Archives For entitlement programs

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Miranda Perry Fleischer, (Professor Law and Co-Director of Tax Programs at the University of San Diego School of Law); and Matt Zwolinski (Professor of Philosophy, University of San Diego; founder and director, USD Center for Ethics, Economics, and Public Policy; founder and contributor, Bleeding Heart Libertarians Blog)

This week, Americans began receiving cold, hard cash from the government. Meant to cushion the economic fallout of Covid-19, the CARES Act provides households with relief payments of up to $1200 per adult and $500 per child. As we have written elsewhere, direct cash transfers are the simplest, least paternalistic, and most efficient way to protect Americans’ economic health – pandemic or not. The idea of simply giving people money has deep historical and wide ideological roots, culminating in Andrew Yang’s popularization of a universal basic income (“UBI”) during his now-suspended presidential campaign. The CARES Act relief provisions embody some of the potential benefits of a UBI, but nevertheless fail in key ways to deliver its true promise.

Provide Cash, No-Strings-Attached

Most promisingly, the relief payments are no-strings-attached. Recipients can use them as they – not the government – think best, be it for rent, food, or a laptop for a child to learn remotely. This freedom is a welcome departure from most current aid programs, which are often in-kind or restricted transfers. Kansas prohibits welfare recipients from using benefits at movie theaters and swimming pools. SNAP recipients cannot purchase “hot food” such as a ready-to-eat roasted chicken; California has a 17-page pamphlet identifying which foods users of Women, Infants and Children (“WIC”) benefits can buy (for example, white eggs but not brown). 

These restrictions arise from a distrust of beneficiaries. Yet numerous studies show that recipients of cash transfers do not waste benefits on alcohol, drugs or gambling. Instead, beneficiaries in developing countries purchase livestock, metal roofs, or healthier food. In wealthier countries, cash transfers are associated with improvements in infant health, better nutrition, higher test scores, more schooling, and lower rates of arrest for young adults – all of which suggest beneficiaries do not waste cash.

Avoid Asset Tests

A second positive of the relief payments is that they eschew asset tests, unlike many welfare programs. For example, a family can lose hundreds of dollars of SNAP benefits if their countable assets exceed $2,250. Such limits act as an implicit wealth tax and discourage lower-income individuals from saving. Indeed, some recipients report engaging in transactions like buying furniture on lay-away (which does not count) to avoid the asset limits. Lower-income individuals, for whom a car repair bill or traffic ticket can lead to financial ruin, should be encouraged to – not penalized for – saving for a rainy day.

Don’t Worry So Much about the Labor Market  

A third pro is that the direct relief payments are not tied to a showing of desert. They do not require one to work, be looking for work, or show that one is either unable to work or engaged in a substitute such as child care or school. Again, this contrasts with most current welfare programs. SNAP requires able-bodied childless adults to work or participate in training or education 80 hours a month. Supplemental Security Income requires non-elderly recipients to prove that they are blind or disabled. Nor do the relief payments require recipients to pass a drug test, or prove they have no criminal record.

As with spending restrictions, these requirements display distrust of beneficiaries. The fear is that “money for nothing” will encourage low-income individuals to leave their jobs en masse. But this fear, too, is largely overblown. Although past experiments with unconditional transfers show that total work hours drop, the bulk of this drop is from teenagers staying in school longer, new mothers delaying entrance into the workforce, and primary earners reducing their hours from say, 60 to 50 hours a week. We could also imagine UBI recipients spending time volunteering, engaging in the arts, or taking care of friends and relatives. None of these are necessarily bad things.

Don’t Limit Aid to the “Deserving”

On these three counts, the CARES Act embraces the promise of a UBI. But the CARES Act departs from key aspects of a well-designed, true UBI. Most importantly, the size of the relief payments – one-time transfers of $1200 per adult – pale in comparison to the Act’s enhanced unemployment benefits of $600/week. This mismatch underscores how deeply ingrained our country’s obsession with helping only the “deserving” poor is and how narrowly “desert” is defined. The Act’s most generous aid is limited to individuals with pre-existing connections to the formal labor market who leave under very specific conditions. Someone who cannot work because they are caring for a family member sick with COVID-19 qualifies, but not an adult child who left a job months ago to care for an aging parent with Alzheimer’s. A parent who cannot work because her child’s school was cancelled due to the pandemic qualifies, but not a parent who hasn’t worked the past couple years due to the lack of affordable child care. And because unemployment benefits not only turn on being previously employed but also rise the higher one’s past wages were, this mismatch magnifies that our safety net helps the slightly poor much more than the very poorest among us. 

Don’t Impose Bureaucratic Hurdles

The botched roll-out of the enhanced unemployment benefits illustrates another downside to targeting aid only to the “deserving”: It is far more complicated than giving aid to all who need it. Guidance for self-employed workers (newly eligible for such benefits) is still forthcoming. Individuals with more than one employer before the crisis struggle to input multiple jobs in the system, even though their benefits increase as their past wages do. Even college graduates have trouble completing the clunky forms; a friend who teaches yoga had to choose between “aqua fitness instructor” and “physical education” when listing her job. 

These frustrations are just another example of the government’s ineptitude at determining who is and is not work capable – even in good times. Often, the very people that can navigate the system to convince the government they are unable to work are actually the most work-capable. Those least capable of work, unable to navigate the system, receive nothing. And as millions of Americans spend countless hours on the phone and navigating crashing websites, they are learning what has been painfully obvious to many lower-income individuals for years – the government often puts insurmountable barriers in the way of even the “deserving poor.” These barriers – numerous office visits, lengthy forms, drug tests – are sometimes so time consuming that beneficiaries must choose between obtaining benefits to which they are legally entitled and applying for jobs or working extra hours. Lesson one from the CARES Act is that universal payments, paid to all, avoid these pitfalls. 

Don’t Means Test Up Front

The CARES Act contains three other flaws that a well-designed UBI would also fix. First, the structure of the cash transfers highlights the drawbacks of upfront means testing. In an attempt to limit aid to Americans in financial distress, the $1200 relief payments begin to phase-out at five cents on the dollar when income exceeds a certain threshold: $75,000 for childless, single individuals and $150,000 for married couples. The catch is that for most Americans, their 2019 or 2018 incomes will determine whether their relief payments phase-out – and therefore how much aid they receive now, in 2020. In a world where 22 million Americans have filed for unemployment in the past month, looking to one or two-year old data to determine need is meaningless. Many Americans whose pre-pandemic incomes exceeded the threshold are now struggling to make mortgage payments and put food on the table, but will receive little or no direct cash aid under the CARES Act until April of 2021.

This absurdity magnifies a problem inherent in ex ante means tests. Often, one’s past financial status does not tell us much about an individual’s current needs. This is particularly true when incomes fluctuate from period to period, as is the case with many lower-income workers. Imagine a fast food worker and SNAP beneficiary whose schedule changes month to month, if not week to week. If she is lucky enough to work a lot in November, she may see her December SNAP benefits reduced. But what if her boss gives her fewer shifts in December? Both her paycheck and her SNAP benefits will be lower in December, leaving her struggling.

The solution is to send cash to all Americans, and recapture the transfer through the income tax system. Mathematically, an ex post tax is exactly the same as an ex ante phase out. Consider the CARES Act. A childless single individual with an income of $85,000 is $10,000 over the threshold, reducing her benefit by $500 and netting her $700. Giving her a check for $1200 and taxing her an additional 5% on income above $75,000 also nets her $700. As a practical matter, however, an ex post tax is more accurate because hindsight is 20-20. Lesson two from the CARES Act is that universal payments offset by taxes are superior to ex ante means-testing.

Provide Regular Payments

Third, the CARES Act provides one lump sum payment, with struggling Americans wondering whether Congress will act again. This is a missed opportunity: Studies show that families receiving SNAP benefits face challenges planning for even a month at a time. Lesson three is that guaranteed monthly or bi-weekly payments – as a true UBI would provide — would help households plan and provide some peace of mind amidst this uncertainty.

Provide Equal Payments to Children and Adults

Finally, the CARES Act provides a smaller benefit to children than adults. This is nonsensical. A single parent with two children faces greater hardship than a married couple with one child, as she has the same number of mouths to feed with fewer earners. Further, social science evidence suggests that augmenting family income has positive long-run consequences for children. Lesson four from the CARES Act – the empirical case for a UBI is strongest for families with children.

It’s Better to Be Overly, not Underly, Generous

The Act’s direct cash payments are a step in the right direction. But they demonstrate that not all cash assistance plans are created equal. Uniform and periodic payments to all – regardless of age and one’s relationship to the workforce – is the best way to protect Americans’ economic health, pandemic or not. This is not the time to be stingy or moralistic in our assistance. Better to err on the side of being overly generous now, especially when we can correct that error later through the tax system. Errors that result in withholding aid from those who need it, alas, might not be so easy to correct.

My apologies to TOTM readers for taking last week off. A firm retreat in Phoenix followed by a hearing in Oklahoma City really puts a crimp on one’s fun time. In the meantime, the BCS announced that it is considering eliminating the automatic-qualification offers to BCS conference champions. The ACC and Big East must not be pleased. Proof that what gets written on this blog has a significant (and positive) impact on the world around us.

Joking aside, in Washington this week, the Supercommittee designed to solve the nation’s budget crisis is dominating the headlines. One wonders whether Washington Post writers who follow economic affairs coordinate their opinions. Within a day of the Supercommittee’s announced failure, at least three prominent columnists have reached the identical opinion regarding who is to blame for the Supercommittee’s failure: President Obama. Today, Michael Gerson writes “The supercommittee failed primarily because President Obama gave a shrug.” In another column, Ezra Klein writes “There’s not much we can do, they [the Obama administration] say, in a world where congressional Republicans won’t agree to a reasonable deal. In most cases, that’s true. In this case, it’s really not.” Klein questions why Obama never embraced the Bipartisan Fiscal Commission report (aka the “Bowles-Simpson report”). Finally, in yesterday’s Post, Robert Samuelson writes “The reason we cannot have a large budget deal is that Americans haven’t been prepared for one. The president hasn’t educated them, and so they can’t support what they don’t understand.” Samuelson explains that if we don’t address these entitlement programs, their costs will nearly double as a share of national income, which will displace spending in other areas or necessitate further tax increases or both.

If these opinions flowed exclusively from right-of-center columnists, then they could be discounted as political posturing. While Gerson was the lead speech writer for George W. Bush, Klein and Samuelson are hardly batting from the right. Will a “consensus” emerge among the center-left that Obama is to blame for the budget crisis, and will it propel Obama to confront the entitlement morass? Or do the political benefits of shirking the entitlement debate outweigh the costs? The lasting power of entitlements stems from the self-reinforcing dependency among the beneficiaries (who come to depend on the program) and the members of the political party protecting the program (who come to depend on the built-in constituency for votes). It would require tremendous leadership and courage for Obama to transcend politics as usual, and to save us from a Greek-like financial calamity. If he is not up for this task, look for the Republican presidential candidates to make Obama’s leadership issue number one in the 2012 election.

P.S. It’s probably best not to bring up budget deficits or Greek-like crises during the Thanksgiving meal. Better for your family to digest the food thoroughly before falling asleep on the couch. When in doubt, talk sports. Here’s a good conversation starter: When was the last time we cared about the Detroit Lions this late into the season?

Ezra Klein has an interesting blog post covering Peter Diamond’s nomination to Federal Reserve Board.  The standard refrain in this debate has been something like: “See! The Republicans blocked Diamond and now he won the Nobel — don’t they look silly now.”  I don’t find the particular issue of comparing Diamond’s qualifications as an economist to those qualifications required of a Board member all too interesting and so I wont comment on that here.  Though I should say here so we can get to the point of the post that I believe Diamond should be confirmed.

But, more interestingly, Ezra raises an issue that I haven’t seen discussed elsewhere: perhaps the objection to Diamond isn’t just about mismatch of skill set to Federal Reserve, or even partisan politics (Klein argues it is clearly at least partially about this), but rather, about Senator Shelby and the Republicans hating behavioral economics.   Though, as noted here, there is a standard political tit-for-tat story that might explain the fight over Diamond just as well.

To be more precise, Klein says that he’s “heard” that this is an important objection the Republicans have raised with respect to Diamond and that what they really want is a hearing about Diamond’s behavioral work.  Klein writes:

And there’s really no other choice. You can’t serve on the Federal Reserve Board before you serve on the Federal Reserve Board. Shelby’s argument against Diamond is cover for his actual objections against Diamond. One of those objections is simple partisan politics. But another, I’ve heard, is odder: Shelby hates behavioral economics.

This White House, as has been endlessly pointed out, is big on behavioral economics. See Peter Orszag, Jeff Liebman and Cass Sunstein for more on that. But the administration’s embrace of the discipline has provoked a response that the White House never anticipated. Republicans have grown suspicious of behavioral economics. And Diamond, it turns out, has done a fair amount of work in the field (for instance, here). Insofar as Shelby’s got an actual objection to Diamond, that’s it, and one of the things he wants is another hearing focusing on Diamond’s behavioral work.

Ah well. For those actually interested in Diamond’s work, here’s a post from Tyler Cowen on Diamond’s academic papers and influence. Diamond has published in many areas, but two particular points of expertise are labor markets and entitlement programs, both of which the Federal Reserve will need considerable knowledge of over the next few years. Without Diamond — or someone like him — on the Board, it’s no exaggeration to say they’ll be learning on the job.

Its certainly true Diamond has done some behavioral work — see his CV here.  Though, I do not think that Diamond is considered a relatively major producer of behavioral economics scholarship.  The value of his contributions lie elsewhere.  But to the point: do the Republicans hate behavioral economics?  And does that explain what is going on with Diamond?

For starters, its a bit odd to see talk about a political party loving or hating a branch of economics.  Its not completely unique either.  But I do not think that what is going on here is Republican political hatred for behavioral economics.  Rather, I suspect that what is really going on here is not that the Republicans (or Democrats, with the exception of Cass Sunstein and Liz Warren) have any real, substantive views on behavioral economics per se.  The idea that the a political party rejects a branch of economics in its entirety is a rhetorical device used to invoke notions that the rejecting party is “anti-knowledge” or “anti-science,” or at a minimum, speaking about a subject they know nothing about.  If Shelby was truly making claims about the substance of behavioral economics, perhaps this explanation would apply to him.  Maybe it does.  But there is, I think, a more powerful reason for skepticism concerning applications of behavioral economics that does not require hatred or anything close to it.

Consider the distinction between behavioral economics and behavioral law and economics, i.e. attempts to apply insights from behavioral economics into law and regulation.  There are real and substantial criticisms of behavioral economics that are out there on both theoretical and empirical economic grounds. Of course. the same is true for other branches on economics — and to some extent, the jury is still out on much of behavioral economics in terms of empirical verification, robustness of results, and surviving a cost-benefit test in real world application.  But in the meantime, the ratio of regulatory proposals to robust empirical findings is incredibly high — and remarkably consistent, the behavioral law and economics literature nearly uniformly applies the insights of behavioral economics to justify paternalistic intervention.  I do think that behavioral economics has been quite unique in the speed with which its insights have been incorporated into policy, the magnitude of the number of proposals involved, and the remarkable breadth of their coverage into nearly every aspect of life.  Again, this is not as much a problem with the behavioral economists with those attempting to translate the insights from that literature into policy.

In my view, this translation exercise has gone demonstrably beyond what is justified by the behavioral economics literature.   The legal literature contains hundreds, if not a thousand, policy proposals purported to be based on the insights of behavioral economics.  I’ve noted before the rush of the legal literature to make use of the endowment effect before the results were “in.”  I’ve argued before that the attempts to incorporate insights of behavioral economics into consumer protection law, and especially in the context of the CFPB and the regulation of consumer credit, have gone much further than warranted by theory and evidence.  Similarly, in the antitrust context, regulatory proposals concerning more interventionist antitrust grounded in behavioral economics have, as the saying goes, written checks that the literature cannot cash.   As behavioral-economics-based regulatory proposals continue to mount that uniformly favor greater intervention, and increasingly go beyond what economic theory and robust empirical evidence warrant, a concern arises that, as Federal Trade Commissioner Rosch describes it “behavioral economics was simply liberalism masquerading as economic thinking.”  The suspicion in these cases is based on economic theory and empirical evidence, cost-benefit analysis, error costs, and standard economic decision making tools.

Perhaps the distinction between behavioral economics and behavioral law and economics is semantic.  I don’t think so.  Now, I don’t pretend that Shelby or anybody else has read the literature and is offering a nuanced critique of particular experiments or models.  But I certainly do not discount the notion that a group might object to behaviorally-informed regulation when regulatory proposals invoked in its name have systematically and consistently outstripped the available evidence, occasionally ignore it, and are remarkably consistent in their support of paternalism.  The idea that the Republicans (in this case) are somehow against an entire branch of economics seems to be a not-so transparent attempt to play the familiar “anti-science” card.  Perhaps an effective rhetorical move.  But I don’t think it fits here on the merits unless one takes the truly odd position that regulatory proposals that play fast and loose with (or flat out ignore) the theory and evidence from the behavioral economics literature to implement preferred policies have a claim to scientific superiority.

The Party of No

Todd Henderson —  23 February 2010

In the comments to my last post on Mr. Obama’s health proposals (which have gotten worse — price controls!?), “Chris” and I have been having a back-and-forth about what he characterizes as a uniquely Republican disease — obstructionism. He calls Republicans “the Party of No.”

I’m not a political scientist, but this seems like a partisan statement to me. My guess, as expressed in my comments, is that the Republican conduct today in opposing the health reforms is driven by a mix of ideological point of view, desire to be reelected, desire to please contributors, susceptibility to arguments of particular lobbyists, and so on. No matter which of these (or others) is the major driver, it seems silly to me to describe their conduct as new in American politics or a Republican-only phenomenon.

My guess is supported by an interesting paper by Rick Pildes, which he is presenting at a workshop at Chicago today. It is entitled “Ungovernable America: The Causes and Consequences of Polarized Democracy.” Pildes writes about Democrat obstructionism of the Bush Administration:

Moreover, while still in opposition, [Pelosi] argued . . . that the Democrats should not assist in trying to improve Republican legislation, but should be oppositional throughout, in an effort to draw sharp contrasts with the aim of taking over the chamber in later elections. She discouraged Democrats from co-sponsoring bills with Republicans, to avoid enabling Republicans to look bipartisan and discouraged ranking Democrats from negotiating with Republicans on their committees. For example, during the debates over privatizing Social Security, she, along with Senator Reid, decided the Democrats would not only oppose Bush’s efforts, but would not offer any alternative, nor negotiate with Bush, until he gave up priviazation.Whether in opposition or in the majority, Pelosi is in many ways a mirror image of Newt Gingrich when it comes to using rules and institutional structures to realize a vision of unified and polarized partisan combat. (Footnotes omitted).

There are interesting questions raised by the fact of polarization Pildes describes. Is this a good or bad thing from a social welfare perspective? Big government types might think it is bad, because it may lead to less big government, but on the other hand, the government is ever growing, and making change more difficult locks in entitlement programs and allows the bureaucracy to creep, if not run. Small government types might think it is bad for this last reason, but might also think it is good because it prevents even more radical change. George Will’s highly entertaining talk at CPAC makes this argument.One might also ask how we can try to fix the polarization problem, if there is one. Pildes offers some interesting suggestions, including mandating open primaries, because these generally put forth more moderate candidates.

But one thing that is not an interesting question, because it is patently false, is that Republicans are uniquely obstructionist and bad. It is true that a tenet of conservatism is to be against change — what William Buckley called the urge to “stand athwart history, yelling Stop” — but this is not necessarily informative about the willingness to govern. After all, we start today with a modern welfare state of unprecedented proportions in this country, and therefore the need to legislate to reduce the size of government is as strong as the need for the other side to legislate to increase it.

If there are problems with politics today, there are problems with politics today, not with this party or with that party. Let’s have the debate about the role of government in our lives and how much government we are willing to pay for. Calling each other names — Party of No!, Socialists! — doesn’t seem very helpful to that debate. This is something we all learned on the playground, but seem to have forgotten.

Mr. Obama, go to "China"

Todd Henderson —  22 February 2010

The president revealed his last-ditch plan to reform our healthcare system today. (Funny the plan is revealed before the “bipartisan” meeting about health care being trumpeted for political reasons.) One thing I was hoping to see in the proposal is missing — an increase in the eligibility age for Medicare (and, while we are at it, Social Security). Although I would prefer to see us do away with these entitlement programs, if we have them, why not make them solvent and sensible? When these programs were passed, people lived a lot shorter lives than they do today, and a simple indexing to life expectancy would go a long way toward reducing our national fiscal crisis. Not only would this reduce our government-funded health care expenses, it would encourage 65 year olds to stay in the work force. Take my Dad. He retired to a life of reading history books when he hit that magic number, even though he was still energetic, capable, and earning a good living at the time. Our perverse entitlement programs encouraged him to do this, to accept government handouts even though he doesn’t need them, and mandated that he go onto a government-run insurance program, even though he could easily afford his own health care bills or insurance. This makes absolutely no sense. Any system that takes people like this out of the work force and bestows upon them welfare without regard to need is not just stupid, it is immoral.

Faced with a similar set of existing incentives in the 1990s, President Clinton and a Republican Congress ended welfare as we knew it. No longer would we pay people not to work, but instead we would make government handouts instrumental toward a productive life. President Clinton had the cache and credibility with the opponents of welfare reform to get this obviously beneficial change enacted, just as President Nixon did with foreign policy hawks when he went to China. Since Democrats largely stand in the way of entitlement reform, the same must be true of President Obama. President Bush wasn’t able to reform Social Security in part because his proposal to let people invest their own money for retirement sounded to some like a plan to make Bush’s banker friends rich at the expense of Joe the Plumber. But Obama could do this. If he proposed to raise the eligibility age for Medicare (and the other entitlement programs) gradually but dramatically, perhaps in return for some Republican concessions on insurance reform and subsidies for the poor to buy insurance, there might be a deal. The Republicans might even be able to get some tort reform as part of the deal — again, who better than a Democrat lawyer to stand up to the trial lawyers?

In his best moments, the president has seemed to play against type and stand up for good ideas that are not favored by his core special-interests constituency. There have been, for instance, some nods for school choice and performance pay that have irritated the teachers’ unions. He has also continued our assault on Muslim terrorists. We need more of this from the president. (And, he needs more of it if he hopes to be reelected. Just ask President Clinton.) In short, the best hope for reform is compromise, and compromise in ways in which Mr. Obama has a comparative advantage. Anyone could ram through a one-sided agenda; it takes real leadership to go to China. Book your ticket, Mr. Obama. I hear the Great Wall shouldn’t be missed.