wage subsidies

December 10th, 2013

Over at the Noahpinion blog, there is an interesting discussion of wage subsidies as an alternative to the minimum wage.

There has been a lot of talk about raising the minimum wage lately. Minimum wage is one of those things where the public strongly disagrees with economists – Americans are very strongly in favor of minimum wage hikes, but most economists think it’s a bad idea. Economists generally prefer the EITC [earned income tax credit], also called a “negative income tax”. Minimum wages can cause higher unemployment, and often just give money to high school kids who don’t need it; EITC suffers these problems much less. ….

So is there a policy that would combine the economic efficiency of the EITC with the popularity of the minimum wage? I believe that there is. It’s called a wage subsidy. This means paying companies to offer their employees higher wages. ….

Wage subsidies are better than EITC, for several reasons. For one, they are automatic – poor people don’t have to take the time and initiative and mental energy to go claim them. Second, they will probably make people feel more valuable, since people tend to view wages as money they “earn”. From the worker’s perspective, it will just look like wages went up. In fact, a better name for wage subsidies might be “wage matching”. ….

Wage subsidies are better than the minimum wage. For one thing, minimum wage doesn’t necessarily raise wages for people who are slightly higher up the wage distribution but still poor. Wage subsidies can push up wages for all of the working poor.

Also, wage subsidies encourage higher employment, while minimum wage encourages higher unemployment. …. [W]e may soon face increased downward pressure on wages from increased automation – the so-called “rise of the robots” – and wage subsidies would be a way of placing our thumb on the scale for the human beings.

Noah Smith, “Wage subsidies“, Noahpinion, 7 December 2013.

This is not a new idea. Edmund Phelps, professor emeritus of economics at Columbia University, wrote an entire book in 1997 pleading for wage subsidies: Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise (Harvard University Press). A second edition was published in 2007.

Like Noah Smith, I don’t understand why voters do not embrace this idea. The political left prefers minimum wages, conservatives insist on the EITC (despite – because of? – low take up), and libertarians want the free market to set wages (leaving problems of low incomes to voluntary charity).

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the ‘poverty’ industry

December 10th, 2013

Quite a lot of money has been made in writing about poverty. It is financially more rewarding than working as public servants to improve services for poor people.

Richard M. Titmuss, Social Policy: An Introduction (Pantheon Books, New York, 1974), p. 16.

Recycled from the TdJ 2003 archive.

British sociologist Richard Titmuss (1907-73) founded the academic discipline of Social Policy. The chair that he held at LSE is now known as the Richard Titmuss Chair in Social Policy.

 

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Hong Kong’s means-tested Old Age Living Allowance (OALA)

December 8th, 2013

I came across an interesting year-old blog on reform of social pensions in Hong Kong, which I had somehow missed until now. The author of the blog is a Hong Kong businessman and politician. His views are shared by  many in the middle and upper classes of this former British colony. His English has flaws, but his defence of means tests is worth reading.

The controversial elderly allowance-”Special OAA” funding is going to determine in Financial Committee on Friday, 26th Oct. Special OAA is a policy recommended elderly over age 65 increase the OAA monthly payment from $1,110 to $2,200 given an asset-income test has passed. Legislative Council questioned the policy and mean-test while the government stood firm to implement the policy.

According to the government, Hong Kong permanent residents aged 65 or above just simply declare their assets to be below $186,000 and monthly income below $6,660, there could be an increase in subsidy. ….

Some … OAA opponents emphasized that the means tests should be eliminated. The elimination could act as the first step for establishing a universal retirement protection system. They also point out that in long-term, $2,200 per month is certainly not enough to maintain the basic life. The new OAA payment is calculated as just slightly less than ten full days working payment at the minimum wage $28.

If the government wants to lessen its financial burden, having means test for elderly allowance is not the only way. In contrast, it would [could?] post further reduction on taxable citizens for those who need to take care of elderly. ….

[Government could also] redirect its policy to independent funding by elderly themselves rather than through pension. Such as restoring incentives to save so that people can support their life when getting aged. Means testing is scarcely going to provide the encouragement on saving.

Wong Po Yan, “New Elderly Allowance Policy”, Hong Kong Law Blog, 25 October 2012.

Wong Po-yan (born 1923 in Mainland China) was appointed in 1979 by Governor Murray MacLehose to the Legislative Council, where he served until 1988. The “Special” OAA he mentions is now law, and is officially known as the Old Age Living Allowance (OALA).

Mr Wong’s post attracted 8 comments, all in support of the means test. None of them – including Mr Wong – call for abolition of the monthly OAA of HK$1,090 (US$140), which is given without a means test to all residents from the age of 70, unless they receive an alternative pension from government. I missed the opportunity to comment, so am posting my reaction here.

Seniors who pass a means test are entitled, from age 65, to an Old Age Living Allowance (OALA) of HK$2200 (US$285) a month. For those who apply and qualify, the OALA replaces any OAA (HK$1090) or disability allowance (HK$1400) they currently receive. Other seniors 70 years of age or older will continue to receive the HK$1,090 OAA.

The OALA is only 60% of Hong Kong’s official poverty line of HK$3,600 a month. Despite its name it is not enough to live on, so is too small to lift all seniors out of poverty. I think that Mr Wong would agree that the amount is too low. Mr Wong clearly does not like the means test. I also dislike it but, unlike Mr Wong, favour replacing it with a universal pension from age 65, with benefits at least as large as the poverty line of HK3,600 (US465) a month. This would eliminate all senior poverty in the territory.

Mr Wong proposes replacing means tests with two measures. Both benefit the wealthy and exclude the poor – the precise opposite of the intended effect of means tests. His first proposal is to reduce the taxes of those care for the elderly. This is tax expenditure, equivalent to a government subsidy that goes primarily to the wealthy – those with enough income and assets to pay taxes. An alternative is to provide a direct cash grant to caregivers. This would ensure that all caregivers – wealthy and poor – receive a subsidy. But how can government ensure that the elderly receive all the benefits from such a subsidy? This can be accomplished by giving the cash directly to the elderly, rather than channel it though a caregiver (most often an adult child).

Mr Wong’s second proposal is to encourage the young to save for their own old age. I presume that Mr Wong wants government to provide tax incentives, perhaps even matching contributions, for those who save in retirement savings accounts. This policy has been implemented by many countries, with two results. First, the poor are unable to save, so face even greater poverty in old age. Second, those who do save in tax-favoured retirement accounts reduce other forms of saving (or increase their indebtedness), so the policy has little impact on net saving. Also important is the fact that increased saving by the young does nothing to improve the well-being of those who are already old. In any case, is this really a new policy? Doesn’t the government of Hong Kong already have a plan in place, known as the Mandatory Provident Fund (MPF), intended to encourage retirement saving?

In sum, a policy for Hong Kong that is fair and efficient is the universal age pension: a new OAA, with a minimum benefit equal to the poverty line, and an age of eligibility set at 65 years. This would eliminate senior poverty in one stroke, without penalizing those who save for retirement and without denying benefits to those who continue to work beyond age 65. A universal pension is affordable, because it would replace the existing OAA, OALA and disability allowance. To ensure future adequacy, the universal pension should be indexed to consumer prices or, even better, the poverty line.

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path dependence

December 7th, 2013

In 1977, I purchased a Betty Crocker cookbook, which I continue to use, even though none of the recipes have metric measures. This is particularly troublesome for oven temperatures, which are in the archaic Fahrenheit scale. Only recently did I notice the following unhelpful comment, in a concluding chapter on “Special Helps”.

METRICS IN THE KITCHEN

The metric system is arriving gradually, but don’t panic–you have plenty of time to master it. Total United States conversion may take a decade. And learning the system is easy: All metric measurements are divisible by 10.

Betty Crocker’s Cookbook (New and Revised Edition, ring bound, Golden Press, 1976), p. 362. (Emphasis added.)

The transition to metric has been slower than expected. In fact, I have seen no progress at all since 1976. Let me know if I missed something.


 

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persons with disabilities (PwDs) – a new database

December 5th, 2013

[I]n recognition of the International Day of Persons with Disability, we are launching a Disability Benefit database to give some much needed publicity to this oft-neglected social security instrument. The database complements a similar and very useful old age pension database that can be found at HelpAge International’s Pension Watch website. Our hope is that the database will give some support to the persons with disabilities of Kiribati and across the world as they struggle to have their rights recognised…..

Disability benefits should be a core component of any national social security system. There is strong international evidence that disability increases the risk of individuals and families falling into poverty. Many PwDs face additional costs if they are to access school or employment and disability benefits can provide them with essential support to increase their independence. Others face care costs – which can be significant – while family members often have to give up or reduce their employment to look after them. In the absence of a disability benefit not only do PwDs experience greater difficulties, so do their relatives, with significant impacts on the wellbeing of children. One consequence of the absence of a disability benefit – or an old age pension for the elderly with disabilities– is the greater social exclusion of PwDs ….

I’m writing this as the father of a daughter who has received a disability benefit from birth. It has made a significant difference to her life, enabling us to finance activities for her that – in the absence of the benefit – we would never have been able to. There are those who believe that my daughter should never have received this benefit, arguing that it should have been means-tested. They are wrong and they are prejudiced. Without it, her life would have been much less fulfilling. So, let’s not let the mean means-testers destroy the lives of people with disabilities across developing countries.

Stephen Kidd, “Disability Benefits: The Neglected Social Security Instrument“, Just KIDDing, Development Pathways, 2 December 2013.

Development Pathways’ new Disability Benefit database can be accessed here.

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John Kay on inequality

December 4th, 2013

There is nothing new here, but I found the entire column interesting, perhaps because I agree with it.

Some inequality is inevitable, and there seem to be three principal factors that make it more tolerable.

Inequality is easier to accept if everyone is becoming better off. Recent dissatisfaction in Britain and the US is significantly attributable to the fact that while some have grown much richer, median incomes have not increased. The criticism that the rapid economic growth of China and India has been accompanied by rising inequality is mainly made from outside these countries.

Inequality is easier to accept if the beneficiaries have benefited people other than themselves. Bill Gates’s extraordinary wealth causes little resentment because he is associated with technological innovations that have transformed business and personal life. Financiers rarely attract similar approval because – sometimes rightly, sometimes wrongly – they are suspected of appropriating wealth created by others rather than engaging in genuine wealth creation.

And inequality is more tolerable if its beneficiaries behave well. Mr Gates has chosen to devote his Microsoft fortune and his time to philanthropy rather than fly in entertainers and exotic foods for lavish parties. Investor Warren Buffett lives in the Omaha bungalow he purchased 50 years ago.

John Kay, “London’s mayor is half right on envy, greed and inequality“, Financial Times, 4 December 2013.

This will soon be posted at www.johnkay.com, in the archive of John Kay’s past FT columns.

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health insurance for the poor

December 3rd, 2013

Austin Frakt blogs today on Medicaid, government healthcare insurance for the poor in the United States. Medicaid is better insurance than you might think.

My point is that one can get a misleading impression of Medicaid access by relying only on studies that compare it to “any private” coverage and/or on studies that only survey physicians or their offices. Studies show that access can in fact be comparable to that of some private plans, particularly those [studies] that consider the direct experience of patients.

It’s worth also mentioning that the literature is more consistent in finding that the uninsured have even worse access than Medicaid or private plan enrollees. Medicaid is less than ideal, but not as bad as many might think; it’s also better than nothing.

Austin Frakt, “Medicaid and access: Not what you think“, The Incidental Economist, 3 December 2013.

That is his conclusion. Before you dismiss it, read the full blog. I am not qualified to judge, but Frakt’s argument seems compelling to me. Some time ago, I read that Medicaid patients who undergo surgery fare better on average than patients with private insurance. Why? Because hospitals receive very little compensation from Medicaid, so keep the patients in hospital for as short a time as possible. Medicaid patients recover faster and contract fewer hospital infections. I don’t have the source for this study, and my memory may be faulty. But I vividly recall reading this.

Private insurance plans differ. Some are very restrictive, while others (more expensive plans) allow considerable choice. When private plans are lumped together, this biases survey results against Medicaid. “If a doctor’s office does not accept new Medicaid patients but does accept a patient from any one of the many possible private plans, then that counts as accepting private patients.”

Austin Frakt is a health economist at Boston University’s School of Medicine and its School of Public Health. Here is his link to a 7-page review of the literature on this subject.

 

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changing role of teachers

December 2nd, 2013

TdJ welcomes Christopher back to the blogosphere. This is an amazing post. Take time to read all of it.

For many years the archetypal teacher has been the ‘sage on the stage’ ….. An experienced adult with appropriate qualifications hands down information from the lecturer’s podium to a student audience. Lectures proceed with the calculated regularity of a locomotive. Students must follow along at the prescribed pace or be left behind. There are extra readings, assigments, quizzes and exams to extend learning beyond the lecture hall, but these are almost always of a one-size-fits-all nature. ….

There is some value to this paradigm. When information was costly and difficult to obtain, it made sense for a specialist to collect it on behalf of the students, then feed it to them in a partially digested form. This is similar to how parent birds feed worms to their hatchlings, or how a bee collects pollen and returns it to the hive.

As information becomes abundant and easy to access, the importance of this role diminishes. Anyone with access to a web browser can retrieve information – too much of it, in fact. The expert’s role then shifts from the ‘sage on the stage’ to the ‘guide on the side’. The value added from a real live (or pre-recorded) instructor is in giving a guided tour of the neighbourhoods everyone is free to walk through, imbuing them with structure, sense and meaning.

The same technology driving this shift – web search, social networking, interactive applications and so on – also makes it possible for learning to be customized to a student’s characteristics and potential to a remarkable degree.

In what follows, I will take you on a tour of a small first step into this new ‘blended learning’.

Christopher Willmore, “An experiment in personalized learning“, Stray Silvers, 25 November 2013.


 

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Ha-Joon Chang at lunch with the FT

December 2nd, 2013

[For Ha-Joon Chang], economics is a tool for changing the world, not for explaining why the world is as we find it. He is a reader at Cambridge rather than a full professor, a relative sidelining he attributes to his heterodox approach. “I don’t do maths,” he says, blinking softly through his round, silver-rimmed spectacles. “A lot of economists think I’m not an economist.” ….

I ask whether he thinks economics is a moral pursuit. Chang’s starting point seems to be that economic policies can make the world better. “Moral dilemmas are unavoidable,” he says as I signal for the bill. “Don’t forget that, at least in this country, economics used to be a branch of moral philosophy. Adam Smith, Karl Marx, Joseph Schumpeter – they’re not just writing about economics, but about politics and culture and society and morality.” He drains his cup. “How has this wonderful subject we call economics become so narrow-minded? I find that really sad.”

David Pilling, “Lunch with the FT: Ha-Joon Chang“, Financial Times, 30 November 2013.

This is a tiny portion of a fascinating interview – one of the most interesting that I have seen in the “Lunch with the FT” series. Korean economist Ha-Joon Chang (born 1963) has authored numerous books, including Kicking Away the Ladder: Development Strategy in Historical Perspective (Anthem Press, 2002), which won the 2003 Gunnar Myrdal Prize. His work is controversial. He explains “most of my professional colleagues, who are much keener to accept market outcomes than I am, would dismiss me as a crank or – the worst of all abuses among economists – a ‘sociologist’”. Nonetheless he was awarded the 2005 Wassily Leontief Prize from the Global Development and Environment Institute. (Previous prize-winners include Amartya Sen, John Kenneth Galbraith, Alice Amsden and Robert Wade.) FT Asia editor David Pilling notes that “his books have been bought by more than 1.3m people – not bad for an economist who turned up in Cambridge 27 years ago barely able to speak English.”

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another reaction to Pope Francis

December 1st, 2013

James Pethokoukis, at the American Enterprise Institute, posted a response to the Pope’s message that I prefer to Mankiw’s reaction. Mr Pethokoukis doesn’t say much, but directs us to a statement of University of Illinois professor Deirdre McCloskey that is two years old.

Some on the left are interpreting the Pope’s statement as the pontiff taking sides against free marketeers. I will write more on that later, but I thought this from the great Christian libertarian economist Deirdre McCloskey provides a useful lens through which to view the Pope’s comments:

Friedrich Hayek, the modern master of what people in the USA call “libertarianism” and what others call “real liberals,” once wrote an essay entitled “Why I Am Not a Conservative.” He was not a conservative, nor am I or Robert Nozick or Tom Palmer or Donald Boudreaux or Ronald Hamowy or John Locke or Thomas Paine or (the Blessed) Adam Smith.

I am a Christian Liberal. That is, I believe on the one hand that in human affairs the best policy is to let people alone to exercise their creativity. Such creativity has made the modern world. We should take power away from the massive modern state, which so often follows the Other Golden Rule: Those who have the gold, rule. States are corrupted by the rich ….

But on the other hand as a Christian I also believe that as a spiritual affair we should love God and love God’s creatures, that is, our neighbors as ourselves. (It is Jewish and Muslim law, too: Rabbi Hillel was asked to summarize the law and the prophets while standing one leg. His reply was: to love God , the commandments 1-4, and our neighbors, 5-10.) In consequence, unlike fatherly and unChristian liberals, I believe in helping the poor.

At a meeting libertarians/liberals last year in the Bahamas I expressed to someone what I thought was an axiom, “But of course we all want to help the poor.” He instantly retorted, “No: only if they help me.” It took my breath away. I want to help the poor, period, not only as part of an exchange … And my liberal part adds to my Christian duty: Help the poor really, not by making them unemployable by raising the minimum wage, or uneducated by forcing them into public schools, or violent and victimized by outlawing recreational drugs.

Deirdre N. McCloskey, “Christian Libertarianism (or, outside the USA, Christian “Liberalism”): An exchange with The Clinic, a satirical journal in Chile”, Prudentia, 21 November 2011.

James Pethokoukis, “A Christian, free-market response to Pope Francis“, AEI Ideas, 26 November 2013.

From what McCloskey says, it follows that the best way to help the poor is to help everyone, with universal (taxpayer financed, public or private) schooling and healthcare, universal child allowances, and universal old age pensions. Poverty can be eliminated if flat benefits are generous enough, bureaucracy will be minimized and the State will be stripped of its power to determine who receives benefits. Access to universal benefits depend only on legal residence and (sometimes) age, not wealth or income. Cash allowances for children go to the child’s mother or legal guardian, not directly to the child.

What is often ignored is that Hayek, in his essay “Why I Am Not a Conservative”, explained also why he was not a libertarian. He was living in Chicago at the time, and unhappy with American conservatives and libertarians.

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