Sunday, December 10, 2017

Yet Another Sign of a Stronger Labor Market: Increases in Job Leavers and Reentrants

The headline unemployment level remained unchanged at 4.1 percent in November, but a closer look at the underlying data shows signs of increasing strength of the labor market. One such indication is the continued rise in the number of job leavers and reentrants. For slightly different reasons, workers in both categories can be considered voluntarily unemployed, in contrast to job losers, whose unemployment is unambiguously involuntary.

For full details and chart, see my exclusive post on SeekingAlpha.

Monday, December 4, 2017

In Search of the Elusive Effects of the Regulatory State

The Trump administration is at war with the regulatory state. The fight is most intense at the Environmental Protection Agency (EPA), where Administrator Scott Pruitt is reportedly accompanied by armed guards even within the EPA building, but the Departments of Energy, Transportation, Interior and others are doing their bit. The Consumer Financial Protection Bureau is the latest agency to come under attack. Should we cheer all this on?
Certainly, the quality of the country’s regulatory regime does matter. As the Niskanen Center’s Will Wilkinson, puts it,
Whether a country’s market economy is free—open, competitive, and relatively unmolested by government — is more a question of regulation than a question of taxation and redistribution. . .

If we want to encourage freedom and prosperity, we should pay more attention to easing the grip of the regulatory state.
Still, before we take an axe, Pruitt-style, to anything that looks like it might be a regulation, it would be nice to have some actual evidence to show the degree to which regulation undermines our freedom and prosperity, and some data to help us prioritize the worst regulations for early excision. The popular indexes of economic freedom from the Heritage Foundation and the Fraser Institute, both of which have components that purport to quantify the regulatory burden, would seem like a good place to look. What follows is a summary of what we can learn from those indicators, and some thoughts about how they might be improved. 

Friday, November 24, 2017

The High Cost of Healthcare: Is it Really Just the Prices?

Uwe Reinhardt, the eminent health care economist, who died last week, spent his career diagnosing the ills of the U.S. medical system and suggesting remedies. One of his most famous articles, written with colleagues Gerard F. Anderson, Peter S. Hussey, and Varduhi Petrosyan, bore the trenchant title, “It’s the Prices, Stupid.” In it, Renhardt and his co-authors concluded,
In 2000 the United States spent considerably more on health care than any other country, whether measured per capita or as a percentage of GDP. At the same time, most measures of aggregate utilization such as physician visits per capita and hospital days per capita were below the OECD median. Since spending is a product of both the goods and services used and their prices, this implies that much higher prices are paid in the United States than in other countries. But U.S. policymakers need to reflect on what Americans are getting for their greater health spending. They could conclude: It’s the prices, stupid.
Yes, our health care is plagued by high prices, with the cost of some new cancer treatments approaching a million dollars. However, as an article by Katie Hafner and Griffin Palmer in Tuesday’s New York Times details, it is not always just the prices.

Hafner and Palmer explore the rapid increase in the treatment of older Americans for skin cancer. To some extent, the increase can be explained by demographics—the aging of a generation that grew up with no clue that exposure to the sun’s rays could be anything but beneficial. However, demographics alone cannot explain why the number of biopsies for skin cancer that were billed to traditional Medicare Part B has risen 55 percent over the past decade, despite a small drop in that program’s enrollment.

The article zeros in on the role of private dermatology clinics, the largest of which is Advanced Dermatology and Cosmetic Surgery. The growth of ADCS has been fueled, in part, by an investment of $600 million by Harvest Partners, a private equity firm. ADCS makes heavy use of physician assistants to perform thousands of biopsies and treatments. The authors question the adequacy of supervision of the assistants by qualified MDs (as required by law). They report the opinion of independent specialists who characterize ADCS treatments as far too aggressive, especially for cancers that are unlikely to be fatal, and for patients who are near the end of their lives from other causes.

This examination of a single specialty raises the obvious question: Is it still just the prices, stupid, or are other factors also at work?

Although the New York Times story on dermatology is largely anecdotal, it fits in with another line of evidence that suggests that high U.S. healthcare expenditures are driven by demand, not just by higher prices per quantity supplied. Some of that evidence in question is laid out in a long, data-packed post by the anonymous author of the blog Random Critical Analysis (RCA). (If you don’t want to spend an hour working through RCA’s original post, Tyler Cohen has a brisk summary here.)

RCA maintains that although U.S. healthcare spending seems way out of line with that of its OECD peers when stated relative to GDP, it is not nearly so far out of line when compared to consumption. After all, as RCA points out, health care is a “superior good” with high income elasticity. In plain Englsih, that means Americans, like people all over the world, tend to devote a higher percentage of their total consumption spending to health care as their standard of living rises.

Although there are a few countries that have higher per capita GDP than the United States, there are none that have higher per capita consumption. Part of the reason is that Americans don’t save much. Another reason is that the United States runs a trade deficit, which makes its consumption larger as a share of GDP compared to countries that export a lot, like Germany or Norway. RCA also adjusts consumption data to reflect cross-national differences in the share of goods and services that are paid for by government but consumed by individuals.

As John Cochrane points out in a comment on his own blog, the scandal is not that we spend so much on healthcare, but that we don’t get more for our money. Our high propensity to consume health care should not curb, but rather, should spur our search for reforms that could increase the efficiency of our healthcare system.

Based on notes previously posted at

Wednesday, November 15, 2017

Global Carbon Emissions Will Rise in 2017, but Not All the News is Bad

The Global Carbon Project (GPC) has just released a report on carbon emissions for 2017. The GPC was formed to assist the international science community to establish a common, mutually agreed knowledge base supporting policy debate and action to slow the rate of increase of greenhouse gases in the atmosphere.
The headline number in the GPC report is disconcerting. After staying flat for 2014 through 2016, total carbon emissions are expected to resume their upward trend in 2017.

Not all the news is bad, however. The trend of CO2 output is downward in the three countries with the highest emissions, China, the United States, and the European Union. It is still steadily upward in India, the fourth-largest emitter.

The next chart shows emissions in two ways, one of which attributes emissions to the countries where goods are produced and the other to the countries where they are consumed. Since many goods that are produced in China are consumed elsewhere, its consumption emissions are lower than its production emissions. That pattern is reversed in the US and the EU, which import many goods from China and elsewhere.

The biggest factor behind falling emissions in the top three source countries is a decrease in carbon intensity, that is, in carbon emissions per dollar of GDP. Decreased carbon intensity is in part due to cleaner technologies and in part to steady shift away from goods and toward services.

Wider adoption of carbon pricing, whether in the form of taxes or cap-and-trade, would accelerate the downward trend in carbon emissions per dollar of GDP. As the charts show, it would take only a modest additional push to achieve a global peak in carbon emissions, once and for all. Peak carbon would not mean an end to global warming, but it would be an important milestone.
Reposted from Niskanen Center. View many more great charts here:

Thursday, November 9, 2017

Why Does the US Spend So Much on Healthcare? The Case of Urine Drug Testing

U.S. health care reformers face a daunting task. Our country spends more on healthcare than any of its wealthy peers but lags in terms of health outcomes. Just why do we spend so much and get so little for it?

Not because Americans visit the doctor more or spend more days in the hospital. In both categories, according to a report from the Commonwealth Fund, the U.S. ranks below the OECD median. Instead, the excess spending
is likely driven by greater utilization of medical technology and higher prices, rather than use of routine services, such as more frequent visits to physicians and hospitals.
A new study from Kaiser Health News provides a thought-provoking case study that focuses on the high cost of urine drug testing (UDT). Doctors who prescribe opioids for pain management order UDTs monitor compliance with recommended treatments and check for illegal substances that might interfere with health. Up to a point, such tests improve outcomes, but evidently, some practitioners go far beyond that in pursuit of revenue. According to the study, some practitioners receive more than 80 percent of their income not from treatment, but from testing.
 “We’re focused on the fact that many physicians are making more money on testing than treating patients,” said Jason Mehta, an assistant U.S. attorney in Jacksonville, Fla. “It is troubling to see providers test everyone for every class of drugs every time they come in.”
What is more, as the report explains, attempts at cost control have sometimes had perverse results:
Tests to detect drugs in urine can be basic and cheap. Doctors have long used testing cups with strips that change color when drugs are present. The cups cost less than $10 each, and a strip can detect 10 types of drugs or more at once and display the results in minutes.
After noticing that some labs were levying huge charges for these simple urine screens, the Centers for Medicare & Medicaid Services moved in April 2010 to limit these billings. To circumvent the new rules, some doctors scrapped cup testing in favor of specialized — and much costlier — tests performed on machines they installed in their facilities. These machines had one major advantage over the cups: Each test for each drug could be billed individually under Medicare rules.
“It was almost a license to steal. You had such a lucrative possibility, it was very tempting to sell as many [tests] as you can,” said Charles Root, a longtime lab industry consultant whose company, CodeMap, has tracked the rise of testing labs in doctors’ offices.
The Kaiser report focuses on the cost of excess testing to Medicare, which by 2014 reached $8.5 billion per year, more than the entire budget of the Environmental Protection Agency. But private insurers, too, are struggling to cope with the same problem. In a separate discussion, Dr. Anthony Guarino, a clinician and expert witness in pain management cases, offers some common-sense guidelines for distinguishing excess from medically necessary testing. In his view,
Excessive and unnecessary UDTs cost patients, insurance companies and the government hundreds of millions of dollars per year. There are no guidelines from any medical society that justifies this form of testing.  When testing occurs repeatedly for a question that has already been asked and answered (i.e. Is the patient reliable and forthcoming), this testing is unnecessary and not medically justified.
The case of overuse of UDT illustrates one of the most formidable barriers facing would-be healthcare reformers: Every dollar of excess healthcare spending is a dollar of revenue for some healthcare provider—a revenue stream that the providers will fight doggedly to protect.

Previously posted on Niskanen Notes

Note to Tax Reformers: Consider Fixing the Formula for Taxing Social Security Benefits

While public attention is focused on big issues like corporate and inheritance taxes, many smaller but sensible opportunities to improve tax fairness and efficiency are being overlooked. A new Economic Brief from the Richmond Fed discusses one such example—taxation of social security benefits.

Currently, seniors pay income tax on a portion of their social security benefits that rises with increases in their total income, including earned income and other pension income. The formula is complex, but, as the brief explains, its effect is to expose seniors with even modest incomes to surprisingly high effective marginal tax rates—higher than younger workers who earn similar incomes from their jobs alone. For example, a senior with $16,000 in yearly Social Security benefits and $32,000 of income from other sources pays an effective marginal tax rate of 27.5 percent–much higher than the 15 percent marginal rate for a younger worker with wage income of $32,000.

According to the research on which the brief is based, the higher marginal rate discourages seniors from continuing to work. A part-time job that might look attractive at a 15 percent tax rate looks less attractive at 27.5 percent. If the seniors in question worked more, they would contribute more to the Social Security system in payroll taxes.

The brief discusses two possible reforms that would lower marginal tax rates and increase labor force participation of seniors while maintaining revenue neutrality. One would be to tax all Social Security benefits as ordinary income, rather than a portion that rises with income. Doing so would lower effective marginal tax rates and induce more work, thereby generating more revenue both through payroll taxes and taxes on benefits. Payroll tax rates could then be decreased to maintain revenue neutrality. Alternatively, all benefits could be made nontaxable, as they were before 1983.

Surprisingly, this change would result in no lost revenue, since greater payroll tax revenue would roughly equal the loss of revenue from benefit taxes.

Why not give it a try?

Reposted from Niskanen Notes

Thursday, October 26, 2017

Thinking about Tax Cuts (Part 1): Growth and Prosperity

Tax reform season is upon us. The White House and Congressional Republicans promise that their unified framework for tax reform will “fuel unprecedented economic growth.” The President has touted numbers as high as 6 percent. His more cautious advisers suggest 3 percent, a full percentage point or more above recent long-run forecasts. But even if faster growth were a sure thing, we need to ask whether that would bring real prosperity. Just what is real prosperity, and what would it take to achieve it?

Growth and prosperity are not the same thing

Economists use GDP as a measure of a country’s total output of goods and services that compresses output of steel, radishes, and flu shots into a single number. Although they are less widely known, it is also possible to measure the broader concept of prosperity by aggregating the many dimensions of human flourishing, including health, education, personal freedom, and living conditions, into one indicator. We expect GDP and prosperity to be positively related, but how closely? 

Let’s look at some numbers. For this post, I will use the Social Progress Index (SPI) as a measure of prosperity. According to Michael Porter, Professor at the Harvard Business School and a member of the Advisory Board of the Social Progress Initiative, the SPI is “a practical tool for government and business leaders to benchmark country performance and prioritize those areas where social improvement is most needed,” and “a systematic, empirical foundation to guide strategy for inclusive growth.” (The Legatum Prosperity Index, an alternative that I have used elsewhere, would yield similar conclusions.)

The SPI is constructed from some 50 individual indicators, covering things like longevity, school enrollment, homicide rates, environmental quality, protection of property rights, freedom of religion, and many more. Despite the “progress” in its name, there is nothing especially “progressive” about it in the political sense. The great majority of its components measure aspects of human wellbeing that are equally valued by progressives, libertarians, and conservatives. 

Here is a scatter plot of the SPI against GDP per capita.* The solid black trendline shows a reasonably close fit between the two variables, with an R2 of 0.82. The fit is best for a logarithmic trendline, indicating that for any given starting point, a 1 percent gain in income yields a roughly the same gain in SPI score, although a $1 gain in income has a much stronger effect for low-income countries. 

The United States ranks fifth in terms of GDP per capita among the 128 countries covered by the SPI and eighteenth in terms of its social progress score. It lies exactly on the black trendline, which is plotted from data for all countries. However, that trend is pulled down by the poor SPI scores of countries like Saudi Arabia and Kuwait (conspicuous outliers in the lower right of the scatter), which suffer from the curse of riches. Compared to its real peers, the wealthy democratic countries of the OECD, the United States is an underperformer. 

There does not appear to be any one group of indicators that pulls down U.S. performance down relative to global or OECD trends. We can see that by looking at some sub-groupings of the SPI indicators.

The creators of the SPI organize their indicators into three groups. Basic Human Needs includes survival-related indicators like nutrition, clean water, child mortality, and violent crime. Foundations of Wellbeing includes education, access to information, life expectancy, and environmental quality. Opportunity includes political rights, property rights, tolerance, and higher education. Compared with all countries, the United States is below the trend for basic human needs and opportunity, and close to the trend for foundations of wellbeing. Within the OECD, the U.S. is below trend in all three categories.

Instead of the SPI’s own groupings of indicators, which I find a bit quirky, we can instead reorganize them into more straightforward categories of health, education, living conditions, and personal freedoms. Among all countries, U.S. indicators are above the GDP-adjusted trend for education, on the trend for personal freedoms, and below the trend for health and living conditions. Within the OECD, U.S. performance is above trend for education and below trend for all of the other three. (Note that the education indicators in the SPI are mostly quantitative measures, such as primary, secondary, and college enrollments, rather than qualitative measures, like test scores.)

Where do we go from here?

By a variety of measures, then, the United States does not do a good job of converting raw GDP into the elements of true prosperity. Where do we go from here?

One option would be to prioritize more rapid GDP growth, as does the GOP’s unified framework for tax reform. If everything worked out for the best, growth would pick up to about three percent per year. After five years of growth at that rate, assuming no change in the position of the United States relative to the GDP-SPI trend, we would catch up with the point that Ireland occupies today. The next chart, which zooms in on the upper-right-hand corner of the preceding one, shows that outcome as Arrow A, which points to the right, parallel to the OECD trendline.

There is a possible catch, though. Backers insist the unified framework will produce enough growth to pay for promised rate reductions without increasing the deficit, but critics dispute that. The liberal-leaning Tax Policy Center estimates that the plan would reduce federal revenues by $2.4 trillion over ten years. The more conservative Committee for a Responsible Federal Budget estimates the revenue loss at $2.2 trillion.

Suppose the critics are right, and deficits widen. Suppose Congress gives in to pressures to cut support for education, public health, clean water, and environmental quality. If those programs were slashed, then, even if the promised 3 percent growth materialized, Arrow A would swing to a more south-easterly direction, significantly undershooting Ireland.

A second option would be to increase spending on social and environmental programs without fundamental structural reforms. Conservative critics would, no doubt, warn that doing so would put the brakes on growth. For the sake of discussion, suppose they were right, and GDP growth slowed to 1 percent per year. Under such a policy, the U.S. economy would travel along a path like Arrow B, with slower growth but larger gains in social prosperity. After five years, we might end up somewhere near the point representing today’s Switzerland.

Could we do even better?

If the only choices were Ireland or Switzerland, I would be tempted to aim for Switzerland. To choose otherwise, one would have to value GDP itself more highly than the better education, health, environmental quality, and personal freedom that go into the Social Progress Index. But could we do better still?

We could, if we pursued reforms that enhanced the inherent dynamism of the U.S. economy while also strengthening social and environmental protections. That combination could send our economy forward along Arrow C in the chart, aiming to the right of Switzerland and higher than Ireland. In bare outline, such a policy package might usefully include the following elements:

First, it would include genuine tax reform, as opposed to the simple tax cuts that are the likely outcome as the proposed unified framework works its way through Congress. Real tax reform would be revenue neutral. It would fully fund any cuts to top corporate and personal rates with elimination of loopholes, and without pie-in-the-sky dynamic scoring. Adding carbon taxes or consumption taxes to the mix could allow a sharp reduction in payroll tax rates, which, according to the Tax Policy Center, is a bigger burden than the income tax for three-quarters of American households.

Second, the package would include reforms of the social safety net to minimize the egregious disincentives to work that are built into today’s welfare system. I have sometimes suggested a Universal Basic Income as one way to increase work incentives, but there are many other ideas. A universal child benefit, an enhanced Earned Income Tax Credit, or an old-fashioned negative income tax also hold promise.

Third, the package would lift barriers to labor mobility that are built into our healthcare system. One critical step would be to end “job lock” by decoupling health insurance from employment. Reforms that made healthcare more portable from state to state would also help. Such reforms would simultaneously boost GDP and SPI scores. 

Fourth, a comprehensive reform package would include a strong free trade policy combined with reforms that enhanced economic resilience in the face of trade and technology shocks. Healthcare and safety net reforms would contribute to shock-proofing the economy, but other measures would help too, including a rollback of excessive occupational licensing, measures like “Ban the Box” that aim to improve the job market success of ex-offenders, and measures to combat the opioid epidemic.

Tax cuts alone are not enough

The lesson here is that the even if the tax cuts in the GOP’s unified framework performed as promised, growth of GDP alone is not enough to guarantee prosperity. Instead of using growth as the be-all and end-all metric for tax policy, or any other area of policy, our primary goal should be to improve the ability of the U.S. economy to transform raw GDP into real social prosperity as measured by indicators of health, education, environmental quality, and personal freedoms. 

Rather than forcing economic growth for its own sake, we should focus on structural reforms that would enhance economic dynamism through improved labor mobility, reduction of work disincentives in the social safety net, and creation free markets for jobs, goods, and services both within the country and among nations. 

This is not, after all, asking the impossible. Just moving up to an average level of performance, as represented by the social prosperity trendline for other wealthy, democratic countries, would be a great step forward. In fact, why be content to shoot for an Ireland or a Switzerland, which themselves are underperformers? Why not aim for the above-trend standards of a Denmark, a Finland, or a New Zealand? Why not try, at least?
*The SPI data are from the 2017 release of the index, which contains the most recent available value of each variable for each country. The average data year for the 2017 release is 2015. Accordingly, I have used 2015 values of GDP per capita, measured at purchasing power parity, downloaded from the IMF data base.

Reposted with permission from