Month: December 2018

The most obvious reason for the Earned Income Tax Credit is to raise the level of household income for poor and near-poor workers. A secondary reason is to encourage such workers to enter the workforce and remain connected to jobs. But there’s another potential benefit as well. Jacob Bastian Katherine Michelmore consider “The Long-Term Impact of the Earned Income Tax Credit on Children’ s Education and Employment Outcomes” (Journal of Labor Economics, October 2018, pp. 1127-1160, ungated version here). It suggests that the the EITC can be viewed not just a transfer of income, but also as an investment in human capital with a corresponding payoff.

A lot of economists and policy wonks, myself included, are enamored of the EITC as a way of helping low-wage workers. Unlike raising the minimum wage, it doesn’t risk the potential unwanted side effects of telling employers to pay more. At a more subtle level, it’s designed so that those who work more don’t immediately have the benefit clawed back from them. Here’s a useful figure from the Tax Policy Center to illustrate the structure. The different lines show families with different numbers of children. Thus, the top line shows that a worker in a family with three children would receive a payment equal to 45% of earnings up to a total income of $14,290, for a total credit of $6,431. That total credit stays fixed as income rises to $18,660, and then phases more slowly, with a loss of 21.06% of the credit for each dollar earned until the credit is eliminated at total earnings of $49,104.

It\’s easy to spot some potential difficulties with the EITC. The small line at the bottom shows that it provides very little benefit for those without children. The tax credit is “refundable,” which means that it doesn’t just reduce the tax liability of low-wage workers to zero, but provides direct payments to them payments. The slow phase-out of the subsidy means that the payments don’t only go to the poor, but also to those above the official poverty line. The total cost of the EITC is more than $60 billion (which is about twice the cost of the Temporary Assistance to Need Families “welfare” program). The It adds complexity to the tax returns of low-wage workers, and there can be problems of fraud (for example, if the number of children actually living with someone is overstated).

That said, a compelling body of research developed over the last few decades suggests that the EITC has a range of benefits (for summaries, see here and here). Its payments are concentrated among lower-earners, and it lifts about 6 million households above the poverty line. It encourages entering the labor force. It improves maternal and infant health.

All of which brings us back to the recent paper by Bastian and Michelmore. The amount of the earned income tax credit has varied over time because of changes in federal law and state law, and it is also designed to vary by size of family. They use these variations as a kind of “natural experiment.” They use data from the  Panel Study of Income Dynamics (PSID), which tracks families over time and onto the next generation. They write:

This paper analyzed the long-run effects of childhood EITC exposure on education and employment outcomes among individuals born between 1967 and 1995. Using variation in federal and state EITC benefits over time by family size, results indicate that the EITC significantly improves a number of outcomes for children and that these improvements persist into adulthood. After a policy-induced $1,000 increase in EITC exposure between ages 13 and 18, we find that individuals are subsequently 1.3% more likely to complete high school by age 20 and 4.2% more likely to complete a college degree by age 26. These education gains also translate into increases in employment and earnings in adulthood. Estimates suggest that a $1,000 increase in EITC exposure from age 13 to age 18 leads to a 1.0% increase in the likelihood of being employed between ages 22 and 27 and a $560 (or 2.2%) increase in average annual earnings.

The broad benefits of the Earned Income Tax Credit, which go beyond providing income to low-wage families, create a distinct possibility that the program may come close to paying for itself. Indeed, Jacob E. Bastian and Maggie R. Jones have a recent working paper called “Do EITC Expansions Pay for Themselves? Effects on Tax Revenue and Public Assistance Spending” (December 9, 2018). They write:

We use administrative Internal Revenue Service tax data linked to Current Population Survey data on enrollment in public assistance programs to estimate the EITC’s net cost. The evidence from three decades of EITC policy expansions implies that the EITC decreases public assistance received by mothers and increases payroll and sales taxes paid. Our estimates suggest that the EITC has a self-financing rate of 87 percent, so that the EITC’s true cost is only 13 percent of the “sticker price.”

On one side, it seems useful to dampen the enthusiasm about this result just a bit. It’s a working paper, so numbers are subject to change. But more to the point, the main way in which the EITC “pays for itself” is by an offsetting reduction payments for other government support programs like welfare or housing assistance. Thus, the underlying argument is that it is better for government support to low-wage households to be channeled in a way that encourages work–not that total government support for those with low wages has declined.

On the other side, it seems plausible that the Bastian and Jones methodology considerably understates the gains from the EITC. It is based purely on increases in work effort by mothers. It doesn’t take into account benefits to maternal and infant health, or the benefits to improved education and earnings for children. Including these kinds of benefits might plausibly yield a result that the $60-plus billion spent on the Earned Income Tax Credit  actually does pay for itself.

Back in December 1968, an ecologist and microbiologist named Garrett Hardin published a short essay called \”The Tragedy of the Commons\” in Science (December 13, 1968, pp. 1243-1248).  The phrase \”tragedy of the commons\” passed into everyday use, and the article itself spawned a vast research literature. Fifty years later, what\’s it all about?

Here is how Hardin conceptualized the tragedy of the commons: 

\”The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy.

As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, \”What is the utility to me of adding one more animal to my herd?\” This utility has one negative and one positive component.

1) The positive component is a function of the increment of one animal. Since the herdsman receives all the proceeds from the sale of the additional animal, the positive utility is nearly +1.

2) The negative component is a function of the additional overgrazing created by one more animal. Since, however, the effects of overgrazing are shared by all the herdsmen, the negative utility for any particular decision-making herdsman is only a fraction of -1.

Adding together the component partial utilities, the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another…. But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit–in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.\”

Hardin applied this concept in a variety of contexts. For example, he points out that free parking in shopping areas is a kind of commons; that  national parks are a kind of commons; that emitting pollution into air and water diminishes the common environment. But the main focus of his essay is on human overpopulation. Hardin wrote:

\”Perhaps the simplest summary of this analysis of man\’s population problems is this: the commons, if justifiable at all, is justifiable only under conditions of low-population density. As the human population has increased, the commons has had to be abandoned in one aspect after another. First we abandoned the commons in food gathering, enclosing farm land and restricting pastures and hunting and fishing areas. These restrictions are still not complete throughout the world. Somewhat later we saw that the commons as a place for waste disposal would also have to be abandoned. Restrictions on the disposal of domestic sewage are widely accepted in the Western world; we are still struggling to close the commons to pollution by automobiles, factories, insecticide sprayers, fertilizing operations, and atomic energy installations. …

Every new enclosure of the commons involves the infringement of somebody\’s personal liberty. … The most important aspect of necessity that we must now recognize, is the necessity of abandoning the commons in breeding. No technical solution can rescue us from the misery of overpopulation. Freedom to breed will bring ruin to all. At the moment, to avoid hard decisions many of us are tempted to propagandize for conscience and responsible parenthood. The temptation must be resisted, because an appeal to independently acting consciences selects for the disappearance of all conscience in the long run, and an increase in anxiety in the short. The only way we can preserve and nurture other and more precious freedoms is by relinquishing the freedom to breed, and that very soon.\”

Hardin did not go into detail about population policy here, but in general, he writes approvingly of \”mutual coercion, mutually agreed upon by the majority of the people affected.\”

It has become commonplace to refer to the rise of antimicrobial resistance (AMR) as a tragedy of the commons. Each individual wishes to use the common-pool resource of functioning antimicrobials whenever they might have a beneficial effect (whether in treating human illness or in raising livestock), but overuse accelerates the spread of drug-resistant pathogens, so the drugs become useless to all—and therein lies the tragedy. …Whereas Hardin emphasized private or state ownership to achieve this, Ostrom argued that those who share in exploiting a common-pool resource can develop their own rules to prevent its overuse. She identified factors that are conducive to the establishment of effective institutions to regulate the exploitation of a resource: Users have common interests; they place a high value on the resource far into the future; users support effective monitoring; accurate information is valued and easily communicated; and it is feasible to establish binding and enforceable regulations. … 

Many of Ostrom\’s observations are starting to be fulfilled in the search for solutions to the problems of AMR, even if few people in this area explicitly set out to apply her work. The growing threat of AMR is increasingly understood by medical professionals, policy professionals, and the public alike. The associated discourse reflects the common, long-term interests of these diverse users. The widely accepted need for better surveillance of AMR signals rising support for effective monitoring and accurate, shared information. In a growing search for effective rules, physicians are adhering more strictly to evidence-based guidance for diagnosing infections; for infection control in hospitals; for procuring, prescribing and dispensing antimicrobials; and for ensuring that patients complete treatments. Beyond codes of practice, governments have in some settings introduced methods of enforcement, such as restricting the use of essential drugs to certified treatment centres. And public health specialists have called for AMR to be included among the International Health Regulations, a legally binding agreement to prevent the international spread of disease. Last, the global nature of the challenge is acknowledged in the World Health Organization\’s leadership in developing new norms for using existing antimicrobials and investing in new ones.

For economists, the tragedy of the commons is a memorable example of a situation where people pursuing their own self-interest will unleash a dynamic that leads to outcomes making everyone worse off than before. But the development of the idea has also brought forward the idea that while market coordination can fail, so can coordinatiou through government and coordination through social customs. In some ways, the tragedy that ultimately underlies the \”tragedy of the commons\” is the recognition that gains from cooperation are possible, but not being achieved.

If carbon capture and storage was cheap and easy, it would be a technological fix for the issue of climate change. It\’s not that simple, of course. But along with a range of other technologies and policies, carbon capture and storage can be part of the answer. In the Global Status of CCS 2018, the Global CCS Institute provides an overview of this technology (download requires free registration). The tone of the report is boosterish and upbeat about the technology–but it\’s also full of facts and case studies and background about efforts currently underway.

Here are some main points:

When the Intergovernmental Panel on Climate Change develops scenarios for how the world economy limit carbon in the atmosphere in the next few decades, a major expansion of carbon capture and storage is baked into those forecasts. 

\”In October 2018, the Intergovernmental Panel on Climate Change (IPCC) released its highly anticipated Special Report on Global Warming of 1.5 °C (SR15), reinforcing the role carbon capture and storage technology must play in beating climate change. … Significantly for CCS, it made the point that any remaining emissions would need to be balanced by removing CO2 from the air. CCS was acknowledged in three of all four pathways IPCC authors used to reach 1.5°C and was singled out for its ability to: `play a major role in decarbonising the industry sector in the context of 1.5°C and 2°C pathways, especially in industries with higher process emissions, such as cement, iron and steel industries.\’\”

There are a number of reasonably large-scale CCS facilities in operation, but they have naturally tended to pick the approaches that are already cost-effective. The question is whether CCS will spread into a much broader array of uses. 

There are now 43 commercial large-scale global CCS facilities, 18 in operation, 5 in construction and 20 in various stages of development. … The first-of-a-kind commercial CCS facilities addressed in this report have already been in operation for years, mostly in industrial applications. They are “low hanging fruit”  in terms of deployment – natural gas processing, fertiliser, ethanol production where CO2 capture is an inherent process of productions. There is still a swathe of industrial applications crying out for CCS application. There is also a wave of new innovations such as hydrogen with CCS, direct air capture, CCS hubs and clusters that need to be deployed. …

CCS is the conduit to a new energy economy of hydrogen production, bioenergy with CCS (BECCS), direct air capture (DAC) and carbon to value (C2V), representing a raft of CO2 reuse applications.

Hydrogen: Several CCS clean hydrogen initiatives are at the planning and feasibility stages in Europe – Hydrogen 2 Magnum (H2M) in the Netherlands, H21 North of England, Hynet North West, Ervia Cork CCS, HyDeploy in the UK. In Australia, the Hydrogen Energy Supply Chain is paving the way towards CCS enabled hydrogen production.

BECCS: Bioenergy with carbon capture and storage offers large-scale negative emissions (carbon removal) where CO2 emissions are removed from the atmosphere through the application of CCS to the transformation of trees and crops into energy fuels. The CO2 capture at Arkalon and Bonanza ethanol plants in Kansas, and CO2 storage in enhanced oil recovery, as well as Illinois Industrial CCS are well-known BECCS operations in the US.

DAC: Direct air capture, whereby CO2 is removed directly from the atmosphere through the use of capture technologies that bind or “stick” to CO2, is operating successfully at Zurich-based Climeworks, Canada’s Carbon Engineering (CE), and Global Thermostat in the US.

C2V: CO2 is being innovatively used to manufacture new C2V products, including fertiliser feedstock (SABIC in Saudi Arabia), soda ash (Carbon Clean Solutions in India), foams used in mattresses and upholstered furniture (Cavestro in Germany), bricks and cement (Australia’s Mineral Carbonation International), it is acid gas injection with subsequent CO2 storage.

The last 12 months have been particularly refreshing in the world of CCS. There has been a noticeable surge in inclination and activity with policy-friendly CCS legislation introduced in the United States (45Q), China (an ETS) to new levels of political action undertaken in the UK (the Rt Hon Claire Perry’s CCUS Cost Challenge Task Force), Norway (ACT – Accelerating CCS Technologies), and the Netherlands (CCS Road-map). …  More and more, people are seeing the practicality and importance in deploying the one technology proven to decarbonise “difficult” sectors such as cement and steel and “locked-in”  fossil fuel-based infrastructure. … The concept of industrial CCS hubs and clusters is taking rapid shape in North Western Europe … Industry is closely situated, storage resources are abundant, employment is assured, the business case is obvious.

For those interested in reading more:

• David W. Keith, Geoffrey Holmes, David St. Angelo and Kenton Heidel discuss \”A Process for Capturing CO2 from the Atmosphere,\” in the August 15, 2018 issue of Joule (2:8, p1383-1636).  A readable discussion of this research in the Atlantic is here, and in Technology Review is here. 
• In Technology Review (Februrary 20, 2018), James Temple provides a discussion of how a tax credit provision in the tax bill passed in December 2017 may give a boost to carbon capture efforts in the US. The article is:  \”The carbon-capture era may finally be starting: Analysis of a newly approved tax credit shows it could make an immediate dent in industrial emissions and narrow the financial gap for power plants.\” 
• My previous blog posts on this subject include \”The State of Play with Carbon Capture and Storage\” (January 9, 2018), \”Carbon Capture and Storage: No Stone Unturned\” (July 7, 2016), and \”Carbon Capture and Storage: An Update\” (December 24, 2013).

Studies of income inequality use different measures of income, and unsurprisingly, reach some different results. Steven J. Rose lays out some differences in the major studies looking at changes in inequality of US income since 1979 in \”How Different Studies Measure Income Inequality in the US,\” just by the Urban Institute (December 2018).

This table gives a sense of some of the issues involved. The question is seemingly a straightforward one: that is, what is the median income growth from 1979 to 2014. But the answers range from -8% to +51%.

Why do the answers vary? The rest of the table gives some clues. Most of these studies rely on data from the Current Population Survey from the US Census Bureau, but some rely on data from income tax returns. The indexes used to adjust for inflation are different. The definition of income can be before-taxes and before-transfers, or after-taxes and after-transfers. A value can be placed on non-income government benefits, like the value of Medicaid and Medicare, or not. A value can be included for employer-paid benefits, or not. Income can be defined broadly as including gains in home values in a given year, or more narrowly focused on income directly received in a given year. The figures can be adjusted for the number of people per household, or not.

These kinds of issues will matter for measures of inequality, too. For example, consider the question of what share of total income went to the top 1% of households in 1979 and 2014. Here\’s a table from Rose:

Using the method of Piketty and Saez (2003), share of income going to the top 1% rose by 11.9 percentage points. Using the 2018 method of those two authors, together with Zucman, the share of income going to to top 1% rose by roughly half as much–similar to the projections of the Congressional Budget Office.

But some studies use methods which suggest the share going to the top 1% has risen by much less. Here\’s how Rose describes the different methodological choices made by the Auten and Splinter study shown here:

\”Auten and Splinter note that many high-income people control how and when they get paid. When marginal tax rates were high (at least 70 percent) before 1980, many executives and business owners minimized their cash payments and increased their ownership stakes’ net worth. In 1986, marginal tax rates fell to 28 percent, thus changing executives’ and business owners’ compensation preferences. Consequently, Auten and Splinter developed a measure of `consistent market income\’ for each year.

\”Auten and Splinter exclude dependent tax filers, adjust incomes for family size, and stratify, as CBO does, with equal numbers of people in each percentile. This approach is considerably different from that of Piketty, Saez, and Zucman, who count every person over age 19 (where married couples share joint income and dependents have only their personal income). This difference may seem trivial, but it leads to a much larger number of low-income cases in Piketty, Saez, and Zucman’s report than in Auten and Splinter’s.

\”Finally, Auten and Splinter allocate the 17 percent of national income that is collective consumption (e.g., defense, education, police, fire, courts, and administration) differently than do Piketty, Saez, and Zucman, who apportion this total per individuals’ disposable income. Auten and Splinter evenly split collective consumption between per capita and posttax incomes. This difference moves about 3 percent of national income from the top 10 percent to the bottom 50 percent.\”

 Rose mentions some other studies that do not offer a direct comparison of 1979 to 2014, but over a roughly similar time period suggest that the top 1% is not increasing its share of income as much as some other studies suggest. For example, some studies have mixed in data from the Survey of Consumer Finance which is done every three years by the Federal Reserve. He writes:

\”Bricker and colleagues (2016) are researchers at the Federal Reserve Board closely involved in producing and disseminating information from the Survey of Consumer Finances. … [T]his study attempts to allocate all national income to families and finds a small gain in the top 1 percent’s income share, from nearly 16 percent in 1988 to nearly 18 percent in 2012. Larrimore and colleagues (2017) find a small gain (under 2 percentage points) in the top 1 percent’s income share. This study uses a combination of income tax records, the CPS, and the Survey of Consumer Finances to estimate capital gains accrual by year for every class of capital ownership, including homeownership by county and by tax-preferred retirement accounts.\”

What\’s the bottom line here? Rose tries to apply a common standard across all of these studies, following the guidance of the \”Canberra Group\” of experts in this area. He writes: 

\”[T]he top 10 percent of the income ladder captured 45 percent of income growth from 1979 to 2014; and  the share of the top 1 percent grew 3.5 percentage points. All studies find that income inequality rose after 1979, but common perceptions that all income gain went to the top 10 percent and middle class incomes stagnated (or even declined) are wrong.\”

I won\’t try here to dig down into the merits of these different approaches. I\’ll just note that when hearing someone make a claim about patterns of inequality, knowing exactly what they are measuring will have a big effect on the answer they give.

Timur Kuran \”critically evaluates the analytic literature concerned with causal connections between Islam and economic performance\” in his essay \”Islam and Economic Performance: Historical and Contemporary Links,\” published in the most recent issue of the Journal of Economic Literature (December 2018, 56:4, pp. 1292–1359). He is not interested in sweeping generalizations, but rather in discussing work published in the the last two decades in the professional economics literature. From the abstract:

\”Among the findings are the following: Ramadan fasting by pregnant women harms prenatal development; Islamic charities mainly benefit the middle class; Islam affects educational outcomes less through Islamic schooling than through structural factors that handicap learning as a whole; Islamic finance has a negligible effect on Muslim financial behavior; and low generalized trust depresses Muslim trade. The last feature reflects the Muslim world’s delay in transitioning from personal to impersonal exchange. The delay resulted from the persistent simplicity of the private enterprises formed under Islamic law. Weak property rights reinforced the private sector’s stagnation by driving capital from commerce to rigid waqfs. Waqfs limited economic development through their inflexibility and democratization by keeping civil society embryonic. Parts of the Muslim world conquered by Arab armies are especially undemocratic, which suggests that early Islamic institutions were particularly critical to the persistence of authoritarian patterns of governance. States have contributed to the persistence of authoritarianism by treating Islam as an instrument of governance. As the world started to industrialize, non-Muslim subjects of Muslim-governed states pulled ahead of their Muslim neighbors, partly by exercising the choice of law they enjoyed under Islamic law in favor of a Western legal system.\”

(Side note: The Journal of Economic Literature is published by the American Economic Association, which also publishes the Journal of Economic Perspectives where I work as Managing Editor. JEL is not freely available online, but many readers will have access through library subscriptions.)

Here\’s some additional detail on a few of these points, but Kuran\’s article has a wealth of greater detail on history, institutions, and economic studies:

Ramadan fasting by pregnant women

\”The timing of Ramadan is based on lunar cycles rather than the solar year. Because lunar months are shorter than solar months, it moves about ten days backwards every year, relative to the solar- based Gregorian calendar. The length of the daily dawn-to-dusk fast also varies, in this case because of interactions between latitude and the time of year when Ramadan falls. Exploiting the variations in time of year and length of fast, researchers have identified both immediate and long- term negative effects on growth.

\”Based on cross- country comparisons, Campante and Yanagizawa-Drott (2015) find that longer fasting depresses production and thus economic growth. Several other studies (Almond and Mazumder 2011; van Ewijk 2011; Majid 2015; Almond, Mazumder, and van Ewijk 2015) use intertemporal variations in particular countries to identify how fasting during early pregnancy affects the offspring’s prenatal development, physical attributes, educational achievement, and economic success. Their analyses show that individuals whose mothers fasted while they were in utero have shorter lives, worse health, less mental acuity, lower educational achievement, and weaker performance in the labor market. The magnitudes in question are substantial. Majid’s study shows that adults exposed to the fast while in utero work 4.5 fewer hours per week. The Almond and Mazumder study finds that mental disabilities stemming from exposure to the fast during month one in utero accounts for 15 percent of all mental disabilities among Muslims. The evidence is overwhelming that the fasting ritual, as currently practiced, depresses the global economic competitiveness.\”  

Islamic finance

\”Islamic finance refers to a class of financial transactions that are ostensibly free of interest and compatible with Islamic teachings. It encompasses Islamic banking, asset- backed Islamic bonds known as sukuk, Islamic insurance known as takaful, along with Islamic credit cards, mutual funds, stock indexes, mortgages, and microfinance. The Islamic finance market was estimated to hold assets around $2 trillion in 2016 (Islamic Financial Services Board 2016). The figure represented 1 percent of the global finance market of around $200 trillion. The global share of Islamic finance pales in comparison to the 24 percent share of Muslims within the global population … Evidently, only a small share of the financial transactions by or among Muslims follows a self-consciously Islamic template. Nevertheless, in the Muslim world and even beyond, the rise of Islamic finance represents a challenge to conventional finance. …

\”Scholarship on Islamic banking focuses on whether its actual operations differ in any fundamental way from conventional banking, which deals in interest openly and without apology. In practice, various researchers have shown, the returns of Islamic banks are statistically indistinguishable from those of the conventional banks with which they compete. They generally set their “profit shares” in advance through procedures that make simple transactions look complex. Hence, their returns amount to what most economists call interest. The reason why Islamic banks resort to interest is not for lack of commitment to their charter. Rather, like profit- maximizing conventional banks, they consider interest advantageous under conditions of asymmetric information …\”

Islamic charities

\”Self-consciously Islamic charities tend to outperform governments in providing social services. But the same is true of private secular charities. Evidently, the successes of Islamic charities stem from superior organization, rather than Islam itself. Indeed, from an organizational standpoint, today’s Islamic charities harken more to the charities of advanced modern societies than to anything found in seventh-century Arabia. Although Islamic charities generally tout their services to the poor, by and large their beneficiaries belong to the middle class.\”

If you would like more Kuran, a starting point would be his two earlier articles in the Journal of Economic Perspectives touching on some of these same themes.

• Kuran, Timur. 1995. \”Islamic Economics and the Islamic Subeconomy.\” Journal of Economic Perspectives, 9 (4): 155-173.
• Kuran, Timur. 2004. \”Why the Middle East is Economically Underdeveloped: Historical Mechanisms of Institutional Stagnation.\” Journal of Economic Perspectives, 18 (3): 71-90.

\”Welfare\” was a common label for what used to be Aid to Families with Dependent Children (AFDC), which in the 1996 \”welfare reform\” legislation morphed into Temporary Assistance to Needy Families (TANF). A common concern at the time was that too many welfare recipients were capable of holding jobs–especially in the relatively healthy labor market of that time. Thus, the welfare reform legislation created a requirement that there was a time limit for  how long welfare could be received, and that recipients had to be looking for work or getting training. In addition, federal support for the TANF program was turned into a block grant that states had considerable discretion in how to spend, as long as the ultimate goal was helping needy families.

The experience in the few years immediately after the welfare reform legislation of 1996 in some ways validated these concerns. The number of welfare recipients dropped substantially, suggesting that with a push, a number of welfare recipients could find jobs. But now it\’s 22 years later, and the evolution of welfare–by which I specifically mean the TANF program–has had steadily less effect in its core purpose of providing temporary assistance to needy families. A group of researchers at the Center on Budget & Policy Priorities, including Ife Floyd, Ashley Burnside, and Liz Schott, have been detailing this issue in a series of reports in 2018.

For examaple, ,Ife Floyd, Ashley Burnside, and Liz Schott discuss  \”TANF Reaching Few Poor Families\” )November 28, 2018). The graph shows the share of families with children in poverty that received AFDC benefits before 1996 or TANF benefits since then. Back in 1996, about 2/3 of families with children in poverry received TANF benefits; now it\’s less than 1/4,

There is enormous variation across states. There are about 15 states where fewer than 10% of the families with children in poverty receive TANF benefits.

One issue here is that the actual amount spent on TANF has been falling in real dollars (that is, after adjusting for inflation) since its creation in 1996. Liz Schott, Ife Floyd, and Ashley Burnside lay out the overall pattern in at \”How States Use Funds Under the TANF Block Grant\” (April 2, 2018). They write:

Under TANF, the federal government gives states a fixed block grant totaling $16.5 billion each year. This annual amount has not increased for inflation over the past two decades and now is worth over one-third less than when TANF was created. Under the law’s maintenance-of-effort (MOE) requirement, states must maintain a certain level of state TANF spending, based on a state’s spending for AFDC and related programs prior to TANF’s creation in 1996. (States are required to maintain 80 percent, or in some cases 75 percent, of their historical spending level.) This minimum state spending threshold has also declined by one-third in value due to inflation. States may also qualify for federal “Contingency Funds”; roughly 20 states have done so for the last several years. In 2016, states spent $30.9 billion in combined federal TANF ($15.9 billion) and state MOE ($15 billion) funds.

What\’s happening here is that states have considerable flexibility in how to spent TANF funds, and they are using the money in a range of ways. Here a figure showing the national distribution of how states spend the federal and state TANF money. 

With TANF money going to this array of programs, the size of actual TANF benefits received by families in most states has fallen since 1996. Ashley Burnside and Ife Floyd lay this out in \”TANF Benefits Remain Low Despite Recent Increases in Some States\” (October 25, 2018). In 36 states, the value of TANF benefits is at least 20% less now than back in 1996. 

Of course, it\’s always important to remember that there is a portfolio of anti-poverty programs. There is sometimes a tendency to think of welfare as the main government program providing assistance for those with low incomes. But that hasn\’t been true for awhile now. For example, the Supplemental Nutrition Assistance Program (SNAP), commonly known as food stamps, has spending of about $70 billion per year. The Earned Income Tax Credit is roughly another $70 billion per year. In turn, these are dwarfed by Medicaid spending at $581 billion in 2017.  Low income people may also benefit from a range of other programs, including Supplemental Security Income (SSI), Social Security, disability insurance, unemployment insurance, housing assistance, and others.

But whatever the arguments over welfare reform back in 1996, the TANF program as it has emerged more than two decades later is providing substantially less assistance to low-income families. Some of the poor and near-poor have found their way into employment, but the number of families with children in extreme poverty seems to have risen.  The most recent of the studies cited here notes:

Researchers H. Luke Shaefer and Kathryn Edin found that the number of U.S. households living in extreme poverty in any given month more than doubled between 1996 and 2011, from 636,000 to 1.46 million; the number of children living in such households also doubled, from 1.4 million to 2.8 million. These households are “concentrated among those groups who were most affected by welfare reform,” they explained.

For some previous posts looking back on how welfare reform has evolved from when it used to be  see …

As an overall pattern over the decades, spending in the US health care has been rising, both on a per person basis and as a share of GDP, and a number of health outcomes have improved. Are the benefits worth the costs?

Jeffrey Selberg, Bradley Sawyer, Cynthia Cox, Marco Ramirez, Gary Claxton and Larry Levitt tackle the question \”A generation of healthcare in the United States: Has value improved in the last 25 years?\” in a short essay published by the Peterson Center on Healthcare and the Kaiser Family Foundation (December 6, 2018).

In terms of health care costs: \”In 1991, the GDP attributable to healthcare was 12.8% or $788 billion. In 2016, healthcare consumed 17.9% of GDP or $3.3 Trillion.\”

In terms of health care status: \” Between 1991 and 2016, life expectancy increased by 3.1 years to 78.6, representing a 4% improvement. In the same time, disease burden (as measured by the total number of disability adjusted life years, or DALYs) improved by 12%.

Disease burden is comprised of two factors: years of life lost to premature death, which improved by 22%, and years living with disability, which worsened by 2%. The improvement in overall years of life lost was driven by a remarkable 36% reduction in years lost due to premature death from diseases of the circulatory system. At the same time, the worsening of years living in disability was led largely by an increase in substance use disorders. Moreover, substance use is one of the primary contributors to the slight decline in life expectancy in 2015 and 2016, the first time life expectancy has dropped two years in a row in several decades. Another critical outlier where outcomes have worsened in the U.S. (and not other comparable countries) is maternal mortality, which has gone up significantly from 14 deaths per 100,000 live births in 1991 to nearly 31 in 2016.\”

Again, are the benefits worth the costs of health care spending? There are at least three ways to tackle this question, none of them fully satisfactory.

1) One approach is to put a monetary value on the extending life expectancy by a healthy year (mid-range estimate run about $100,000) and on the value of a human life (about $9 million, for reasons given here). These authors decide not to take this approach. They write: \”Much more analysis and discussion, beyond the scope of this paper, would be necessary to make such a judgement.\”  In a way, that\’s fair enough. As if the problems of putting monetary values on health outcomes were not enough, a deeper issue with this approach is that many factors affect health outcomes other than health care spending, so a basic comparison of changes in health spending with changes in overall health outcomes wouldn\’t make sense. The economist in me would like to see the results of such an analysis, even just a back-of-the-envelope calculation. But I readily confess that, for example, thinking about how to measure the benefits of US has health care spending against a changing health issues like the opioid epidemic or the rise in maternal mortality mentioned above raises some difficult issues.

2) An alternative approach is to do an international comparison. How do the changes in US health care spending and US health outcomes compare with other high-income countries? The overall pattern is that in the last 25 years, other countries have seen about the same rise in per capita  health care spending as in the US (although at a lower overall levels), while achieving higher gains in health. The authors write: \” Over the past 25 years, similarly sizable and wealthy nations generated an average increase in life expectancy of 5.2 years, or 7%, compared to the U.S.’s 3.1 years, or 4% improvement. In these countries, disease burden improved by 22%, compared to the U.S.’s 12%.  … On average, comparable countries spend under two thirds (60%) of what the U.S. spends on healthcare relative to GDP, while the per capita spending growth has been similar over the last three decades.\”

3) However, international comparisons also raise raise the question: Are health care problems in the US in some ways worse than in other countries, so that US health care spending is higher in part because it is facing bigger challenges? In the comparison with other high-income countries, the authors write: \”The disease burden in the U.S. is appreciably higher at 24,235 versus 18,605 disability adjusted life years per 100,000 population—a difference of 30%. … The 2016 U.S. rate of obesity is over twice that of other high-income countries (40% versus 17%).\”:

4) There are two possible goals for society to consider: improving health, and making sure that people have health insurance so that they are not overly exposed to high health care costs. These goals overlap, but they aren\’t the same. If the goal is to improve health outcomes, it might make sense for the US to spend less on health care, and instead to spend more on the social determinants of health like better housing. In their international comparisons, the authors note:

\”According to the OECD’s 2016 measure of poverty (which can be applied across countries more easily than the U.S. federal poverty level), 18% of people in the US are living below poverty, versus 10% in comparable OECD countries. When combined, public and private spending on social services and healthcare is fairly similar across these countries (30.5%) and the U.S. (32.6%), but the distribution is very different in the U.S., where we spent much more than average on health (16.3% vs 10.5% of GDP) and less than average on public social services (16.3% vs 20.0% of GDP) in 2013, the most recent year of available data on social services spending internationally.\”

In general, I\’m a supporter of programs that expand health insurance coverage, like Medicaid and the changes in the 2010 Patient Protection and Affordable Care Act. But it\’s worth remembering that when we commit substantial resources to making health insurance available, the main effect may be to reduce financial stress rather than to improve physical health outcomes. Medicaid costs thousands of dollars per person. The 2010 Patient Protection and Affordable Care Act expanded health insurance coverage to about 22 million more people at an annual cost to the federal government of about $110 billion–so about $5,000 per person. If the goal is to improve people\’s physical health, then alternative ways of spending that money might well have a larger effect: say, steps focused on reducing the opioid epidemic, or reducing maternal mortality, or broader improvements in the living conditions of the poor and near-poor.

At the heart of the problem in defining an economic strategy toward China is the following awkward fact: Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly, or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percent.

Equally, while some U.S. companies might earn more profits operating in China, and some job displacement in American manufacturing because of Chinese state subsidies may have occurred, it cannot be argued seriously that unfair Chinese trade practices have affected U.S. growth by even 0.1 percent a year.

This is not to say that China is not a threat to the international order. It is a seismic event for the United States to be overtaken after a century as the world’s largest economy.

It\’s worth spelling out the underlying logic here a bit. The formula for economic growth is to invest in human capital, physical capital, and technology, in an economic environment that provides incentives for hard work, efficiency, and innovation. China has made dramatic changes in all of these areas, and they are the main drivers behind China\’s extraordinary economic growth in the last four decades, and its expectation of above-global-average growth heading into the future.

Looking specifically at trade, China\’s exports of goods and services were 19.7% of GDP in 2017, and its imports of goods and services were 18% of GDP. China\’s economy has been growing at 6-7% per year, so the overwhelming majority of that growth has been economic production in China for domestic consumption. No matter your views of China\’s trade surplus, there\’s no sensible economic theory which suggests that China\’s trade surplus, which as a share of GDP is relatively small, is a major driver of China\’s growth.

Yes, there was a \”China shock\” after China entered the World Trade Organization in 2001, when China\’s exports suddenly soared from 20.3% of GDP in 2000 to 36% of GDP in 2006. The size of this shock was not predicted by China or others, and it\’s fair to argue that neither the US nor others in the world economy did a good job of reacting to that shock at the time. But again, China\’s exports are now down to 19.7% of GDP in 2017–a lower proportion of China\’s economy than in 2000. To put it differently, China\’s exports have been growing more slowly than the rest of its economy since 2006.

Conversely, the US economy has not done a great job of investing in the fundamentals of economic growth. The US once led the world in share of workers with higher education, but now it\’s middle-of-the-pack. The US is a low-saving economy, with low rates of investment in both private and public capital. US spending on research and development has been stagnant for years, while other countries have been expanding. Rates of business start-ups have been declining.  Mobility of US workers is down. Economic mobility between generations in the US is not high. Further, the US has made little progress–and little effort–to address ongoing issues like the projections of large and growing budget deficits, or rising health care costs, or a much higher level of income inequality than a few decades ago.

But in 21st century, when it comes a wide array of decisions–international trade talks, decisions of the the International Monetary Fund and the World Bank, who leads the way during global financial crises, who dominates the flows of international investment capital and foreign aid, who has the power to impose trade or financial sanctions, and what kind of military threats are most credible–the shifts in the global economy suggest that the high-income countries of the world will not dominate as they did during most of the 20th century. Instead, countries with the world\’s largest economies, but much lower standard of living for their populations, will play a central role in setting the rules. 

\”The 2017 Tax Act, sometimes called the Tax Cuts & Jobs Act, has been heralded by some as historic reform and by others as Armageddon. This Collection analyzes the Act, exploring the process by which it was passed, the values that undergird its policies, and how specific provisions will affect the structure of the U.S. and global economy moving forward.\” Thus begins a five-paper \”Forum: Reflections on the 2017 Tax Act\” from the Yale Law Journal (dated October 25, 2018)

Michael J. Graetz writes the \”Foreword—The 2017 Tax Cuts: How Polarized Politics Produced Precarious Policy.\” He touches on a number of the themes mentioned in the two papers by Joel Slemrod and Alan Auerbach in the\”Symposium on the Tax Cuts and Jobs Act\” that appeared in the Fall 2018 issue of the Journal of Economic Perspectives: yes, the US corporate taxation needed both lower rates and more sensible treatment of multinational companies, but in many ways the new tax bill created a muddle–and a muddle that will lead to substantially higher budget deficits. Here\’s a flavor of Graetz (footnotes omitted throughout): 

\”The Democrats’ complaints about the law’s reduction in the corporate tax rate from 35% to 21% ring hollow. Democrats themselves had long realized that the U.S.’s exceptionally high corporate tax rate in today’s global economy—with highly mobile capital and intellectual property income—invited both U.S. and foreign multinational companies to locate their deductions, especially for interest and royalties, in the United States, and to locate their income in low- or zero-tax countries. This is obviously not a recipe for economic success. Both before and after the legislation, Democrats urged a corporate tax rate of 25% to 28%; meanwhile, Donald Trump asked for a 15% rate.So, even if Democrats had been involved in the legislative process, the 21% rate that we ended up with would be in the realm of a reasonable compromise. … [A] significantly lower corporate rate has been long overdue, and raising it would be a mistake. If Democrats are unhappy with the distributional consequence that a corporate tax cut will benefit high-income shareholders, the appropriate remedy––given the mobility of business capital, businesses’ ability to shift mobile intellectual property and financial income to low-tax jurisdictions, and the challenges of intercompany transfer pricing––is to increase taxes at the shareholder level, not to increase corporate tax rates. …

Congress’s greatest challenge in crafting this tax legislation was figuring out what to do about the international tax rules. … Congress confronted daunting challenges when deciding what rules would replace our failed foreign-tax-credit-with-deferral regime. There were essentially two options: (1) strengthen the source-base taxation of U.S. business activities and allow foreign business earnings of U.S. multinationals to go untaxed; or (2) tax the worldwide business income of U.S. multinationals on a current basis when earned with a credit for all or part of the foreign income taxes imposed on that income. Faced with the choice between these two very different regimes for taxing the foreign income of the U.S. multinationals, Congress chose both. …
No doubt analysts can find provisions to praise and others to lament in this expansive legislation, but we should not overlook its most important shortcoming: its effect on federal deficits and debt.  …

Under the 2017 tax law, the federal debt held by the public is estimated to rise to more than 96% of GDP by 2028, and this does not count the omnibus spending bill signed in 2018 by President Trump. … If the current policy levels of taxes and spending are maintained, total deficits over the next decade will approach $16 trillion, with deficits greater than 5% of GDP beginning in 2020. By 2028, current fiscal policy will produce deficits of more than 7% of GDP annually. This is unsustainable. … The budget legislation of the 1990s, along with the economic growth unleashed by the information technology revolution of the late 1990s, completely eliminated the projected deficits by the year 2000 and produced a federal surplus for the first time since 1969. Indeed, the budget surpluses projected by the Congressional Budget Office at the beginning of this century were so large that, in March 2001, Chairman of the Federal Reserve Alan Greenspan told Congress that the federal government would soon pay off all of the national debt and would have to begin investing its surplus revenues in corporate stocks, a prospect he abhorred. The good news is that this problem has been solved. 

I was also struck by the essay by Linda Sugin, \”The Social Meaning of the Tax Cuts and Jobs Act.\” Sugin describes the social values that seem to underlie the provisions of the TCJA. She writes:

This Essay discusses five American priorities and values revealed by the TCJA:

1. The traditional family is best;
2. Individuals have greater entitlement to their capital than to their labor;
3. People are autonomous individuals;
4. Charity is for the rich; and
5. Physical things are important.

The TCJA’s distributional effects dovetail with these values. … First, traditional families with a single working spouse and a stay-at-home spouse are disproportionately prosperous, so subsidizing that family model reduces progressivity. Second, access to capital increases with affluence, so a greater entitlement to investment income favors taxpayers who enjoy that affluence. Third, valuing individual autonomy is consistent with robust individual property rights, and less consistent with high levels of taxation for shared community purposes. Fourth, favoring the charitable giving of the rich allows them tax reductions not available to others, and sends the message that philanthropy substitutes for tax paid. Fifth, prioritizing physical assets favors individuals are able to invest in such assets and underrates the important value that workers contribute to prosperity. Critics of the legislation concerned about the law’s reallocation of tax burdens down the income scale and its projected budgetary deficits must focus more on these embedded priorities.

Of the other three papers, two papers dig into details of the changes in the international corporate tax regime, while the other argues that the Tax Cuts and Jobs Act will push firms away from the use of debt financing–and thus toward alternative types of financing–with implications that are not yet clear.

Rebecca M. Kysar discusses \”Critiquing (and Repairing) the New International Tax Regime.\”

\”In this Essay, I address three serious problems created—or left unaddressed—by the new U.S. international tax regime. First, the new international rules aimed at intangible income incentivize offshoring and do not sufficiently deter profit shifting. Second, the new patent box regime is unlikely to increase innovation, can be easily gamed, and will create difficulties for the United States at the World Trade Organization. Third, the new inbound regime has too generous of thresholds and can be readily circumvented. There are ways, however, to improve upon many of these shortcomings through modest and achievable legislative changes, eventually paving the way for more ambitious reform. These recommendations, which I explore in detail below, include moving to a per-country minimum tax, eliminating the patent box, and strengthening the new inbound regime. Even if Congress were to enact these possible legislative fixes, however, it would be a grave mistake for the United States to become complacent in the international tax area. In addition to the issues mentioned above, the challenges of the modern global economy will continue to demand dramatic revisions to the tax system.\”

Susan C. Morse raises implications about International Cooperation and the 2017 Tax Act.

\”Some have criticized the 2017 Tax Act for lowering the corporate tax rate. This Essay argues instead that Congress deserves credit for bringing the U.S. rate in line with other OECD countries, potentially saving the corporate tax by establishing a minimum global rate. … There is a silver lining for the corporate income tax in the Tax Cuts and Jobs Act of 2017. This is because the Act’s international provisions contain not only competitive but also cooperative elements. The Act adopts a lower, dual-rate structure that pursues a competitiveness strategy and taxes regular corporate income at 21% and foreign-derived intangible income at 13.125%. But the Act also supports the continued existence of the corporate income tax globally, thus favoring cooperation among members of the Organisation for Economic Cooperation and Development (OECD). Its cooperative provisions feature the minimum tax on global intangible low-taxed income, or GILTI, earned by non-U.S. subsidiaries. Another cooperative provision is the base erosion and anti-abuse tax, or BEAT. The impact of the Act on global corporate income tax policy will depend on how the U.S. implements the law and on how other nations respond to it.\”

Robert E. Holo, Jasmine N. Hay and William J. Smolinski discuss issues of corporate leverage in \”Not So Fast: 163(j), 245A, and Leverage in the Post-TCJA World.\”

\”The Tax Cuts and Jobs Act will require large multinational corporations to reevaluate the use of debt in their acquisition and corporate structures. Changes to the Tax Code brought about by the Act have reduced incentives to use debt in these contexts. These changes may require practitioners to identify new approaches to financing acquisitions and will necessitate reevaluation of current capital structures used by large multinational entities. …

\”In other words, is it a good idea to dampen the worldwide preference for debt in capital structures? Is there a problematic preference for debt that needs fixing in the first place? It is likely too early to make that call given the potential number of unintended consequences that my result under the new law. … By changing the rules of the game, the IRS has effectively changed the inputs to that modeling exercise. It remains a complicated question whether, holistically, business entities carry excess debt relative to equity; but it is certainly the case that a new set of rules which, on their face, appear to favor equity over debt, may very well cause those modeling exercises to produce an output that suggests a shift in debt-equity preferences is in order.\”