Matthew Yglesias's Blog, page 2352

American Taxes Are Low

All things considered, public policy across the developed world does very similar things. It promotes health insurance, gives pensions to the elderly, offers income support to the poor, pays for basic infrastructure, and does some subsidization of rural lifestyles that people feel sentimental about. But levels of taxation vary wildly.

Jamelle Bouie, the Center on Budget and Policy Priorities has a chart that makes the case:

This is one important reason why the United States has large projected budget deficits.

Inflation Expectations Creeping Up

Some good news from Ryan Avent on the inflation expectations front:

Inflation expectations are inching up. That's good! The Fed began QE2 in order to reverse a steady decline in expectations, and a rise in expectations reduces real interest rates, which helps to stimulate the economy.

There are only two problems here. One is that though expectations are now moving in the right direction, they're still lower than would be optimal. It'd be nice to see expectations pushed all the way up to Reaganesque levels in the 4 or 5 percent range, but even if that's unrealistic ten year expectations could at least get above two. The other problem is that any hint of effective monetary policy and growth expectations seems to spark a new round of crazy talk from Fed hawks about the need to tighten policy.

Privatizing Medicare Will Destabilize Benefits For All Seniors, Even Those Allegedly Exempted From It

According to Paul Ryan, privatizing Medicare will open up a universe of benefits to patients so bounteous that they won't even mind that the value of the vouchers they're getting is eroding at a frightening rate. But also according to Paul Ryan, today's elderly people don't need to worry about the fact that this doesn't make sense since "if you're 55 and above, no changes whatsoever in Medicare." I've written before about how politically unstable this is going to be. Ryan is essentially promising people born in 1956 and earlier that people born in 1955 and later are going to keep taxing ourselves to finance an expensive program that we'll never benefit from.

My colleague Igor Volsky adds the observation that even if this problem is avoided, Medicare will be actuarially destabilized anyway:

In 2022, newly-eligible beneficiries would have to enroll in a private plan, but existing beneficiaries (those who are over 55 today) would also have the option of leaving traditional Medicare. As Ryan's budget put it, "While there would be no disruptions in the current Medicare fee-for-service program for those currently enrolled or becoming eligible in the next ten years, all seniors would have the choice to opt into the new Medicare program once it begins in 2022. No senior would be forced to stay in the old program."

That opens up the possibilities of private plans trying to lure away the healthiest beneficiaries (as is currently the case in Medicare Advantage) and of health care providers abandoning traditional Medicare patients for the higher reimbursement rates of private insurers. For chronically ill seniors who are more likely to remain in fee-for-service Medicare this means two things: higher costs (as the healthier beneficiaries exit the risk pool) and fewer doctors.

You could conceivably deal with the adverse selection issue, but the provider abandonment problem is completely unsolvable. Right now most health care providers accept Medicare even though its payment rates are stingy because the customer base is so large. Under Ryancare, starting in eleven years the size of the Medicare customer base will start to erode. That means each and every year more providers will find it's in their interests to abandon Medicare patients. Imagine the sorry fate of the Last Medicare Patient In America, alone and adrift in a world of privatization. Who's going to take his insurance? Nobody. But of course there won't be any such Last Medicare Patient because the combination of actuarial and political instability ensures that sometime in the late 2020s or early 2030s, the remaining stock of Medicare beneficiaries will be tossed into the higher-cost voucher pool.

Friday Freaky Future Politics

Neil Sinhababu says we can't know the future of the welfare state:

If there's one thing I'm convinced of about the future, it's that it's going to be really weird in ways we can't imagine right now. There's going to be all sorts of crazy new technologies. Some of them are going to transform human social relations in ways we can't predict in advance. Others might make life utterly awesome for those who have them, making it an important big government liberal cause to provide them to everybody. The government is violating people's right to pleasure if it doesn't fund the writing of the program that allows people to set themselves up with whatever awesome sex dreams they want once they download it into their brains through the USB slot in the back of their necks! We need to discover the minimal physical unit that can have the experience of intense pleasure, and devote huge resources to manufacturing them by the quintillions!

I don't think that's right. There'd be no reason to specifically provide awesome sex dreams as an in-kind benefit. There's always an argument from the declining marginal utility of money for redistribution of money but that's different from saying there's specifically an argument for public subsidy for some specific thing. We want to subsidize activities that are associated with positive externalities (education, other stuff related to kids), do direct provision of risk-pooling (retirement security, some health insurance), and at least consider direct provision of natural monopolies (mostly physical infrastructure) but crazy pleasure machines have nothing to do with it.

The foreseeable game-changer here is some kind of genetic engineering. For many of the same reasons that we subsidize education, we might want to subsidize in utero interventions to improve the people of tomorrow. It wouldn't just be a question of equity, it would be a question of specifically wanting to encourage parents to invest in this direction. After all, you can't "win the future" just by having kids crack the books and work hard when in Finland the children emerge from the womb already two years ahead of us in math and science. I suspect the emergence of this kind of technology would substantially remap politics.

Mickey Kaus Explains That Barack Obama's Bad At Politics Because He's Black

Mickey Kaus:

Cost doesn't go into why Obama managed to get to the top of politics without being all that good at it. The answer is distressingly obvious: Obama's the biggest affirmative action baby in history.

It's brilliant. The only thing left to explain is how is it that white men are so disproportionately successful at getting elected to national office despite the terrifying obstacles that stand in our way.

Natural Resources Are No Guarantee Of Wealth

I don't know anything about Nigeria, so I found Dayo Olopade's article on the Nigerian election campaign fascinating. But it's worth observing that Bill Clinton ought to be smarter than this:

The contrast between potential and performance is fascinating in Nigeria—the fourth-fastest growing economy in the world. Nigeria is a major oil exporter whose sagging infrastructure still requires it to import petroleum for local use. The country expertly polices most of the African continent, in military operations from Sierra Leone to Sudan—yet can't squash poisonous regional tensions over oil and religion. Visiting Lagos in March, Bill Clinton remarked that "there is no reason why a country with so much resources and potential should be poor."

This happens all the time. If you take two very similar stable democracies like Norway and Denmark then it's true that, yes, Norway's natural resource wealth helps make it richer than Denmark. Similarly, Alaska would be nowhere without oil. But it's just not the case that natural resource wealth is some kind of ticket to prosperity for poor countries and it's probably well past time for people to stop being surprised about this. In the particular case of Nigeria, it seems like the fact that controlling the government means you control the oil has contributed to the country's public sector dysfunction. If you're running a country with few resources, you really only benefit personally from being in charge if you manage to run the country well. That's the story of, say, Singapore. Charles Kenny says there's not really a resource curse but it's clear that resource miracles are pretty rare.

Bailout, Bailout, Everywhere

One of the problems with public opposition to bailouts is that they don't actually stop bailouts from happening, they simply encourage governments to do what banks want and structure the bailouts in complicated ways that obscure what's happening. For example, as German politicians huff and puff about bailout out irresponsible EU countries they're actually bailing out German banks:

The announcement on April 6th that Portugal will become the third euro-area country to receive a bail-out was not well received in Germany. As the largest euro-area country, it is contributing 20% or €52 billion ($75 billion) to the bail-out funds of the three profligate countries, mostly via the euro area's European Financial Stability Facility. This is dwarfed however, by Germany's banks' exposure to the three countries, which totals €230 billion. Only around 12% of this is sovereign or public debt, but a sovereign default could easily lead to a slew of domestic bank and corporate defaults too, to which the country is far more exposed.

The remarkable thing about the discourse around this is the hegemony achieved by the view that when an unsustainable debt relationship occurs, it's the borrower who was being irresponsible. When you take out a loan, you have to make interest payments. You're charged interest precisely because the lender is taking on default risk and giving up liquidity. Of the two parties to the transaction, one—the lender—is the putative professional in the room, the expert assessor of risk. You don't bargain with a bank and say "pretty please give me a lower interest rate." You ask for a loan, the lender looks at the situation and makes you an offer, and you take it or leave it. Had German banks appropriately assessed default risks from Ireland, Portugal, etc. they would have asked for higher rates and fewer people would have borrowed. But the savers and financial intermediaries in high-savings countries failed to manage the capital flows responsibly. And now they're getting self-righteous about it.

Mike Pence On The Debt Ceiling In 2002: "I Truly Believe If You Owe Debts, You Pay Debts."

My colleague Pat Garofalo has the video of Rep Mike Pence (R-IN) speaking on the House floor in 2002 in favor of raising the debt ceiling. He was quite passionate about it at the time:

Hypocrisy and the debt ceiling are two great tastes that taste great together, so there's no news here. But this just underscores how weird a hostage-taking operation over debt would be. After all, the basic reality is that if it were up to Representative Pence all on his lonesome, he'd be raising the debt ceiling. When one side favors raising the debt ceiling and the other side also favors raising the debt ceiling, the most reasonable compromise is to raise the debt ceiling.

Why Taxes Are Annoying

I'm paying my taxes today, and it's always worth making the point that the process doesn't need to be nearly as annoying as it is.

A very large share of the public has no income that hasn't already been reported to the IRS by the payer and doesn't itemize deductions. Under the circumstances, the sensible thing would be for the IRS to send everyone a sheet of paper that says "based on the income that's been reported to us and your family status from last year, your taxes owed (or refund owed to you) is $X with standard deductions. If something's changed, or if that income number is wrong, or if you want to itemize deductions, you should fill out forms blah blah blah. Otherwise, just send a check." A lot of us would still need to wrestle with the forms and nobody likes to give up money, but this would be much more convenient for millions of people. We don't do it because H&R Block and TurboTax don't want to lose customers and, crucially, because the conservative movement wants taxes for ordinary people to be as annoying as possible. Rich people don't care about this kind of simplification because they itemize their deductions and hire accountants. But they benefit from middle class people resenting the tax process because it helps them build the case for low tax rates.

Speaking of tax rates, political entrepreneurs on the right will often try to convince you that reducing the progressivity of the tax code will somehow simplify the process. This is a nonsensical lie. The part of the process where you go from taxable income to taxes owed is quite simply notwithstanding the stepwise brackets. Indeed, in the age of cheap computing power there's no reason the brackets couldn't be replaced by infinitesimal increments. What's complicated is the definition of taxable income, thanks to our predilection for adding deductions to the code and thank to the unfortunate habit of conducting too much social policy via tax credits instead of straightforward agency spending.

Paul Ryan's Bad Political Economy

Representative Paul Ryan (R-WI) in 2009:

[Medicare Advantage] is a favorite target of Washington. In 1997, a similar option was made available to seniors, then called Medicare+Choice. But year after year, the reimbursement rates were cut for these plans, making it increasingly unattractive for private providers to offer plans. As a result of inadequate federal reimbursements, seniors in Southeastern Wisconsin were dropped from Humana and United Health Care's Primecare Gold plans. Prior to dropping coverage in 1999, Primecare Gold had 1,965 enrollees in Racine County and 590 in Kenosha County. [...]

If all of this is coming as a surprise, the problem runs deeper than politicians failing to be frank with the American people. The federal government has actively sought to silence providers' warnings to their customers of these pending cuts. It was recently uncovered that the Centers for Medicare and Medicaid Services (CMS), a division the U.S. Department of Health and Human Services, placed a gag order on Medicare Advantage providers for sharing information with their enrollees about pending changes to their plans. Without regard for private health care plans' right to inform their enrollees about consequential legislation, CMS has launched an investigation against Humana for mailing a factually verified warning about proposed cuts.

So why is it that this exact same problem won't recur 11 years from now when according to Ryan's plan we're supposed to start seeing draconian cuts in payments to private Medicare insurers. Benjy Sarlin has more on the basic unworkability of this idea.