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Posts Tagged ‘Welfare’

Last September, I shared some very encouraging data showing how extreme poverty dramatically has declined in the developing world.

And I noted that this progress happened during a time when the “Washington Consensus” was resulting in “neoliberal” policies (meaning “classical liberal“) in those nations (confirmed by data from Economic Freedom of the World).

In other words, pro-market policies were the recipe for poverty reduction, not foreign aid or big government.

Sadly, the Washington Consensus has been supplanted. Bureaucracies such as the International Monetary Fund, the United Nations, and the Organization for Economic Cooperation and Development are now pushing a statist agenda based on the bizarre theory that higher taxes and more spending somehow produce prosperity.

To add insult to injury, some people now want to rewrite history and argue that free markets don’t deserve credit for the poverty reduction that already has occurred.

Esteban Ortiz-Ospina, writing for Our World in Data, wants readers to conclude that redistribution programs deserve credit.

…the share of people living in extreme poverty around the world has fallen continuously over the last two centuries. …many often say that globalization in the form of ‘free-market capitalism’ is the main force to be thanked for such remarkable historical achievement. …this focus on ‘free-market capitalism’ alone is misguided. …Governments around the world have dramatically increased their potential to collect revenues in order to redistribute resources through social transfers… The reach of governments has grown substantially over the last century: the share of total output that governments control is much larger today than a century ago.

And for evidence, Mr. Ortiz-Ospina included this chart.

I shared a version of this data back in June, asserting that the explosion of social welfare spending made this “the western world’s most depressing chart.”

So does Ortiz-Ospina have a compelling argument? Does poverty go down as welfare spending goes up?

Nope. Johan Norberg points out that there is a gaping flaw in this argument. An enormous, gigantic hole.

Wow. This isn’t just a flaw. It’s malpractice. It’s absurd to argue that welfare spending in developed nations somehow led to poverty reduction in developing countries.

I hope Mr. Ortiz-Ospina is just an inexperienced intern, because if he really understands the data, one might be forced to conclude that he’s dishonest.

But let’s set that issue aside. Johan closes his video by explaining that poverty in rich nations declined before modern welfare states. I want to expand on that point.

Johan cited Martin Ravallion, so I tracked down his work. And here’s the chart he put together, which I’ve modified to show (outlined in red) that extreme poverty basically disappeared between 1820 and 1930.

And guess what?

That was the period when there was no welfare state. Not only is that apparent from Our World in Data, it’s also what we see in Vito Tanzi’s numbers.

Here’s Tanzi’s table, which I first shared five years ago. And I’ve circled in red the 1880-1930 data to underscore that there was virtually no redistribution during the years poverty was declining.

The bottom line is that poverty in the western world fell during the period of small government. Yet some people want to put the cart before the horse. They’re making the absurd argument that post-1950s welfare spending somehow reduced poverty before the 1930s.

That’s as absurd as Paul Krugman blaming a 2008 recession in Estonia on spending cuts that took place in 2009.

P.S. For those who want U.S.-specific data, it’s worth noting that dramatic reductions in American poverty all occurred before Washington launched the so-called “War on Poverty.”

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America has a major dependency problem. In recent decades, there’s been a significant increase in the number of working-age adults relying on handouts.

This is bad news for poor people and bad news for taxpayers. But it’s also bad news for the nation since it reflects an erosion of societal capital.

For all intents and purposes, people are being paid not to be productive.

Guided by the spirit of Calvin Coolidge, we need to reform the welfare state.

Professor Dorfman of the University of Georgia, in a column for Forbes, pinpoints the core problem.

The first failure of government welfare programs is to favor help with current consumption while placing almost no emphasis on job training or anything else that might allow today’s poor people to become self-sufficient in the future. …It is the classic story of giving a man a fish or teaching him how to fish. Government welfare programs hand out lots of fish, but never seem to teach people how to fish for themselves. The problem is not a lack of job training programs, but rather the fact that the job training programs fail to help people. In a study for ProPublica, Amy Goldstein documents that people who lost their jobs and participated in a federal job training program were less likely to be employed afterward than those who lost their jobs and did not receive any job training. That is, the job training made people worse off instead of better. …Right now, the government cannot teach anyone how to find a fish, let alone catch one.

And Peter Cove opines on the issue for the Wall Street Journal.

…the labor-force participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression. The welfare state is largely to blame. More than a fifth of American men of prime working age are on Medicaid. According to the Census Bureau, nearly three-fifths of nonworking men receive federal disability benefits. The good news is that the 1996 welfare reform taught us how to reduce government dependency and get idle Americans back to work. …Within 10 years of the 1996 reform, the number of Americans in the Temporary Assistance for Needy Families program fell 60%.

Interestingly, European nations seem to be more interested in fixing the problem, perhaps because they’ve reached the point where reform is a fiscal necessity.

Let’s look at what happened when the Dutch tightened benefit rules.

A fascinating new study from economists in California and the Netherlands sheds light on how welfare dependency is passed from one generation to the next – and how to save children from lives of idleness.

A snowball effect across generations could arise if welfare dependency is transmitted from parents to their children, with potentially serious consequences for the future economic situation of children. …there is little evidence on whether this relationship is causal. Testing for the existence of a behavioural response, where children become benefit recipients because their parents were, is difficult… Our work overcomes these identification challenges by exploiting a 1993 reform in the Dutch Disability Insurance (DI) programme… The 1993 reform tightened DI eligibility for existing and future claimants, but exempted older cohorts currently on DI (age 45+) from the new rules. This reform generates quasi-experimental variation in DI use… Intuitively, the idea is to compare the children of parents who are just over 45 years of age to children whose parents are just under 45. .

Here’s the methodology of their research.

The first step is to understand the impact of the 1993 reform on parents. Figure 1 shows that parents who were just under the age 45 cut-off, and therefore subject to the harsher DI rules, are 5.5 percentage points more likely to exit DI by the year 1999 compared to parents just over the age 45 cut-off. These treated parents saw a 1,300 euro drop in payments on average. …the reform changed other outcomes as well. There is a strong rebound in labour earnings.

This chart from their research captures the discontinuity.

Here are the main results.

The second step is to see how children’s DI use changed based on whether the reform affected their parents. We measure a child’s cumulative use of DI as of 2014, by which time they are 37 years old on average. Figure 2 reveals a noticeable jump in child DI participation at the parental age cut-off of 45. There is an economically significant 1.1 percentage point drop for children if their parent was exposed to the reform, which translates into an 11% effect relative to the mean child participation rate of 10%. …welfare cultures, defined as a causal intergenerational link, exist.

This second chart illustrates the positive impact.

But here’s the most important part of the research.

Reducing access to redistribution to parents is a good way of boosting income and education for children.

…we examine whether a child’s taxable earnings and participation in other social support programmes change. Cumulative earnings up to 2014 rise by approximately €7,200 euros, or a little less than 2%, for children of parents subject to the less generous DI rules. In contrast, we find no detectable change in cumulative unemployment insurance receipt, general assistance (i.e. traditional cash welfare), or other miscellaneous safety net programs. Looking at a child’s educational attainment, there is intriguing evidence for anticipatory investments. When a parent is subject to the reform which tightened DI benefits, their child invests in 0.12 extra years of education relative to an overall mean of 11.5 years. …these findings provide suggestive evidence that children of treated parents plan for a future with less reliance on DI in part by investing in their labour market skills.

And it’s also worth noting that taxpayers benefit when welfare eligibility is restricted.

These strong intergenerational links between parents and children have sizable fiscal consequences for the government’s long term budget. Cumulative DI payments to children of the targeted parents are 16% lower. This is a substantial additional saving for the government’s budget, especially since there is no evidence that children substitute these reductions in DI income for additional income from other social assistance programmes. Furthermore, there is a fiscal gain resulting from the increased taxes these children pay due to their increased labour market earnings. Overall, we calculate that through the year 2013, children account for 21% of the net fiscal savings of the 1993 Dutch reform in present discounted value terms. This share is projected to increase to 40% over time.

Ryan Streeter of American Enterprise Institute explains that other European nations also are reforming.

Welfare reformers might draw some lessons from unlikely places, such as Scandinavia. While progressives like to uphold Nordic democratic socialism as a model for America, the Scandinavian welfare systems are arguably more pro-work than ours… For instance, to deal with declining labor force participation, Denmark eliminated permanent disability benefits for people under 40 and refashioned its system to make employment central. Sweden reformed its welfare system to focus on rapid transitions from unemployment to work. Their program lowers jobless assistance the longer one is on welfare. The Nordic model is more focused on eliminating reasons not to work such as caregiving or lack of proper training than providing income replacement. Similarly, the British government combined six welfare programs with varying requirements into a single “universal credit.” The benefit is based on a sliding scale and decreases as a recipient’s earnings increase, replacing several differing formulas for phasing out of welfare programs with one. An evaluation of the new program, which encourages work, found that 86 percent of claimants were trying to increase their work hours and 77 percent were trying to earn more, compared to 38 percent and 55 percent, respectively, under the previous system. …Scandinavia and Britain learned a while ago that successful welfare reform is not just about how much money a country spends on people who earn too little. It’s really about how to help them find and keep a good job. It’s time for America to catch up.

Amen.

For what it’s worth, I think we’ll be most likely to get good results if we get Washington out of the redistribution business.

In effect, block grant all means-tested programs to the states and then phase out the federal funding. That would give states the ability to experiment and they could learn from each other about the best way of helping the truly needy while minimizing incentives for idleness.

P.S. This WIzard-of-Id parody is a very good explanation of why handouts discourage productive work.

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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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Happy New Year!

We listed yesterday the good and bad policy developments of 2017, so now let’s speculate about potential victories and defeats in 2018.

Here are two things I hope will happen this year.

  • Welfare reform – If my friends and contacts on Capitol Hill are feeding my accurate information, we may see a bigger and better version of the 1996 welfare reform in 2018. The core concept would be to abolish the dozens of means-tested programs (i.e., redistribution programs targeted at low-income people) in Washington and replace them with a “block grant.” This could be good news for federal taxpayers if the annual block grant is designed to grow slowly. And it could be good news for poor people since state government would then have the ability and flexibility to design policies that help liberate recipients from government dependency.
  • Collapse of Venezuela – Given the disastrous deterioration of the Venezuelan economy, it’s difficult to envision how the Maduro dictatorship can survive the year. Yes, I know the regime is willing to use the military to suppress any uprising, but I suspect hungry and desperate people are more likely to take chances. My fingers are crossed that the corrupt government is overthrown and Venezuela becomes another Chile (hopefully without a transition period of military rule).

Here are two things I fear may happen in 2018.

  • Pulling out of NAFTA – America dodged a bullet in 2017. Given Trump’s protectionist instincts, I worried he would do something very dangerous on trade. But pain deferred is not the same thing as pain avoided. The President has made some very worrisome noises about NAFTA and it’s possible he may use executive authority to scrap a deal that has been good for the United States.
  • A bad version of Brexit – Given the statist mindset in Brussels and the continent’s awful demographics, voting to leave the European Union was the right decision for our British friends. Simply stated, it makes no sense to stay on a sinking ship, even if it sinking slowly. But the net benefits of Brexit depend on whether the United Kingdom seizes the moment and adopts pro-growth policies such as tax cuts and free-trade pacts. Sadly, those good reforms don’t appear likely and it appears instead that the feckless Tory leadership will choose to become a satellite member of the EU, which means living under the thumb of Brussels and paying for harmonization, bureaucratization, and centralization. The worst possible outcome in the short run, though at least the U.K. is better positioned to fully extricate itself in the future.

I’m adding a new feature to my hopes-and-fears column this year.

These are issues where I think it’s likely that something consequential may occur, but I can’t figure out whether I should be optimistic or pessimistic. I sort of did this last year, listing Obamacare reform and Italian fiscal crisis as both hopes and fears.

It turns out I was right to be afraid about what would happen with Obamacare and I was wrong (or too early) to think something would happen with Italy.

Here are three things that could be consequential in 2018, but I can’t figure out whether to be hopeful or fearful.

  • Infrastructure reform or boondoggle – I put an “infrastructure boondoggle” as one of my fears last year, but the President and Congress postponed dealing with the issue. But it will be addressed this year. I’m still afraid the result may be a traditional pile of pork-barrel spending, but it’s also possible that legislation could be a vehicle for market-based reform.
  • Normalization of monetary policy – I try to stay clear of monetary policy, but I also recognize that it’s a very important issue. Indeed, if I was to pick the greatest risk to the economy, it’s that easy-money policies (such as artificially low interest rates) have created a bubble. And bursting bubbles can be very messy, as we learned (or should have learned) in 2008. The Federal Reserve supposedly is in the process of “normalizing” monetary policy. I very much hope they can move in the right direction without rattling markets and/or bursting bubbles.
  • A China bubble – Speaking of macroeconomic risks, I’m very glad that China has partially liberalized and I’m ecstatic that reform has dramatically reduced severe poverty, but I also worry that the government plays far too large a role in the banking sector and interferes far too much in the allocation of capital. I’m guessing this eventually leads to some sort of hiccup (or worse) for the Chinese economy, and all I can do is cross my fingers and hope that the government responds with additional liberalization rather than the bad policies being advocated by the OECD and IMF.

By the way, I fully expect the Democrats to sweep the 2018 elections. And since the Party is now much farther to the left than it used to be, that could lead to very bad news in 2019 – particularly if Trump unleashes his inner Nixon.

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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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The welfare state is bad news for both taxpayers and recipients.

Pervasive handouts also are a mistake because they create incentives for very bad behavior.

And I’m not just talking about the incentive not to work. Welfare enables and encourages utterly horrifying examples of misbehavior.

But there’s a new example that probably would win the prize if there was a contest for the most sickening behavior enabled by governments giveaways.

People in India apparently are feeding their older relatives to tigers is order to get cash payments from the government.

I’m not joking. India Today has a story on the matter.

What if suddenly a lot of elderly folks start dying because of fatal tiger attacks? Either the tigers have targeted the old people especially or something is just not right. …Authorities surmise that people are sending older members of the family into the tiger reserve for them to become a prey. Once killed, their bodies are relocated to fields, and staged as victims of a tiger attack, so that the respective family can claim lakhs in compensation from the government.

Here are some added details from the Times of India.

Authorities suspect local families are sending older members into the forest as tiger prey, and their bodies then relocated to fields, to feign attacks and claim lakhs in compensation from the government. Villagers aren’t entitled to compensation if their kin die in the reserve. There has been a string of recent fatal tiger attacks on the elderly, with seven deaths reported in the proximity of the Mala forest range alone since February 16. …Locals, however, say family elders were willing participants in the whole affair. “They think that since they can’t get resources from the forest, this is the only way their families can escape poverty,” farmer Jarnail Singh, 60, told TOI.

And the U.K.-based Daily Mail also has a report on this bizarre situation.

Elderly relatives are being sent into tiger reserves to be killed so that families can claim compensation in a horrifying new trend in India. Younger family members appear to be targeting Pilibhit Tiger Reserve in Uttar Pradesh by sending their elders into the forest to be mauled to death before dumping their bodies in nearby fields. Villagers are not entitled to claim compensation if they die in the reserve, but if they are killed in a tiger attack outside the reserve, they can cash in on government money. …The revelation that this is a deliberate ploy to cash in on compensation money was triggered by Kalim Athar of the Wildlife Crime Control Bureau (WCCB).

Wow. I’m almost at a loss for words.

Imagine the conversation around the dinner table. “Good news, Granny, we’ve arranged an overnight trip for you to the nature preserve.”

It’s even more chilling if the old people are actually willing participants. “Son, make sure to make the scene look realistic after you move my body out of the preserve.”

In some sense, this is actually a broader story about bigger issues such as the degree to which the burden of government is reduced to enable more economic growth in India, including in rural areas. Or the proper balance between environmental stewardship and the needs of the surrounding community.

But it’s hard to focus on those big-picture issues when old people are being sacrificed to tigers to get loot from the government. Somebody – either the families or the willing old people – deserves induction in the Moocher Hall of Fame.

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