Wednesday, January 29, 2014

Federal Government Has Declared War on Work

While 50 years ago the federal government declared war on poverty, I would submit that in recent years it has led an undeclared but real new war: a War on Work. The government increasingly is using its coercive powers to punish people who want to work, creating a vast class of able-bodied Americans dependent on the government—and politicians—for their daily bread.

The statistics are startling. A smaller proportion of working-age Americans works today than when the recession officially ended 4-1/2 years ago (June 2009).

But this trend is not just a failure of policies to encourage economic recovery, such as the stimulus package and the ineffective, highly expansionary Federal Reserve monetary policy. The decline in work has been going on since at least 2000, under both Republican and Democratic administrations.

Suppose today we had the same proportion of Americans working that we did in 2000—the end of the Clinton administration. We would have 14.6 million more workers in America—4 million more than the number of unemployed.

Making reasonable assumptions about the productivity of these lost workers, the annual national output today would be over $2,500 per person higher—over $10,000 for a family of four. The actual recent recorded decline in real median income per household almost certainly would not have occurred. Much of the 21st-century growth dearth—the fall in growth rates from above 3% to only 2% a year—would have been averted.

While a vast number of government policies cause a decline in work, let me mention just six:

 *  Extended unemployment benefits.

 *  Expansion of food stamps.

 *  Higher taxes on workers, especially the most productive ones.

 *  Increases in Social Security disability payments.

 *  Increases in Pell Grants and other forms of federal higher education aid.

 *  Increases in minimum wage laws at local, state and federal levels.

Extended Unemployment Benefits

For almost eight decades, the federal-state unemployment insurance system provided 26 weeks of benefits for unemployed workers, with occasionally a modest short-term extension of those benefits (to typically 39 weeks) during recessions. In 2013, those benefits were given for 73 weeks—four years after the recession ended.

You pay people not to work—and many respond accordingly. In the month with the highest unemployment (10.8%) since the Great Depression, December 1982, the average duration of unemployment was 18.0 weeks; in December 2013, it was 37.1 weeks.

The 73-week benefit provision ended recently, but President Obama and the Senate want it extended—preventing the creation of many jobs.

Food Stamps

If the government subsidizes the purchase of life’s most critical essential—food—it reduces the need to work. In 2000, 17.1 million Americans received food stamps; in October 2013, 47.6 million did.

Higher Taxes on Workers

A decade ago, in 2004, the top marginal federal income tax rate was 35%; today, it is about 43%, counting ObamaCare-related taxes. There is overwhelming empirical evidence that high income taxes impede economic growth. There has been a vast migration of Americans, for example, from the 41 states with state income taxes to the nine states that do not tax work income.

Social Security Disability

In 1990, about 4 million Americans and their dependents received Social Security disability payments—today 11 million do. At a time when health care is improving, and more Americans work in relatively less-risky nonindustrial settings, there has been an explosion in the number of people paid not to work because of alleged inability to do so.

Federal Student Financial Aid

In 2000, fewer than 4 million Americans received Pell Grants to attend college; by 2012, nearly 9 million did. From 2002 to 2012, total federal aid more than doubled, going from $83 billion to $170 billion. Yet large portions of those recipients never graduate, and many that do are truly underemployed—we increasingly have college-educated taxi drivers, janitors, bartenders and retail sales clerks.

Minimum Wage

Seven years ago today, the federal minimum wage was $5.15. By the end of this year, if Obama gets his way, it will be $9.25. Many cities and states have enacted huge minimum wage increases, at a time when the unemployment rate of black teenagers exceeds 35%.

Future Nobel laureate George Stigler noted in 1946 that minimum wage laws caused unemployment, and subsequent empirical evidence overwhelmingly shows that they kill jobs for the most vulnerable unskilled workers.

No nation ever achieved greatness when vast portions of its productive workforce were idle. America will not regain its economic vitality until it ends this war on work.



The ObamaCare Carnival of Perverse Incentives

Cities With Unfunded Health-Care Commitments Are Getting Ready to Dump Their Retirees On the State Exchanges

With fewer glitches to deter them, millions of Americans are now logging on to the ObamaCare health-insurance-exchange websites. When they get there, many are discovering some unpleasant surprises:

The deductibles are higher than what most people are used to, the networks of doctors and hospitals are skimpier (in some cases much skimpier), and lifesaving drugs are often not on the insurers’ formularies. Even after the government’s income-based subsidies are taken into account, the premiums are often higher than what people previously paid.

Why is this happening? Because the new law gives insurance buyers and sellers perverse incentives to behave in ways that create these problems. Things will only get more out of whack as more and more unhealthy people enter a system designed to be paid for by premiums from healthy people.

Under the Affordable Care Act, the benefits insurers must offer are strictly regulated. The law piles on benefits for which everyone must have coverage, whether they could ever use the benefits or not. At the same time, insurers set their own premiums and choose their own networks of doctors and hospitals.

To keep premiums as low as possible, the insurers are offering very narrow networks, often leaving out the best doctors and the best hospitals. In September, the Los Angeles Times reported that Blue Shield will have only about half the doctors in its exchange plan as it has in its traditional plan. One of the exchange plans in Colorado includes only a single Denver hospital, the one that usually treats Medicaid patients.

Narrow networks can be good or bad. Wal-Mart  has selected a half-dozen centers of excellence around the country for its employees, places carefully chosen for their high quality and low costs. The exchange health plans, by contrast, appear to care only about cost. They are offering low fees—sometimes even lower than the rock-bottom fees Medicaid pays health-care providers—and accepting only those providers who will take them.

Under the Affordable Care Act, insurers are required to charge the same premium rate to anyone who wants to sign up, regardless of health status; and they are required to accept anyone who applies. This means that to make ends meet they must overcharge the healthy and undercharge the sick. It also means insurers have strong incentives to attract the healthy (on whom they make a profit) and avoid the sick (on whom they incur losses) by, in effect, making their plans less appealing to the sick.

Here’s how they seem to be doing it: In structuring the plans they offer on the ObamaCare exchanges, the insurers apparently assumed that the healthy will choose the plan they buy based on its price, while ignoring other features of the plan. It makes sense: If I am healthy why wouldn’t I shop for the lowest price? If I later develop cancer, I can move to a plan that has the best cancer care. By law, these plans will be prohibited from charging me more than the premium paid by a healthy enrollee.

Insurers also assume that people who already are ill or otherwise expect to use a lot of health care pay much closer attention to the cost of deductibles and which doctors and hospitals are in the insurer’s network. To have any hope of balancing their books, insurers must then attract the maximum number of customers who are likely to stay healthy and thus not use so much of the care they paid for, while unhealthy people in effect use more than they paid for. This is why most plans are apparently designed to attract people willing to overlook high deductibles and less access to health care in return for lower premiums.

Yet no matter how narrow the provider network, health plans are going to cost more if they enroll more people with above-average health-care costs. And that is what is about to happen.

For some years, the federal government and some states have operated and subsidized risk pools. These allowed the chronically ill and other high-cost people who were “uninsurable” to purchase insurance for the same premium healthy people pay. Under ObamaCare, however, the pools are due to shut down and send their enrollees to the exchanges, where the above-average cost of their care will be implicitly borne by higher premiums charged to everyone enrolled in the plans.

To make matters worse, cities and towns with unfunded health-care commitments are getting ready to dump their retirees on the state exchanges. Since retirees are above-average age, they have above-average expected costs. The city of Detroit, for example, is planning to dump the costs of about 10,000 retirees on the Michigan exchange.

Then there are the job-lock employees —people who are working only to get health insurance because they are uninsurable in the individual market. Under ObamaCare, their incentive will be to quit their jobs and head to the exchanges.

In sum: A lot of high-cost patients are about to enroll through the exchanges. This will force up premiums further for all other buyers.

At some point, politicians of both parties will realize that we can do better than this. That will require a real market for health insurance with premiums that reflect real risks. There is a role for government in helping people with severe health problems. That is why risk pools exist. What we didn’t need was to destroy the market for the many in order to give aid to the few.



Affordable Housing: Rhetoric versus Reality

Lessons from California

Gov. Jerry Brown’s recent veto of Assembly Bill 1229, which authorized cities and counties to impose mandatory inclusionary zoning ordinances, sent a positive signal to the housing market and may help solve the housing shortage in California. Unfortunately some are still trying to modify a failing policy.

On Tuesday, the Sacramento County Board of Supervisors will consider revising its current inclusionary zoning ordinance, which requires builders to set aside a certain number of units at discounts for low-income families.

Passed in 2004, the policy has been a complete failure when compared to nearby surrounding jurisdictions. To cite one example: Sacramento County has produced only 263 subsidized units, compared to 1,528 units in less populated Elk Grove.

The current county program requires setting aside 15 percent of new housing for sale or rent at subsidized rates. County staff members concluded that the current ordinance was detrimental to the creation of market-rate housing, so they are now suggesting lowering the subsidy for new-home construction to 8 percent. Unfortunately, this rate is still higher than many other regional fees and will continue to place the county at a competitive disadvantage in producing new housing.

Inclusionary zoning is actually exclusionary because it raises housing prices and reduces the growth rate of new housing stock, making it more difficult and less affordable for individuals struggling to find housing in this area. The only winners are the few lucky lottery winners who get to purchase new units at subsidized rates.

Contrary to popular opinion, it is the homebuilder—and ultimately the new-home buyer—that bear the burden of this policy.

The ordinance is like a tax on new housing because it forces builders to sell some units at significantly lower prices or to pay an in-lieu fee, reducing overall revenues. The supply of new housing will decrease, causing prices to increase. Some potential buyers, facing higher prices, will go elsewhere and increase the demand and prices of homes in nearby cities or far flung “exurbs,” where the costs of development are lower. Overall prices rise and new home production falls, placing homes out of the reach of many middle-class families.

Politicians like inclusionary zoning because it allows them to raise taxes indirectly. It also allows them to point to a new “affordable” project in their jurisdiction to show off to their constituents. As a former city council member and mayor, I am aware of the allure to act like you are doing something to solve a problem. Unfortunately, this is a problem created by local politicians.

California law only requires that jurisdictions plan for their housing needs. There is no requirement to provide subsidized housing and create artificial housing shortages.

Recent court decisions have required municipalities to demonstrate that a reasonable nexus exists between new-housing development and the demand for subsidized housing. Many municipalities have hired consulting firms to provide such a nexus. Unfortunately, these studies are performed by consultants with backgrounds in urban planning and very little training in economics. As a result, these studies reflect a lack of clear economic thinking using established economic models. They suggest a market failure for subsidized housing because more housing means more demand for subsidized units. Their approach could easily be applied to the purchases of cars, food and clothing, requiring a tax on all newly produced goods. Not surprisingly, none of these studies have been vetted by academic economists or published in respectable economic journals.

If county residents want to support subsidized housing, there are less costly ways of doing so. Voucher programs, down-payment assistance, and other programs allow qualified low-income individuals the freedom to choose where to locate, the type of housing they prefer and the amount of housing they can afford.

Regardless, any solutions for providing subsidized housing should be paid by all taxpayers rather than singling out new homebuyers. If that approach (which would require a popular vote to authorize broad taxation) is too politically risky, at the very least the board should make certain that the cost of the revised Affordable Housing Ordinance is competitive within the Sacramento region.



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