A podcast discussion with Casey Mulligan. What's in the reconciliation bill? How will it work?
Link to the podcast page, with lots of other formats.
Yesterday Casey tweeted that he had read the entire 2,400 page bill. Casey does this sort of thing, as explained in his book "Your'e hired." I have been trying to figure out what's in it for a while. The media coverage is basically absent. (See this great Marginal Revolution post and Bloomberg column (gated, sadly) by Tyler Cowen.) I tried downloading the actual bill too, but promptly fell asleep. (Casey has some good hints on how to read it.)
But here we are, about to embark on a huge set of new federal programs, really larger than anything since the Johnson Administration, and there is essentially no description of what they are, no debate on how they will work, and especially (my hobby horse) what incentives and disincentives they provide. Many of the previous welfare-state programs were disastrous for the supposed beneficiaries. How are we going to avoid that again? At most we talk about top line numbers. I'm a debt hawk, but if we could heal the planet, end all inequity, bring full social racial and gender justice, wipe out poverty, give every American a life of dignity, prosperity, and opportunity for a mere $3.5 trillion, I'm in. Double it. The real question is whether any of this will happen.
Well, Casey read the bill and knows what's in it! Tune in to find out..
PS, I hope to get the podcast going more regularly this fall,
Update:
A summary and review from David Henderson.
Casey writes a detailed blog post on BBB disincentives.
This comment has been removed by the author.
ReplyDeleteUsually, the interviewee gets the lion's share of the time :)
ReplyDeleteIndeed. I'm just starting at this, and that was a main regret. Be Like Tyler...
DeleteThe responses are rather unfocused; the questions are helpful.
DeleteI don't have the heart to listen. Mulligan is crazy brave, but I can't do it.
ReplyDeleteCall Me when it is over.
"...what incentives and disincentives they provide."
ReplyDeleteThis must be a joke: Redistribution, redistribution!
To the middle class, where the votes are.
Yes but we are acting as economists here. Really, economics has little to say about redistribution. Economics has to say a lot about incentives. The economic objection to redistribution is that it usually provides disastrous incentives.
DeleteI was trying to be ironic. :-)
DeleteThis comment has been removed by the author.
Delete"The economic objection to redistribution is that it usually provides disastrous incentives."
DeleteThe economic objection to coerced redistribution is that it provides bad incentives for the beneficiary and the payee for the redistribution.
The economic objection to voluntary redistribution is that it can provide bad incentives for the beneficiary only.
I am aghast that so much spending is going on.
ReplyDeleteBut on the other hand the US will spend $1 trillion this year on the VA and the Department of Defense, and next year and next year and in perpetuity (add in some growth, at perhaps 3% compounded).
David Stockman calls Washington the "welfare warfare' complex.
More guns and butter for the safe and fat.
Unfortunately for your assertion, 64.4%--almost two-thirds--($4.2 trillion) of federal outlays in fiscal year 2020 were for transfer payments (direct and grants) to individuals (not including salaries of government workers). Federal spending is not dominated by defense-related categories. See Row 85 of OMB historical tables at https://www.whitehouse.gov/wp-content/uploads/2021/05/hist11z1_fy22.xlsx
DeleteSince there was some question about who's paying for family medical leave: It looks like the government will effectively reimburse employers 90% of the lesser of (1) the actual benefits paid or (2) the national average cost of benefits per employee-week, times the number of employee-weeks paid. So it seems like the government will pick up most of the tab overall while capping the amount it pays for employees with high income and/or high replacement ratios.
ReplyDeleteIf I'm understanding things correctly, the bill would enable employers of low-income employees to offer paid medical leave at 67 cents on the dollar for employees making up to $15k/year, 40 cents on the dollar at the margin for employees making up to $34k, and potentially even more cheaply above that threshold depending on where the national average cost of benefits winds up. The incentive would be even stronger for employers whose employees are expected to take more medical leave than the national average, e.g. those that hire a lot of young women.
From Sec. 2210 (starting on p. 54) of https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/Committee%20Print%20-%20Subtitle%20A%20-%20Universal%20Paid%20Family%20and%20Medical%20Leave.pdf
Unrelated to my previous comment - I share your concern about the extremely high effective marginal tax rates for low- to middle-income Americans, but my impression is that this bill would probably make things better, not worse. I say "probably" because the affordable housing provisions seem like a huge question mark and it's not hard to picture some of that money being spent in ways that create perverse incentives.
ReplyDeleteAs Casey mentioned, it looks like the phase-outs for the child tax credit would continue to start at $75k for individuals and $150k for married couples. The effective marginal tax rate above that income level would typically* "just" be marginal income tax rate + FICA + 5% for CTC phase-out, or 35% in a zero-income-tax state - much lower than the 60%+ marginal rate resulting from other benefit phase-outs (you mentioned Section 8 housing and food stamps, for example) that occur at much lower income levels. Slightly outdated but still some nice illustrations: https://www.cbo.gov/sites/default/files/cbofiles/attachments/43722-Supplemental_Material-MarginalTaxRates.pdf
Conversely, the expansion of ACA premium subsidies would eliminate one of the largest benefit cliffs that currently exists - namely, the complete elimination of premium subsidies once you cross 400% FPL. At a cost of ~$14 bn/year (https://www.cbo.gov/system/files/2021-02/hwaysandmeansreconciliation.pdf) this is a no-brainer, in my opinion.
In the 12 states that haven't expanded Medicaid**, I agree that the ACA changes would reduce the incentive to work, since employers are held to weaker health insurance affordability standards than subsidized Marketplace plans would provide. I think this is a lesser evil than the problem it attempts to address - namely, that in those states it's possible to make too little money to qualify for premium subsidies, meaning that an individual making $12k/year gets charged the unsubsidized sticker price for health insurance. I also worry that work requirements for affordable health insurance discourage startup formation, especially in light of of all the tech people who have been moving to Texas lately, though I haven't seen good data one way or the other. Ultimately this whole problem is just a symptom of our excessive and government-mandated reliance on employers for health insurance, but short of actually addressing the underlying problem, which is politically infeasible, I don't see a better workaround.
Overall, I'm only seeing one minor change that would increase effective marginal tax rates in the income range between, say, $10k and $50k where existing benefits tend to phase out or fall off - the EITC expansion would increase the effective marginal tax rate for childless people with income between ~$12k and ~$20k. And I don't see any changes that would create a direct disincentive to work, other than the ACA changes I addressed in the previous paragraph. (I say "direct" because, as you pointed out, there's always an income effect.) Of course, I haven't read all 2,465 pages of the bill, so I'm sure I'm missing something.
*It'd be ~29% for a one-income married couple since the working spouse would be above the Social Security wage base. For someone without employer-provided health insurance, that could potentially add another ~10% for phase-out of ACA premium subsidies, depending on how expensive their premiums are.
**In the other 38 states and DC, you can already quit your job and get free health insurance, so the ACA changes have essentially no impact on low-income individuals' incentive to work.
Thanks for these exceptionally good comments. I'm bookmarking the page for later use!
DeleteI suspect there will be a coming push to reverse all of this once it fails spectacularly. Ronald Reagan and Maggy Thatcher got elected after all. Not every New Deal policy survived. Perhaps, much like business cycles, the socialist pull comes in cycles. Neither AOC nor Bernie are novel entities.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteSearching the bill, I found he child care tax credit has specific eligibility requirements for the child and for the parent:
ReplyDelete(D) Eligible child.--The term ``eligible child''
means an individual (without regard to the immigration
status of the individual or of any parent of the
individual)--
(i) who is less than 6 years of age;
(ii) who is not yet in kindergarten;
(iii) whose family income--
(I) does not exceed 100 percent of
the State median income for a family of
the same size for fiscal year 2022;
(iv) whose family assets do not exceed
$1,000,000 (as certified by a member of such
family); and
(v) who--
(I) resides with a parent
participating in an eligible activity;
(C) Eligible activity.--The term ``eligible
activity'', with respect to a parent, shall include, at
minimum, activities consisting of--
(i) full-time or part-time employment;
(ii) self-employment;
(iii) job search activities;
(iv) job training;
(v) secondary, postsecondary, or adult
education, including education through a
program of high school classes, a course of
study at an institution of higher education,
classes towards an equivalent of a high school
diploma recognized by State law, or English as
a second language classes;
(vi) health treatment (including mental
health and substance use treatment) for a
condition that prevents the parent from
participating in other eligible activities;
(vii) activities to prevent child abuse and
neglect, or family violence prevention or
intervention activities;
(viii) employment and training activities
under the supplemental nutrition assistance
program established under the Food and
Nutrition Act of 2008 (7 U.S.C. 2011 et seq.);
(ix) employment and training activities
under the Workforce Innovation and Opportunity
Act (29 U.S.C. 3101)
(x) work activities under the program of
block grants to States for temporary assistance
for needy families under part A of title IV of
the Social Security Act (42 U.S.C. 601 et
seq.); and
(xi) taking leave under the Family and
Medical Leave Act of 1993 (29 U.S.C. 2601 et
seq.) (or equivalent provisions for Federal
employees), a State or local paid or unpaid
leave law, or a program of employer-provided
leave.
My Tom Sawyer approach to reading the bill is working! This is great. So, 100% cliff at state median family income, whatever that is. I will be interested to see the mechanics of verifying all of these pie in the sky limitations. Net worth.. oh, as attested to by a family member. Linking it to other programs is interesting. Of course that means we automatically double up any disincentives.
DeleteIt looks like that's for childcare and pre-K, not the child tax credit. And for what it's worth, it looks like that cliff is temporary, I assume because they've been playing games with the budget:
Delete(D) Eligible child.--The term ``eligible child'' means an individual (without regard to the immigration status of the individual or of any parent of the individual)--
(i) who is less than 6 years of age;
(ii) who is not yet in kindergarten;
(iii) whose family income--
(I) does not exceed 100 percent of the State median income for a family of the same size for fiscal year 2022;
(II) does not exceed 115 percent of such State median income for fiscal year 2023;
(III) does not exceed 130 percent of such State median income for fiscal year 2024; and
(IV) for each of the fiscal years 2025 through 2027, is of any level;
And there is a phase-in detailed a few paragraphs down, though until 2025 it will just be a ramp leading to the top of a cliff:
(i) In general.--Except as provided in clauses (ii)(I) and (iii), the State plan shall provide an assurance that the State will for the period covered by the plan use a sliding fee scale described in clause (ii) to determine a copayment for a family receiving assistance under this section (or, for a family receiving part-time care, a reduced copayment that is the proportionate amount of the full copayment).
(ii) Sliding fee scale.--A full copayment described in clause (i) shall use a sliding fee scale that provides that, for a family with a family income--
(I) of not more than 75 percent of State median income for a family of the same size, the family shall not pay a copayment, toward the cost of the child care involved for all eligible children in the family;
(II) of more than 75 percent but not more than 100 percent of State median income for a family of the same size, the copayment shall be more than 0 but not more than 2 percent of that family income, toward such cost for all such children;
(III) of more than 100 percent but not more than 125 percent of State median income for a family of the same size, the copayment shall be more than 2 but not more than 4 percent of that family income, toward such cost for all such children;
(IV) of more than 125 percent but not more than 150 percent of State median income for a family of the same size, the copayment shall be more than 4 but not more than 7 percent of that family income, toward such cost for all such children; and
(V) of more than 150 percent of the State median income for a family of the same size, the copayment shall be 7 percent of that family income, toward such cost for all such children.
Also, it specifically mentions a cap on "family assets", not net worth, which is pretty weird. If I have a $1 million dollar house with $50k of equity and $50k of other assets, my reading is that my kids would be ineligible because I have $1.05 million in assets even though my net worth is only $100k. Realistically it probably doesn't matter much - most people with young kids and a $1 million house probably have enough income that they wouldn't get a subsidy anyway - but still an interesting quirk.
I have made this comment in the past but I will say it here once more. The purpose of the econ profession is slanted towards the tinkerer. Free market economics dies out after macro and micro 101. That is probably why most economists are either tacitly for this bill or tepid in their criticism. Better to do something even if means a lot of overdoing than to do nothing.
ReplyDelete