Now that the election is over and President-Elect Trump has begun the transition to his administration, there has been some discussion of reforming the market for health insurance. I have written previously that Obamacare is in the process of collapsing because of its structural defects. For example, the Obamacare feature of guaranteed issue has caused a phenomenon known as adverse selection which is driving insurance companies out of the health insurance exchanges (links to other posts on Obamacare are given below). Here I thought it would be useful to outline some changes that seem to be sensible reforms to the currently-available flawed system.
The 2016 election is now over, thankfully, and so it might be a good time to provide some perspective on the electoral outcome. It seems safe to say that voter dissatisfaction motivated much of what happened yesterday and the state of the economy is one part of this voter discontent. In this post, I thought I would provide some data on the business cycle history of the U.S. which I believe was clearly part of the explanation for the election. Along the way, I will give a primer if you will on business cycle measurement. Read more…
It is election season and the bombast is relentless about the so-called problems that politicians need to fix. Equal pay is one such issue. Hillary Clinton contends that, if she is elected President of the United States, she will work to ensure that women are paid equally to men. But the “evidence” that is often offered to support the existence of this problem is simply the incomes of men and women which I have argued in a previous blog post is worthless (that post is here). The reason is that income data must be adjusted for hours worked, occupations, and possibly other reasons to make the comparisons sensible. These adjustments are typically not made and so one wonders if there is really any problem to be solved.
Here I thought I would provide an example of occupational differences which I suspect is at the heart of measured pay differences. The Bureau of Labor Statistics (www.bls.gov) provides data on incomes by occupation. To illustrate the point that occupations matter in equal pay discussions, consider two occupations: chemical engineers and elementary and middle school teachers. BLS reports a mean (average) income for chemical engineers of $103,960 and teachers in elementary and middle schools is $58,060. Now consider the following table.
In the table, there are three people in each occupation. In engineering, there are two men and one woman and, in teaching, there are two women and one man. Note that within each occupation, each person makes exactly the same income so there is no evidence here about discrimination by employers. But men, in the aggregate, make 21 percent more than women ($265,980 is about 21 percent larger than $220,080). So while there is no discrimination by employers, there is a 21 percent aggregate income gap due to occupational differences between men and women.
The point of this example is that if one is to argue for gender bias, the evidence must involve the choices made by men and women, not just the wages paid by firms employing them. I doubt seriously that this would ever happen. What is more likely to happen is that another layer of bureaucratic oversight will be imposed, involving data that must be provided by the private sector to government searching for discrimination. That raises the supply price of the goods and services we buy, thus raising their prices.
I am willing to believe that discrimination exists in our society but I am not willing to believe it on the basis of worthless analysis.
I have tried to stick to economics on this blog, meaning that I do not get involved in expressing political opinions for any reason. But I learned something today that I felt should be passed on to my readers. And that is that two economists, Lawrence Kotlikoff and Edward Leamer, are running for President and Vice President of the U.S. Their web site is kotlikoff2016.com.
These are two established and highly competent economists but, let me be clear. I am not expressing my endorsement of them. I am merely passing on the information to those who might be interested.
Given the turmoil that we are seeing in this election season, it is quite interesting to see two economists feel that they should get on the ballot. It really is true that the U.S. economy has extremely serious problems that are not being addressed by either of the two mainstream candidates running for President. I will be interested to see just how far these two economists get to the jobs they seek.
Much of the political behavior we see is theater or, even worse, buffoonery. I simply tune it out because it is almost always a waste of time to observe the latest actions or comments by politicians. There is a notable exception to this unfortunate reality and that is the policy proposals recently generated by Speaker Paul Ryan and others in the House of Representatives.
This program is called “A Better Way” and the proposals cover many issues that need to be addressed. The documents that were prepared are too broad to be completely discussed here but I urge readers to read the documents for themselves because they are worth reading and considering. Here let me just mention their proposals about taxes, called A BetterWay-Tax-Snapshot.
The tax code is a disgrace. It is riddled with carve-outs for favored groups, complicated by political attempts at central planning or social engineering (e.g., we need more people in houses so we give a write-off for mortgage interest), and is full of vagaries that invite abuse by the IRS. I have stated elsewhere that when a tax code is clear regarding what is taxable, there is little room for bureaucrats to grind an axe against individuals or organizations they dislike. One aspect of the Ryan-proposed tax overhaul is a vast simplification of the tax code which I heartily endorse. But there are other aspects of the proposal that have merit.
The press has reported on several so-called “tax inversions” where companies merge in order to cut their tax bills. The response by many politicians has been typical. The politicians create the incentives that cause the mergers to occur, then the politicians complain about the actions they induced. Now it has been reported that a complex set of new regulations are being prepared by the U.S. Treasury designed to stop these mergers. So this provides yet another example of complexity added to an already-complex tax code providing employment for lawyers and accountants. The Ryan proposal reduces the corporate tax rate which reduces the incentives for these mergers to occur. Firms should merge because it increase their efficiency which raises the wealth of the stockholders, not because of tax policies that may actually reduce economic efficiency.
Finally, the proposal cuts personal marginal income tax rates while eliminating many deductions used by taxpayers to cut their tax bills. The marginal tax rate (MTR) is the additional tax incurred when an additional unit of pre-tax income is earned. These tax rates are a crucial part of the incentives faced by the public and there is comprehensive evidence that a lower MTR raises labor supply which will increase economic activity. This should move in the direction of reversing the low labor force participation rates we have seen and increase real GDP or economic growth.
There might be elements of this proposal or the others that have been offered in A Better Way with which I and others might quibble but these are thoughtful proposals that would correct many of the problems faced by the U.S. I hope that these documents will be read and pondered by all serious voters troubled by the state of the U.S.
The political primaries seem to reflect the dissatisfaction that many voters feel about the state of the U.S. Some of this discontent is likely to be related to the condition of the economy. As I have stated in earlier posts (read them here and here), economic growth is low by long-run U.S. standards and should be the top economic issue considered by the voters in making their voting decisions in the next presidential election.
The last recession ended in June 2009 (go to the web site for the National Bureau of Economic Research for business cycle dates). Below is a table listing annual growth rates for real output (GDP) since the last recession ended.
The data in the table is drawn directly from the Bureau of Economic Analysis, the federal agency responsible for producing the National Income and Product Accounts.
The average growth rate in this table is 2.1 percent. Over the century ending at the beginning of the last recession, real output grew at 3 percent per year. The difference between 2.1 and 3 percent is enormous over long periods of time. Thus there will be enormous losses of real income in store for U.S. residents if the dismal growth rate in the table continues.
Unfortunately, I have not heard a great deal in the press about this unfolding disaster (because a disaster is exactly what it is). But no economic issue is even close in importance to the question of how we can reverse this decline in economic growth.
I recently saw a local newspaper article discussing the selection of economics textbooks to be used in teaching economics to high school students in my local school district. A school board member expressed some concerns that a text might be chosen that could reflect the political or other biases of the text authors. As an economist, I (unsurprisingly) endorse teaching economics to high school students but I am well aware that many economists express opinions about economic policy and other economics issues that do not reflect solid economic analysis. Rather their statements reflect their political or other biases. And so I decided to pursue an example of possible bias recently discussed in a journal devoted to economic analysis.
Richard Vedder is Emeritus Professor of Economics at Ohio University and he recently wrote an article in the Winter 2016 issue of the Cato Journal on the state of academic economics. One matter that he discusses there is the accuracy or possible bias of economics texts and he provides what to me is a stunning example of misinformation in an economics text. I checked Professor Vedder’s example and it is indeed entirely accurate.
In Principles of Economics, 12th Edition (1985), written by the late Paul A. Samuelson and William D. Nordhaus, there is a discussion of the Soviet Union. Consider the following statement (Samuelson and Nordhaus, p. 775) about economic growth in the Soviet Union.
…there can be no doubt that the Soviet planning system has been a powerful engine for economic growth.
The Soviet Union collapsed in 1991 just six years after this statement was published! Does it seem reasonable to you, dear reader, that a country that is a growth engine of such magnitude would break apart a short time later? How can we explain this astonishing statement? How could these economists be wrong? Read more…