Archive for the ‘Welfare State’ Category

According to research from the Bank for International Settlements, the long-term fiscal outlook for the United Kingdom is very grim. The data generated by the International Monetary Fund and the Organization for Economic Cooperation and Development isn’t quite as dour, but those bureaucracies also show very significant long-run fiscal challenges.

The problem in the U.K. is the same as the problem in the United States. And France. And Germany. And Japan. Simply stated, the welfare state is becoming an ever-larger burden in large part because the elderly population is expanding in developed nations compared to the number of potential taxpayers.

The good news, as noted in this BBC story, is that some folks in the United Kingdom realize this is bad news for young people.

Lord Willetts…said the contract between young and old had “broken down”. Without action, young people would become “increasingly angry”.

The bad news is that these folks apparently think you solve the problem of young-to-old redistribution by adding a layer of old-to-young redistribution.

I’m not joking.

A £10,000 payment should be given to the young and pensioners taxed more, a new report into inter-generational fairness in the UK suggests. The research and policy organisation, the Resolution Foundation, says these radical moves are needed to better fund the NHS and maintain social cohesion. …The foundation’s Intergenerational Commission report calls for an NHS “levy” of £2.3bn paid for by increased national insurance contributions by those over the age of 65. It says that all young people should receive a £10,000 windfall at the age of 25 to help pay for a deposit on a home, start a business or improve their education or skills.

To be fair, proponents of this idea are correct about young people getting a bad deal from the current system. And they are right about older people getting more from government than they pay to government.

“There’s no avoiding the pressures for more spending on healthcare and social care, the question is how we meet those pressures,” he replied. “Extra borrowing is unfair on the younger generation. “Extra taxes on the working population – when especially younger workers have not really seen any increase in their pay – will be very unfair. “It so happens that the older people who will benefit most from extra spending on health care have got some resources, so at low rates, it’s reasonable to expect them to contribute.

But I fundamentally disagree with their conclusion that bigger government is the answer.

“It is better than any of the alternatives.”

For what it’s worth, what’s happening in the U.K. is an example of Mitchell’s Law. Young people are getting a bad deal because of programs created by government.

But rather than proposing to unwind the programs that caused the problem, the folks at the Resolution Foundation have decided that creating additional programs financed by additional taxes is the way to go.

By the way, you won’t be surprised to learn that the group also has other bad ideas.

The report calls for the scrapping of the council tax system, replacing it with a new property tax which would raise more money from wealthier homeowners. The proceeds would be used to halve stamp duty for first-time buyers.

Let’s close by looking at some interesting data about the attitudes of the young.

…a poll undertaken for the Intergenerational Commission also suggested people were more pessimistic in Britain about the chances of the next generation having “better lives” than the one before it – compared with almost any other country.

Here’s the chart showing data for the U.K. and several other nations.

Congratulations to France for having the most pessimistic young people (maybe this is why so many of them would move to the U.S. if they had the chance).

And I think the South Koreans are too glum and the Chinese are too optimistic. The Italians also are too upbeat. But otherwise these numbers generally make sense.

P.S. I was very pessimistic about the U.K. in 2012, but had a more upbeat assessment last summer. Now the pendulum has now swung back in the other direction.

P.P.S. If the Brits screw up Brexit, I’ll be even more downbeat about the nation’s outlook.

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I’m conflicted.

I’ve repeatedly expressed skepticism about the idea of governments providing a “basic income” because I fear the work ethic will (further) erode if people automatically receive a substantial chunk of money.

Moreover, I also fear that a basic income will lead to an ever-expanding burden of government spending, particularly once net beneficiaries figure out they can vote themselves more money.

Given these concerns, I should be happy about this report from the New York Times.

For more than a year, Finland has been testing the proposition that the best way to lift economic fortunes may be the simplest: Hand out money without rules or restrictions on how people use it. The experiment with so-called universal basic income has captured global attention… Now, the experiment is ending. The Finnish government has opted not to continue financing it past this year, a reflection of public discomfort with the idea of dispensing government largess free of requirements that its recipients seek work. …the Finnish government’s decision to halt the experiment at the end of 2018 highlights a challenge to basic income’s very conception. Many people in Finland — and in other lands — chafe at the idea of handing out cash without requiring that people work. …Finland’s goals have been modest and pragmatic. The government hoped that basic income would send more people into the job market to revive a weak economy. …The basic income trial, which started at the beginning of 2017 and will continue until the end of this year, has given monthly stipends of 560 euros ($685) to a random sample of 2,000 unemployed people aged 25 to 58. Recipients have been free to do as they wished… The Finnish government was keen to see what people would do under such circumstances. The data is expected to be released next year, giving academics a chance to analyze what has come of the experiment.

The reason I’m conflicted is that the current welfare state – both in the United States and other developed nations – is bad for both taxpayers and poor people.

So I like the idea of experimentation. There has to be a better way of alleviating genuine suffering without trapping poor people in dependency or punishing taxpayers.

Indeed, one of my arguments for radical decentralization in America is that states will try different approaches and we’ll have a much better chance of learning what works and what doesn’t.

And maybe we’ll learn that there are some benefits of providing a basic income. But, as reported by the U.K.-based Guardian, it’s unclear whether the Finnish experiment lasted long enough or was comprehensive enough to teach us anything.

The scheme – aimed primarily at seeing whether a guaranteed income might incentivise people to take up paid work by smoothing out gaps in the welfare system…it was hoped it would shed light on policy issues such as whether an unconditional payment might reduce anxiety among recipients and allow the government to simplify a complex social security system… Olli Kangas, an expert involved in the trial, told the Finnish public broadcaster YLE: “Two years is too short a period to be able to draw extensive conclusions from such a big experiment. We should have had extra time and more money to achieve reliable results.”

I will be interested to see whether researchers generate any conclusions when they look at the two years of data from the Finnish experiment.

That being said, there already has been some research that underscores my concerns.

The OECD is not my favorite international bureaucracy, but its recent survey on Finland included some sobering estimates on the cost of a nationwide basic income.

In a basic income scenario, a lump-sum benefit replaces a number of existing benefits, financed by increasing income taxation by nearly 30% or around 4% of GDP. …the basic income requires significant increases to income taxation. …Financing a basic income at a meaningful level thus would require considerable additional tax revenue, and heavier taxation of income would at least partially undo any improvement in work incentives.

And in a report on basic income last year, the OECD poured more cold water on the idea.

…large tax-revenue changes are needed to finance a BI at meaningful levels, and tax reforms would therefore need to be an integral part of budget-neutral BI proposals. …abolishing tax-free allowances and making BI taxable means that everybody would pay income tax on the BI, and on all their other income. Tax burdens would go up for most people as a result, further increasing tax-to-GDP ratios that are currently already at a record-high in the OECD area. …There are also major concerns about unintended consequences of a BI. An especially prominent one is that unconditional income support would reduce the necessity for paid work.

Indeed, it’s difficult to see how work incentives aren’t adversely affected. Why go through the hassle of being employed when you can sit at home and play computer games all day?

P.S. Given the option of voting on a basic income in 2016, Swiss voters overwhelmingly rejected the notion.

P.P.S. Former Vice President Joe Biden actually agrees with me about one of the downsides of basic income.

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There is a lot of good news about the job market in America.

The official unemployment rate, released just yesterday, is down to 4.1 percent, which is the lowest its been since the end of the Clinton years. Even more impressive, the number of people getting unemployment benefits (i.e., getting paid not to work) has dropped to the lowest level since the early 1970s.

I don’t want to rain on this parade, but the numbers aren’t as good as they seem.

Back during the Obama years, I repeatedly pointed out the real health of the labor market should be measured by looking at either the rate of labor force participation or the employment-population ratio.

These are the numbers that give us a more accurate picture of the extent to which labor is being productively utilized (remember, national income is determined by the quality and quantity of labor and capital in the economy).

So let’s dig into the government’s database on labor force statistics and see where we stand when examining these more-insightful numbers.

We’ll start with the data on the rate of labor force participation, which is basically a measure of those working and looking for work as a share of the adult population. As you can see, that rate dropped significantly at the end of the Bush years/beginning of the Obama years. And it hasn’t recovered even though the recession ended back in 2009.

By the way, we shouldn’t expect this rate to be 100 percent, or even anywhere close to that high. After all, the 16-and-up population includes plenty of full-time students, retired people, disabled, stay-at-home moms (or dads), and others.

But I worry about the downward trend.

Now let’s look at the employment-population ratio, which is slightly more encouraging. We see a precipitous drop during the recession, but at least the number has been trending in the right direction for several years.

Though it’s nonetheless semi-depressing that the increase has been rather slow and we haven’t come anywhere close to recovering from the downturn.

To help understand the rate of joblessness, here’s a video from the Mercatus Center.

And to better understand the rate of employment, here’s a video from Nicholas Eberstadt at the American Enterprise Institute.

As far as I’m concerned, the key factoid is near the end, where he points out that we would have 10 million additional working-age men productively employed if the rate of employment today was the same as it was in 1965.

And that’s largely the fault of government programs – such as unemployment insurance, disability, Obamacare, licensing, etc – that make it easier for people to choose to be unproductive.

Speaking of which, let’s close with some excerpts from one of Jason Riley’s columns in the Wall Street Journal.

Peter Cove dropped out of a graduate program at the University of Wisconsin-Madison more than 50 years ago to enlist in Lyndon Johnson’s War on Poverty. These days, he’s fighting a war on dependency. …Mr. Cove moved to New York in 1965 to work for the city’s new Anti-Poverty Operations Board… Mr. Cove…noticed… “The government’s unprecedented expenditures failed to bring about the decline in poverty that Johnson had promised. Instead, they made things worse.” Between 1962 and 2012, the percentage of the U.S. population receiving government assistance in the form of cash transfers almost doubled to 21% from 11.7%. …Between 1965 and 2011, the official poverty rate was essentially flat, while government spending per person on poverty programs rose by more than 900% after inflation. “…But as welfare spending soared, the decline in poverty came to a grinding halt.” …Mr. Cove…came to understand that the answer to poverty is prosperity, that the private sector is the better generator of prosperity, and that the best antipoverty program is a job. “Not only does big government get in the way when it provides disincentives to work, it also has a profoundly negative effect on community,”… The increase in government dependency that Mr. Cove laments predates President Obama by decades, but it did accelerate on Mr. Obama’s watch.

Great points, particularly about how the welfare state actually undermined progress on reducing poverty and also eroded societal capital.

All of which is captured in this Wizard-of-Id satire.

P.S. Some honest leftists admit that the welfare state has caused collateral damage.

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Writing about federal spending last week, I shared five charts illustrating how the process works and what’s causing America’s fiscal problems.

Most important, I showed that the ever-increasing burden of federal spending is almost entirely the result of domestic spending increasing much faster than what would be needed to keep pace with inflation.

And when I further sliced and diced the numbers, I showed that outlays for entitlements (programs such as Social SecurityMedicareMedicaid, and Obamacare) were the real problem.

Let’s elaborate.

John Cogan, writing for the Wall Street Journal, summarizes our current predicament.

Since the end of World War II, federal tax revenue has grown 15% faster than national income—while federal spending has grown 50% faster. …all—yes, all—of the increase in federal spending relative to GDP over the past seven decades is attributable to entitlement spending. Since the late 1940s, entitlement claims on the nation’s output of goods and services have risen from less than 4% to 14%. …If you’re seeking the reason for the federal government’s chronic budget deficits and crushing national debt, look no further than entitlement programs. …entitlement spending accounts for nearly two-thirds of federal spending. …What about the future? Social Security and Medicare expenditures are accelerating now that baby boomers have begun to collect their government-financed retirement and health-care benefits. If left unchecked, these programs will push government spending to levels never seen during peacetime. Financing this spending will require either record levels of taxation or debt.

Here’s a chart from his column. Only instead of looking at inflation-adjusted growth of past spending, he looks at what will happen to future entitlement spending, measured as a share of economic output.

And he concludes with a very dismal point.

…restraint is not possible without presidential leadership. Unfortunately, President Trump has failed to step up.

I largely agree. Trump has nominally endorsed some reforms, but the White House hasn’t expended the slightest bit of effort to fix any of the entitlement programs.

Now let’s see what another expert has to say on the topic. Brian Riedl of the Manhattan Institute paints a rather gloomy picture in an article for National Review.

…the $82 trillion avalanche of Social Security and Medicare deficits that will come over the next three decades elicits a collective shrug. Future historians — and taxpayers — are unlikely to forgive our casual indifference to what has been called “the most predictable economic crisis in history.” …Between 2008 and 2030, 74 million Americans born between 1946 and 1964 — or 10,000 per day — will retire into Social Security and Medicare. And despite trust-fund accounting games, all spending will be financed by current taxpayers. That was all right in 1960, when five workers supported each retiree. The ratio has since fallen below three-to-one today, on its way to two-to-one by the 2030s. …These demographic challenges are worsened by rising health-care costs and repeated benefit expansions from Congress. Today’s typical retiring couple has paid $140,000 into Medicare and will receive $420,000 in benefits (in net present value)… Most Social Security recipients also come out ahead. In other words, seniors are not merely getting back what they paid in. …the spending avalanche has already begun. Since 2008 — when the first Baby Boomers qualified for early retirement — Social Security and Medicare have accounted for 72 percent of all inflation-adjusted federal-spending growth (with other health entitlements responsible for the rest). …

Brian speculates on what will happen if politicians kick the can down the road.

…something has to give. Will it be responsible policy changes now, or a Greek-style crisis of debt and taxes later? …Restructuring cannot wait. Every year of delay sees 4 million more Baby Boomers retire and get locked into benefits that will be difficult to alter… Unless Washington reins in Social Security and Medicare, no tax cuts can be sustained over the long run. Ultimately, the math always wins. …Frédéric Bastiat long ago observed that “government is the great fiction through which everybody endeavors to live at the expense of everybody else.” Reality will soon fall like an anvil on Generation X and Millennials, as they find themselves on the wrong side of the largest intergenerational wealth transfer in world history.

Not exactly a cause for optimism!

Last but not least, Charles Hughes writes on the looming entitlement crisis for E21.

Medicare and Social Security already account for roughly two-fifths of all federal outlays, and they will account for a growing share of the federal budget over the coming decade. …Entitlement spending growth is a major reason that budget deficits are projected to surge over the next decade. …The unsustainable nature of these programs face mean that some reforms will have to be implemented: the only questions are when and what kind of changes will be made. The longer these reforms are put off, the inevitable changes will by necessity be larger and more abrupt. …Without real reform, the important task of placing entitlement programs back on a sustainable trajectory will be left for later generations—at which point the country will be farther down this unsustainable path.

By the way, it’s not just libertarians and conservatives who recognize there is a problem.

There have been several proposals from centrists and bipartisan groups to address the problem, such as the Simpson-Bowles plan, the Debt Reduction Task Force, and Obama’s Fiscal Commission.

For what it’s worth, I’m not a big fan of these initiatives since they include big tax increases. And oftentimes, they even propose the wrong kind of entitlement reform.

Heck, even folks on the left recognize there’s a problem. Paul Krugman correctly notes that America is facing a massive demographic shift that will lead to much higher levels of spending. And he admits that entitlement spending is driving the budget further into the red. That’s a welcome acknowledgement of reality.

Sadly, he concludes that we should somehow fix this spending problem with tax hikes.

That hasn’t worked for Europe, though, so it’s silly to think that same tax-and-spend approach will work for the United States.

I’ll close by also offering some friendly criticism of conservatives and libertarians. If you read what Cogan, Riedl, and Hughes wrote, they all stated that entitlement programs were a problem in part because they would produce rising levels of red ink.

It’s certainly true that deficits and debt will increase in the absence of genuine entitlement reform, but what irks me about this rhetoric is that a focus on red ink might lead some people to conclude that rising levels of entitlements somehow wouldn’t be a problem if matched by big tax hikes.

Wrong. Tax-financed spending diverts resources from the private economy, just as debt-financed spending diverts resources from the private economy.

In other words, the real problem is spending, not how it’s financed.

I’m almost tempted to give all of them the Bob Dole Award.

P.S. For more on America’s built-in entitlement crisis, click here, here, here, and here.

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Back in 2014, I shared a report that looked at the growth of redistribution spending in developed nations.

That bad news in the story was that the welfare state was expanding at a rapid pace in the United States. The good news is that the overall fiscal burden of those programs was still comparatively low. At least compared to other industrialized countries (though depressingly high by historical standards).

I specifically noted that Switzerland deserved a lot of praise because redistribution spending was not only relatively modest, but that it also was growing at a slow rate. Yet another sign it truly is the “sensible country.”

But I also expressed admiration for Canada.

Canada deserves honorable mention. It has the second-lowest overall burden of welfare spending, and it had the sixth-best performance in controlling spending since 2000. Welfare outlays in our northern neighbor grew by 10 percent since 2000, barely one-fourth as fast as the American increase during the reckless Bush-Obama years.

But I didn’t try to explain why Canada had good numbers.

Now it’s time to rectify that oversight. I went to the University of Texas-Arlington last week to give a speech and had the pleasure of meeting Professor Todd Gabel. Originally from Canada, Professor Gabel has written extensively on Canadian welfare policy and he gave me a basic explanation of what happened in his home country.

I asked him to share some of his academic research and he sent me several publications, including two academic studies he co-authored with Nathan Berg from the University of Otago.

Here are some excerpts from their 2015 study published in the Canadian Journal of Economics. Gabel and Berg explain welfare reform in Canada and look at which policies were most successful.

During the 1990s and 2000s, Canada’s social assistance (SA) system transitioned from a relatively centralized program with federal administrative controls to a decentralized mix of programs in which provinces had considerable discretion to undertake new policies. This transition led to substantially different SA programs across provinces and years… Some provincial governments experimented aggressively with new policy tools aimed at reducing SA participation. Others did not. In different years and by different amounts, nearly all provinces reduced SA benefit levels and tightened eligibility requirements.

By the way, the SA program in Canada is basically a more generous version of the Temporary Assistance to Needy Families (TANF) program in America, in part because there are not separate programs for food and housing.

The study includes this remarkable chart showing a significant drop in Canadian welfare dependency, along with specific data for three provinces.

The authors wanted to know why welfare dependency declined in Canada. Was is simply a result of a better macroeconomic environment? Or did specific reforms in welfare policy play a role?

…what role, if any, did new reform strategies undertaken by provinces play in observed declines in SA participation. This paper attempts to address this question by measuring disaggregated effects of new reform strategies on provinces’ SA participation rates, while controlling for changes in benefit levels, eligibility requirements, labour market conditions, GDP growth and demographic composition.

Their conclusion is that welfare reform helped reduce dependency.

…our econometric models let the data decide on a ranking of which mechanisms—reductions in benefit levels, tightened eligibility requirements, improved macro-economic conditions or adoption of new reform strategies—had the largest statistical associations with declines in participation. The data suggest that new reforms were the second most important policy reform after reductions in employment insurance benefits. … In the empirical models that disaggregate the effects of different new reform strategies, it appears that work requirements with strong sanctions for non-compliance had the largest effects. The presence of strong work requirements is associated with a 27% reduction in SA participation.

Here’s their table showing the drop in various provinces between 1994 and 2009.

The same authors unveiled a new scholarly study published in 2017 in Applied Economics, which is based on individual-level data rather than province-level data.

Here are the key portions.

A heterogeneous mix of aggressive welfare reforms took effect in different provinces and years starting in the 1990s. Welfare participation rates subsequently declined. Previous investigations of these declines focused on cuts in benefits and stricter eligibility requirements. This article focuses instead on work requirements, diversion, earning exemptions and time limits – referred to jointly as new welfare reform strategies.

Here’s their breakdown of the types of reforms in the various provinces.

And here are the results of their statistical investigation.

The empirical models suggest that new reform strategies significantly reduced the probability of welfare participation by a minimum of 13% overall…the mean person in the sample faces a reduced risk of welfare participation of 1.1–1.3 percentage points when new reform strategies are present… the participation rates of the disabled, immigrants, aboriginals and single parents, appear to have responded to the presence of new reform strategies significantly more than the average Canadian in our sample. The expected rate of welfare participation for these groups fell by two to four times the mean rate of decline associated with new reform policies.

The bottom line is that welfare reform was very beneficial for Canada. Taxpayers benefited because the fiscal burden decreased. And poor people benefited because of a transition from dependency to work.

Let’s close by looking at data measuring redistribution spending in Canada compared to other developed nations. These OECD numbers include social insurance outlays as well as social welfare outlays, so this is a broad measure of redistribution spending, not just the money being spent on welfare. But it’s nonetheless worth noting the huge improvement in Canada’s numbers starting about 1994.

Canada now has the world’s 5th-freest economy. Welfare reform is just one piece of a very good policy puzzle. There also have been relatively sensible policies involving spending restraint, corporate tax reform, bank bailoutsregulatory budgeting, the tax treatment of saving, and privatization of air traffic control.

P.S. If it wasn’t so cold in Canada, that might be my escape option instead of Australia.

P.P.S. Given the mentality of the current Prime Minister, it’s unclear whether Canada will remain an economic success story.

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Inequality is now a major dividing line in the world of public policy.

Supporters of limited government think it’s not a big issue and instead focus on the policies that are most likely to generate growth. Simply stated, they tend not to care if some people get richer faster than other people get richer (assuming, of course, that income is honestly earned and not the result of cronyism).

Folks on the left, by contrast, think inequality is inherently bad. It’s almost as if they think that the economy is a fixed pie and that a big slice for the “rich” necessarily means smaller slices for the rest of us. They favor lots of redistribution via punitive taxes and an expansive welfare state.

When talking to such people, my first priority is getting them to understand that it’s possible for an economy to grow and for all income groups to benefit. I explain how even small differences in long-run growth make a big difference over just a few decades and that it is very misguided to impose policies that will discourage growth by penalizing the rich and discouraging the poor.

I sometimes wonder how vigorously to present my argument. Is it actually true, as Thatcher and Churchill argued, that leftists are willing to hurt poor people if that’s what is necessary to hurt rich people by a greater amount?

Seems implausible, so when I recently noticed this amusing humor on Reddit‘s libertarian page, I was not going to share it. After all, it presumes that our friends on the left genuinely would prefer equal levels of poverty rather than unequal levels of prosperity.

But, after reading a new study from the International Monetary Fund, I’m wondering if I’m underestimating the left’s fixation with inequality and the amount of economic damage they’re willing to inflict to achiever greater equality of outcomes.

Here are some introductory passages to explain the goal of the research.

…it is worth reemphasizing some lessons from the “old masters” in economics who addressed this topic a few decades ago—including Arthur M. Okun and Anthony B. Atkinson in the 1970s. Their lessons—on how to elicit people’s views on inequality and how to summarize societal welfare using a monetary indicator encompassing both average incomes and their distribution—remain relevant for fiscal policymakers today. …a satisfactory theory of welfare must recognize that welfare depends on both the size and the distribution of national income. …This primer seeks to encourage more widespread use by policymakers of the tools developed by welfare theory. …the primer provides an in-depth, step-by-step refresher on two specific tools chosen because of their simplicity and intuitive appeal: Okun’s “leaky bucket” and Atkinson’s “equally-distributed-equivalent income.”

Please note that the IMF explicitly is saying that it wants policymakers to change laws based on what’s in the study.

And, as you continue reading, it should become obvious that the bureaucrats are pushing a very radical agenda (not that we should be surprised given the IMF’s track record).

Here’s the bureaucracy’s take on Okun and his pro-redistribution agenda.

Okun (1975) proposed a thought experiment capable of eliciting people’s attitudes toward the trade -off between equality and efficiency: Okun asked the reader to consider five families: a richer one making $45,000 (in 1975) and four poorer ones making $5,000. Would the reader favor a scheme that taxed the rich family $4,000 and transferred the proceeds to the poorer families? In principle, each poorer family would receive $1,000. But what if 10 percent leaked out, with only $900 reaching the recipients? What would the maximum acceptable leak be? The leak represented not only the administrative costs of tax-and-transfer programs (and, one might add, potential losses due to corruption), but also the fact that such programs reduce the economic incentives to work. …Okun reported his own answers to the specific exercise he proposed (his personal preference was for a leakage of no more than 60 percent). ….Okun was willing to accept that a $4,000 tax on the rich household [would] translate, with a 60 percent leakage, into a $400 transfer to each of the four poor households.

The only good part about Okun’s equity-efficiency tradeoff is that he acknowledges that redistribution harms the economy. The disturbing part is that he was willing to accept 60 percent leakage in order to take money from some and give it to others.

It gets worse. When the IMF mixes Okun with Atkinson, that’s when things head in the wrong direction even faster. As I noted last month, Atkinson has a theory designed to justify big declines in national income if what’s left is distributed more equally. I’m not joking.

And that IMF wants to impose this crazy theory on the world.

Atkinson (1970) showed that under the assumptions above and having identified a coefficient of aversion to inequality, it becomes easy to summarize the well-being of all households in an economy with a single, intuitive measure: the equally-distributed-equivalent income (EDEI), i.e., the income that an external observer would consider just as desirable as the existing income distribution. …The percentage loss in mean income—compared with the initial situation—that an observer would find acceptable to have a perfectly equal distribution of incomes was introduced by Atkinson (1970) as a measure of inequality.

The study then purports to measure “aversion to inequality” in order to calculate equally-distributed-equivalent income (EDEI).

The greater the observers’ aversion to inequality, the lower the EDEI. Table (2) reports for a few alternative ε coefficients, for the example above.

Here’s a table from the study, which is based on a theoretical rich person with $45,000 and a theoretical poor person with $5,000 of income. A society that isn’t very worried about inequality (ε = 0.2) is willing to sacrifice about $4,000 on overall income to achieve the desired EDEI. But a nation fixated on equality of outcomes might be willing to sacrifice $32,000 (more than 60 percent of overall income!).

I’ve augmented the table with a few of the aggregate income losses in red.

In other words, nations that have a higher aversion to inequality are the ones that prefer lots of misery and deprivation so long as everyone suffers equally.

Another use of this data is that it allows the IMF to create dodgy data on income (sort of like what the OECD does with poverty numbers).

It appears the bureaucrats want to use EDEI to claim that poorer nations have more income than richer nations.

…the ranking of countries based on the EDEI often differs significantly from that based on mean income alone. For instance, South Africa’s mean income is more than double that of the Kyrgyz Republic, and substantially above that of Albania. However, those countries’ lower inequality implies that their EDEI is significantly higher than South Africa’s. …Similarly, the United States’ mean income is considerably above that of the United Kingdom or Sweden. However, for an inequality aversion coefficient of ε=1.5, Sweden’s EDEI is above that of the United States, and for ε=2.0 also the United Kingdom’s EDEI is above that of the United States.

Here’s a table from the study and you can see how the United States becomes a comparatively poor nation (highlighted in red) when there’s an “aversion” to inequality.

In other word, even though the United States has much higher living standards than European nations, the IMF is peddling dodgy numbers implying just the opposite.

But the real tragedy is that low-income people will be much more likely to remain poor with the policies that the IMF advocates.

P.S. Fans of satire may appreciate this “modest proposal” to reduce inequality. I imagine the IMF would approve so long as certain rich people are excluded.

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I’ve written several times that the left wants big tax hikes on poor and middle-class taxpayers. Simply stated, that’s the only way they can finance a European-sized welfare state.

Some of them even admit they want to pillage ordinary taxpayers.

Now we have another addition to our list. Writing in today’s Washington Post, two law professors from UCLA openly argue in favor of tightening the belts of average Americans to enable a bigger federal government.

…we need more tax revenue from the middle class, not less.

They start by complaining that middle-income taxpayers have benefited from big tax cuts over the past 35 years.

Middle-class tax burdens are at historic lows. The Congressional Budget Office reported in 2016 that the average federal income tax rate for the middle class — here meaning the middle 60 percent of the income distribution — declined from 7.8 percent in 1979 to 3.4 percent in 2013. Focusing on all federal taxes (not just income taxes), the average tax rate dropped from 19.2 to 13.8 percent over the same period. With these lower tax rates, the share of taxes paid by the middle class has also declined. The middle class paid 35 percent of income taxes in 1979 but only 16 percent in 2013, while its share of all federal taxes fell from 43 to 30 percent.

As far as I’m concerned, this is good news, not something to bemoan. Indeed, my goal is to have similar reductions in tax burdens for all taxpayers.

But the authors raise a very valid point. We will have giant tax increases in the future and people at all income levels will be adversely impacted. Though there is one way of avoiding that grim European future.

Unless Congress is willing to dramatically cut major entitlement programs.

Incidentally, we don’t need to “dramatically cut” those programs. The authors are relying on dishonest Washington budget math.

In reality, the problem is solved and tax increases are averted so long as reforms are adopted to ensure that entitlement programs no longer grow faster than the private sector.

But that’s not what the authors want. They actually look forward to big tax increases.

What the middle class needs is not meager tax cuts but a muscular commitment to robust public institutions designed to benefit middle-income individuals. The higher taxes could come from our current income tax (from tax increases on the middle class and the wealthy) or a broad-based consumption tax (such as a VAT or carbon tax).

I’m greatly amused by the language they use. They want readers to believe that bloated European-style welfare states are “robust public institutions” and that politicians grabbing more money to buy more votes is a way of showing “muscular commitment.”

I’m also not surprised that they embraced a carbon tax or value-added tax.

By the way, the column compares the United States with other industrialized nations. Simply stated, we win (at least from my perspective).

Data from the Organization for Economic Cooperation and Development reveal that American families with children face substantially lower average income-tax rates (in some cases, less than half) than similar families in other developed countries. And this is before factoring in consumption taxes, which represent a large share of middle-class tax burdens in most countries, but not in the United States.

Those are remarkable numbers. Income taxes grab a much bigger share of family income in Europe. And then governments take an even bigger slice thanks to onerous value-added taxes.

The authors would argue that Europeans get “robust public institutions” in exchange for all that money, but what they really get is less growth and lower living standards.

Indeed, it’s worth noting that the richest European nations are on the same level (or below) the poorest American states.

That’s not exactly a ringing endorsement for higher tax burdens.

The bottom line is that left-wing politicians usually pontificate about raising taxes on the rich, but the truly honest folks on the left openly admit that the real targets are lower-income and middle-class households.

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