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Here’s an interesting piece worth slogging through on ways in which policy changes implied by traditional economic analysis can skew power in ways that make a lot of people a lot worse off. The prose is a bit dense and opaque, but the point and the many historical examples are interesting and convincing.

The authors — Acemoglu and Robinson — are the same duo behind “Why Nations Fail,” a similar foray into the way policy choices can lead to starkly different outcomes, based on whether the political economy supports “inclusive” or “extractive” institutions.

The point of their new article comes down to this: When economic “rents” or market failures provide economic benefits to weaker groups — those with less stature or power in society — efforts to eradicate such “inefficiencies” may further empower dominant elites in ways that are counterproductive for the larger society.

For example, policy makers often argue that unions, minimum wages, or financial regulation create inefficiencies that reduce growth, jobs, investment, business formation, yada-yada, bark-bark-woof-woof. A&R cook up a simple “two-period” model where such “efficiency gains” now lead to power imbalances later that reduce aggregate social welfare (the best outcomes for the most people).

Take unions, for example. It’s simple to show using Econ 101 concepts that unions distort the price of labor, by raising their members’ wages above the market equilibrium. And there’s little worse in the firmament of basic economic theory than distorting price signals. So when you “fix it” by whacking the union, equilibrium is restored. (more…)

While Americans clamor for jobs, House Republican Leadership has instead opted to hold its umpteenth vote to deny families and small businesses access to quality, affordable health care. Despite the GOP’s relentless opposition, the Affordable Care Act (ACA) has already improved the lives of more than 100 million people.

 

The ACA is raising the quality of care, halting skyrocketing health costs, saving seniors money on prescription drugs, providing preventive care without co-pays, and eliminating the worst insurance company abuses. When fully implemented in the next few years, the law will provide affordable health benefits to 25 million uninsured Americans.

 

Instead of improving health care, the Republican repeal plan would take it away. Specifically, it would:

 

• Stop new consumer protections against insurance company abuses. Beginning on Jan. 1, 2014, the ACA makes it illegal for insurers to discriminate against adults with pre-existing conditions. Without this protection, 129 million people with chronic conditions like diabetes, high blood pressure and asthma would be vulnerable to being price-gouged or denied coverage, as they were for so many years before the law.
• Revive the loathsome practice of allowing insurers to deny coverage to children with pre-existing conditions. Soon after it was enacted, the ACA required insurance companies to cover children with pre-existing conditions. The insurers fought this before and after the law passed. Repeal would permit insurance companies to push sick children back into the uninsured population to spruce up their profit reports.
• End prescription drug savings for seniors. In only three years, the ACA has saved 6.3 million seniors $6.1 billion on their prescription drugs. Repeal would force elderly Americans to give that money back to overpaid drug company executives. The ACA also strengthens and protects Medicare and eliminates waste, fraud and abuse.
• Kick young adults off their parents’ health plans. About 3.1 million young adults are now covered on their parents’ insurance plans because of the ACA. Repeal would dump them into a broken marketplace that doesn’t offer them affordable, quality coverage. (more…)

I really don’t like to be cynical — therein lies the way to dark and gnarled soul — so I apologize in advance for this cynical statement (but keep reading… hope is on the way): whatever D.C. is debating right now, you can rest assured that it’s mostly B.S., and I don’t mean Bowles-Simpson.

To state the glaringly obvious, lobbyists are paid to steer the debate and ultimately the legislation their clients’ way, and they’re not bound by facts or logic or what’s best for most people. The best way to understand our debates is to think of them like television commercials. It’s about as likely that something called a “jobs” bill will generate jobs as drinking a particular beer will lead your super-hot downstairs neighbor to unexpectedly drop by to party with you.

We could certainly talk about guns in this context, but lately I’ve been thinking about this in terms of tax policy. I’ll post something longer (and more upbeat) later in the week, but I’m increasingly convinced that linking taxes to growth, investment, and jobs the way we typically do is generally misguided and incentivizes beer-party scenarios: tweak the code and your [nation/state/city] will have more jobs than it knows what to do with!

There’s a long and deep academic literature examining the responsiveness of labor supply, investment, income growth, and job creation to changes in the tax code, and that literature has led some economists, as opposed to many lobbyists, to embrace the mantle of small responders, i.e., particularly regarding tax changes, we believe the evidence points you toward smaller elasticities with regard to the variables above.*

There’s no better example than taxes on capital gains. Ever since I’ve been in this business, and until I leave it, people have and will continue to argue that lower taxes on capital gains will boost investment, productivity, and jobs. And yet, there’s virtually no evidence.

University of Michigan tax economist Joel Slemrod, another of the nation’s leading tax policy experts, has found that “there is no evidence that links aggregate economic performance to capital gains tax rates.” Similarly, [Tax Policy Center] has found no statistically significant correlation between capital gains rates and real GDP growth during the last 50 years. In addition, a new CRS report analyzing capital gains tax rates and economic growth finds that “analysis of such data suggests the reduction in the top [capital gains] tax rates have had little association with saving, investment, or productivity growth”. (more…)

You want my advice, you should pour a tall cup-a-Joe and settle in to read this essay by Sean Reardon in Sunday’s New York Times on education and wealth. He covers a lot of ground, but the theme that resonated most with me is one I’ve stressed often in these parts regarding the growing evidence of linkages between increased income inequality and diminished opportunities. A prominent channel through which this occurs is, of course, education.

It’s not just that rich kids do better in school than poor kids. That’s an old problem.

What is news is that in the United States over the last few decades these differences in educational success between high- and lower-income students have grown substantially.

Moreover, these growing differences show up in college access and completion.

…the proportion of students from upper-income families who earn a bachelor’s degree has increased by 18 percentage points over a 20-year period, while the completion rate of poor students has grown by only 4 points.
…15 percent of high-income students from the high school class of 2004 enrolled in a highly selective college or university, while fewer than 5 percent of middle-income and 2 percent of low-income students did.

How, though, do these developments link up with inequality? As Reardon sees it “the academic gap is widening because rich students are increasingly entering kindergarten much better prepared to succeed in school than middle-class students. This difference in preparation persists through elementary and high school.” (more…)

Payrolls increased by 165,000 last month and the unemployment rate ticked down to 7.5 percent, in a jobs report that painted a considerably brighter picture than last month’s version. In fact, the disappointing 88,000 payroll gain for March was revised up in today’s report to 138,000, and in February, new revisions show a large increase of 332,000 jobs.

That means employers added 114,000 more jobs in February and March than we thought, bringing the monthly average payroll gains over the past three months to a healthy 212,000 per month. Job growth at that pace, if it persists, should be enough to gradually, albeit slowly, bring down the unemployment rate. In fact, the decline in the jobless rate from 7.6 percent in March to 7.5 percent in April was due not to a shrinking labor force (i.e., people giving up looking for work) but to more people getting jobs.

Those looking for losses in sequester-sensitive industries could see some evidence in the report, as construction (down 6,000), government (down 11,000), and manufacturing (zero jobs added) all came in weak. Thus, all of the job gains last month came from private, service producing industries. Also, in signs that labor demand is still not strong enough, wage growth remains subdued, up 1.9 percent over the past year, and average weekly hours ticked down last month. (more…)

Well, well. It appears that both the Senate and House have voted to end sequester-imposed furloughs of air traffic controllers, just in time for the weekend.

You choose: Is this bipartisan support to mitigate one of the noxious effects of sequestration, which I and others have been tracking? Or is it papering over the high-visibility stuff that affects the affluent while lots of other budget bleeding goes on beneath the radar?

I choose the latter. While the annoyance of flight delays caught the attention of elected officials, businesspeople and other frequent flyers, lots of other, less advantaged Americans will continue to feel the pain of the sequester due to cuts in a variety of programs.

My CBPP colleague Sharon Parrott outlined some of the people outside of airport security lines facing sequestration-induced hardships:

• Jobless workers losing unemployment benefits. Sequestration requires every state to cut benefits for the long-term unemployed. So far, roughly 800,000 workers in 19 states have seen their benefits cut by… about $120 a month, on average. When all states implement these cuts, they will affect as many as 3.8 million jobless workers.

• Children losing Head Start. …Already, some Head Start programs are cutting their programs for the current school year — dropping children from the program, ending the school year several weeks early, or cutting services such as bus transportation. These cuts can leave families scrambling to find alternatives for their children. The Associated Press reports, for example:

At least two Indiana Head Start programs have resorted to a random drawing to determine which three-dozen preschool students will be removed from the education program for low-income families, a move officials said was necessary to limit the impact of mandatory across-the-board federal spending cuts. (more…)

Heading out to the left coast, in the air with what looks like a pretty good Wi-Fi connection.

Re: sequester, definitely saw some delays at D.C. National — spoke to the folks sending flights to NYC and they said that backups were already starting, driven by the furloughs of 1,500 air traffic controllers that commenced yesterday. (Though, truth be told, unless they somehow got caught in the federal budget crossfire, I’d like to know why the lines at Einstein Bagels were the worst in the airport; 20 minutes after ordering, I actually had to board before they could toast my bagel. One should have absolutely no patience for the myth of private-vs.-public sector efficiency.)

But let’s talk for a second about these airport delays. First, it’s an obvious point, but I’m sympathetic to this New York Times editorial this AM on how you don’t see policy makers fretting much about sequester-driven lotteries forHead Start slots. But start threatening travel and commerce, and you get their attention pronto.

Second, there’s some interesting and important, albeit highly weedy, substance here. Policy makers and editorial pages are suggesting that FAA didn’t have to furlough air-traffic controllers across the board — they could have upped the furloughs at small, less busy airports and avoided cuts at the larger hubs. Republicans, you’ll be shocked to find out, are busy trying to blame this all on the president (Cantor tweet from yesterday: “Why is President Obama delaying your flight.”) (more…)

Payrolls were up only 88,000 last month, well below expectations, and while the unemployment rate ticked down to 7.6 percent, the decline in the jobless rate was due not to job gains, but to people leaving the labor market. In fact, the share of the population in the workforce — working or looking for work — fell to 63.3 percent, the lowest level in decades.

In other words, a notably weak jobs report. As usual, we want to be careful not to over-interpret one month’s worth of pretty volatile data. Still, over the first quarter of the year — thus averaging out some of the statistical noise in the report — payrolls are up 168,000 per month, compared to 209,000 per month in the fourth quarter of 2012. (more…)

The furloughs haven’t much phased in yet, and the economy doesn’t show obvious signs of sequester drag yet.  It’s early, however, and anecdotal signs of trouble (brown shoots?) are showing up, like this one from an Indiana paper (h/t: SP).

At least two Indiana Head Start programs have resorted to a random drawing to determine which three-dozen preschool students will be removed from the education program for low-income families, a move officials said was necessary to limit the impact of mandatory across-the-board federal spending cuts.

Got that?  A lottery to see who gets kicked out of preschool?  That’s how we’re building the future?  Really?  That’s a better way forward than closing the carried interest loophole or lowering the housing subsidy to the most affluent homebuyers? (more…)

This morning’s events included a surprising announcement from GOP leaders who’d met over the weekend to discuss budget strategy.

According to an aide present at the weekend retreat, Rep. Paul Ryan, the powerful chairman of the House Budget Committee, brought a version of John Maynard Keynes treatise, The General Theory… as a joke. “He thought he’d crack Eric and John up, but a funny thing happened when they started flipping through the book,” the aide said.

Rep. Eric Cantor confirmed the account. “Paul brought Keynes in there as a goof, of course, but when he started reading passages, we were all inexplicably spellbound. Mitch [McConnell, R, KY -- GOP minority leader in the Senate] came in, saw us all listening intently and asked me if Paul was reading from the Bible. ‘He just might be,’ I heard myself reply.”

Reached for comment last night, Rep. John Boehner confirmed that the weekend turned into a seminar on Keynes. The party leaders even got economics Nobelist and Keynes’ defender Paul Krugman to join the retreat on Sunday, for an extended lecture on the macroeconomics of Keynesian stimulus.

“I thought it was probably a trap,” said Krugman, who nevertheless quickly flew down to DC and was clearly surprised by his reception. “By the end of the day, they were falling all over themselves to apologize to me for getting this wrong for so long. I really didn’t know what to say. I’m still pinching myself.”

Rep. Ryan began the day on Capitol Hill by surprising everyone in his caucus by denouncing his own budget, endorsed by the Republican-led House just weeks ago, as “a horribly misguided example of austerity economics” and “a roadmap back to recession.” (more…)