money the federal government already spends on healthcare?” </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Total federal spending now accounts for roughly 50 percent of total healthcare spending. My calculations suggest that money would buy a UCC benchmark plan, with no premium for anyone, that would cap total out-of-pocket medical spending, including deductibles and all other cost-sharing, at 25 percent of a household’s eligible income. (Eligible income means total income minus the FPL for that household.) Approximately 65 percent of the population would have health care expenses of no more than 15 percent of total income, including all households with incomes below 250 percent of the poverty level. More than 95 percent of households would have expenses of less than 20 percent of total income. </p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>Those numbers are based on 2017 levels of healthcare spending with no cost savings. Suppose a UCC plan included administrative and/or market-based cost-saving measures sufficient to reduce overall expenditures by 10 percent. In that case, the out-of-pocket maximum for a budget-neutral UCC benchmark plan could be held to 15 percent of eligible household income. If savings of 15 percent were achieved, the out-of-pocket maximum could be lowered to 10 percent. (<a>See here</a>, pp. 25ff, for the detailed calculations.)</p>
<!--/wp:paragraph-->
<!--wp:paragraph-->
<p>But, as the CBO report reminds us, UCC is only one healthcare reform approach among many. The most important point to draw from the CBO’s work is that <em>any</em> of their four approaches would move us toward the goal of affordable healthcare access for all Americans, and a clear improvement over what we have now.</p><p><i>Previously posted at <span style="color: #0000ee;"><u><a href="https://www.niskanencenter.org/a-cbo-roadmap-to-universal-healthcare/">NiskanenCenter.org</a></u></span> Photo courtesy of Pixabay</i></p>
<!--/wp:paragraph-->Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com0tag:blogger.com,1999:blog-2938311055760665357.post-58553622773254324792020-09-19T10:48:00.002-07:002020-11-05T06:26:03.555-08:00Quality of Government: A Statistical Portrait<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4gW9E8jjq9QbYwc9GKodNHL7u9QjqOSM42RXIbw4zZOVXt4DXzC9T03uZP2Y4XMwdNdTy4CjoBr8qFWdrsg6srzC4vPmg-f3J-7YN99eh3SsH7NxZWsvParfHnlccrNm4m8f3-3Vl9JSN/s1276/P200817-1.png" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="540" data-original-width="1276" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4gW9E8jjq9QbYwc9GKodNHL7u9QjqOSM42RXIbw4zZOVXt4DXzC9T03uZP2Y4XMwdNdTy4CjoBr8qFWdrsg6srzC4vPmg-f3J-7YN99eh3SsH7NxZWsvParfHnlccrNm4m8f3-3Vl9JSN/s320/P200817-1.png" width="320" /></a></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p style="text-align: left;"><span style="background-color: white; color: #191e23; font-family: "Noto Serif"; font-size: inherit; white-space: pre-wrap;">In a recent </span><a href="https://www.niskanencenter.org/what-the-pandemic-revealed/" style="background-color: white; box-sizing: inherit; color: #007fac; font-family: "Noto Serif"; font-size: inherit; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out; white-space: pre-wrap;">three-part essay</a><span style="background-color: white; color: #191e23; font-family: "Noto Serif"; font-size: inherit; white-space: pre-wrap;">, the Niskanen Center’s Brink Lindsey acknowledges all that the modern market system has done to incentivize innovation and coordinate the production and distribution of goods and services. He is concerned, though, that the economists who have assumed leadership of the free-market intellectual movement sometimes take the existence of markets themselves for granted. He adds a vital qualification: </span></p></blockquote><div style="background-color: white; box-sizing: inherit; color: #191e23; font-family: "Noto Serif"; outline: 0px;"><div style="box-sizing: inherit; outline: 0px;"><div style="box-sizing: inherit; outline: 0px;"><div style="box-sizing: inherit; outline: 0px;"><div class="block-editor-block-list__layout" style="box-sizing: inherit; outline: 0px; padding-left: 58px; padding-right: 58px; position: relative;"><div aria-label="Block: Quote" class="wp-block block-editor-block-list__block has-selected-ui" data-block="63c2823d-99eb-4475-a4a7-74b08985459d" data-type="core/quote" id="block-63c2823d-99eb-4475-a4a7-74b08985459d" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><blockquote class="wp-block-quote" style="border-left: 4px solid rgb(0, 0, 0); box-sizing: inherit; margin: 0px 0px 28px; padding-left: 1em; quotes: none;"><div aria-label="Write quote…" aria-multiline="true" class="rich-text block-editor-rich-text__editable" role="textbox" style="box-sizing: inherit; outline: 0px; white-space: pre-wrap;"><p style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 0px 0px 28px;"><em style="box-sizing: inherit;">A well-functioning market system is neither self-executing nor self-sustaining</em>. To achieve what they are capable of, markets need to be embedded in and supplemented by supportive legal, political, and social institutions. </p></div></blockquote></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="9a7ec9f9-fc07-4ad5-a37e-0db2fdfdcd59" data-type="core/paragraph" id="block-9a7ec9f9-fc07-4ad5-a37e-0db2fdfdcd59" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The idea that institutions are important to the proper functioning of a market economy is hardly new. <a href="https://www.jstor.org/stable/1821637?seq=1" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Harold Demsetz’s</a> work on property rights and <a href="https://en.wikipedia.org/wiki/Douglass_North" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Douglass North’s</a> writings on institutions and transaction costs are well-known landmarks in the literature. The question of quality of government (QoG) is a somewhat narrower, but still broad question within the study of economic institutions. <a href="https://press.uchicago.edu/ucp/books/book/chicago/Q/bo11632847.html" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Bo Rothstein’s</a> 2011 book on QoG provides an excellent overview of the literature and many original contributions. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="e1c4cbbf-3387-4e28-8878-e54e5381ebe5" data-type="core/paragraph" id="block-e1c4cbbf-3387-4e28-8878-e54e5381ebe5" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The scope of this commentary is much less ambitious than any of these classic works. As a “statistical portrait,” it is more descriptive and exploratory than a rigorous exercise in hypothesis testing. Still, by highlighting some key relationships, I hope to point the way to potentially fruitful topics for further research. And even with these disclaimers, the findings reported here shed light on important questions regarding the relationship of QoG to democracy, personal freedom, and the satisfaction of basic human needs.<span></span></p><a name='more'></a><span></span><p></p><!--more--><p></p></div><div aria-label="Block: Heading" class="wp-block block-editor-block-list__block has-selected-ui" data-block="6fb46bbc-c54a-45d5-a226-eb700302a8ae" data-type="core/heading" id="block-6fb46bbc-c54a-45d5-a226-eb700302a8ae" role="group" style="box-sizing: inherit; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><h2 aria-label="Write heading…" aria-multiline="true" class="rich-text block-editor-rich-text__editable" role="textbox" style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em 0px; white-space: pre-wrap;"><span style="box-sizing: inherit;"><span style="font-size: large;">What is quality of government?</span></span></h2></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="592f6e59-2c6f-454b-a363-3a6b039f8ddb" data-type="core/paragraph" id="block-592f6e59-2c6f-454b-a363-3a6b039f8ddb" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The first task is to develop a summary measure of the quality of the supportive legal, political, and social institutions that form the essential foundation for a well-functioning market economy. As the primary source, I will draw on a set of data issued annually by the <a href="https://www.prosperity.com/" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Legatum Institute</a>, a London-based think tank whose mission is “to create the pathways from poverty to prosperity, by fostering open economies, inclusive societies and empowered people.” The <a href="https://www.prosperity.com/about/resources" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">downloadable data</a> in the institute’s latest annual prosperity report is substantially expanded and reorganized. It now includes 294 indicators, organized into 65 “elements,” nesting in 12 “pillars” and three “domains.” Of these indicators, 206 are new for 2019, with 88 carried forward from previous years. Full description of the organization and sources of the indicators can be found in a detailed <a href="https://www.prosperity.com/download_file/view/3920/1692" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">methodology report</a>. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="c046acf1-5c5d-4c2b-8932-1e84df1b34a6" data-type="core/paragraph" id="block-c046acf1-5c5d-4c2b-8932-1e84df1b34a6" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The Legatum data include a dozen or more elements that appear plausibly to bear on quality of government. From these I selected the following nine: </p></div><div aria-label="Block: List" class="wp-block block-editor-block-list__block has-selected-ui" data-block="4aeb3a6e-ac86-4019-a7bd-d34d19ace535" data-type="core/list" id="block-4aeb3a6e-ac86-4019-a7bd-d34d19ace535" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><ol aria-label="Write list…" aria-multiline="true" class="rich-text block-editor-rich-text__editable" role="textbox" style="box-sizing: inherit; margin-bottom: 28px; margin-left: 1.3em; padding-bottom: inherit; padding-left: 1.3em; padding-right: inherit; padding-top: inherit; white-space: pre-wrap;"><li style="box-sizing: inherit; margin-bottom: initial;">Rule of law</li><li style="box-sizing: inherit; margin-bottom: initial;">Government integrity </li><li style="box-sizing: inherit; margin-bottom: initial;">Protection of property rights</li><li style="box-sizing: inherit; margin-bottom: initial;">Contract enforcement</li><li style="box-sizing: inherit; margin-bottom: initial;">Protection of investor rights</li><li style="box-sizing: inherit; margin-bottom: initial;">Executive constraints</li><li style="box-sizing: inherit; margin-bottom: initial;">Government effectiveness</li><li style="box-sizing: inherit; margin-bottom: initial;">Regulatory quality</li><li style="box-sizing: inherit; margin-bottom: initial;">Government accountability</li></ol></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="0e8f26e6-c7f7-4ccd-91ef-f58d99b654d7" data-type="core/paragraph" id="block-0e8f26e6-c7f7-4ccd-91ef-f58d99b654d7" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The selection reflects a pragmatic, procedural perspective on quality of government. The first six items are consistent with Rothstein’s view that impartiality<em style="box-sizing: inherit;"> </em>is the key marker of QoG. By impartiality, he means that “when implementing laws and policies, government officials shall not take into consideration anything about the citizen/case that is not stipulated beforehand in the policy or the law.” Items seven and eight on the list tilt more toward technocratic competence in operating the machinery of government than on impartiality. The ninth item, government accountability, will be discussed separately in the next section.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="a2a07348-4fa5-44fe-9686-7c46e468f21e" data-type="core/paragraph" id="block-a2a07348-4fa5-44fe-9686-7c46e468f21e" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">This pragmatic approach is much narrower than that adopted by <a href="https://www.jstor.org/stable/43654916?read-now=1&refreqid=excelsior%3A29d7a5be69e14043aeea7cae0b69e7de&seq=9#page_scan_tab_contents" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Marcus Agnafors</a> and other writers who argue for including ethics and morality in QoG. Agnafors points out that a purely procedural concept of QoG could give a high rating to, say, a government that wrote clear laws for ethnic cleansing of its territory, enforcing them impartially and offering formal due process to those marked for forced resettlement. For present purposes, however, it would be inappropriate to conflate quality government and morally good government in this way. By adopting a pragmatic, procedural view of QoG, we can ask whether higher QoG is associated with better outcomes in terms of human rights, freedom, and satisfaction of basic needs – questions that would make no sense if our measure of QoG itself encompassed those outcomes. (Spoiler alert: governments that produce excellent outcomes based on low QoG turn out to be rare.)</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="c29eb191-b41c-4732-95f7-d6f3731377e4" data-type="core/paragraph" id="block-c29eb191-b41c-4732-95f7-d6f3731377e4" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Our definition of QoG also overlaps with what <a href="https://www.sciencedirect.com/science/article/abs/pii/S0014498316301966?via%3Dihub" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Noel D. Johnson and Mark Koyama</a> call <em style="box-sizing: inherit;">state capacity, </em>by which they mean “an ability of a state to collect taxes, enforce law and order, and provide public goods.” In practice, procedural QoG would appear to be a necessary condition for high state capacity, but as I understand it, the latter concept encompasses substantively good policies and good outcomes as well as competence and impartiality.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="74ded82d-4313-4828-8025-9f801f0d325a" data-type="core/paragraph" id="block-74ded82d-4313-4828-8025-9f801f0d325a" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">In addition to the qualitative considerations discussed above, the selection of the nine indicators to be included in QoG was also guided, in part, by exploratory factor analysis. The nine QoG elements load strongly on a single factor, so their average can be reliably used as a single variable, which I will call QoG9. Exploratory analysis indicated that it makes no significant difference whether GoG9 is computed as a simple average of the nine elements or as a factor-weighted average, so I use the simple average in all of the tests discussed below. Full data underlying QoG9 and other variables, full data for the figures, and as full details of selected factor analysis and regression tests can be found in an <a href="http://tiny.cc/z8ylsz" rel="noreferrer noopener" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;" target="_blank">online appendix</a>.</p></div><div aria-label="Block: Heading" class="wp-block block-editor-block-list__block has-selected-ui" data-block="142463d9-e364-4ed2-b8b9-ca8453cb5aa0" data-type="core/heading" id="block-142463d9-e364-4ed2-b8b9-ca8453cb5aa0" role="group" style="box-sizing: inherit; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><h2 aria-label="Write heading…" aria-multiline="true" class="rich-text block-editor-rich-text__editable" role="textbox" style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em 0px; white-space: pre-wrap;"><span style="box-sizing: inherit;"><span style="font-size: large;">Quality of government and democracy</span></span></h2></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="bcb84b8f-275e-420a-beca-750f9e5889e3" data-type="core/paragraph" id="block-bcb84b8f-275e-420a-beca-750f9e5889e3" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Many people who live in democratic countries tend to think of “good government” and “democracy” as synonymous. However, as Rothstein explains, the relationship between the two is complex. On the one hand, if a country is to be considered more than superficially democratic, procedural rules for the selection of leaders must be embodied in a system of law and elections and must be carried out impartially. In that sense, democracy implies at least some minimal level of QoG. On the other hand, it is evident, when we look around the world, that there are countries where voters in honest elections enthusiastically elect and re-elect leaders who are known to be corrupt or partial to their own class, clan, or ethnic group. On the other hand, one can point at least to isolated examples of countries that have reasonable QoG scores, as defined here, yet score poorly on measures of procedural democracy.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="01ee6fd6-7736-453d-8015-b5249681210e" data-type="core/paragraph" id="block-01ee6fd6-7736-453d-8015-b5249681210e" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Of the nine Legatum elements in QoG9, the ninth, “government accountability,” is explicitly a measure of procedural democracy. It is based, in turn, on four underlying indicators: (1) A measure of the degree to which there is a shared consensus on democracy and a market economy as a goal; (2) an indicator from Freedom House of political participation and rights; (3) a measure of the level of democracy from the Center for Systematic Peace; and (4) a measure of the adequacy of complaint mechanisms from the World Justice Project. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="f43b4546-0968-4a40-aef2-fae97dc53680" data-type="core/paragraph" id="block-f43b4546-0968-4a40-aef2-fae97dc53680" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">In a factor analysis, “government accountability” makes the cut for inclusion in QoG9, but only barely. Its correlations with the other eight QoG elements, while all statistically significant, are the smallest of any in the complete cross-correlation table. Government accountability is significantly correlated with the average of the other eight elements (a variable I will refer to as QoG8), but the R<sup style="box-sizing: inherit;">2</sup> is a modest 0.49.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="849866e1-34c1-4ca9-b049-a198d3b984a5" data-type="core/paragraph" id="block-849866e1-34c1-4ca9-b049-a198d3b984a5" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">These statistically significant but not overwhelmingly strong correlations suggest that although there is a general tendency for high-quality governments to be democratic, there are exceptions. To further investigate the relationship of procedural democracy to government quality, I turned to a more detailed set of democracy data from <a href="https://freedomhouse.org/" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Freedom House</a>, including three indicators of the freedom and fairness of the electoral process and four indicators of freedom of political participation. I combined these into a measure of <em style="box-sizing: inherit;">procedural democracy.</em> The correlation of this broader measure of procedural democracy with QoG8 (excluding government accountability) is 0.62 (R<sup style="box-sizing: inherit;">2</sup> = 0.39) for the sample of 162 countries for which both variables are available.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="bffda44f-1c73-4fb6-b9f5-c2eb602cb37b" data-type="core/paragraph" id="block-bffda44f-1c73-4fb6-b9f5-c2eb602cb37b" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Figure 1 shows a scatter plot of QoG8 vs. procedural democracy as based on the seven components from Freedom House. Scores are normalized so that the axes show standard deviations above or below the mean for each variable. The dotted trendline shows that there is a tendency for countries that are more democratic to have relatively high QoG ratings. Countries above the trendline have higher QoG than would be expected based on their level of democracy alone, while the opposite is true for those below the trendline.</p></div><div aria-label="Block: Image" class="wp-block block-editor-block-list__block has-selected-ui" data-block="c2c72e08-6856-4f1d-a12a-8ff922995ab9" data-type="core/image" id="block-c2c72e08-6856-4f1d-a12a-8ff922995ab9" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><figure class="wp-block-image size-large" style="box-sizing: inherit; margin-bottom: 1em; margin-left: 0px; margin-right: 0px; position: relative;"><div style="box-sizing: inherit; outline: 0px;"><div class="components-resizable-box__container" style="box-sizing: border-box; display: inline-block; flex-shrink: 0; height: auto; max-height: 1310.32px; max-width: 1450px; min-height: 20px; min-width: 22.132px; outline: 0px; position: relative; user-select: auto; width: auto;"><img alt="This image has an empty alt attribute; its file name is image1.png" src="https://www.niskanencenter.org/wp-content/uploads/2020/08/image1.png" style="border: none; box-sizing: inherit; display: block; height: inherit; max-width: 100%; width: inherit;" /><span style="box-sizing: inherit;"></span></div><div class="__resizable_base__" style="box-sizing: inherit; flex: 0 1 0%; height: 532.925px; left: 0px; outline: 0px; position: absolute; transform: scale(0, 0); width: 580px;"></div></div></figure><div class="components-drop-zone" style="border-radius: 2px; border: 2px solid rgb(0, 113, 161); bottom: 0px; box-sizing: inherit; left: 0px; opacity: 0; outline: 0px; position: absolute; right: 0px; top: 0px; transition: opacity 0.3s ease 0s, background-color 0.3s ease 0s, visibility 0s ease 0.3s; visibility: hidden; z-index: 40;"></div></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="8e46deca-2d42-4a33-955c-13ee0ba36bef" data-type="core/paragraph" id="block-8e46deca-2d42-4a33-955c-13ee0ba36bef" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The diagram is divided into quadrants, with notable outliers labeled by their ISO codes. Starting with the northeast quadrant, we find countries that have better-than-average ratings on both procedural democracy and government quality, with Norway winning the blue ribbon. Most OECD countries (orange dots) and most EU members belong in this quadrant. Taiwan is the best-rated among countries outside the OECD. A few countries, such as India, have higher-than-average QoG scores, but fall below the trendline, indicating that they do not rate as highly as we would expect, given their level of democracy. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="090b3355-ddcd-4735-bd4b-4c5a40b231db" data-type="core/paragraph" id="block-090b3355-ddcd-4735-bd4b-4c5a40b231db" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The northwest quadrant contains countries with higher-than-average QoG but lower-than-average democracy scores. Singapore and Hong Kong are conspicuous outliers, although one suspects that Hong Kong has slipped in both categories since these data were collected. Lower and farther to the left we find countries like the United Arab Emirates and China, which are less well governed, but still have higher-than-average QoG scores and are even less democratic. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="cbbbea8d-d4ba-4063-8eb0-6a3cd5e4dea0" data-type="core/paragraph" id="block-cbbbea8d-d4ba-4063-8eb0-6a3cd5e4dea0" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Part of the southwest quadrant lies above the trendline. Russia is found there, showing that although its quality of government is below average, it is nonetheless a bit better than we would expect from a country so undemocratic. The same goes for Turkey, which is the least democratic country in the OECD. The part of the southwest quadrant that falls below the trend line includes some of the world’s basket cases – Somalia, Venezuela, and Haiti, among others.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="77c680a8-3e05-4983-91ba-36c6e4e553cb" data-type="core/paragraph" id="block-77c680a8-3e05-4983-91ba-36c6e4e553cb" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Finally, the southeast quadrant includes countries that are more democratic than average but less well governed. Mexico is the only OECD country in this quadrant, with a QoG just below the average. The extreme outliers in this region are mostly very small countries, such as Cape Verde, Suriname, and Madagascar. Two large countries, the Philippines and Ukraine, also fall into this quadrant, but closer to the center of the grid.</p></div><div aria-label="Block: Heading" class="wp-block block-editor-block-list__block has-selected-ui" data-block="73e1990a-dc09-4f0f-ac20-e3c3dd0f5887" data-type="core/heading" id="block-73e1990a-dc09-4f0f-ac20-e3c3dd0f5887" role="group" style="box-sizing: inherit; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><h2 aria-label="Write heading…" aria-multiline="true" class="rich-text block-editor-rich-text__editable" role="textbox" style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em 0px; white-space: pre-wrap;"><span style="box-sizing: inherit;"><span style="font-size: large;">Government quality, GDP, and oil</span></span></h2></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="4e6ae676-a738-46f9-8e75-5279df8b46c4" data-type="core/paragraph" id="block-4e6ae676-a738-46f9-8e75-5279df8b46c4" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Next, we turn our attention to the relationship between QoG and GDP per capita (measured in constant U.S. dollars at purchasing power parity, IMF data). There is a strong tendency for countries with higher GDP to have better governments. For the 162 countries in our sample, the correlation of government quality with GDP per capita is 0.80. (The relationship is by-and-large logarithmic; all statistical results reported use log GDP.)</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="63d7fab3-da50-4c53-b09b-811981df99c4" data-type="core/paragraph" id="block-63d7fab3-da50-4c53-b09b-811981df99c4" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Figure 2 shows a scatter plot of government quality against GDP. The vertical axis this time shows raw QoG9 scores on a scale from 0 to 100. It quickly becomes apparent that the countries shown fall into two distinct groups. To emphasize that pattern, the figure highlights 20 countries that are often referred to as <em style="box-sizing: inherit;">petro-states </em>as orange dots. These comprise all countries that have oil and gas revenues equal to 5 percent or more of GDP, plus Bahrain. (Bahrain has many traits in common with other Middle East petro-states but does not make the 5 percent cutoff, since much of its petroleum industry is based on refining crude oil originally extracted in neighboring Saudi Arabia.) Petro-states outside the Middle East include Russia, Kazakhstan, Equatorial Guinea, Angola, and Ecuador. Norway, the United States, and Canada, although all large oil producers, do not make the 5-percent cutoff.</p></div><div aria-label="Block: Image" class="wp-block block-editor-block-list__block has-selected-ui" data-block="6c1cd1fe-15c2-4b0e-8c55-cdcb44ced855" data-type="core/image" id="block-6c1cd1fe-15c2-4b0e-8c55-cdcb44ced855" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><figure class="wp-block-image size-large" style="box-sizing: inherit; margin-bottom: 1em; margin-left: 0px; margin-right: 0px; position: relative;"><div style="box-sizing: inherit; outline: 0px;"><div class="components-resizable-box__container" style="box-sizing: border-box; display: inline-block; flex-shrink: 0; height: auto; max-height: 1390.53px; max-width: 1450px; min-height: 20px; min-width: 20.8554px; outline: 0px; position: relative; user-select: auto; width: auto;"><img alt="This image has an empty alt attribute; its file name is unnamed-7.png" src="https://www.niskanencenter.org/wp-content/uploads/2020/08/unnamed-7.png" style="border: none; box-sizing: inherit; display: block; height: inherit; max-width: 100%; width: inherit;" /><span style="box-sizing: inherit;"></span></div><div class="__resizable_base__" style="box-sizing: inherit; flex: 0 1 0%; height: 499.8px; left: 0px; outline: 0px; position: absolute; transform: scale(0, 0); width: 580px;"></div></div></figure><div class="components-drop-zone" style="border-radius: 2px; border: 2px solid rgb(0, 113, 161); bottom: 0px; box-sizing: inherit; left: 0px; opacity: 0; outline: 0px; position: absolute; right: 0px; top: 0px; transition: opacity 0.3s ease 0s, background-color 0.3s ease 0s, visibility 0s ease 0.3s; visibility: hidden; z-index: 40;"></div></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="03ff7dc1-b2fd-4146-8758-f3cc95dc29af" data-type="core/paragraph" id="block-03ff7dc1-b2fd-4146-8758-f3cc95dc29af" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">QoG is positively related to GDP in both the petro and non-petro groups, but the trend line for the petro-states lies well below that for the non-petros. Within the petro group, the correlation of QoG with log GDP is 0.85 and within the non-petro group it is 0.87. A multiple regression of QoG on log GDP and a dummy variable for membership in the petro group shows a multiple correlation of 0.87, with statistically significant regression coefficients for both independent variables (p < 0.001).</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="785f69fb-2cc3-4360-8260-2d9466f0c49d" data-type="core/paragraph" id="block-785f69fb-2cc3-4360-8260-2d9466f0c49d" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The relatively poor quality of government in the petro-states illustrates what is widely called the <em style="box-sizing: inherit;">resource curse</em> or <em style="box-sizing: inherit;">curse of riches. </em>The resource curse has many complex economic and noneconomic aspects, but, as Jeffrey A. Frankel notes in a 2010 <a href="https://www.nber.org/papers/w15836.pdf" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">survey of the literature</a>, institutional weakness is one of the most widely observed. A popular explanation is that in resource-rich countries, politics is reduced to a struggle to capture resource rents, whereas in resource-poor countries, governments must motivate people to create wealth and must provide the institutional framework in which they can do so.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="f68023d1-45d3-4614-85c2-dd643ac2fa01" data-type="core/paragraph" id="block-f68023d1-45d3-4614-85c2-dd643ac2fa01" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Strictly speaking, there is nothing in the data shown in Figure 2 that would allow us to draw any causal conclusions regarding the relationship between wealth and government quality. Market-oriented writers do not hesitate to express a belief that rule of law, protection of property rights, and so on are the cause of superior economic performance. However, it is likely that there is feedback in the other direction as well, inasmuch as more prosperous and better-educated citizens in countries higher up the curve might well have less tolerance for corrupt and unresponsive governments.</p></div><div aria-label="Block: Heading" class="wp-block block-editor-block-list__block has-selected-ui" data-block="bb7e14b6-4cf3-4595-82a0-b673de55e5da" data-type="core/heading" id="block-bb7e14b6-4cf3-4595-82a0-b673de55e5da" role="group" style="box-sizing: inherit; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><h2 aria-label="Write heading…" aria-multiline="true" class="rich-text block-editor-rich-text__editable" role="textbox" style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em 0px; white-space: pre-wrap;"><span style="box-sizing: inherit;"><span style="font-size: large;">Better governments tend to be larger, not smaller</span></span></h2></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="18cf4b83-6b3a-419a-9bf0-5234cf222322" data-type="core/paragraph" id="block-18cf4b83-6b3a-419a-9bf0-5234cf222322" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">There is a widespread tendency for governments with high QoG ratings to be relatively large, as measured by the share of government revenue or expenditure in GDP. Across all countries in our sample, the correlation coefficient for QoG9 and revenue share is 0.80. If we omit the petro-states, which, as we saw in the last section, have a distinctive political economy of their own, the correlation rises to 0.87. If government expenditures rather than revenue are used as the measure of the size of government, the correlations are very slightly lower, but with the same signs and still strongly statistically significant. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="9d24791b-36af-4163-9c5a-7c08834fadd3" data-type="core/paragraph" id="block-9d24791b-36af-4163-9c5a-7c08834fadd3" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">However, a question immediately arises about how much confidence should be placed in them, since both QoG and the share of revenue in GDP increase as GDP per capita increases. Because of this confounding variable, The simple correlation of quality with size of government could be spurious. Conceivably, even the sign of the correlation could be misleading. It might be the case, for example, that rich countries have high quality government <em style="box-sizing: inherit;">despite</em> the fact that their governments are large, and that small governments might be inherently better, holding GDP constant. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="c3375a56-6956-4bf8-9679-5c09b6a51de2" data-type="core/paragraph" id="block-c3375a56-6956-4bf8-9679-5c09b6a51de2" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">One way to sort out this three-way relationship is to look at a multiple regression using QoG as the dependent variable and both GDP and the share of government revenue in GDP as independent variables. For the sample of non-petro countries, such a test yields a multiple correlation of 0.88 and coefficients for both the GDP and revenue variables that are positive and statistically significant (p < 0.001). The partial correlation of QoG9 with the revenue share, controlling for GDP, is 0.32 (p < 0.001)</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="2ea9a2e7-4c33-4b70-b8aa-e49bd0d4d37a" data-type="core/paragraph" id="block-2ea9a2e7-4c33-4b70-b8aa-e49bd0d4d37a" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">It appears, then, that even when we control for the effects of GDP per capita, better governments tend to be larger, rather than smaller. The data point strongly toward rejection of <a href="https://www.google.com/search?q=quote+the+government+that+governs+least&oq=quote+government+that+governs+&aqs=chrome.1.69i57j0l2.11443j0j7&sourceid=chrome&ie=UTF-8" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Thoreau’s</a> view that “that government is best which governs least” and of <a href="https://en.wikiquote.org/wiki/Grover_Norquist" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Grover Norquist’s</a> modern variant, that we can improve government by making it small enough to “drown in the bathtub.” </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="69c2340b-453b-4bd5-ba43-da9f9878e70e" data-type="core/paragraph" id="block-69c2340b-453b-4bd5-ba43-da9f9878e70e" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">To be sure, the fit between QoG and size of government is not airtight. There are outliers, as shown in Figure 3. The chart covers all non-petro countries, with selected outliers highlighted in red. The trendline is based on all points, both red and blue. The axes show standardized values, with scales indicating standard deviations above or below the means for each variable.</p></div><div aria-label="Block: Image" class="wp-block block-editor-block-list__block has-selected-ui" data-block="b8792fe2-016b-4610-82df-523b2105ccb5" data-type="core/image" id="block-b8792fe2-016b-4610-82df-523b2105ccb5" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><figure class="wp-block-image size-large" style="box-sizing: inherit; margin-bottom: 1em; margin-left: 0px; margin-right: 0px; position: relative;"><div style="box-sizing: inherit; outline: 0px;"><div class="components-resizable-box__container" style="box-sizing: border-box; display: inline-block; flex-shrink: 0; height: auto; max-height: 1306.33px; max-width: 1450px; min-height: 20px; min-width: 22.1997px; outline: 0px; position: relative; user-select: auto; width: auto;"><img alt="This image has an empty alt attribute; its file name is image3.png" src="https://www.niskanencenter.org/wp-content/uploads/2020/08/image3.png" style="border: none; box-sizing: inherit; display: block; height: inherit; max-width: 100%; width: inherit;" /><span style="box-sizing: inherit;"></span></div><div class="__resizable_base__" style="box-sizing: inherit; flex: 0 1 0%; height: 531.325px; left: 0px; outline: 0px; position: absolute; transform: scale(0, 0); width: 580px;"></div></div></figure><div class="components-drop-zone" style="border-radius: 2px; border: 2px solid rgb(0, 113, 161); bottom: 0px; box-sizing: inherit; left: 0px; opacity: 0; outline: 0px; position: absolute; right: 0px; top: 0px; transition: opacity 0.3s ease 0s, background-color 0.3s ease 0s, visibility 0s ease 0.3s; visibility: hidden; z-index: 40;"></div></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="cf75ee3e-c461-4afb-92a6-4c1284ffc927" data-type="core/paragraph" id="block-cf75ee3e-c461-4afb-92a6-4c1284ffc927" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Starting in the northeast quadrant, we are not surprised to find that four Nordic countries have the most prominently large and high-quality governments. New Zealand, Switzerland (CHE), and the United States have governments that are also very high quality, but are only a little larger than average, as measured by revenue. Italy and Greece also fall in this quadrant, but below the trend line. Their governments, although large, are not as good as we would expect them to be based on their size alone. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="460627b0-6489-4334-ba73-5aff4518b46f" data-type="core/paragraph" id="block-460627b0-6489-4334-ba73-5aff4518b46f" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The northwest quadrant, much less heavily populated, consists of governments of higher-than-average quality and smaller-than-average size. These countries are given high marks on the economic freedom rankings of organizations like the Fraser Institute, the Cato Institute, and the Heritage Foundation. There is no doubt that they are prosperous and well-governed, especially the five that are highlighted as red dots, but the comparatively small size of their governments, as ranked according to the share of revenue in GDP, should not necessarily be accepted at face value.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="fa9ea6f6-bd14-42b9-91e5-ae80c3ec3d41" data-type="core/paragraph" id="block-fa9ea6f6-bd14-42b9-91e5-ae80c3ec3d41" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Ireland is a special case, in that it has one of the highest ratios of gross national product to gross national income of any country in the world. That is because more than a quarter of its GDP consists of the profits of international companies like Apple and Google that use Ireland as a tax haven. If we were to adjust for this “phantom” GDP and base the chart on GNI instead, Ireland’s ratio of tax revenue to income would be high enough to move it over into the northeast quadrant. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="58ba682f-f3db-45ac-9e89-c0fa64295d45" data-type="core/paragraph" id="block-58ba682f-f3db-45ac-9e89-c0fa64295d45" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Hong Kong is another special case. For one thing, it is not an independent country, so it does not bear costs such as national defense and maintaining a full world-wide diplomatic presence. Also, as mentioned before, it seems likely that its high QoG rating is under threat from recent events.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="fd5b2a4d-8095-4184-acdf-5bc8ac326f99" data-type="core/paragraph" id="block-fd5b2a4d-8095-4184-acdf-5bc8ac326f99" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The other three East Asian countries highlighted in the northeast quadrant have a trait in common that tends to exaggerate the difference between the size of their governments and those of their European peers. Both the East Asian and the European countries that are highlighted in Figure 3 have high-quality, comprehensive health care systems, but they are financed differently. The European health systems are supported directly by taxes, so the costs of maintaining them are reflected in the share of government revenue in GDP. In contrast, their East Asian counterparts are based on compulsory private insurance. Replacing a tax with a mandatory premium paid to a private insurance company means that the stream of payments bypasses the government budget. But is there any real difference between a compulsory premium and a tax? Some might say there is not.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="eed6fa97-a0c7-463f-99e0-4a0b730362b1" data-type="core/paragraph" id="block-eed6fa97-a0c7-463f-99e0-4a0b730362b1" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Turning now to the southeast quadrant, we find countries that have large but low-quality governments. There are relatively few of these. In some, like Serbia and Ukraine, citizens pay higher-than-average taxes without getting much in return by way of quality government. Others, like South Sudan and Eritrea, display even worse governance without even the compensation of low taxes. China also falls into this quadrant, but is very close to the center.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="6ec016c0-57a6-4e31-89a3-0f1c1ad573f0" data-type="core/paragraph" id="block-6ec016c0-57a6-4e31-89a3-0f1c1ad573f0" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Finally, the southwest quadrant contains a large number of countries where taxes are low but the quality of government is low, too. Yemen, Haiti, and the Democratic Republic of Congo offer little for fans of small government to admire. Nigeria and a few others at least manage to make it above the trendline, showing slightly better governance than we would expect, given their poorly funded public sectors.</p></div><div aria-label="Block: Heading" class="wp-block block-editor-block-list__block has-selected-ui" data-block="5211c7f2-07df-41ce-bf51-66fe5da4ab26" data-type="core/heading" id="block-5211c7f2-07df-41ce-bf51-66fe5da4ab26" role="group" style="box-sizing: inherit; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><h2 aria-label="Write heading…" aria-multiline="true" class="rich-text block-editor-rich-text__editable" role="textbox" style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em 0px; white-space: pre-wrap;"><span style="box-sizing: inherit;"><span style="font-size: large;">Quality of government, human needs, and freedom</span></span></h2></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="10fd4bc3-461c-42cb-9da9-d4fad53a0877" data-type="core/paragraph" id="block-10fd4bc3-461c-42cb-9da9-d4fad53a0877" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">So far, this statistical portrait has focused on factors that tend to strengthen the institutional foundations of governance. However, quality of government is not an end in itself. Political theorists and activists throughout history have promised us that QoG is good because it makes life better. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="05beb804-1100-4e0e-b80a-7e152ce796d0" data-type="core/paragraph" id="block-05beb804-1100-4e0e-b80a-7e152ce796d0" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Rothstein investigates the material benefits of good government in Chapters 2 and 3 of his book. He concludes, both from his own analysis and from previous literature, that life is indeed better in many ways where quality of government is high. This section presents further evidence that basic human needs are better satisfied and personal freedom is greater where QoG is high. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="3d11275d-1664-4f0b-a892-cfb201973769" data-type="core/paragraph" id="block-3d11275d-1664-4f0b-a892-cfb201973769" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">The first step was to use the Legatum data set to construct a measure of the degree to which basic human needs are satisfied in a given country. In doing so, I was guided by <a href="https://www.simplypsychology.org/maslow.html" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Abraham Maslow’s hierarchy of needs</a>. Maslow proposed that human needs can be organized in a pyramid, beginning at the base with physiological needs like food and shelter, progressing to needs for safety and security, then love and belongingness, then self-esteem and esteem from others, and finally what he called “self-actualization,” by which he meant achieving one’s full potential. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="2a935f5d-ab4a-4f32-9403-c2dd22da5503" data-type="core/paragraph" id="block-2a935f5d-ab4a-4f32-9403-c2dd22da5503" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">My measure of basic needs focuses on needs in the two lowest levels of the Maslow hierarchy. Following the same statistical approach used to construct the QoG variable, I settled on a NEEDS variable that is the simple average of the following twelve elements from the Legatum data set:</p></div><div aria-label="Block: List" class="wp-block block-editor-block-list__block has-selected-ui" data-block="284f929e-b814-4f0d-b7de-b4b07ab9e53b" data-type="core/list" id="block-284f929e-b814-4f0d-b7de-b4b07ab9e53b" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><ol aria-label="Write list…" aria-multiline="true" class="rich-text block-editor-rich-text__editable" role="textbox" style="box-sizing: inherit; margin-bottom: 28px; margin-left: 1.3em; padding-bottom: inherit; padding-left: 1.3em; padding-right: inherit; padding-top: inherit; white-space: pre-wrap;"><li style="box-sizing: inherit; margin-bottom: initial;">Health care systems</li><li style="box-sizing: inherit; margin-bottom: initial;">Preventive interventions</li><li style="box-sizing: inherit; margin-bottom: initial;">Physical health</li><li style="box-sizing: inherit; margin-bottom: initial;">Longevity</li><li style="box-sizing: inherit; margin-bottom: initial;">Basic services</li><li style="box-sizing: inherit; margin-bottom: initial;">Connectedness</li><li style="box-sizing: inherit; margin-bottom: initial;">Material resources</li><li style="box-sizing: inherit; margin-bottom: initial;">Nutrition</li><li style="box-sizing: inherit; margin-bottom: initial;">Protection from harm</li><li style="box-sizing: inherit; margin-bottom: initial;">Shelter</li><li style="box-sizing: inherit; margin-bottom: initial;">Property crime</li><li style="box-sizing: inherit; margin-bottom: initial;">Violent crime</li></ol></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="46620647-655e-4b1a-8c9b-4404444b7007" data-type="core/paragraph" id="block-46620647-655e-4b1a-8c9b-4404444b7007" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">A regression of NEEDS on the log of GDP, QoG9, and the size of government yielded a coefficient of multiple correlation of 0.94, regardless of whether the share of government revenues or expenditures was used as the measure of the size of government. The coefficient on all of the independent variables was positive and statistically significant. (See the online appendix for details.) The partial correlation of NEEDS with QoG9, controlling for GDP and government expenditures, was a statistically significant 0.32 (p < 0.0001). The partial correlation of NEEDS with government expenditure, controlling for GDP and QoG9, was 0.28, also statistically significant but slightly lower than that for NEEDS and QoG9. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="1d6e573d-c2c4-4868-8016-b58cacbb590e" data-type="core/paragraph" id="block-1d6e573d-c2c4-4868-8016-b58cacbb590e" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">In short, the satisfaction of basic needs increases with higher quality and larger size of government; QoG has a significant independent effect on need satisfaction even when controlling for the effects of higher GDP and higher government expenditures; and QoG has a somewhat stronger effect on need satisfaction than size of government. All of these results are consistent with my own earlier research on the issue <a href="https://www.niskanencenter.org/freedom-government-part-one/" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">[1]</a> <a href="https://www.niskanencenter.org/quality-government-not-size-key-freedom-prosperity/" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">[2]</a>. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="538ba0ba-352a-4900-b9a5-de94228ceb13" data-type="core/paragraph" id="block-538ba0ba-352a-4900-b9a5-de94228ceb13" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">Turning now to personal freedom, the Legatum Prosperity Index contains its own measure, based on freedom of assembly and association; freedom of speech and access to information; absence of legal discrimination; social tolerance; and an element Legatum calls “agency,” which measures individual rights, freedom of movement, women’s rights, forced labor, and other indicators. For present purposes, I dropped the social tolerance element, partly because, in contrast to absence of legal discrimination, it appeared to be based more on cultural attitudes than on public policy, and partly because factor analysis suggested that social tolerance was less consistently associated with the freedom group than were the other four elements. That left me with a variable PFREE, which is the simple average of four Legatum elements:</p></div><div aria-label="Block: List" class="wp-block block-editor-block-list__block has-selected-ui" data-block="b49e3232-124b-4208-b741-2061433db8d1" data-type="core/list" id="block-b49e3232-124b-4208-b741-2061433db8d1" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><ol aria-label="Write list…" aria-multiline="true" class="rich-text block-editor-rich-text__editable" role="textbox" style="box-sizing: inherit; margin-bottom: 28px; margin-left: 1.3em; padding-bottom: inherit; padding-left: 1.3em; padding-right: inherit; padding-top: inherit; white-space: pre-wrap;"><li style="box-sizing: inherit; margin-bottom: initial;">Freedom of assembly and association</li><li style="box-sizing: inherit; margin-bottom: initial;">Freedom of speech and information</li><li style="box-sizing: inherit; margin-bottom: initial;">Absence of legal discrimination</li><li style="box-sizing: inherit; margin-bottom: initial;">Agency</li></ol></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="2e54de34-5bbc-400b-9158-70b04169c7a5" data-type="core/paragraph" id="block-2e54de34-5bbc-400b-9158-70b04169c7a5" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">For comparison, some readers may be familiar with a personal freedom index published by the <a href="https://www.cato.org/human-freedom-index-new" style="box-sizing: inherit; color: #007fac; outline: 0px; transition-duration: 0.05s; transition-property: border, background, color; transition-timing-function: ease-in-out;">Cato Institute</a>. For the 157 countries for which both the Cato personal freedom and my PFREE measure are available, the correlation coefficient is slightly over 0.90. That is no real surprise, since they are conceptually similar and share some of the same underlying indicators.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="91bb047a-35ea-47ca-8fff-4a53d335489d" data-type="core/paragraph" id="block-91bb047a-35ea-47ca-8fff-4a53d335489d" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">A multiple regression of PFREE on log GDP, QoG9, and a measure of the size of government gives a coefficient of multiple correlation of 0.79. It makes no difference whether expenditure or revenue is used as the indicator for size. The coefficients for log GDP and QoG9 are highly significant (p < 0.0001) while those for either measure of size are only marginally significant ( .01 < p < 0.05). The partial correlation of QoG9 with PFREE, controlling for log GDP and government expenditure, is 0.67, suggesting that quality of government is responsible for a substantial part of cross-country differences in personal freedom. The partial correlation of GREV with PFREE, controlling for log GDP and QoG9, is just 0.17, indicating that personal freedom increases as the size of government increases. That is still statistically significant, but it suggests that quality of government has a much stronger effect on personal freedom than does the size of government. That, again, is consistent with my earlier research.</p></div><div aria-label="Block: Heading" class="wp-block block-editor-block-list__block has-selected-ui" data-block="6d9fad91-68fa-4d8b-943f-ad3f562bde96" data-type="core/heading" id="block-6d9fad91-68fa-4d8b-943f-ad3f562bde96" role="group" style="box-sizing: inherit; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><h2 aria-label="Write heading…" aria-multiline="true" class="rich-text block-editor-rich-text__editable" role="textbox" style="box-sizing: inherit; color: inherit; line-height: 1.4; margin: 0.83em 0px; white-space: pre-wrap;"><span style="box-sizing: inherit;"><span style="font-size: large;">Conclusions</span></span></h2></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="0a9a2192-f905-46aa-8ac6-0f8459be5c4f" data-type="core/paragraph" id="block-0a9a2192-f905-46aa-8ac6-0f8459be5c4f" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">This statistical portrait reaches a number of conclusions about quality of government, as defined to include rule of law, integrity, and other measures of impartiality and competence. </p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="45e64339-19a6-4341-955b-8dfb49ba240f" data-type="core/paragraph" id="block-45e64339-19a6-4341-955b-8dfb49ba240f" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">We have seen that, on the whole, QoG tends to be higher in countries that are more democratic. To no one’s surprise, we have found that rich countries tend to be better governed than poor countries, although countries that are heavily reliant on natural resource wealth are distinct outliers in that regard. Finally, we have seen that better governments tend to be bigger, as measured by the size of their budgets relative to GDP. The data give little support to the idea that slashing government budgets is a reliable way to improve government quality.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="1788ea56-2340-4ced-9633-938f563885f1" data-type="core/paragraph" id="block-1788ea56-2340-4ced-9633-938f563885f1" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">We have also found that in key respects, life is better in countries that have high-quality governments, and even more so when those governments are both higher-quality and larger. That is true both when a “better life” is defined in terms of the satisfaction of basic human needs and when it is defined in terms of human freedom. In all these respects, the results are consistent with the preponderance of findings in previous literature in the subject, including my own earlier work.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="30391da2-a47f-455a-bcf2-43e4463294b5" data-type="core/paragraph" id="block-30391da2-a47f-455a-bcf2-43e4463294b5" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;">To put it succinctly, that government is best that governs best.</p></div><div aria-label="Block: Paragraph" class="wp-block block-editor-block-list__block has-selected-ui" data-block="21cbaebc-9ec7-4dbf-991d-b4af920c9b84" data-type="core/paragraph" id="block-21cbaebc-9ec7-4dbf-991d-b4af920c9b84" role="group" style="box-sizing: inherit; font-size: 16px; margin: 28px auto; max-width: 580px; outline: 0px; overflow-wrap: break-word; position: relative; transform-origin: center center; transform: none;" tabindex="0"><p aria-label="Paragraph block" aria-multiline="true" class="rich-text block-editor-rich-text__editable wp-block-paragraph" role="textbox" style="box-sizing: inherit; font-size: inherit; line-height: inherit; margin: 28px 0px; white-space: pre-wrap;"><em style="box-sizing: inherit;">Originally published by <a href="https://www.niskanencenter.org/quality-of-government-a-statistical-portrait/">Niskanen Center.</a> I would like to thank Niskanen Center intern Masud Alam for help in preparing this commentary.</em></p><div><em style="box-sizing: inherit;"><br /></em></div></div><div class="block-list-appender" style="box-sizing: inherit; font-size: 16px; outline: 0px;" tabindex="-1"></div></div></div></div></div></div><div style="background-color: white; box-sizing: inherit; color: #191e23; font-family: "Noto Serif"; font-size: 16px; outline: 0px; position: fixed;" tabindex="0"></div>Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com1tag:blogger.com,1999:blog-2938311055760665357.post-47103289893925082212020-07-13T11:58:00.000-07:002020-07-13T11:58:39.578-07:00New Research Boosts Our Understanding of the Effective Marginal Tax Rates for the Poor<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWKhcw3XKCoNeFlPTcjBI3hyX88f4O9igDz6_1cAfww5G1OdizME7Gq6j2KsrT1Z8zPnCsEvYw1heLdRMC03ozLIwNmcpyCyoW4A84crPMec5r3NiocFEovHPbuK_2ZjJaf-vog62sjHUP/s1600/P200708-1s.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="427" data-original-width="640" height="213" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWKhcw3XKCoNeFlPTcjBI3hyX88f4O9igDz6_1cAfww5G1OdizME7Gq6j2KsrT1Z8zPnCsEvYw1heLdRMC03ozLIwNmcpyCyoW4A84crPMec5r3NiocFEovHPbuK_2ZjJaf-vog62sjHUP/s320/P200708-1s.png" width="320" /></a></div>
<div class="MsoNormal">
Does the American welfare system adequately encourage the
poor to achieve self-sufficiency, or is it a “poverty trap” that locks welfare
beneficiaries into a lifetime of dependency? The question has been debated endlessly
with no clear win for either side. </div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
In large part, the dispute turns on a concept known as
the <i>effective marginal tax rate </i>(EMTR) faced by poor and
near-poor households. The EMTR is the percentage of any additional earned
income that a household pays in taxes or loses in government benefits. Critics
argue that high EMTRs leave little incentive to work, and even for those who do
work, they mean that their efforts do little to help them to lift their
disposable incomes above the poverty level. What is the point of getting a job
if taxes and benefit reductions are going to eat up 75 percent or more of your
earnings, even without figuring in expenses like child care, commuting, or work
clothes? Supporters of the existing welfare system argue that punitively high
EMTRs are rare. They emphasize that the current welfare system, despite its
flaws, does raise millions of families out of poverty.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Recent research revives the longstanding debate over EMTRs.
This commentary reviews studies that suggest that despite some changes for the
better, critical segments of the low-income population, especially those with
incomes close to and just above the poverty line, continue to face weak work
incentives. Simply expanding eligibility for existing welfare programs will not
fix the problem. As explained in the conclusion, a more effective approach to
mitigating the poverty trap would be to cash out and consolidate current
welfare programs, replacing them with a combination of universal income
supports, universal child benefits, and wage subsidies for the lowest-paid
workers.</div>
<a name='more'></a><o:p></o:p><br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Background: The hypothetical-household approach<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
One source of past disagreements over poverty and work
incentives has been what we can call a <i>hypothetical-household approach</i> to
calculating effective marginal tax rates. That approach begins by listing
specific benefits that a hypothetical household might receive and taxes that it
might pay as income changes. Suppose, for example, that a certain household
receives food stamps, subject to a benefit-reduction rate of 24 percent;
receives cash benefits, subject to a benefit-reduction rate of 30 percent; and
pays a 7 percent payroll tax. The EMTR for that household would be the sum of
the various marginal rates, in this case, 24+30+7=61 percent. After benefit reductions
and taxes, net income would increase by only $39 for each $100 earned. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A 2015 study from the <a href="https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/50923-marginaltaxrates.pdf">Congressional
Budget Office</a> illustrates the hypothetical-household approach. Figure
1, which is based on supplemental data from the CBO study, applies to a
hypothetical family of one parent and one child living in Pennsylvania in 2016.
The household participates in the Earned Income Tax Credit (EITC), Temporary
Assistance for Needy Families (TANF), SNAP (formerly food stamps), Medicaid,
the Children’s Health Insurance Program (CHIP), and, as its income rises beyond
the Medicaid level, ACA cost-sharing subsidies for health insurance. The example
also takes payroll and income taxes into account. The figure shows how the
household’s disposable income after taxes and transfers would vary as its
earned income changes.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKWGjvLlLqMo61hrtKyN4ij69F3FDYbwIRd_aqznUH0JbNHdTFxih1fjmYbGxfymm9zoPoKe3Dy4NAoLDQL87CL7n-CsQBhmU0c-xqEmgyR6qOBFzXKik9DlZ40IuwKm4sX9EzsMChoNfe/s1600/P200527-1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="457" data-original-width="498" height="293" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKWGjvLlLqMo61hrtKyN4ij69F3FDYbwIRd_aqznUH0JbNHdTFxih1fjmYbGxfymm9zoPoKe3Dy4NAoLDQL87CL7n-CsQBhmU0c-xqEmgyR6qOBFzXKik9DlZ40IuwKm4sX9EzsMChoNfe/s320/P200527-1.png" width="320" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="mso-no-proof: yes;"><v:shapetype coordsize="21600,21600" filled="f" id="_x0000_t75" o:preferrelative="t" o:spt="75" path="m@4@5l@4@11@9@11@9@5xe" stroked="f">
<v:stroke joinstyle="miter">
<v:formulas>
<v:f eqn="if lineDrawn pixelLineWidth 0">
<v:f eqn="sum @0 1 0">
<v:f eqn="sum 0 0 @1">
<v:f eqn="prod @2 1 2">
<v:f eqn="prod @3 21600 pixelWidth">
<v:f eqn="prod @3 21600 pixelHeight">
<v:f eqn="sum @0 0 1">
<v:f eqn="prod @6 1 2">
<v:f eqn="prod @7 21600 pixelWidth">
<v:f eqn="sum @8 21600 0">
<v:f eqn="prod @7 21600 pixelHeight">
<v:f eqn="sum @10 21600 0">
</v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:formulas>
<v:path gradientshapeok="t" o:connecttype="rect" o:extrusionok="f">
<o:lock aspectratio="t" v:ext="edit">
</o:lock></v:path></v:stroke></v:shapetype><v:shape id="Picture_x0020_12" o:spid="_x0000_i1028" style="height: 342.6pt; mso-wrap-style: square; visibility: visible; width: 373.8pt;" type="#_x0000_t75">
<v:imagedata o:title="" src="file:///C:/Users/Ed/AppData/Local/Temp/msohtmlclip1/01/clip_image001.png">
</v:imagedata></v:shape></span><o:p></o:p></div>
<div class="MsoNormal">
For this household, the EMTR is lowest in a range from 31 to
54 percent of the federal poverty level (FPL). In fact, the rate is actually a
negative 33 percent in that range, meaning that disposable income increases, on
average, by $1.33 for each extra dollar earned. The boost in income is due to
the bonus that the EITC gives to the lowest-paid workers. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The highest EMTRs and the weakest work incentives occur in a
range from 115 to 127 percent of the poverty level. In that range, the
household has reached the phaseout range of the EITC and is also subjected to
substantial benefit reductions for other programs. The EMTR is 80 percent, and
the family gains only 20 cents in disposable income for each dollar
earned. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Defenders of the current welfare system dismiss the
importance of such hypotheticals. For example, <a href="https://www.cbpp.org/research/federal-tax/it-pays-to-work-work-incentives-and-the-safety-net">Isaac
Shapiro and colleagues</a> from the Center for Budget and Policy
Priorities (CBPP) maintain that extreme EMTRs are worst-case scenarios that
apply to only a small fraction of households who receive an unusual combination
of government benefits. Even then, they apply only in certain narrow income
ranges. By their calculations, fewer than 3 percent of families with incomes
below 150 percent of the poverty line are subject to EMTRs as high as 80
percent.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Who is right here? New research that overcomes the
limitations of the hypothetical-household model provides some answers.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>The real-household approach</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The new body of research shifts the focus from hypothetical
households receiving an assumed set of programs to real households and the
programs they actually participate in. Studies based on the <i>real-household
approach</i> acknowledge that poor households vary in many ways:<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l2 level1 lfo1; tab-stops: list .5in;">Characteristics
like the number of children and state of residence that determine the
programs for which they qualify.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l2 level1 lfo1; tab-stops: list .5in;">The
degree to which they actually participate in those programs.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l2 level1 lfo1; tab-stops: list .5in;">Their
earnings and other factors that determine the benefits they receive from
the programs in which they participate.<o:p></o:p></li>
</ul>
<div class="MsoNormal">
The real-household approach both recognizes these variations
and accounts for the number of families that fall into each category.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A <a href="https://aspe.hhs.gov/marginal-tax-rate-series">series of marginal tax
rate briefs</a> published by the Department of Health and Human Services
in 2019 illustrates the real-household approach. For example, the second brief
in the series focused on 24 million households with children, whose incomes
were less than 200 percent of the poverty line. Among its findings:<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l0 level1 lfo2; tab-stops: list .5in;">Median
EMTRs increased with income, starting at -22 percent for those with
incomes less than 24 percent of the federal poverty level (FPL) and
peaking at 51 percent for those with incomes of 100 to 124 percent of FPL.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo2; tab-stops: list .5in;">There
was wide variation in the combinations of programs for various households.
For example, the most common combination, SNAP + EITC + Child Tax Credits
(CTC) + Medicaid/CHIP, accounted for just 12.5 percent of poor households
with children. <o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo2; tab-stops: list .5in;">Different
combinations of programs produced different median EMTRs. For example, the
most common combination for poor households with children produced a
median EMTR of 42 percent. Adding housing benefits to that combination
raised the EMTR to 63 percent, but that combination applied to only 1.6
percent of such households.<o:p></o:p></li>
</ul>
<div class="MsoNormal">
These findings are an improvement over the
hypothetical-household model. They support the contention that we should be
cautious about drawing conclusions from examples based on relatively rare
combinations of program participation. However, they leave a lot unsaid. The
HHS results only whet our appetite for information about the full distribution
of EMTRs above and below the medians, the effects of other benefit and tax
programs not included in the studies, and the variations in EMTRs from state to
state. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Extending the real-household approach <o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Another study, published even more recently, sheds light on
all these matters. That study comes from <a href="https://kotlikoff.net/wp-content/uploads/2020/05/Marginal-Net-Taxation-of-Americans-Labor-Supply-NBER-PDF.pdf">David
Altig, Alan Auerbach, Laurence Kotlikoff, Elias Ilin, and Victor Ye.</a> Like
the HHS researchers, Altig et al. follow a real-household approach. They
take into account the observed frequency with which households of various
structures participate in specific welfare programs. However, they go beyond
the HHS studies in three important respects:<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l3 level1 lfo3; tab-stops: list .5in;">They
consider a larger number of benefit programs and taxes, including premium
subsidies under the ACA, a significant omission from the HHS studies. The
complete list is given in Figure 2.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l3 level1 lfo3; tab-stops: list .5in;">They
explore the dispersion of EMTRs within household types as well as their mean
and median values.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l3 level1 lfo3; tab-stops: list .5in;">They
calculate both current-year EMTRs, which show how income changes affect
taxes and benefits in a given year, and lifetime EMTRs that reflect how an
increase in current-year income affects net taxes in the future.<o:p></o:p></li>
</ul>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj96jTho_sjxmJq_U_PjlJOM-kmpVv5toG-vm0Y6N_ekzTJ0HHYRU-BHx2MDu8VYzD1l0A5Onkm5R-cMnvDv29t-b0I0gaz-CVghtuyJKu4TwUY7-8JuJ2HgV6XqcKuMiLrKwQSo9K_sJPk/s1600/P200530-1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="592" data-original-width="1008" height="232" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj96jTho_sjxmJq_U_PjlJOM-kmpVv5toG-vm0Y6N_ekzTJ0HHYRU-BHx2MDu8VYzD1l0A5Onkm5R-cMnvDv29t-b0I0gaz-CVghtuyJKu4TwUY7-8JuJ2HgV6XqcKuMiLrKwQSo9K_sJPk/s400/P200530-1.png" width="400" /></a></div>
<div>
<br /></div>
<div class="MsoNormal">
The EMTRs are computed using a previously developed model
that the authors call <a href="https://kotlikoff.net/wp-content/uploads/2019/03/Online-appendix-6-5-19-.pdf">The
Fiscal Analyzer</a>. The analyzer is described as “a life-cycle,
consumption-smoothing tool that incorporates borrowing constraints and all
major federal and state fiscal policies.” The data fed into it come from the
Fed’s 2016 <a href="https://www.federalreserve.gov/econres/aboutscf.htm">Survey
of Consumer Finances</a>, which includes information on balance sheets, incomes
(including government benefits received), pensions, and demographic
characteristics for a random sample of households. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="mso-no-proof: yes;"><v:shape id="Picture_x0020_11" o:spid="_x0000_i1027" style="height: 274.8pt; mso-wrap-style: square; visibility: visible; width: 468pt;" type="#_x0000_t75">
<v:imagedata o:title="" src="file:///C:/Users/Ed/AppData/Local/Temp/msohtmlclip1/01/clip_image002.png">
</v:imagedata></v:shape></span><o:p></o:p></div>
<div class="MsoNormal">
Altig et al. calculate current-year EMTRs for an assumed
$1,000 addition to current-year income. The current-year EMTR is the change in
net taxes (that is, the change in taxes paid minus the change in benefits
received) in the current year divided by the change in income. The calculation
of lifetime EMTRs is more complex. The first step is to estimate how the extra
$1,000 of current-year income will affect lifetime taxes and resources,
including the effects of saving on future income, wealth, and taxes paid, as
well as the effect those changes in future income and wealth will have on
future benefits received. The second step is to calculate the present values of
those future taxes and resources. Finally, the lifetime EMTR is calculated as
the change in the present value of net taxes — including taxes paid in the
current year — divided by the change in current-year income.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
If the household does not consume its entire income each
year, any current-year saving increases future income and wealth, leading to
what the authors call “double taxation.” By that term, they mean that the
household pays taxes on its income in the year it is earned and pays additional
taxes or experiences reduced benefits in future years due to its accumulated
savings. Because of double taxation, lifetime EMTRs are always greater than
current-year EMTRs.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Median EMTRs vary remarkably little across income quintiles
when calculated using this approach. As Figure 3 shows, the distribution of
EMTRs is slightly U-shaped, with lower values for the second, third, and fourth
income quintiles than for the first or fifth. The U-shape is more pronounced for
lifetime than for current-year EMTRs. For both the lifetime and current-year
cases, however, EMTRs are lower for the top 1 percent of all U.S. households
than for the top 5 percent. The bars in both parts of the graph average EMTRs
across all age groups in a given income group.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8BUKD_1Q_WmlsSq9vbRdZ69i4feUUWBTd_izwo6-orwUte4Y0L7Kr3ILKQYNIbAocFNTPBzGkZpRukZDDKvGc6rf_Ju1xtSwRIvJw4_PsPOHyLmTU8FwbjbaDdYuioA5oHK-HxGKXy5be/s1600/P200530-2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="378" data-original-width="881" height="171" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8BUKD_1Q_WmlsSq9vbRdZ69i4feUUWBTd_izwo6-orwUte4Y0L7Kr3ILKQYNIbAocFNTPBzGkZpRukZDDKvGc6rf_Ju1xtSwRIvJw4_PsPOHyLmTU8FwbjbaDdYuioA5oHK-HxGKXy5be/s400/P200530-2.png" width="400" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="mso-no-proof: yes;"><v:shape id="Picture_x0020_10" o:spid="_x0000_i1026" style="height: 165pt; mso-wrap-style: square; visibility: visible; width: 384pt;" type="#_x0000_t75">
<v:imagedata o:title="" src="file:///C:/Users/Ed/AppData/Local/Temp/msohtmlclip1/01/clip_image003.png">
</v:imagedata></v:shape></span><o:p></o:p></div>
<div class="MsoNormal">
For present purposes, one of the most striking findings of
the Altig study is the wide dispersion of EMTRs within the lowest 20 percent of
the population. That quintile is critically important for any discussion of
poverty policy. As of 2019, it consisted of households with incomes less than
$26,840, thereby including all officially poor households with four or fewer
members – 91 percent of all poor households. The quintile also includes some
non-poor households with three or fewer members.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Figure 4 divides EMTRs into percentiles within the
lowest-income quintile. It shows that a quarter of these lowest-quintile
households face current-year EMTRs higher than 59 percent. For them, taxes and
benefit reductions wipe out three-fifths or more of any income earned in the
current year. <o:p></o:p></div>
<div class="MsoNormal">
What is more, any saving by such households is penalized.
Unless the household spends its entire income in the year it is received,
double taxation takes a further bite from lifetime income. The lifetime EMTR is
74 percent for the highest-taxed segment of these households. When double
taxation is considered, at least three-quarters of any extra income
earned by this group in the current year is sooner or later clawed back either
through taxes or benefit reductions.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjG1UgzxaFEIlJy4aRaoP-Y7HyE4f7Cq_4YDzp7l60EEuP9uZ3nfK9ZTwYgMmdQi9T6tp9SO7HR2QsQeDspM8B6QQSlsW5UCYpPrb49VF-gBYKpyJP9chfzNBFjvHeU1PcgxduwElP5MIFD/s1600/P200530-3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="206" data-original-width="470" height="140" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjG1UgzxaFEIlJy4aRaoP-Y7HyE4f7Cq_4YDzp7l60EEuP9uZ3nfK9ZTwYgMmdQi9T6tp9SO7HR2QsQeDspM8B6QQSlsW5UCYpPrb49VF-gBYKpyJP9chfzNBFjvHeU1PcgxduwElP5MIFD/s320/P200530-3.png" width="320" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
For the calculation of short-term work incentives, the
current-year EMTR is probably the more important rate. However, when it comes
to the broader concept of a poverty trap, lifetime EMTRs also play a role. A
high lifetime EMTR means that even people who work year after year at low-wage
jobs, and save whatever they can, will find it harder over time to work their
way permanently out of poverty.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="mso-no-proof: yes;"><v:shape id="Picture_x0020_9" o:spid="_x0000_i1025" style="height: 154.8pt; mso-wrap-style: square; visibility: visible; width: 352.8pt;" type="#_x0000_t75">
<v:imagedata o:title="" src="file:///C:/Users/Ed/AppData/Local/Temp/msohtmlclip1/01/clip_image004.png">
</v:imagedata></v:shape></span><o:p></o:p></div>
<div class="MsoNormal">
Note that for both the current-year and lifetime measures,
the mean EMTR is greater than the median. That reflects the fact that poor
households in the high-EMTR tail of the distribution face “cliff effects,”
meaning that they lose certain benefits all at once when they reach a certain
earnings threshold. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Do EMTRs really matter?<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
In addition to the controversy over how widespread high
EMTRs are, there is a further controversy over whether high EMTRs really
matter. Altig et al. are careful to avoid that issue. “We seek to understand
Americans’ work disincentives, not the response to those disincentives, a task
we leave for future research,” they write. I agree that labor market behavior
is a complex issue, too much so to treat fully here. At the same time, though,
it is too important to leave without making a few points, which I hope to
follow up on in future commentaries.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Shapiro and his CBPP colleagues take the position that EMTRs
don’t make much difference. Citing a 2011 article by <a href="https://www.irp.wisc.edu/publications/dps/pdfs/dp139211.pdf">Yonatan
Ben-Shalom, Robert Moffitt, and John Karl Scholz</a>, written for the Oxford
Handbook of the Economics of Poverty, they write that “the behavioral response
[to high EMTRs] is small enough, in aggregate, that it has almost no impact on
the substantial degree to which the safety net lifts people out of poverty.”<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Ben-Shalom et al. pose the question in a very specific way,
asking how safety-net programs affect low-income families’ behavior relative to
a counterfactual situation in which such programs do not exist at all. They
carefully review research that bears on this question and find little evidence
that the welfare system in aggregate has major effects on work effort. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
However, in a <a href="http://www.econ2.jhu.edu/people/Moffitt/USSafetyNetWorkIncen.pdf">2016
follow-up</a>, Moffitt adds several important qualifications. He notes that
although work disincentives are relatively small for individual programs, they
can be significant for those who benefit from multiple programs. Although
Moffit doubted that there were enough such families to matter much, the
real-household research reviewed above, not available at the time, suggests
that such cases are far from rare. Secondly, Moffit warns that “work incentives
are more of an issue for families with higher incomes who, when working more,
face both the loss of traditional safety net benefits as well as a phaseout of
[EITC] tax credits.” He concludes that the welfare system as a whole “is doing
very little at the moment to help families help themselves, and this is where
policy could be markedly improved.”<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Moffit adds that aggregate behavioral responses to work
disincentives are difficult to detect statistically because other determinants
of whether a low-income family works swamp the effects of EMTRs. I certainly
agree. Improving our knowledge of how EMTRs are distributed across real
households, as recent research has done, is one step toward reducing the
statistical noise. Still, many other factors also cause variations in the
way individuals respond to the incentives and disincentives inherent in welfare
programs.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The availability of jobs, which varies from place to place
and with the state of the business cycle, is obviously one such factor. Also,
as I have emphasized repeatedly in discussions of <a href="https://www.niskanencenter.org/expanded-work-requirements-in-non-cash-welfare-programs/">work
requirements for noncash welfare</a> and <a href="https://www.niskanencenter.org/the-economics-of-a-job-guarantee-how-great-is-the-need/">guaranteed
jobs proposals</a>, in boom or bust, many of the poor fall into the category of
“hard-to-employ.” These include not only people with little education or job
training, but also those with criminal records, unstable housing, substance
abuse issues, family situations that interfere with regular work schedules,
borderline mental and physical conditions that fall short of actual disability,
and other problems that make it hard to hold a job. Many such people do
repeatedly seek and find work, but their spells of employment are irregular and
often end on a sour note. It is little wonder that small, or even large,
variations in EMTRs have limited effect on their labor-market participation. It
is no surprise that the many hard-to-employ persons in the welfare population
muddle the results of statistical studies.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Statistical results aside, what really bothers me about high
EMTRs is the perverse selectivity with which they reach the highest levels for
the very people who are most likely to respond to labor-market incentives.
Hypothetical- and real-household studies agree that people with incomes from
zero to half of the poverty level – people who work only part-time or only
intermediately, and at low-wage jobs with minimal chance of advancement –
typically face EMTRs that are low or even negative. But if you show enough
stick-to-it-iveness to work full-time at a minimum wage job, or to hold a
steady part-time job at twice the minimum wage, you hit a dead zone. There,
taxes and benefit reductions take the largest possible bite out of anything you
would earn by working extra hours, or seeking a promotion, or making the change
to a different job that might have short-term inconveniences, but would achieve
long-term rewards. To me, piling penalty-rate EMTRs of 60, 70, and even 80
percent on exactly these people – those on the verge of achieving real
self-sufficiency but not quite there yet – is the very essence of the poverty
trap.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
It is also worth noting that the relatively low EMTRs that
many households face are due not to good design of existing welfare programs,
but rather, to the failure or inability of many ostensibly eligible families to
enroll in them. That is partly due to the fact that childless households have
limited access to the largest income-support program, the EITC. But eligibility
is not the whole story. It is <a href="https://www.ncsl.org/research/labor-and-employment/earned-income-tax-credits-for-working-families.aspx">estimated</a> that
at least 20 percent of families that are eligible for the program do not
actually participate. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Nonparticipation is an even bigger problem for some other
programs. For example, the <a href="https://www.urban.org/sites/default/files/publication/100521/what_was_the_tanf_participation_rate_in_2016_0.pdf">Urban
Institute</a> found that only a quarter of all families that were eligible
for TANF in 2016 participated – a rate that had fallen by more than 40
percentage points since the program’s first full year of operation in 1997.
Reasons for nonparticipation ranged from difficulty in navigating the welfare
bureaucracy to strict enforcement of work requirements to drug testing. Section
8 housing vouchers are also notoriously hard to get, even for qualifying
families. A guide from the nonprofit journalism group <a href="https://www.propublica.org/article/what-you-need-to-know-about-how-section-8-really-works">ProPublica</a> details
the difficulties people encounter with waiting lists, documentation, and
finding an apartment once a voucher is in hand. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Advocates for the poor regularly lament these high
nonparticipation rates, and rightly so. If TANF and housing vouchers were
actually accessible to all who met the formal eligibility requirements, and if
EITC were open to childless households, those programs would lift far more
people to a decent standard of living. But ironically, without other reforms,
wider participation in existing welfare programs would significantly increase
the number of households facing punitively high EMTRs. It would reduce measured
poverty, but at the same time, it would make it even harder for low-wage
working families to make those crucial transitions from poverty to permanent
self-sufficiency, and </div>
<div class="MsoNormal">
then on to the middle class. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>What should we do?<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Can anything be done about the poverty trap? Should we even
try? <o:p></o:p></div>
<div class="MsoNormal">
Shapiro and the CBPP group do not paint a very optimistic
picture of the potential for change. As they put it, <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
there are really only two options [for] lowering marginal
tax rates. One is to phase out benefits more slowly as earnings rise; this
reduces marginal tax rates for those currently in the phase-out range.
But it also extends benefits farther up the income scale and increases costs
considerably, a tradeoff that many policymakers may not want to make. The
second option is to shrink (or even eliminate) benefits for people in poverty
so they have less of a benefit to phase out, and thus lose less as benefits are
phased down. This reduces marginal tax rates, but it pushes the poor families
into — or deeper into — poverty and increases hardship, and thus may harm
children in these families. In effect, the second option would “help” the
poor by making them worse off.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
In my view, however, there is a third way. Whether or not it
represents a choice that policymakers are ready to make today or tomorrow, it
deserves to be placed on the table as a desirable goal toward which to work.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The third way to fight the poverty trap is neither to
increase nor to reduce benefits within the existing system, but rather, to
defragment that system and then to rebuild it. As Moffit points out, the most
daunting EMTRs are not due to high benefit-reduction rates in any individual
program. Rather, they are attributable to the perverse interactions of
multiple programs, each uncoordinated with the others, giving rise to
overlapping phase-out ranges, and sometimes to abrupt eligibility cliffs.<o:p></o:p></div>
<div class="MsoNormal">
That being the case, the path to successful reform should
begin by cashing out in-kind programs that cater to specific needs like food,
housing, winter heating, telephone, internet, and the like. Those should then
be consolidated with existing cash assistance programs such as TANF to achieve
what I call a system of <a href="https://www.niskanencenter.org/a-social-safety-net-for-an-age-of-uncertainty/"><i>Integrated
Cash Assistance</i></a> (ICA). ICA, together with some separate program to
guarantee <a href="https://www.niskanencenter.org/universal-catastrophic-coverage/">universal
affordable access to healthcare</a>, would become the twin pillars of a new,
comprehensive social safety net. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Within the ICA, cash benefits would be subject to a single
income-dependent schedule free of overlapping phaseout zones and cliffs. The
punitively high EMTRs that many poor households face today, especially those at
the critical margin between dependency and self-sufficiency, would be a thing
of the past.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
ICA is a concept, not a rigid formula. There would be
considerable room for flexibility in designing the ICA benefit schedule.
Subject to the usual exigencies of negotiation and coalition-building, the
schedule could include:<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; tab-stops: list .5in;">An
unconditional minimum benefit regardless of labor-market status.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; tab-stops: list .5in;">Wage
supplements for low-wage workers similar to the phase-in range of the
EITC.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; tab-stops: list .5in;">A
gradual phaseout of benefits beginning at some point beyond the poverty
level, similar to a negative income tax.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; tab-stops: list .5in;">Equal
benefits for people regardless of age, or if preferred, a separate benefit
schedule for children.<o:p></o:p></li>
</ul>
<div class="MsoNormal">
Could we afford it? That is the wrong question. ICA has no
inherent price tag. Its cost, like the details of its benefit schedule, would
be subject to political decisions. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
As a starting point for discussion, I have described a
baseline ICA that would cost no more than what is now spent on the various
income-support programs it would replace. Such a baseline ICA would provide a
minimum benefit roughly equal to half the FPL – an income level that the Census
Bureau calls “deep poverty” – and would include modest wage subsidies and child
allowances. It would provide stronger work incentives over its entire range
than those faced by low-income households today. Despite its modest minimum
benefit, it would raise a considerably higher fraction of low-income households
out of poverty than does the current welfare system.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
When we look at our current welfare system honestly in the
light of the latest research, the picture is not a pretty one, but we should
not give way to despair. There are better alternatives, if we are willing to
work toward them. Even if we cannot get there in a single leap, incremental
changes that are consistent with an overall ICA-like vision can move us in the right
direction.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<i>Reposted from <a href="https://www.niskanencenter.org/new-research-revives-debate-over-a-poverty-trap/">NiskanenCenter.org</a>. Photo courtesy of <a href="https://pixabay.com/photos/trouser-pockets-empty-jeans-1439412/">Pixabay.com.</a></i></div>
<div class="MsoNormal">
<i><br /></i></div>
<div class="MsoNormal">
<br /></div>
<br />Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com4tag:blogger.com,1999:blog-2938311055760665357.post-73879424422031127932020-06-15T12:02:00.000-07:002020-06-15T12:02:11.417-07:00It's Time to End the Preference and Tax Capital Gains as Ordinary Income<br />
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAHIPuFGpvjDNRy1m0xypyt8sLDbRVF3d7DHj1pA6ITFQycp1EKg3HgmKn1LcdCXvYWH8T67UbEqgj7AOmb2SP-9_m9BxfubyLY1jCdWcQ2MKfQ7uUB6i1qalNa2Q_2LzKCpGPtAqbmTA5/s1600/P200611-1s.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="648" data-original-width="741" height="279" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAHIPuFGpvjDNRy1m0xypyt8sLDbRVF3d7DHj1pA6ITFQycp1EKg3HgmKn1LcdCXvYWH8T67UbEqgj7AOmb2SP-9_m9BxfubyLY1jCdWcQ2MKfQ7uUB6i1qalNa2Q_2LzKCpGPtAqbmTA5/s320/P200611-1s.jpg" width="320" /></a></div>
<br />
<div class="MsoNormal">
The United States entered the COVID-19 crisis with an
unusually large budget deficit for an economy at or close to full employment.
Even if employment, output, and growth were to recover quickly to where they
were at the end of 2019 (something that is <a href="https://www.niskanencenter.org/how-fragility-of-household-wealth-threatens-the-economic-recovery/" target="_blank">far from certain</a>), the deficit, under current law, will
remain large.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The good news is that interest rates are likely to remain
well below the rate of GDP growth for the foreseeable future, as they have
since the beginning of the century. As long as that remains the case, <a href="https://www.niskanencenter.org/macroeconomic-implications-of-the-cares-act/" target="_blank">there is no danger</a> of an “exploding debt” scenario in
which a large but constant federal deficit causes debt to grow without limit as
a share of GDP. At this point, the greatest danger to the recovery is premature
austerity. Still, as the recovery proceeds, we are sure to hear it argued on
both economic and political grounds that the deficit should be reduced.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
At that point, the search will be on for ways to close the
budget gap. Although everyone will roll out their favorite spending cuts, much
of the heavy lifting is going to have to come on the revenue side of the
budget. As former Trump adviser Gary Cohn put it recently, talking to
CNN’s <a href="http://transcripts.cnn.com/TRANSCRIPTS/2005/24/fzgps.01.html" target="_blank">Fareed Zakaria</a>,</div>
<blockquote class="tr_bq">
Our next Congress, the Congress that sits down in 2021,
almost has to sit down and look at our spending and our revenue side. … How we
spend money? There are a lot of places where we could cut back. In addition to
that, I think they have to look at our tax system and think of ways that we
raise revenue.</blockquote>
<div class="MsoNormal">
No area of the tax code is more ripe for reform than the
preferential treatment given to capital gains. While incomes from wages and
salaries face a maximum tax rate of 37 percent, capital gains on assets held
for more than a year, in most cases, are taxed at a maximum rate of just 20
percent.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
The benefits of the capital gains tax preference <a href="https://www.taxpolicycenter.org/briefing-book/how-are-capital-gains-taxed" target="_blank">flow predominantly to the rich</a>. Some 70 percent of the
benefits go to taxpayers with annual incomes of $1 million or more, who enjoy
annual benefits of $145,000 each. Benefits for households with incomes of
$50,000 or less average about $10. For years, backers have tried to find
broader justifications for this tax break, contending that benefits to the few
somehow trickle down to the rest, but their efforts are less than convincing.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Here are some of the many issues raised by the capital gains
tax preference, and the many reasons why its elimination should be at the top
of the list in the search for additional sources of federal revenue.</div>
<a name='more'></a><o:p></o:p><br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Are capital gains really income?</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
One argument for lenient tax treatment is that even if
income is to be taxed, capital gains are not income at all, but only a
reflection of a transfer of ownership of an existing asset. If we want assets
to come under the control of those who can put them to best use, say defenders
of the preference, we should not erect barriers to their purchase and sale. Just
as we tax labor income when it is paid out to workers, we should tax capital
income only when it is paid out as interest, dividends, royalties, or whatever,
but not when ownership of an asset is transferred from one party to another.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
That might make sense if it were possible to distinguish
cleanly between income and capital gains, but it is not. Instead, it is all too
easy to transform income from almost any source into something that looks like
a capital gain.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Consider a fanciful example: I make a contract with my wife
to supply 2,000 hours of labor over the coming year for a payment of $2,000.
Under the terms of the contract, she can, if she wants, call on me to use those
hours in any way she wants. She could ask me to mow the lawn and make lasagna
for dinner, but she could also sell the local university an option that would
allow it to buy my services at the same $2,000 she paid for them. The
university willingly pays her $95,000 for the option, which is a good deal for
them since they would otherwise have had to pay me $100,000 to teach my quota
of courses. When we file our joint tax return come April 15, we will be taxed
at the capital gains rate on my wife’s $95,000 income from the option sale,
while I report ordinary income of $2,000. Our before-tax income is a little
lower than it otherwise would be, but our total taxes are a lot lower.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Although this example seems absurd, the real world is full
of situations where businesses can do much the same — structure a transaction
to make it look like a capital gain instead of ordinary income. In fact, <a href="https://www.spe1031.com/Exchange-Basics/Transactions-In-Connection-With-Exchanges/Capital-Gains-Planning" target="_blank">one law firm</a> advertises an options-based strategy
exactly like that described above, except that it is used to shelter income
from real estate rather than from labor. Choices like organizing a firm as a
partnership instead of a corporation, paying executives with stock options
instead of a salary, or imaginatively structuring a real estate deal can also
convert ordinary income to capital gains. The strategies are endless.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
One of the most controversial ploys is the <a href="https://www.taxpolicycenter.org/briefing-book/what-carried-interest-and-should-it-be-taxed-capital-gain" target="_blank">carried interest rule</a>, which allows hedge fund and
private-equity managers to structure the income they receive for their services
in a form that qualifies for taxation as capital gains. Even some commentators
who are otherwise enthusiastic about lenient taxation of capital gains draw the
line at carried interest. For example, <a href="http://www.thedailybeast.com/articles/2012/01/17/the-right-way-to-tax-mitt-romney.html" target="_blank">David Frum</a>, who thinks a lower tax rate for capital gains
is good policy, agrees that the rule is “utterly unjustifiable. If you’re
investing with other people’s money,” he says, “What you are earning is income
— and it should be taxed as such.” The 2017 Tax Cuts and Jobs Act, which
slashed the corporate tax rate, was supposed to close the carried interest
loophole, but it ended up making only minor modifications. For the most
part, <a href="https://www.pionline.com/article/20180319/PRINT/180319865/carried-interest-lives-on-despite-tax-reform" target="_blank">say tax analysts</a>, the rule lives on.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Tax avoidance strategies that convert ordinary income to
capital gains would be a problem even if they did nothing but generate
inequities and reduce federal revenues, but that is not the whole story. Such
strategies may require more than just waving an accountant’s wand over
something a firm would do anyway. Instead, structuring transactions to take
advantage of specific tax rules often requires changing actual business
practices, such as the choice of financing methods, the timing of investments,
even the choice of one’s whole line of business. Often, the changes would be
unprofitable except for their tax advantages. Although proponents of the
capital gains preference claim it supercharges growth and efficiency,
tax-induced changes in business practices are a significant drag on the real
economy.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Do we need a capital gains preference to correct for
inflation?</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
A second argument used by supporters is that we need low tax
rates on capital gains to avoid taxing “phantom” gains produced by inflation.
The argument is superficially plausible. When there is inflation, asset owners
may be taxed on nominal gains even when real asset values do not increase.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
For example, suppose you buy some shares of stock at $100
and sell them for $120 a couple years later. Inflation has meanwhile pushed up
the cost of living by 10 percent. That leaves you with an inflation-adjusted
pretax gain of just $10. If you pay 37 percent tax as ordinary income on the
$20 nominal gain, your tax rate on the $10 real gain is 74 percent. Cutting the
rate on nominal capital gains to 20 percent reduces the real rate to 40 percent
— not quite enough even to fully level the playing field, but a move in the
right direction, it would seem.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
But there are two flaws in that argument.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
First, any arbitrary rule, such as a fixed lower tax rate or
an exclusion of a portion of capital gains, can only crudely approximate the
necessary adjustment for inflation. The 20 percent rate that is close to right
in the example we just gave becomes too low if inflation slows (as it has in
recent years). If inflation instead accelerated, it would become too high. Second, the rate that just levels the playing field for a person in one
tax bracket could be too high or too low for those in other brackets.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A more nuanced approach would be to index the basis on which
capital gains are calculated to reflect actual inflation between purchase and
sale. That would avoid the taxation of phantom capital gains, but not a second,
equally serious problem: Other forms of investment income, too, are subject to
phantom taxation when there is inflation.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Suppose, for example, that in a zero-inflation world,
borrowers would offer a 5 percent coupon rate on top-rated corporate bonds. If
the rate of inflation rises to 5 percent, borrowers would be willing to offer a
10 percent nominal coupon rate on the bond, since they know they will be able
to pay future interest and principle in less valuable dollars. The 10 percent
nominal rate leaves your real return and their real interest cost at 5 percent.
So far, so good. But suppose now that you are subject to a 20 percent tax on
your interest income. In the zero-inflation case, your interest income after
tax is 4 percent. In the inflationary case, you have to pay tax on the whole 10
percent nominal rate, leaving you an 8 percent nominal return after taxes. When
you subtract 5 percent inflation, that 8 percent nominal return becomes just 3
percent. In short, even if borrowers adjust nominal interest rates to fully
reflect inflation, inflation increases the effective tax rate on bondholders.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The situation would be similar for income from the common
stock of a firm that has constant real profit, from which it pays a constant
fraction in dividends. Faster inflation would increase the real effective rate
of taxation on the dividends.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A helpful 1990 paper from the <a href="https://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/77xx/doc7773/90-cbo-041.pdf" target="_blank">Congressional Budget Office</a> explores the problem in
detail. The paper confirms that faster inflation raises the effective tax rate
on investment income, but it points out that the effect is inherently smaller
for capital gains than for dividend or interest income. Attacking the problem
of phantom capital gains in isolation by whatever means — a preferential
capital gains rate, an exclusion, or indexation — only widens the gap between
the way inflation affects capital gains and the way it affects interest and
dividends. Doing so increases the attractiveness of tax avoidance strategies
that involve inefficient business practices.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The ideal solution to distortions caused by inflation would
be to index the entire tax system. Indexation would have to cover not only all
forms of investment income, but also taxation of ordinary income, real estate,
inheritance, and everything else. But trying to remove the effect of inflation
on capital gains taxes separately is likely to make things worse, not better.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Do we need the preference to avoid double taxation of
corporate profits?</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
“Double taxation” of corporate profits is a third common
argument in defense of lenient tax treatment of capital gains. The idea is that
corporate profits are taxed once at the business level and then again at the
individual level when they are paid out as management bonuses, dividends, or
capital gains.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
It is true that a preferential rate on capital gains would
be one way to attack the distortion — one way, but a bad one. A much better way
would be to fix the flaws in corporate taxes that are the source of the problem
rather than apply a Band-Aid to capital gains.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Actually, part of the job was done in the 2017 Tax Cuts and
Jobs Act, which lowered corporate tax rates across the board. A further step
would be to get rid of the numerous loopholes in the corporate tax system that
allow a big chunk of corporate profit to escape taxation altogether while those
unlucky enough not to qualify pay much more.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
But the 2017 corporate tax cut left a key part of the job
unfinished. If we want to enjoy the potential efficiency benefits of corporate
tax reform, those taxes should not just be reduced; at the same time they
should be shifted to the individual incomes of the managers and shareholders
who are the ultimate recipients of corporate profits. To do that would require
eliminating the capital gains preference. A regime that had no corporate income
tax and full taxation of profits, whether earned by shareholders as capital
gains, dividends, or in any other form, would eliminate double taxation once
and for all without an unfair redistribution of the overall burden of taxation.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>The lock-in effect</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The “lock-in” effect is a final problem with capital gains
taxation. As the tax is currently administered, people do not have to pay
capital gains on an asset until it is sold. As a result, the after-tax return
on an appreciating asset increases the longer it is held.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Compare a bond that pays a steady interest income every year
to a stock that increases in value by the same amount each year. Over time, the
effective tax rate on the stock would be lower even if the statutory tax rate
were the same on both interest income and capital gains. The reason is that
bondholders have to pay their tax year by year, while stockholders can defer
payment of the tax until they sell their shares, possibly many years later.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Moreover, if people still have not sold their stock or other
assets when they die, their heirs never have to pay taxes on the capital gains
at all. Instead, the value of the assets is “stepped up” to the market value at
the time of the original purchaser’s death. In the meantime, the original
owners can live quite well by borrowing against the value of the assets. When
they die, their heirs can sell enough shares to pay off the loans, without
paying capital gains taxes either on those shares or the ones they keep.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The lock-in effect, then, creates an artificial incentive
for owners to hold on to stocks or real assets longer than they otherwise
would. In many cases, that means that assets do not move smoothly from the
hands of those who own them to those of new owners who could make better use of
them. Furthermore, the lock-in effect greatly reduces the revenue that the
government realizes from capital gains taxes.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Unfortunately, removing the tax preference and taxing
capital gains at the same rate as ordinary income would, by itself, make the
lock-in problem worse. Assets would move from hand to hand even more slowly
than they do now. As a result, the increase in revenue from lifting the capital
gains preference would be disappointingly small.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Fortunately, there are ways to overcome the lock-in problem.
A recent study from <a href="https://www.brookings.edu/policy2020/votervital/what-are-capital-gains-taxes-and-how-could-they-be-reformed/" target="_blank">Brookings</a> by Grace Enda and William G. Gale discusses
several possible reforms.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Two of the simplest reforms attack the so-called “Angel of
Death” loophole that allows heirs to fully or partially escape capital gains
taxes. One version would eliminate the valuation step-up at death. Suppose John
Sr. buys an asset for $1,000 in 1990 and dies in 2010 when the asset is worth
$2,000. John Jr., the heir, finally sells the asset in 2020 when it is worth
$3,000. Under the current regime, John Jr. pays no capital gains tax until
2020, and then only on the $1,000 gain that has occurred since the time of
inheritance. Without the step-up, John Jr. would pay tax in 2020 on the full
$2,000 gain that had taken place since the original purchase. An even stronger
version of the same reform would require John Jr. to pay tax on the first
$1,000 of the gain in 2010, at the time of inheritance, and pay the tax on the
remaining $1,000 when the asset is sold in 2020.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A still more far-reaching reform would be to tax capital
gains annually on an <i>accrual</i> or <i>mark-to-market</i> basis.
Suppose that your tax rate is 30 percent, and in year 0, you buy 100 shares of
stock at $50 a share. They rise in price to $100 in Year 1, fall to $75 in Year
2, and rise again to $150 in Year 3, at which point you sell them. Under
mark-to-market taxation, in Year 1 you pay tax of $1,500 on a capital gain of
$5,000; in Year 2, you have a negative tax liability of $750 on a capital loss
of $2,500, which you can carry forward; and in Year 3, you have a capital gain
of $7,500 on which you owe tax of $2,250, $750 of which you cover with the
carried-forward loss. Your total tax over the 3 years is $3,000, the same as it
would be if you were taxed only at the time of sale, but because there is no
deferral of taxes, there is no lock-in effect.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Mark-to-market taxation would be easy to implement for
assets like stocks and bonds that were actively traded, but not so easy for
hard-to-value assets like real estate or private business interests. An
approach called <i>retrospective taxation</i> could be used in such
cases. Under that system, capital gains would be taxed at the time of sale, but
the tax rate would be higher the longer the asset had been hed. The rate of
increase in the tax rate would depend on market interest rates. If it were done
right, the cost of the rising tax rate would exactly balance out the benefit of
deferring taxes until sale. In short, retrospective taxation would eliminate
the lock-in effect without encountering the problem of annual evaluation of
hard-to-value assets.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Any of these reforms, alone or in combination, would
mitigate the lock-in effect. As a result, capital markets would operate more
efficiently, since assets would move more freely into the hands of the owners
who could put them to the best use. It would also increase the revenue gain
from elimination of the capital gains tax preference.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>The bottom line<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Those who defend the preferential rate on capital gains are
right when they argue that all taxes affect business decisions. But it is
a <i>non sequitur</i> to say that because they affect business
decisions, capital gains taxes should be as low as possible. The proper
conclusion, instead, is that we should consider capital gains taxes in the
context of the tax system as a whole:<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">Taxing
capital gains at lower rates than other forms of investment income does
little to encourage investment in general. However, it does a lot to
encourage the structuring of investment in ways that avoid taxes, even if
they are inherently less efficient.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">Theoretically,
an ideal tax system would be fully indexed for inflation, but singling out
capital gains for special treatment while other forms of capital income
are not adjusted actually increases the degree to which inflation
undermines the equity and efficiency of the tax system.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">A case
can be made against double taxation of corporate profits, but the proper
reform would be to tax capital gains and dividends as ordinary income at
the same time that profit taxes at the corporate level were reduced or eliminated.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">The
lock-in effect is real, but the appropriate way to mitigate it would be
through elimination of the angel-of-death loophole while taxing all
capital gains on a mark-to-market or retrospective basis.<o:p></o:p></li>
</ul>
<div class="MsoNormal">
In short, as we look ahead to the likely need for additional
federal revenues as the U.S. economy fully recovers from the COVID-19 downturn,
a thorough reform of our system for taxing capital gains should be a high
priority.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Based on a previous post at <a href="https://www.niskanencenter.org/it-is-time-to-rethink-the-capital-gains-tax-preference/" target="_blank">NiskanenCenter.org</a>. Photo courtesy of <a href="https://pixabay.com/illustrations/success-curve-hand-finger-touch-1093889/" target="_blank">Pixabay.com</a>.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<br />Ed Dolanhttp://www.blogger.com/profile/08757995049056872214noreply@blogger.com2