Archive for September 2014


Guaranteed Annual Income: Let’s talk numbers

I love simple solutions; magic bullets that make problems go away.  I really do.  Complex government programs make us poorer and less free.  So I really want to believe in the Guaranteed Annual Income (GAI) idea, which has been mentioned by a lot of commenters (and Milton Friedman.)  But I just don’t see how the numbers add up.  (For similar reasons, I’d like a single tax, but think that given our level of government spending we need a progressive payroll, property, carbon and VAT tax system.)

Here’s what I don’t get.  Imagine a single mom living in the South Bronx with two kids.  A typical poor American family.  How much do we give them?  If we give every single person the same amount, there will be too much incentive to produce large families.  Think about the amount an individual in the Bronx would need to rise above poverty, and them multiply times 5. It seems like a much better deal than for one person, especially if you assume the marginal cost of raising an extra kid is less than the cost of a single adult.

That can be fixed by giving less for kids than adults.  But how much would the family need to not be considered poor by the standard of NYC progressives?  Here I have to plead ignorance, I don’t really know.  But let’s say it’s $27,000 a year, perhaps $15,000 for the mom and $6000 for each kid.  (I assume the government still has free public education and Medicaid, all other welfare goes away.)

Here’s another problem—is this amount the same in every part of the country?   I suppose it could be adjusted to make it proportional to the cost of living in each city.  Let’s assume you were somehow able to get 60 votes in the Senate for a massive welfare scheme that favored blue areas with a high cost of living.  What then?

Basically every single homeless person in America would be better off moving to a place with a mild climate year around and a high cost of living.  After all, they are homeless, what do they care about real estate prices?  Some portion of that population may be drug users.  Is that a problem? It might be viewed that way by the city with a nice climate year around and a high cost of living. Did I mention that I hope to retire in West LA?

OK, so we’ll just go with the simple plan that most people are proposing, the same payment for every adult, regardless of where they live.  But here’s another problem.  The amount the family of three needs in the Bronx looks much better to a family of immigrants in South Texas.  For instance, add a dad and assume 4 family members, making $42,000.  With that guaranteed income would you want to work in the hot sun picking vegetables and cleaning hotel bathrooms in South Texas or Georgia?  I wouldn’t.

I know what you are thinking:  “No problem.  We’ll have illegals do all the low paid jobs, and the American poor can relax with their GAI.  The illegals don’t qualify for the benefits, so the tomatoes won’t rot in the fields.”

But wait, I thought the left wanted to legalize the illegals.  And even if we don’t legalize them, is the following the “Great Society” the left has been clamoring for since the 1960s:

1.  An underclass of illegals doing the hard stuff, and living in shantytowns.

2.  Tens of millions of poor Americans watching TV, and giving zero incentive to their kids to study hard in school, because they’ve got the GAI awaiting them too.

3.  The upper class, in their gated communities.

I’m not sure that’s what development economists mean when they talk about “getting to Denmark.”  Denmark doesn’t have a GAI.

Again, I really want to believe the GAI can work.  It’s the type of solution I like.  Please convince me I am wrong.  It’s easier to administer than my wage subsidy idea.  But I just don’t see how the numbers add up.  At best you could do a GAI that is so small that it does not eliminate poverty. Not enough to live on.  That might help at the margin, but it would not end poverty.

The problem with simple solutions is that poor people are just like everyone else–they’re complicated.  And they have complicated problems.

PS.  I suppose there are some hidden stereotypes in this post.  That’s not my intention.  I grew up in the 1960s and 1970s and knew plenty of young white people who would love to live what was then called the “hippie” lifestyle if someone else would pay for it.

PPS.  I also doubt our tax system could raise enough revenue.  The figures I quoted would cost about $4 trillion in gross tax revenue.  Yes, the net cost would be far less due to middle class people paying taxes to themselves, but it’s still a lot of money, and would probably mean significantly higher MTRs, perhaps reducing our work effort to European levels.

PPPS.  Note to young pundits—there was a reason that Bill Clinton did welfare reform.

Progressive blind spots

David Henderson has an excellent post pointing to the flaw in Matt Bruenig’s claim that there is 24% poverty in the “market economy.”

In a July post, Matt Bruenig estimates that in the absence of government programs to alleviate poverty, the percent of Americans who would be officially classified as poor would be a whopping 23.8% versus what it actually is: 15%.

Go to his article and figure out how he estimated this. It’s relatively straightforward–it’s straight arithmetic.

Now put on your economist’s hat and see if you can find anything wrong with his methodology. I don’t mean that you might find some government program he failed to take account of: he already admits that his measure isn’t perfect from that viewpoint.

Here’s a hint: what is he assuming about human behavior?

I seem to recall that in the old Soviet Union, 25% of food production occurred on the one percent of land set aside for private gardening.  I suppose one could claim that the “market economy” in the Soviet Union only produced 25% of the food needs of the Soviet people.  For readers of this blog the knee jerk reaction would be to mock or ridicule the blindness of Bruenig.  How could Bruenig overlook the obvious?

But in truth this is a common mistake, which suggests to me that the brains of progressives are simply wired differently than the brains of libertarians.  I recall that when I was a sophomore at Wisconsin my professor made a similar claim to Bruenig.  I raised my hand and made David’s point.  The professor graciously agreed.  And this was a leading expert on poverty at a top 20 economics department.  He just didn’t see the obvious, before I raised my hand.

People don’t like to be ridiculed.  It’s a mistake to think progressives understand this point and choose to omit it.  If they saw it, there would at least be a “to be sure” snuck in somewhere.  Here’s another example from the Bruenig post:

The most frustrating thing about poverty (disposable income poverty, not market income poverty) is that it’s unbelievably easy to reduce. In newspapers and blogs and even some think tanks, people scratch their heads into bloody messes acting (or maybe genuinely being) puzzled by this as if it is some great policy challenge. American pundits speak about poverty reduction as if it is a new frontier that nobody has ever figured out.

But it’s not a new frontier. Other countries have figured it out. Our own country, in its better moments, has figured it out as well. Since 1967, the only thing that has reduced poverty in this country is non-market income. We cut elderly poverty down by over 70% through non-market incomes. We cut disabled poverty rates in half each year (we should do more) through non-market incomes. Super-low poverty countries get that way through non-market incomes as well.

In fact, we spent trillions on the War on Poverty.  Unfortunately, poverty won and we lost.  Don’t believe me?  Isn’t the blogosphere full of progressives complaining that the poverty rate is just as high as in 1967?  I’m actually more optimistic about the living standards of most poor people than the typical progressive. Their living standards have risen with the general population.  But if “non-market income” actually explains the gains made by the poor, then this suggests that non-market incomes have merely crowded out market incomes.

It’s absurd to claim that it’s “easy” to solve a problem like poverty.  Yes, it’s easy if you are dealing with a group of people for whom you don’t have to worry about work disincentives.  Obviously it’s easier to reduce poverty for the elderly, since they are mostly retired.  Nixon did that.  That would also be true of the disabled, if we could accurately measure disability.  (The fact that we cannot partly explains the huge surge in disability, even as Americans are healthier than ever before.)

That’s not to say we can’t do anything.  I’d eliminate all occupational licensing laws and all minimum wage laws and all “welfare.”  Legalize employment contracts between consenting adults. No more chronic involuntary unemployment.  Then I’d institute a large wage subsidy for low wage jobs. But it wouldn’t be “easy,” there’d be lots of fraud in my preferred program.

In fairness, the way libertarian brains are wired also leads them to overlook lots of obvious points. Which ones?  How the hell would I know, I’m a libertarian!  Ask Bruenig.

PS.  I have a response to commenter ‘Fed up’ on the “middle class squeeze” over at Econlog.

Two big mysteries

Nick Rowe has a post discussing 30 year bond yields in Canada.  He begins by quoting from an official at the Bank of Canada:

All told, we think that the neutral rate of interest is lower than it was in the years leading up to the crisis because of these structural developments. We estimate that the real neutral policy rate is currently in the range of 1 to 2 per cent. This translates into a nominal neutral policy rate of 3 to 4 per cent, down from a range of 4 1/2 to 5 1/2 per cent in the period prior to the crisis.

Then Nick comments:

But what puzzles me is this: the 30-year bond is currently yielding 2.74%. That’s below Carolyn’s 3% to 4%. And Carolyn is talking about the Bank of Canada’s target for the overnight rate (the “policy rate”), and that’s normally below the 30-year bond yield.

I checked the 30-year rate in Germany and the US:

US 30-year bond yield = 3.21%

German 30-year bond yield = 1.91%

So it’s a sort of global mystery.  Why are long-term interest rates so low?

But it’s not the only big global mystery.  There’s also the absurdly slow “recovery” from the 2008-09 recession.  This is the only recovery I ever recall seeing where the growth rate of real GDP in the US was below the trend growth rate.  And nominal GDP growth has also been very low. Indeed both growth rates might well be the lowest in American history for a recovery period.

And it’s not just the US.  Some countries like Canada may have done a bit better, but lots of countries in Europe are seeing even slower recoveries in both NGDP and RGDP.

I am always suspicious of coincidences.  I suppose you could dream up an explanation for the low bond yields.  Maybe all that QE has depressed long term bond yields.  Maybe I am wrong that money has been really tight; maybe it’s really easy, and that explains the low bond yields.

But there’s one problem with that explanation–it makes the other mystery even more mysterious. How likely is it that money has been so easy that it has produced almost unbelievably low bond yields, and yet NGDP is growing at the slowest rates ever seen in a recovery?  Easy money is supposed to lead to fast NGDP growth.  I don’t like “answers” that solve one mystery at the expense of making another mystery even more mysterious.  [There’s no law of the conservation of net mysteriousness.]  I like “answers” that solve both mysteries at the same time, using standard off-the-shelf economic theory.

The Great Stagnation!

It explains the low bond yields, and it explains the slow economic growth despite rapidly falling unemployment rates.  But what explains the differences in bond yields between countries?  Here I’d like some help, but I’ll throw out a couple tentative hypotheses.  Although both the US and Canada have 2% inflation targets, I recall reading that the US is more aggressive in the “hedonics” of price adjustments.  Indeed one Fed official said their 2% PCE target is actually more like a 2.4% CPI inflation target.  Is that right?  If so, might that explain why Canada has lower bond yields?  If both countries have 2% inflation targets, but Canada measures inflation more conservatively, then Canada would end up with lower NGDP growth, other things equal.

In the case of Germany, it might be related to the fact that the ECB is targeting inflation at slightly below 2%, an asymmetric target.  In addition, inflation has recently fallen to only 0.3%, and the ECB’s response — how can I put this politely — hasn’t exactly inspired confidence.

So perhaps the entire developed world is entering the sort of growth stagnation that hit Japan 20 years ago, producing low real interest rates everywhere.  Then the differences in bond yields reflect differences in the techniques used to measure inflation, differences in inflation targets (especially the ECB), and differences in how confident investors are that the central bank will actually hit its target (the ECB and Japan.)

I’m glad to see the BOC re-evaluate their interest rate assumptions, but the markets suggest they are still behind the curve.  Of course the Fed has consistently overestimated the Wicksellian equilibrium interest rate, and hence over-estimated RGDP growth, ever since 2007.  And the ECB? There aren’t any words to express my contempt for that organization.

We’re 15 years into the 21st century.  How much longer will it take the world’s central bankers to realize that we aren’t in Kansas anymore?  None of the 20th century rules of thumb have any value in today’s world.

Who has the best political system in the world?

Dylan Matthews says New Zealand has it.  A mixed member proportional representation system (like Germany) and a constitutional monarch head of state (like Australia and Canada.)  And only one house, i.e. unicameralism.  I’ve argued for Switzerland, the world’s most democratic country. But Matthews has convinced me that the Kiwis have the second best system on Earth.

In case anyone is interested, the Fraser Institute has a ranking of Economic Freedom in the World. New Zealand comes in #3, between Singapore (#2) and Switzerland (#4.) Alternatively, it’s the freest economy in the world with cows and sheep.  Personally, I don’t think one should argue that a political system is optimal because it happens to produce policies that YOU prefer, rather than policies that much smarter people with Nobel Prizes prefer (Krugman, Stiglitz, etc.) The world is not set up to please YOU.  It’s set up to efficiently aggregate the Wisdom of Crowds. That’s how political systems should be judged.  Still, you wouldn’t want you’re favorite system to produce Somalia or Iraq.  And the optimal system might well depend on the cultural attributes of the population.

BTW, the US is #17 on the Fraser economic freedom list, between Estonia and Cyprus. Our political system has some good points (lots of democracy and decentralization), and some bad points (big states, non-proportional representation, and filibusters.)

[In the Heritage rankings New Zealand is #5, below Switzerland and above Canada, while the US is #12, below Estonia and above Bahrain.]

Over at Econlog I did posts discussing the recent elections in Sweden and New Zealand.  Both countries were ruled by reformist right-of-center governments, which did lots of good things. New Zealand had much better monetary policy than Sweden, where the Riksbank went after imaginary “bubbles.”  The New Zealand government was re-elected over a left-of-center alternative party advocating taxes on capital gains and higher minimum wages.  The Swedish government lost, and was replaced by a left-of-center coalition.  I wonder what explains the difference?

Abenomics is doing better than I expected (shades of grey)

Here’s commenter dtoh:

I think you’re disheartened a little bit by the results of monetary policy which has been less effective in Japan than you had hoped and therefore you are trying to blame it on socio-economic and supply side factors. Yes…. these are problems, but the primary reason monetary policy has not been effective is the hike in the consumption (and other) tax rates.

Stop worrying, it will take a little longer, but Japan will prove you are a clairvoyant genius.

This is half wrong.  Certainly less effective than I had hoped, but more effective than I expected. In my early posts on Abenomics I suggested that it was likely to have a positive effect, but that Japan would fall short of the 2% inflation goal.  I expected about 1% inflation, still a significant improvement.  Japan has exceeded 1% inflation, even if you discount the effects of the sales tax. The yen has also depreciated much more than I (and the markets) expected.  Japanese stocks have risen much more than I (and the markets) expected.  Indeed by almost every metric they’ve done better than I expected.

So why does dtoh (a careful reader) have the opposite impression?  Because I am also very pessimistic about Japan, due to its big public debt and rapidly falling working age population.  I supported the sales tax increase, but even as I did so I predicted it would hurt the economy, and it has.  And regarding monetary stimulus, it’s technically possible for a policy to improve an economy that is doing very poorly, while still leaving it doing fairly poorly.  That’s Japan.

Read this and this for my earlier pessimism about Japan.

For the same reason, people often wrongly believe I’m a fan of the Chinese government, or its economic policy.  It’s a bad policy–perhaps as bad as Greece. But if China ever became as rich as Greece it would be the single most successful economic policy in all of world history.  And China probably will become as rich as Greece, as moving from a nightmarish policy under Mao to a merely bad policy under Deng and Xi has released the entrepreneurial energies of the Chinese population.

Real world economics is never black and white; it’s always about shades of grey. I’ve frequently pointed out that Abenomics was doing all sorts of things that the liquidity trap Keynesians said was impossible.  It boosted stock prices, it depreciated the yen, and it boosted nominal and real GDP.  That made me seem like an optimist. But I also said it would fall short of the announced goals, and I now feel that more strongly than ever.  Contrary to dtoh, if Japan does well I will be forced to admit I was wrong, as I did not expect Japan to do well.

I’ve also been saying that while QE and forward guidance helped, the Fed has consistently been too optimistic about US growth.  We are in a Great Stagnation. Just yesterday I noticed that Fed officials are hard at work explaining why their latest 3% growth forecast will fail to materialize, just like the previous 5 years.

A sharply stronger dollar could hamper Federal Reserve efforts to spur growth and lift inflation, a senior Fed official said today, in unusually direct remarks about the U.S. currency from the central bank.

By the way, Nick Rowe recently had this to say about central bankers:

But I do have a lot more confidence in the BoC than in the BoJ, ECB, or the Fed. Yes. The people who run the BoC are better macroeconomists, they speak with one voice, and they have the support of the government in doing what they are doing. You do not hear them say totally stupid things, like you do with people making decisions at other central banks.

Yesterday I noticed a perfect example of what Nick was thinking about:

Japan is in danger of falling into a recession as the yen’s decline reduces the purchasing power of households and squeezes corporate profits, said a former deputy governor of the Bank of Japan.

“The current yen weakness is slightly excessive,” Kazumasa Iwata, the deputy from 2003-2008, said in an interview on Sept. 19 in Tokyo. “Abenomics entails the risk of ‘beggar thyself’ consequences and signs are already emerging.”

Hmmm . . . .

Totally off topic, fans of drug legalization will love this youtube.