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Just a “Tax”

June 29th, 2012 . by economistmom

I find it kind of funny that, in the end, what saved President Obama’s health care reform law was to go ahead and call a tax (the crucial cost-controlling provision previously known as a “mandate”), a “tax.” From the Washington Post’s Robert Barnes (emphasis added):

At the core of the legislation is the mandate that Americans obtain health insurance by 2014.

The high court rejected the argument, advanced by the Obama administration, that the individual mandate is constitutional under the Commerce Clause of the Constitution. Before Thursday, the court for decades had said it gave Congress latitude to enact economic legislation.

But Roberts found another way to rescue it. Joined by the court’s four liberal justices — Ruth Bader Ginsburg, Stephen G. Breyer, Sonia Sotomayor and Elena Kagan — he agreed with the government’s alternative argument, that the penalty for refusing to buy health coverage amounts to a tax and thus is permitted.

Roberts summed up the split-the-difference decision: “The federal government does not have the power to order people to buy health insurance,” he wrote. “The federal government does have the power to impose a tax on those without health insurance.”

Later in the Post story, Justice Kennedy explains that the basic problem was that Congress (and implicitly the Obama Administration as well) wouldn’t call a tax a “tax” (bold added):

Kennedy said Roberts and the justices who joined him rewrote the statute in order to save it.

“The act requires the purchase of health insurance and punishes violation of that mandate with a penalty,” Kennedy said. “But what Congress called a ‘penalty,’ the court calls a tax. What Congress called a ‘requirement,’ the court calls an option. .?.?. In short, the court imposes a tax when Congress deliberately rejected a tax.”

It’s seems rather ironic to me that the authors of the health care legislation avoided the term “tax” to make the policy seem more acceptable to the American public–and in the process called its constitutionality into question.  Politicians work so hard to avoid that dirty word–as I’ve noted previously in different contexts.  Yet, taxing is one of the most appropriate things the federal government can do; it is essential in order to fund the public goods and services (such as “affordable [health] care”) that it provides.

Who knows what other things we might be able to accomplish by embracing the federal government’s taxing authority?!

(PS:  Here’s the Concord Coalition’s reaction to the decision.)

How Did You First Learn About the National Debt in School?

June 24th, 2012 . by economistmom

I have agreed to write a reference book on the U.S. national debt over the next year.  It is a book that would be found in the collections of public community libraries and the libraries of high schools and colleges–intended to be used by ordinary concerned citizens, high school AP government students, and college students in political science and economics courses.  For the students it would likely be a supplement to their main textbook, particularly useful in courses where the teacher wants to get into greater depth about the debt and deficits issue or where students are writing term papers on the topic.  I was motivated to agree to take this project on because I think there are big holes in the literature right now:  while there are some books on the debt that are written from a particular point of view with particular policy recommendations, there seem preciously few books that survey all different points of view and explain the big (economic and philosophical) tradeoffs in choosing among all the different policy options.  I also think (based on my reading of my own kids’ textbooks) that AP government textbooks don’t adequately explain what the federal debt is and why the students should care about it, which really troubles me given that they are the ones that will have to deal with it.

But I haven’t yet poured through the various text and reference books that talk about the national debt out there (but I will–this is a big summer project), so I was hoping you readers could first participate in this informal survey:  How did you first learn about the national debt in school–in high school or college–and what did you learn about it?  Did you learn about it as a simply mechanical and abstract thing that didn’t really pertain to you and your life, or were you made aware of how it might affect you more personally–even if largely through effects on the economy as a whole?  If you are someone who first learned about it as a grownup and by reading the news or books or websites on your own, do you feel you learned about it well, and easily?  What was the first lesson you “got”–as in, were told and understood–about why you should personally care about the debt?

Simon and Matt: More Taxes All Around–or At Least On Our Kids (Along with Everything Else That Will Screw Them)

June 18th, 2012 . by economistmom

I found this very nice video of Simon Johnson explaining to CNN-Money’s Lex Haris why taxes will have to come up for everyone–not just the rich. (Simon’s video was embedded in an also-nice CNN-Money column by Joe Thorndike on the topic of “fairness” and taxing the rich.) Simon explains the basic math that I have emphasized over and over again here: (i) the fiscal gap is just too large to put just on the backs of (even) the rich; and (ii) yes, taxes will have to be part of the solution (no matter what you think about their role in creating the “problem”), because the spending paths are not something we could or would choose to flat-line, even as we try our best to damp them down. (BTW, I’m now reading Simon’s new book on the national debt, White House Burning (with James Kwak), which is excellent–particularly in putting the current problem in historical context and making common-sense recommendations that emphasize that “fiscal sustainability” depends on the paths of both the numerator of the debt and the denominator of the size of the economy.)

And what of the fact that the “Just Raise Taxes” solution is not yet gaining enough traction? Matt Miller explains the consequences in his Washington Post column:

Hear me, Americans under 35!

There’s plenty that divides the parties in this pivotal election — from taxes to drones, from public workers to private equity. But there’s one uber-policy that brings Democrats and Republicans together that doesn’t get the attention it deserves.

That policy involves you, younger Americans. You’re in big trouble. You don’t even know it. You’re busy trying to get a degree, land a job, start a family, save for a home. You don’t follow the news. But trust me — you’ve been taken for a ride by your elders.

The question isn’t whether such talk will stir up generational war. That’s already being waged — and you’re losing. The question is whether you’ll wake up and engage in a little generational self-defense. Let me see if I can motivate you.

How are you being swindled today? Let me count just some of the ways…

There’s no cash for such investments in the future because pension and health-care programs for seniors (plus a bloated Pentagon) take up so much of the budget. At the federal level, seven dollars go to programs supporting elderly consumption for every dollar invested in people under 18. Nationally (after taking account of the fact that most education is paid for at the state and local level), the ratio is still 2 1 / 2 to one.

And that’s just today’s elderly tilt. We have trillions in unfunded liabilities in these programs coming due as more and more boomers retire.

Yet amazingly, both parties would exempt every current senior from participating in the inevitable adjustments in these programs. Paul Ryan and Barack Obama lock arms in agreeing that everyone over 55 must be spared such changes, even though most of these Americans are getting back far more than they paid into the system. And millions are well-off…

The solution for the young people?  Matt (with the help of Alan Simpson) explains you gotta fight fire with fire (emphasis added):

There are answers to these challenges that are fair to young and old alike. But we won’t hear them until younger people wake up to what’s happening.

In 1995, when I was a (younger) generational equity worrywart, I asked then-Sen. Alan Simpson how to fix what was clearly coming. Simpson told me nothing would change until someone like me could walk into his office and say, “I’m from the American Association of Young People. We have 30 million members, and we’re watching you, Simpson. You [mess with] us and we’ll take you out.”

Simpson was right then. He’s still right now.

All this talk about what’s “fair” to burden the rich with, and so little mention of our kids.  That’s what’s really outrageous about the partisan bickering about deficit reduction, spending cuts, and tax increases:  the politicians like to claim they are all about doing what’s right for our kids and grandkids–but when you pay close attention, you see their specific actions don’t match up with their vague words.  I think the kids have to get more involved.  The so-called “grownups” aren’t getting it done.

Q: How is College Like Owner-Occupied Housing?

June 13th, 2012 . by economistmom

college-loans-and-tuition-from-wsj-061012

…A:  When loans to purchase it are subsidized, the price of it goes up!

I’m fascinated by this story that appeared in the Wall Street Journal this week (by Josh Mitchell), with the subtitle “As Student Debt Grows, Possible Link Seen Between Federal Aid and Rising Tuition.”  The article explains the link this way:

Rising student debt levels and fresh academic research have brought greater scrutiny to the question of whether the federal government’s expanding student-aid programs are driving up college tuition.

Studies of the relationship between increasing aid and climbing prices at nonprofit four-year colleges found mixed results, ranging from no link to a strong causal connection. But fresh academic research supports the idea that student aid in the form of grants leads to higher prices at for-profit schools, a small segment of postsecondary education.

The new evidence?  Continuing into the WSJ story, my emphasis added:

The new study found that tuition at for-profit schools where students receive federal aid was 75% higher than at comparable for-profit schools whose students don’t receive any aid. Aid-eligible institutions need to be accredited by the Education Department, licensed by the state and meet other standards such as a maximum rate of default by students on federal loans.

The tuition difference was roughly equal to the average $3,390 a year in federal grants that students in the first group received, according to the National Bureau of Economic Research working paper by Claudia Goldin of Harvard University and Stephanie Riegg Cellini of George Washington University…

The authors said their findings lent “credence to the…hypothesis that aid-eligible institutions raise tuition to maximize aid.

I see two main problems with that bottom-line conclusion/suggestion–with the strong caveat that I have not read the actual NBER working paper but only this WSJ story on it (and would love to hear your comments, especially if any of you have read the academic paper).

First, it’s tough to do the “all else constant” experiment here, given that “aid-eligible institutions need to be accredited.” That means being aid-eligible is strongly correlated with whatever qualities make the schools qualify for accreditation.  The Education Department’s website explains how accreditation is done:

The goal of accreditation is to ensure that education provided by institutions of higher education meets acceptable levels of quality. Accrediting agencies, which are private educational associations of regional or national scope, develop evaluation criteria and conduct peer evaluations to assess whether or not those criteria are met. Institutions and/or programs that request an agency’s evaluation and that meet an agency’s criteria are then “accredited” by that agency.

In other words, how “comparable” can two for-profit schools really be with each other, if one (the one providing aid) qualifies as accredited and the other (the one without aid) not?  The way prices work in most markets (for all kinds of goods and services), is that higher quality goods and services command higher demand and hence higher prices.  Take houses, for example.  You could compare two houses that are alike in many measurable attributes–square footage, lot size, school district, age, number of bedrooms and bathrooms, etc–and yet there would be many unmeasured attributes (and some unmeasurable qualities) that might explain why one house sells for a much higher price than the other.  In the case of college tuition, whatever variables the researchers controlled for in terms of “comparability,” we know they couldn’t control for the underlying factors that determined accreditation of the schools–because any of those factors were indistinguishable (inseparable) from the characteristic of whether the school was aid-eligible or not.  I suspect that if we were shown any pair of “comparable” schools in this experiment, we would conclude the aid-eligible school was of obviously higher quality than the aid-ineligible school (it was obvious to the accrediting agency, after all), and that that difference in quality was a reasonable enough reason why the higher quality school charged higher tuition.  So theoretically, the aid doesn’t have to have anything to do with what causes the higher price, and it might be that the only reason why higher prices seem correlated with greater aid is because higher quality is correlated with higher prices.

Second, even if the subsidized loans do have at least something to do with higher tuition and fees, this is just due to the forces of supply and demand–not the ulterior motives of rent-seeking colleges. The WSJ article about the NBER paper suggests that the empirical research provides evidence that colleges take advantage of their aid eligibility to set higher tuition prices, and/or manipulate their tuition charges to increase their aid eligibility.  But I suspect the hard-to-measure true story doesn’t contain quite so much willful drama on the part of the actor playing the college.  Instead, the causation probably runs this way:  subsidized loans lower the out-of-pocket costs of college to students, the lower price increases demand (shifts out the demand curve), and higher demand means a higher market price.  (Microeconomics students learn that the government subsidy acts like a “wedge” between the price received by the seller (the college)–now higher–and the price paid by the consumer (the student)–now lower.)  The higher price received by colleges after the subsidized aid is  not because the suppliers just on their own decide to claim most or all of the benefits of the subsidy by simply setting the price of tuition to reflect a full (or otherwise whimsically-decided) mark-up.

So more subsidized loans means greater demand for the college educations those loans buy, and along with all the other reasons why demand for college is increasing (like, no one can get a job now anyway, but especially not those without college degrees), this raises the market price of college, and, yes, the profits of those for-profit institutions of higher education fortunate enough to be deemed good enough for (simultaneously) accreditation and government-subsidized aid.

So this reminds me of how the government subsidizes home mortgages, via the mortgage interest deduction.  (Actually, technically, it’s from the combination of the non-taxation of the imputed rental services from owner-occupied housing and the mortgage interest deduction.)  Economists universally understand that the mortgage interest deduction raises the price of owner-occupied housing, because the value of the mortgage interest subsidy gets capitalized into the price of houses everywhere–even the prices of houses that are not literally purchased by people who take out mortgages and live in them as owner occupiers.  The point is that many players in the market for housing will qualify for the subsidy, and market prices will reflect how much of the market is made up of those people.  On the issue of the mortgage interest deduction, economists often worry about what the economic effects of that subsidy are, and whether policymakers really intended for those effects.  We can say that homeownership is a good thing, and we can hope that this subsidy to homeownership actually increases homeownership.  But it is a subsidy not to homeownership per se, but to the costs of borrowing to purchase a home–and the larger and/or more expensive the house (and the bigger the loan), the bigger the value of the subsidy.  (And on top of that, the higher ones income, the bigger the subsidy–because the subsidy is run through a tax deduction that makes the subsidy an “upside down” one, with larger percentage subsidies given to people in higher income tax brackets.)  Economists have found evidence that the mortgage interest deduction definitely raises housing prices, but not as much evidence that the subsidy increases homeownership as much as encourages people to buy more expensive houses with larger mortgages.  (For microeconomics students out there, both the income and the substitution effects work in those directions.)  And then we get to the public policy concern:  is that government subsidy worth its cost?  What is the goal of the policy?  If there are social benefits to homeownership, are there even bigger social benefits when people buy bigger houses (even if by going into bigger personal debt)?

Now come back to the student loan story.  College is like owner-occupied housing in that if you subsidize the costs of borrowing for college, you will raise the market price of a college education–just like the mortgage interest deduction raises the market price of a house.  Further, you might hope that what you’re doing with the subsidy is making it possible for kids to go to college who otherwise wouldn’t be able to afford it.  That might be partly the case, just like there are surely some households at the cusp of the owning-vs-renting decision for which the mortgage interest deduction is the marginal factor that makes owning the winner.  But just like the mortgage interest deduction goes to a lot of people who would own homes anyway and might just opt for the more expensive home made possible by a bigger mortgage, subsidized student loans go to a lot of students who would have gone to college anyway but may now opt to go to more expensive colleges made possible by larger (but subsidized) student loans.  And some of us might wonder if that policy effect is worth the cost, because government-subsidized educational aid costs real money (it increases government spending and increases our public debt), just like government-subsidized mortgages do.  Do all of us really want to be partially paying for kids (not even our own) to go to expensive colleges?

By the way, I speak about this effect of subsidized aid on the demand for expensive colleges, not just conceptually, but from personal experience.  I have two daughters in college, one at Princeton and the other at Sarah Lawrence.  [Clarification: these are non-profit institutions, not the for-profit colleges that the NBER analysis examined.  I don't have any personal experience with the for-profit versions.]  If you google their costs, you will see they certainly both qualify as “expensive.”  But a combination of need-based grant aid and subsidized loans have way narrowed the difference between the net cost to send my daughters to those schools and what the costs of sending them to the in-state (Virginia) public universities would be.  They would not be attending those schools were it not for the availability of such aid, but without that aid, they would have still gone to college–just to a cheaper (in-state) one.

Based on just my personal experience (thus far), I think that more expensive colleges tend to be worth their higher costs.  Certainly they must be worth their higher costs if they continue to attract students, and I know many students go to these expensive colleges without any subsidized aid–because they can afford it and decide it is worth spending their own money that way over other ways.  More expensive homes are worth their prices, too, given that (or to the extent that) there are people who demand such expensive homes.  The public policy question about whether we want to be subsidizing expensive homes, however, seems a more damning criticism than asking the same question about subsidized college aid, because there’s probably more value added–to society, broadly–in encouraging higher-quality educations that happen to come with higher prices, than in encouraging higher-priced homes that are made possible with larger mortgages.  If the bigger, more important, public policy goal regarding higher education is to make it possible for more students to attend any college, however, then the government’s subsidized student loan policy might score poorly compared with an alternative policy of increasing need-based grants–in the same way that the mortgage interest deduction scores poorly compared with alternative policies that subsidize affordable housing if the goal is to increase homeownership.

Your feedback, thoughts, personal experiences, welcome!

UPDATE (4:30 pm): I’m especially interested to hear from those of you with knowledge/experience with for-profit schools. I should have made clear that the NBER paper is focused on for-profit college/higher ed institutions, and in fact, here’s the relevant segment of the WSJ article (emphasis added):

Steve Gunderson, president of the Association of Private Sector Colleges and Universities, a trade group for for-profit schools, disputes a link between federal aid and prices, saying colleges merely respond to market demand.

The study’s authors warned their findings don’t apply to public colleges and private nonprofit schools, which they say are different because they aren’t motivated by profits and because their prices are largely determined by state funding and donations.

A spokesman for Education Secretary Arne Duncan said the administration believes there is a link between federal aid and tuition increases at for-profit schools, but that it sees no such tie with public and nonprofit schools.

(Even with a strong profit motive, I wonder how much these schools are able to set their own prices and manipulate their subsidized aid.  How competitive of a market is it, and is it not still true that their prices are largely a reflection of their relative qualities?)

A Longer-Term View of the “Cliff”

June 5th, 2012 . by economistmom

cbo-long-term-outlook-cover-graphic-june2012

The Congressional Budget Office released its latest estimates of the long-term federal budget outlook today.  The graphic above comes from the report’s cover.  If you are familiar with the report, this year’s offers nothing that new, but it’s a good way to take a step back from current policy debates (dominated by the politics) and put impending decisions in the context of the bigger picture (important for the economics).  The biggest difference between the unsustainable deficits resulting from the business-as-usual “extended alternative fiscal scenario,” and the sustainable deficits that would occur under the “extended baseline scenario” (current law), continues to be–as it has ever since 2001 when the Bush tax cuts were first passed–what we do about expiring tax cuts.  From Table 1-2 in the report (page 12), under the “baseline”/current-law scenario where expiring tax cuts either actually expire or are extended but paid for with offsetting revenue increases, revenues grow from 15.8 percent of GDP in 2012 to 23.7 percent of GDP in 2037.  If instead the expiring tax cuts are extended and deficit financed (as has been standard practice since 2001), revenues only reach 18.5 percent of GDP in 2037–which happens to be right around the 40-year historical average policymakers who don’t want to raise taxes like to label the “right” level of revenues for the future.  Comparing primary deficits (the difference between revenues and non-interest spending), the CBO table and graphic show that the 2037 deficit is 7.7 percent of GDP under business as usual, but is a primary surplus of 1.1 percent of GDP under current law.  This implies that nearly 60 percent of the difference between the unsustainable deficits under business as usual and the sustainable ones under current law (or paygo-compliant extended policies) is explained by the financing of expiring tax cuts.  Only about 40 percent of the difference is explained by the difference in spending paths under the CBO’s two scenarios.  And if you look in further detail at the spending breakdown, you might notice that despite the major contribution of Medicare, Medicaid, and Social Security spending to  federal spending growth over the next several decades, the difference between the CBO’s two scenarios on these spending levels in 2037 is just 0.8 percent of GDP–in contrast to the 5.2 percent of GDP difference in revenue levels.

This just reminds me that the current debate over what to do about the “fiscal cliff” is not irrelevant, even if somewhat misguided.  The “fiscal cliff” is also largely about the expiring tax cuts, representing one possible way of making them comply with current law: let current law play out, literally, and let all the tax cuts expire at the end of this year–the Bush tax cuts, the payroll tax cut, AMT relief, everything!–along with letting the spending cuts of the “sequester,” and other cuts like those to Medicare physician payments, kick in as well.  The emphasis on this particular version of sticking to the current-law baseline is misguided because it makes it seem as if the choice is between the “cliff” in full form (which seems dangerous and not very smart given the state of the economy) and no cliff or fiscal restraint at all.  If that is the debate, it is easy to predict that “not at all” will win in the end (at the end of the year).  The CBO report in the context of the fiscal cliff debate is very relevant, however, in reminding us that current law offers us a path to longer-term fiscal sustainability–at least over the next couple decades–which we ought to be considering more seriously beyond the “take the cliff now–or not” question.  I’ve repeatedly harped on the point that sticking to the current-law baseline levels of revenues and spending (and even keeping the two sides of the ledger separate) doesn’t have to mean literally sticking to current law and that very particular composition and timing of the expiring tax cuts.  We could achieve sustainable deficits by sticking to strict pay-as-you-go rules on expiring tax cuts.  We do not have to let all the expiring tax cuts actually expire; we just have to be willing to pay for them over the next ten years.  Spreading out the timing of the revenue increase (and the spending cuts) could turn the fiscal “cliff” in current law into that more manageable “climb” towards fiscal sustainability I’ve talked about before–an admittedly tough climb, but one we cannot keep avoiding forever.

***UPDATE, 3:15 pm:  Here’s a link to the Concord Coalition’s press release on the CBO report.