Archive for the ‘Government’ Category

Why I support a UBI

First, I want to apologize for my recent light posting–a combination of being busy and not feeling well meant that something had to give.  Still the last few weeks have been the busiest this blog has ever seen (more attention than I really want, honestly… I’d prefer just to influence the thinking of the more important bloggers) and I don’t think ignoring all that traffic shows respect for my readership.   So I’m going to try to up my game and post more regularly this week.

This post, just like my last several (here and here) is again a response to Steve Waldman (indirectly) and his series on social welfare economics.   This time I mostly agree with what Waldman wrote… I have some nitpicks with the fifth post in the series, but that’s all.

I’m actually responding to a commenter who suggested in my last post that Waldman is trying to justify a universal basic income.  But I also support a UBI!   Probably for different reasons than Steve, too.  That’s what I want to talk about… I’ll present my thinking here in list form.

1.  Efficiency of Unconditional Institutions

Let’s think in terms of two basic institutional structures which might make up the welfare state, two packages of benefits as it were.  I’ll call them “conditional” benefits and “unconditional”.   These labels are pretty self-explanatory, but let me pedantically spell them out.

There is a state of the world s and a set of all states S.  Conditional benefits means that for some s and s’ in S, there are associated benefit levels, b_s and b_s’, which are not the same.  Unconditional benefits means that the benefit level, b, is the same in all states of the world S.   Simple.  Here’s the thing, though: who decides if the state of the world is s or s’?

If the government decides, than conditional benefits mean larger bureaucracies and more fraud.   If beneficiaries decide than you have to worry about creating “truth telling mechanisms“… that is you need to think about the cost of encouraging people not to game the system, to reveal their true type as an economist might put it.  The problem with this second approach is that any type revelation mechanism requires what we call information rents.  Which in non-economese means that the benefits packages have to be less targeted or less generous than would be idea.

2  Interlocking Macroeconomic Institutions

This is a point I haven’t heard elsewhere, but I think is the single greatest benefit to a UBI… It plays really well with another macroeconomic institution I support: nominal GDP targeting monetary policy.

Consider this.  Fund a UBI through a simple flat tax on all income (for simplicity).  So, you earn UBI benefits of w, then the after-tax benefit is (1-t)w and the tax collected is (t x NGDP… I’ll write NGDP as PY from now on).  If the population is N, then Nw = tPY.   So, if the growth target for nominal income is adjusted for population growth, then the funding stream for UBI is stable when the UBI grows at the same rate as NGDP.   Another way to say the same thing is that wage pressure in the economy always grows at the rate of nominal income growth.

Yet a UBI would be a powerful counter-cyclical automatic stabilizer: rising in importance whenever NGDP falls below target.  That reduces how hard the central bank has to work

That’s not all, though.  Suppose NGDP is on target, but there is a supply shock, what happens?  Well, inflation rises as a share of nominal growth.   The purchasing of the UBI erodes relative to trend growth.  Marginal workers reenter the labor force.  So potential GDP growth rises again.  Also note that when the UBI is set “too high”, that’s just a kind of adverse supply shock.

So, a UBI is an automatic stabilizer for Potential GDP as well as Nominal GDP when coupled with NGDP level targeting.  This is a point that Nick Rowe ought to appreciate.

3  Work Paternalism is bad

Unlike Adam Ozimek, I don’t think it’s OK for libertarians to denounce all forms of paternalism… except when it comes to telling people that they necessarily have to work.   Un.  Cool.

Why do most people drop out of the labor force?   1) Personal reasons like becoming mothers (or, increasingly, fathers)… that’s something you ought to support if that’s the choice people want to make; 2) Professional reasons like retiring or career changes–these shouldn’t be tied to strict cutoffs like a retirement age but based on personal choices and normally libertarians are the first to point this out; 3) education–a UBI makes it easier to be a student and that’s a good thing for the economy.  These are all people who are making better choices because of UBI.

That leaves only two theoretical groups, those who are demoralized by lengthy spells of unemployment (“discouraged workers”) and (theoretically, at least) there are the  “parasites”.

In terms of the demoralized, I think people have the sign wrong: a UBI would help keep morale up, because low morale is one of the consequences of living without an income.   More than that an income can help fund hobbies and hobbies can help prevent skill degradation by giving them an outlet to use some of those skills even without a job.

As for the parasites… to a good approximation, I don’t think they exist.  Adam and other libertarians, on the other hand, seem to think that everyone who chooses not to work in a UBI regime must be a parasite.  That’s ridiculous.  A UBI, at least at the level people talk about, would be barely enough, or perhaps not even enough, to live on.   People who would use their benefits to buy pot and video games would find no money left for rent and groceries, while who use their benefits for rent and groceries would find no money left to enjoy their free time.   These are just not choices that actual human beings would make.

At any rate, that’s my thinking on a UBI.  There is one more reason for me supporting a UBI, but that’s an issue which I think will come up when I’m ready to discuss my thesis online.


Governments are people?

July 15, 2012 1 comment

Miles Kimball argues that corporations are people.   I agree with (almost) everything he says, except his conclusions.   Let me hand the mic to him for a moment, emphasis mine:

…There are two potential meanings of this statement, and I want to agree with both:

  1. When the government taxes a corporation, the tax ultimately falls on some human being.
  2. When a corporation makes a decision, some set of human beings is behind that decision, and they are morally responsible for that decision.

Mitt wanted to emphasize the first point: that any tax on corporations is ultimately paid by some human being. That is a sound principle in the academic field of Public Finance. The big problem with corporate taxes is that, despite efforts on the part of many economists, economists don’t have that good a handle on exactly who ends up paying them…So if the intent is to make taxes depend on income, for example, it is a lot easier to get the intended effect on that score by taxing people directly rather than by taxing corporations…

…I want to focus more on the second meaning: when a corporation makes a decision, some set of human beings is behind that decision, and they are morally responsible for that decision…When approaching corporate decisions ethically, it minces words not to recognize the people behind the decisions, even when their exact identities are not clear

…Now, although corporations are people, typically a corporation is not a person, but instead many people. To the extent that corporate decisions reflect the outcome of a game  among many people (in economists’  technical sense of the word “game”), the actions of a corporation may not reflect any coherent objective function…its actions can be judged in relation to the intended objectives of the corporation. In that way, we can try to protect people from Frankenstein monsters of corporations that are doing things no one intends because of internal games being played

…I don’t know of any theorem suggesting that an invisible hand will work within a corporation to make good things happen that no one intended. And the wisdom of literature such as Scott Adams Dilbert or TV shows such as The Office suggest, to the contrary, that entropy often reigns—so that corporations often do less well than the intentions of the people in them

First and foremost, I think Miles  is missing a key meaning for the statement “corporations are people”, that is the reason the issue is in the news at all: if corporations are people, do corporations have any rights?   In Citizens United, the Supreme Court said yes.

This is not a question about taxes–the government can tax individuals who most definitely have rights–and its not an issue about morality–free speech as an example is not a moral imperative, it rather defines an individual’s relationship to the government.   I’ll get back to this, I’d like to say a few things first.

Me being agreeable

Like Miles, I’m not particularly interested in the tax argument either.   It is completely true that taxing corporations as something other than people is potentially problematic.   To the extent that standard theory has anything to say about this issue, the key takeaway is that we should tax all income equally and income always–eventually–flows to a human being.   If one source of income is taxed at a different rate than another,  that encourages agents to play games disguising one source of income as another–and these games are pure economic waste.

As one minor caveat to that, my understanding is that the corporate tax was instituted in the first place to close a tax loophole wherein personal income could be disguised as un-taxed corporate income.

So I’d like to focus a little more time on the second point.

At one point in my life, I would have agreed with Miles, here completely.   A long long time ago–in a Texas classroom not long after the Gingrich revolution–I found myself alone debating this exact position.   That was my first thought.

The only problem is I no long think it’s quite right.  Sure the people at a corporation have a moral responsibility for their actions, but do we conclude that, therefore, corporations are people?    I’ve highlighted select passages from Miles’ post above.   There is a theme.

By its nature as a conglomeration of individuals, a corporation–or any firm, government or organization–cannot truly be said to make decisions at all.   If two try to steer a car simultaneously, can one be blamed for crashing through a storefront window.   If a corporation were to bulldoze the wrong house because no one bothered to double check the address, IS there someone to blame, even in theory?   Can anyone be blamed for the inaction of everyone?

Satisfying Godwin’s Law

Miles has the right argument, but draws the wrong conclusion.   A corporation is not a person precisely because it cannot be held accountable for its own actions.   It is a ‘frankenstein’s monster’ of individuals, but also procedures, paperwork and lines of authority, stitching them all together.   An individual can have moral culpability, but only when that individual has made a decision.

If I were to ask you whether a German Jew were responsible for the Holocaust, you would rightly scoff.   Yet as an organization of people, the German government is the responsibility of all German voters.   Conversely, if this government were a person responsible for its own actions than would it still be right to blame Hitler?   No one would agree to that; we all feel viscerally that Hitler is the villain (along with more than a few of his henchmen and enablers).   You can’t blame individuals for the actions of organizations of which they are a part and you can’t absolve individuals for improper actions on behalf of their organizations.

In what sense does this make a corporation a person?

Me being less agreeable

I would characterize my argument above as a minor quibble: I’m endorsing his argument, while rejecting the label he seems to think it implies–it is not an argument, but a meta-argument.   Is it helpful to say that “Lehman Brothers” is a person, when it comes time to assign blame for its actions?  I would tend to say ‘no’, Miles seems to be saying ‘yes’.   Yet we would both agree that the management at Lehman is ultimately responsible.

Mitt Romney may have been discussing taxes; yet, none of this is what the public debate is really about.   We are talking about corporations as “people” because “corporate rights” have been thrust into the center of the public debate.   If a corporation is a person, does it have free speech rights, so that (if money is “speech”) it may spend unlimited sums of money to influence a democratic election.

This is the third possibility of what it may mean for the “corporations are people”-meme, which Miles completely ignores.   A person has “rights”–“rights” defining what a government can’t do to a person.   Therefore, as a  person the government cannot regulate activities of corporations which it cannot for individuals–which it turns out are many.

A few questions:

  1. If a person can vote, do we have universal suffrage while corporations can’t vote as well?
  2. If a person can be punished for wrong doing, should not we a corporation (or a government!) be sent to prison for wrongdoing?   If another Nazi massacre is discovered, should not “Germany” be punished for it?   Whatever previous punishments had been doled out for previous crimes, there is no statute of limitations for murder.
  3. If a government is a person–and why would a government not be a person, if a corporation is one–why would it not have the right to flood the public with propaganda?   Draft enemies lists?   Deny government services to those it deems unworthy?

The solution is clear.   These questions are nonsense, because an organization–though composed of individuals with rights–is an unthinking Frankenstein’s monster that has no rights.

What does it mean to be “free market”?

A good question from Adam Ozimek.   I’m not really interested in whether or not Paul Krugman is “free market”–he could be a communist for all I care–but it does beg the question, “What is a free market (or at least) what does it mean to the average person?”

My guess is that “free market” means different things to different people.   And before we can answer the question what a “free market” might be, we need to understand what a “free market” means to different people.

Different meanings for different groups

For the record, my own view is that the words “free market” is never well-defined: it is always an everywhere a misleading concept, the power of the concept comes from its ambiguity.

  • For technocratic progressives:  For people like Krugman or me (but not me) ; when they say “free market”, I think they mean it in the mechanism design sense.   The market –when allowed to do its thing–is a powerful tool.   Nothing more, nothing less.   The market (in this sense) can do great things under the right circumstances, but this means nothing for either regulations or tax rates.   Regulations and taxes “change the game”, but not the usefulness of the tool.
  • For the rest of the progressive community:  Speaking for people who are not too much like me;  I would venture that when the typical progressive hears the words “free market” they think of exploitation by the rich and powerful.   There is some truth to this.   A market without redistribution will tend to concentrate wealth and power.   For these, regulations and taxes are buffers against the concentration of wealth and power so that unlike the technocrats they see a tension between regulations, taxes and free markets.   The irony is that many progressives have bought into the libertarian view of free markets.
  • For libertarians:  Speaking for people like Adam (but not necessarily Adam, and definitely not me); I would guess that “free market” is ipso facto the absence of constraints on economic behavior.   For these, taxes and regulations are anathema to free markets.   How can markets be free if they are taxed?   How can markets be free if someone is regulating their activity?
  • For non-libertarian conservatives:  I think conservatives have the most diverse views of the meaning of “free market” and the hardest views to pin down.  For some religious conservatives, especially the prosperity bible types, the “free market” is a kind of proxy for God’s Favor–markets give God a free hand to punish the wicked and reward the righteous.   There’s something similar with business conservatives–the rich are ipso facto the most Worthy and most Important for the health of the economy.   The market is what makes sure those are the ones who are rewarded, rather than… others.  For these, taxes and regulations undo the work of the market–rewarding the slothful and punishing the virtuous.

I’ve left out technocratic conservatives (in part I just think that group is too diverse to capture in one paragraph).

When Krugman calls himself “free market”, who is he talking to?

Not to people like me, I’m guessing.    For someone like Krugman (or me) being free market is not a description, it is a fact.   Markets are powerful tools and we are happy to use them as tools.   If you have a hammer, why not use it to pound some nails?

As a rhetorical device, though, I think I can see Krugman’s true targets.

First, the non-technocratic progressive community has (ironically) bought into the libertarian view that “free markets” are directly at odds with taxes or regulations.   This is ironic because seeing the ravages of the “free market” many of these see free markets as something which must be fought.   To these, Krugman is saying; don’t hate the hammer.

I think Krugman is also speaking to the libertarian community.   To these, he is saying; we have something in common.   He is appealing to middle ground.   When he says that he is a Welfare State Capitalist, he is doubling down on the middle ground.   Denmark really is a nice place to live, he is asking; is it so terrible to move in that direction?

To conservatives, I think he is saying; you need to reconsider your theory of justice.   By pairing free markets and social welfare he is saying that the market itself will not produce justice, but we can build a system which will.   To these, he is issuing a challenge.

I don’t know what Krugman is thinking, of course, but I would guess that his rhetorical strategy does all of the above, whether he planned it to or not.

Is Krugman lying?  Can you be “free market” and support 70% marginal tax rates?

Of course, my answer is yes.   You can be “free market” and support 100% marginal tax rates, or 110%.   It doesn’t matter.    Taxes change the rules of the game, maybe for the better or maybe for the worse, but the game is unchanged.

Everyone is entitled to exchange what they have , but no one is entitled to name their own price for the exchange.   I am free to sell my car, but I have no right to claim $1M in exchange.   If the price is set by an un-taxed market or if the price is set by the market with a tax, what difference should that make?   I can still sell my car, although it may no longer be worth the effort.   It may also not be worth effort if the market is flooded with quality, cheap new cars.

To put it succinctly: no one is entitled to surplus.

[Edit]  I also endorse this response from Karl Smith.

A monopoly for coercion

July 5, 2012 1 comment

Following on my last post, I’d like to discuss an issue that I didn’t really get to (that post was already going far too long).   Libertarians at least have a theory, i.e. (as summarized by Holbo)

  1. maximize property and contract rights, so as to
  2. maximize “freedom”–especially for the worthy–whatever that is suppose to mean, for the purpose of
  3. maximizing human welfare

It’s a good theory:  intuitive and with a grain of truth to it.

I made the argument in my last post that regulation could in theory improve welfare and “freedom”.   I never got a chance to expound a political theory, however, on the limits–or possibly the lack thereof–of interventions.   After all, if you think that regulations (i.e. government coercion) are OK then why aren’t private forms of coercion?

This is the converse of the libertarian problem that I spent so many words on in that post.    I think libertarians are wrong, but what do I as a progressive believe which would make an intervention right?   Managers are people too, so why can I take away their options?

The problem as I see it, is succinctly explained by Keynes:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

Libertarians have ideas–they are wrong, but they are influential.   Yet it is not enough to fight the encroachment of libertarian ideas, we have to offer an alternative.

A few possibilities:

  • welfare/utilitarianism:  There is a declining marginal utility of options, to restrict options for those who have many and reallocate options to those with few is welfare improving.
  • the need to fight power and wealth as self-reinforcing phenomena:  I’ve made this point before.   Consider this.   Give 100 people each a $1 bill. Have them match up, and bet on a fair coin toss an amount equal to half the wealth of the poorer individual.   Repeat.   It is not hard to see that, asymptotically, all the wealth will be in the hands of a single individual.   This result is robust–as long as the coin toss is fair, it is truly unfair because those with more wealth can afford a loss.   The problem remains even if someone is more “skilled”–using an unfair coin–the wealth buffer matters more than a rigged coin toss.   You can apply this idea to an entire economy and get the same result.
  • coercion as a form of violence:  The government is the monopoly supplier of violence.   This has been the case for a long time as the alternative caused more problems than it solved.   But coercion is a form of violence, so why isn’t the government the  monopoly supplier of coercion?   Hence the title of the post.

A basic theory on the use of coercion in society

Like the libertarians, I want to be somewhat utilitarian–as an ultimate, but ultimately unreachable goal human welfare should be maximized.

However, unlike libertarians, I recognize that property and contract rights will not work.   In addition to the good they do, property rights protect the powerful and as such harm the rest of society, since wealth and power are self-reinforcing.

So here goes.

  1. Property and contracting are privileges given by the rest of society and may be revoked at any time by that society (which granted those privileges in the first place).
  2.  All forms of private coercion are anathema to a free and fair society.    I would accept this as a definition of “free and fair”, being that these ‘freedom’ and ‘fairness’ are hard to define otherwise.    Call this the “my right to swing my arms ends at your nose” principle.
  3. The government has a monopoly on the use of violence and hence coercion (as a form of violence).   It is not possible to have a society without the threat of both–there is a no-trade theorem (which should be the subject of another post)–so the provision must be relegated to someone.
  4. By 2 and 3 (and recognizing that governments are run, ultimately, by private individuals), a free and fair society is one run by the rule of law.
  5. By 2, and recognizing that laws are written by private individuals, a free and fair society is one in which all people must have the options of voice at all times over those laws which will apply to them and the right of exit must be respected.   Call this the democratic principle.   For example, the people of Hungary are less free than they used to be because they have less voice over new laws moving forward.   This, I hope, answers Hayek’s objection.

I think this sums up my political philosophy.   Its definitely not as sexy as the “contract and property rights = freedom = maximal human welfard”, but I think its more right.

If you have some objections/corrections, let me know.

Have the west’s institutions become extractive?

June 13, 2012 4 comments

I recently finished reading Acemoglu and Robinson’s (A&R) new book, Why Nations Fail.   Really, even before I even started–ever since I first heard the premise of their thesis–I’ve had this uncomfortable feeling.   For the last 30 or 40 years, with (pretax) inequality rising everywhere in the western world (and overall growth slowing), are we in fact witnessing the early stage of the formation or transition to extractive institutions in Europe and North America?

Before I get into the argument, let me first say that my own answer is somewhere between “I have no idea” and “maybe, maybe not”.   This is not an open and shut case, by any means.   I do, however, have this uncomfortable feeling.

I’ve been meaning to write this post for some time, but part of the current impetus is, via Thoma, this excellent essay in the Democracy Journal by James Kwak.   James, it seems, has the same worry I do; you should read him in full to get the entire pro argument.   Reflecting my own uncertainty, my case is going to be much more muddled.

Background:  what are extractive/inclusive institutions and why do we care?

The basic case that A&R make revolves around a simple intuition about the functioning of the political economy of prosperity and inequality.   It can be separated into two distinct feedback loops:

  1. The vicious circle (extractive institutions):  essentially, great wealth buys political power and political power leads to greater wealth. Historically, the easiest way to become richer is to dominate the political process, which shapes the economic institutions and those economic institutions (i.e. contract enforcement, property rights) define the economic incentives of everyone.  By rigging the economic playing field in their favor, the wealthy elite has the resources to dominate the political process.   Wash, rinse repeat.   A&R document (sometimes in excruciatingly repetitive detail) how this pattern shows up again, and again around the world leading inevitably to the impoverishment of the nation.
  2. The virtuous circle (inclusive institutions):   widely distributed power leads to widely distributed wealth which in turn makes accumulating power far more difficult (though not impossible).   Far less inevitable than the vicious circle, it is nonetheless the case that under the proper circumstances these inclusive political institutions (i.e. democracy) provide voters with the tools to undo excessive concentrations of wealth and power–which might threaten, for example, one’s right to sell one’s own labor in a free and fair market or one’s property (i.e. inclusive economic institutions).   The ‘populists’ are (often) the heroes of this story.   Always working against the virtuous circle is the fact that finance and markets–necessary to provide healthy incentives to work and innovate–have a tendency to concentrate wealth while the centralization of political power–necessary to distribute power broadly–also concentrates power in the hands of a few; you can’t have 300 million presidents.

Much of history can be interpreted as one or the other of these feedback processes operating to make a nation poor or rich, respectively.   Starting with the glorious revolution in England and the French revolution, the west has been mostly in the process of the virtuous circle.

Turning Extractive in the US

This is the subject of James Kwak’s essay and I don’t have much to add to it.   It is true that the the US is a democracy with broad suffrage rights.   However, as he rightly points out, this simple thinking ignores the real feedback mechanism in the vicious circle.   As the concentration of wealth  and power increase, the ability and incentive to expropriate more wealth and power increase.

I am reminded of a paper from Roger Lagunoff which shows how this might work in a relatively simple dynamic model of endogenous political change.   What’s interesting is that there emerges a simple notion of the virtuous circle in the sense that a majority rule voting model is stable.   There is also a vicious circle in that a model in which political outcomes rely on majority wealth (imagine every dollar of wealth gets its own vote) will be unstable (“admits reform”)–either the political system must become ever more concentrated or it must collapse back to majority voting.

Contra James, I’m only moderately worried about this.   After all, the naked power grab by the rich must eventually become obvious enough even to Republican voters.   No matter how much money the rich pour into elections, ultimately it is voters who vote and there’s only so much you can do to sell a defective product.

After all, as A&R point out, we’ve seen this movie before.   In the guilded age, the robber barons bought elections even more egregiously than they do now.   Eventually, this process led not to permanent political domination by the robber barons, but to the eventual collapse of their power during the progressive age.   In the Lagunoff paper, either the situation continually gets worse, or eventually it collapses back to majority vote.   In a nation with firmly entrenched democracy, the latter seems far more likely.

That’s not to say that we wouldn’t all be better off short-circuiting the process and returning to majority rule sooner rather than later.

Are Central Banks Extractive?

The one thing I really wanted to add is my main fear–there’s something profoundly anti-democratic about central bank independence.   In a sense, “insulating” the bank from politics is the point.   But then, a central bank is at the heart of a modern economy’s economic institutions.   To be honest, I don’t know the answer.   A couple of random thoughts:

  1. Central Banks are isolated from political pressures from the government, but not political pressure from banks.   For example, Jamie Dimon is still on the board of the New York Fed (as I write this) which is the regional bank which regulates JP Morgan Chase.   To put it another way, Nancy Pelosi or John Boehner have less power over the regulation of JP Morgan Chase–a systemically important institution–than Jamie Dimon.   Maybe I’m exaggerating, but not by much.
  2. Supporting point 1, note that there is evidence suggesting central banks internalize bank welfare rather than national welfare:  1) The ECB LTRO facility lent money at sub-market rates to banks, rather than democratically elected governments 2) TARP passed easily in the US, the stimulus did not 3) The ECB has insisted on austerity in the eurozone periphery–in contradiction of standard macroeconomics and often despite ambivalence or even hostility from local polities–as a condition of doing its job of macroeconomic stabilization 4) In effect, the ECB has removed at least two democratically elected governments who failed to implement austerity quickly enough.
  3. Following a negative shock to NGDP, inflation targeting redistributes 100% of loses onto debtors.   Why have most central banks been so insistent on inflation targeting?   The evidence was never really strong that IT was ever particularly superior, even in standard models which have not performed well recently.   Conversely, it seems Israel has made an NGDP target work, and an NGDP target is much more equitable in theory.   To see this, if your “sticky price” is the shadow price of debt service, than an inflation target magnifies the damage done by a shock to nominal income (say, the collapse of a housing bubble) via a classical Fisherian debt deflation dynamic as the real burden of debt rises compared to income.   So, again, why are we still targeting inflation?   Could it be that banks and the wealthy are the creditors?

To be frank, I’m really not sure about any of these points.  Just worried.

On the Activity-Inactivity distinction, Will SCOTUS outlaw Pigouvian taxes?

March 28, 2012 Leave a comment

It seems that yesterday was a really bad day for “Obamacare”. With the problem seeming to be the “limiting principle” for the government’s claim of authority.

As I said yesterday, this is just silly. Of course there is a limit to this claim of authority; healthcare really is a special industry. Ken Arrow wrote in a famous paper that a free market in healthcare would be impossible. The reason being that healthcare requires the use of insurance for funding, and insurance often implies perverse incentives for market participants. This is critically important, although I suppose “practicality” can easily not be a criterion the Supreme Court puts any weight on–fine.

A better point is just to note that very human being will eventually buy healthcare as a part of being human. I can not buy insurance, but I’ll still get sick and die (eventually) with probability one. I can sign a paper saying not to use any means whatsoever to keep me healthy, in the event of a crisis, but when the crisis eventually comes and I’m unconscious will my next-of-kin hold to that agreement? If I am treated, then who exactly is paying for that? The answer, of course, is society. Despite my best attempts to not be treated, chances are that I will be and when I am, it is you that pay for it (whoever you are, so long as you pay taxes). In short, the decision (and it is a decision) to go without care induces an externality on the rest of society. The efficient way to deal with an externality is to tax it–that is the individual mandate.

If the individual mandate gets struck down, then how do you defend, say, a clean air regulation? After all, that can be said to be taxing inactivity, too. The status quo is that pollutants are being released into the atmosphere; the tax is “forcing” private citizens (in none of these examples is anyone actually forced to do anything) to buy goods from private companies (i.e. mitigation equipment) when those individuals had the option to do “nothing”. So the Clean Air Act is unconstitutional, right? Except its not. Is the distinction here only that spewing poisons into the air is an “activity” even though it is only a by-product (what you really want to do is produce, say… electricity)? After all, our Galtian Overlords/Champions of Industry didn’t just decide one day to spew poison into the atmosphere, but they do it because it is a consequence of producing electricity. But if that is the distinction–and really you have to twist yourself into knots to see it that way–then how is it that forcing you to pay for my ER visit anything but a by-product and therefore an activity?

Framing effects and legal thinking

March 27, 2012 Leave a comment

This week is “repeal-Obamacare” week, so I suppose I should comment. Full disclosure: I have a pre-existing condition and I know with certainty (from experience) that I will never be able to buy health insurance on the individual market without major reforms such as the ACA.

So, needless to say, I am a little miffed by the whole thing. What really gets me is that my Tea-Partier parents are waiting on tenterhooks for what they seem to think is the inevitable repeal verdict. With my own future partly riding on not repealing I can’t help but feel a little unloved–or at least less loved than Glenn Beck.

As to the substance, though, I have to say that my respect for proper legal analysis has dropped a rung or ten. I mean, really, does this whole brouhaha revolve around a distinction between regulating activity and regulating inactivity? It seems to me that in the real world ain’t no difference. Are we really on the cusp of enshrining into constitutional law status-quo bias and framing effects?

Let’s take a hypothetical example. Suppose that I wrote into law a “homeowner’s mandate”. Anyone who does not buy a house pays a “penalty”–of course this is terrible policy, but I’ll get back to that. That “penalty” is large enough to partially fund home-buying by reimbursing homeowners for their interest payments (the rest of the money comes out of general revenues). Of course, run through the tax-code, what I’ve just described is the mortgage-interest deduction. Don’t believe me? Let’s conduct a little experiment. Suppose that we observe the tax payments as well as characteristics of many tax payers, but not the the tax code directly. Would I be able to observe a difference between my “homeowner’s mandate” and the mortgage interest deduction? I say no. Moreover, the only reason that individuals might behave differently is through the different frames that they perceive the problem. In the name of almighty Zeus’s skinny jeans, how does that make one unconstitutional but not the other?

As for framing effects, we’ve already crossed that bridge, it seems that yesterday’s arguments revolve around whether the individual mandate is a “tax” or a “penalty” executed through the tax code. Forgive me if I see no difference. If a “penalty” raises revenue, then it is a tax. The AMT (the Alternative Minimum Tax) can be described as a “penalty” rate for anyone who falls under it, but it is a tax. Everyone agrees it is a tax. Today’s ruling means that if it merely been named the “Alternative Minimum Penalty”, then it would be a “penalty” and therefore not a tax. Way to go brilliant legal minds!

I think I’ve come to the conclusion that legal thinking is not ever about reason or even evidence, it is always and everywhere about exploiting cognitive biases. On the bright side (for people like me), if the law is struck down in its entirety I predict that this would re-energize much of the left; on the one hand, the verdict would crystallize the thinking on the left about “conservative judicial activism” (there’s no doubt now that such a thing exists) just as Roe V. Wade did for the right a generation ago and on the other hand, there’s no more rightward policy for healthcare that would reduce costs and provide universal coverage–the next attempt at an HC law would be well leftward of what we get in the ACA (although it might take another generation. Politically, my guess is that a mixture of corporate interests and reactionary politics will be blamed for the defeat of the ACA and combining this perception with the growing 99% movement could prove… explosive. My conclusion is that this could be a “win the battle, lose the war” moment for conservatives. Still, striping the individual mandate would be disastrous in every sense of the word.