Tax incidence in the Obama health plan

Taking a short break from grueling midterm studying to point out a post on Greg Mankiw's blog:

Most economists agree on these two propositions about tax incidence (covered in Chapter 6 of my favorite textbook):

1. It does not matter which side of a market you tax. A tax on buyers is the same as a tax on sellers. In particular, a tax on employers is equivalent to a tax on employees.
2. Because labor demand tends to be more elastic than labor supply, a payroll tax falls largely on employees.

Now consider the Obama health plan. A major element of the plan is an extra payroll tax on firms that do not give their workers health insurance. By the basic theory of tax incidence, this is equivalent to a tax on workers without insurance.

In other words, the Obama plan is much the same as imposing a health insurance mandate, backed up by the penalty of a tax surcharge on your earnings if you fail to have coverage.

One difference: If an individual buys his own health policy, rather than getting it through his employer, he still pays the tax. That is, the Obama policy continues, even reinforces, a strong policy-induced preference for employer-provided over individually-purchased health insurance.

Mankiw goes on to assure that this is just an observation rather than a "don't do it!" I'll go ahead and say that this is a good reason to rethink it. There are already lots of structural problems with tying health insurance to employment. Read more.

What to do?

I've summarized some of the problems with democracy. Since the value of a single vote is marginally zero, voters have no incentive to curb their irrational beliefs or cure their ignorance. Politicians have every incentive to favor special interests over the average citizen, causing all of us to be much worse off. All voting systems are imperfect and can lead to highly variable results with the same populations and preferences. Strategic voting and agenda setting can influence election outcomes much more than even a large number of votes, causing everyone to be worse off.

Here are some proposals to "fix" democracy, given this knowledge.

1) Remove more options from the whims of democratic policy. This is Bryan Caplan's preferred option. He thinks the economy is too serious to be left in the hands of ignorant, dogmatic voters. He thinks something like an economics committee would make much better decisions. Nobel laureate and public choice father James Buchanan would prefer the amendment method. He supports a balanced budget amendment, which would make the costs of special-interest voting bear more immediately on voters' wallets.

2) Limit suffrage. Some want to raise the voting age, some want to impose income or land-owning restrictions. I don't think these are particularly good ideas. An education requirement sounds a little better, but education is fairly subjective. Some even think something as simple as solving a quadratic equation would be a better test than none at all. It sounds very elitist, and it is. But some of us don't think, "We should preserve the badness of democratic policy because doing otherwise would be elitist" a very convincing argument.

3) Futarchy. This is Robin Hanson's idea. Prediction markets are betting markets on future events. People put money down on, say, X being the outcome of an election, and get a return if they're correct. Hanson proposes we use these to "vote values, but bet beliefs." That is, he thinks we should use democracy not to elect representatives or to pass laws, but to elect a consensus on values. For instance, society could vote to increase the incomes of the poor. Then a betting market for policy would kick in: people would bet money on which policy would accomplish that goal. Whichever policy gets the best odds after a set period of time automatically goes into effect, and after the time allotted in the terms of the original bet, a measurement is taken and the success of the policy is assessed--again, based on the terms of the bet.

The benefit of futarchy is that people actually have to put money down to influence policy. If Caplan is right about rational irrationality, a futarchy would have more rational policy as it would be very costly for people to have input in the political system. Another benefit is that we wouldn't have to rely on the wisdom of politicians; the market would quickly skyrocket the odds of policies with the best wording. Technically, anyone could propose any policy.

The biggest problem should be obvious: lots of policy effects are hard to measure, let alone attribute a cause. Hanson thinks, however, if our final metric is broad enough (ie, high GDP), some correlation should be available.

"Predictocracy" is another government structure that's been proposed to take advantage of prediction markets. In predictocracy, betting markets make the full range of government decisions, except when the markets decide to relegate a decision to another mechanism. For a discussion about the pros and cons of each, see here and here. The final purpose, however, is to institute a mechanism by which people have to pay for forcing potentially wrong beliefs on others, to aggregate people's true, willing-to-stake-money beliefs, to find out not only what people believe but also how confident they are in those beliefs. Another nice benefit is that prediction markets do away with the problem of agenda setting. Competition, rather than an agenda setter, determines when and how policies go in effect.

4) Less agenda setting. This one isn't discussed as much in some circles, so allow me to get righteous for a second. The DNC and the RNC are illegitimate institutions and should be abolished. They have no constitutional authority. What elements of their authority derive from voters only derive from a small portion of the voting population--and not based on an arguable restriction like an education requirement, but an arbitrary one, the status of voter registration. Yet they wield enormous power over the outcome of U.S. elections. They have enough power to deny voters the ability to nominate a Constitutionally eligible candidate.

"But Colbert's run was a joke!" you say. I say, so? Colbert has the Constitutional right to make that joke. Where did the DNC get its authority to deny him a political presence? And if they have the authority to do that to a jokester, they have equal authority to do it to a serious candidate. Since when did politicians' motives determine how our democratic proceedings should evaluate them?

Back when people feared the Obama v. Clinton nomination run would end in a superdelegate vote, some in the DNC worried that this would be an undemocratic outcome. Did it not occur to them that, uh, in that case they should immediately change the system--that the potential for the DNC to override democracy is enough to render the DNC illegitimate in a democratic system?

Far be it from me to vehemently defend democracy--I've been attacking it for several entries, after all. But the presence of the DNC and the RNC, unlike the other "democracy substitutes" I've proposed, do nothing to fix any of the pathologies of democracy. They only enhance the problems of agenda setting and strategic voting. I can see that they fill some sort of organizational purpose, but they also unjustly influence and even override voter preferences.

5) Stop worshipping democracy. This is the easiest to accomplish. None of the problems of democracy will change if you don't first admit that democracy isn't sacred. I couldn't possibly say this better than Caplan:

One good thing to come out of the bailout: Barney Frank gave me another nice example of what I call "democratic fundamentalism."

If you don't want politics in this process, you probably shouldn't be handing it over to 535 politicians. That's democracy.

The first sentence, of course, is rhetorical: Don't hand things over to 535 politicians?! Ridiculous!

The second sentence is where the fundamentalism shines through: So what if we paid $100B in pork/bribes to pass this bailout? Since we did it democratically, you have no business criticizing us.

Notice: If someone said, "So the economy's tanking. That's capitalism," everyone would assume the speaker wanted to limit capitalism. But when someone says, "That's democracy," we assume the speaker wants to end the conversation. Democracy is truly the sacred cow of the modern world.

And there's no reason for it to be. Stop encouraging uninformed people to vote, stop insisting that voting for a scumbag is morally or civically important, stop defending the outcomes of democracy even if they're demonstrably terrible, and stop voting for nincompoops. Do these things until you and everyone else are no longer offended by the question of the sanctity of democracy. And then, fix democracy. If you don't like any of the above answers, use the evidence and ideas available to you to come up with better ones. But don't pretend it isn't broken or can't be fixed. Read more.

The morality of voting

Sorry about the long delays in finishing the voting series. There are only two more entries, including this one. But grad school has been wiping me out.

Is not voting immoral? That it doesn't matter much doesn't matter much. As Tyler Cowen points out:

Let's say you were asked to join a firing squad of ten expert marksmen, all shooting at an innocent man, and so good they never miss. Still, they want a louder execution with eleven bullets instead of ten. In return they will donate five dollars to your favorite charity. Should you join and shoot?

Most of us would say no, even though your bullet has no chance of changing the final outcome. Once you buy this conclusion, it is easy to see why people might vote. Most moral judgments reflect some mix of estimated marginal and average products, not just marginal products alone. In part morality means the ability to take a longer-run, universalizable, or more rules-based perspective.

With which I agree. After all, I'm a vegetarian.

But the "civic duty" argument for voting may still be deeply flawed. He continues:

The best argument for not voting is the following: in lieu of voting you should earn extra income and donate it to the very poor. Or perhaps take the day off and work at the soup kitchen. After all, why should voting be the most important collective good you can contribute to? And even if voting has a special importance, maybe you should work harder, earn more money, and use the funds and your time to get other people to vote. Spend a day driving people to the polls rather than voting, for instance.

If my previous analysis of the expected value of voting is accurate, then voting is almost certainly one of the least important collective goods. But more importantly, what Cowen only slightly addresses is the case of voting being a public bad. After all, bad voting is pollution, a negative externality. If one is ill-informed or biased, that person's civic duty might be to not vote. Jason Brennan has a paper on this idea, or see Will Wilkinson for further thoughts.

In the U.S., the two-party system has ensured that most people will vote for "the lesser of two evils." Imagine two candidates; one is a war-mongerer who will kill many people in an unprovoked war, while the other is an economic protectionist who will shorten people's lifespans and increase infant mortality rates. The first candidate will likely injure and kill many more people, but does the second is still a butcher. Reconsider Cowen's argument. If marginally ineffective actions can be considered very immoral, isn't voting for either of these two candidates immoral?

Of course, that's very simplistic. Either candidate will have a position on a huge number of policy decisions. On net one could argue that the "moral" candidate is the one who maximizes some function (life length, life quality) for the most people, but there could also be many more "non-viable" candidates who would do even better.

These are just some musings. The point is, it's not at all clear to me what one's moral duty is when it comes to voting. To put it another way, consider this post from Helen Rittelmeyer:

[W]e aren’t all special political snowflakes, and we have to pick teams. The rules would be different if politics were meant to be a process for discovering truth, but it isn’t, not even in a democracy. You stick with your team and help it win, and, if you have problems with the ideas your team is promoting, you take it up with them outside the political realm.
. . .
I should distinguish between two slightly different claims I’m trying to make: that elections are about tactics and not ideas, and that democratic dialogue is about pulling for your team and not about discovering truth through argument. Even assuming that you find the first statement both false and overly cynical (which, on some days, I do), there’s still the second. If you want a clash of ideas that eventually leads to an agreed-upon truth, try philosophy. This is democracy.

If she is considered more moral than a non-voter, I want nothing to do with the moral calculus that returned this result.

(Read the response to that post, by the way. It's good.) Read more.

Voting Errata

How Much a Vote? Free Speech and Democracy

I previously explained why I wouldn't pay two cents for another person's vote in a national election. Actually, thanks to corruption, there's an interesting paper about the subversion of Democracy by a licentious ruler. Abstract:

Which of the democratic checks and balances - opposition parties, the judiciary, a free press - is the most critical? Peru has the full set of democratic institutions. In the 1990s, the secret-police chief Vladimiro Montesinos systematically undermined them all with bribes. We quantify the checks using the bribe prices. Montesinos paid television-channel owners about 100 times what he paid judges and politicians. One single television channel's bribe was four times larger than the total of the opposition politicians' bribes. By revealed preference, the strongest check on the government's power was the news media.

Of course, there's a kind of reverse-causality going on here. Democratic institutions ensured the value of the media and free speech. Voters, had they known about Montesinos' full behavior, would have outed him immediately. Montesinos apparently found this possibility much more threatening than individual in-government votes challenging his policies.

Despite the presence of rational ignorance, democracy seems to keep rules from really pissing off voters. Which is great, but we still get things like the Iraq War. How do you think that one would have turned out had there not been so much debate in the media? Just something to think about. The input of the media has enormous effects on policy, or at least Montesinos seemed to think so. Which leads me to think that ideas like the Fairness Doctrine are extremely dangerous, much moreso than limiting suffrage.

Tiebout Competition

Imagine you're at your local DMV. You've been standing in line for God knows how long, been pushed back and forth between offices to sign papers, had any number of problems that people have at these places. Finally, you shout for the whole office to hear, "Damnit, I'm not going to stand here and take this anymore! I'm going to take my business elsewhere!"

Of course the embarrassment of the laughter is enough to make you leave anyway.

Never underestimate non-pen-and-ink forms of voting. Tiebout competition, or "voting with your feet," is a powerful incentive for institutions to cater to your preferences. Some opponents of school voucher programs claim that the power of exit will lead only the most motivated parents to exit, instead of staying in the distraught school system that they're needed. It's an argument I find absolutely absurd. Have motivated drivers made the DMV any better? Did all the best and brightest in Soviet Russia make the poorer that much better off? In fact, weren't they almost universally either part of the oppressing party or imprisoned or killed? Without the right of exit, what threat can you make to a monopolist that will give incentive for a change in policy?

Along with a free press, Tiebout competition has the potential to be more influential than voting. In fact, this is pretty much the economic case for Federalism. Free movement between countries, to the degree that their respective governments can't even question one another's legal documents, allows competition between laws. There's a reason corporations flock to Deleware.

There are still things we, nationally, want to take off the table--the ability to censor the press, for instance. Environmental regulation. And so on. But this also makes a case against the nationalization of certain regulations like the minimum wage. For instance, when the cost of living varies by state, businesses in high cost of living states advocate federal minimum wage laws to suppress their competition (pdf). There are countless other examples, and if Federalism hadn't so waned since the Civil War, we might not have such a problem with rent-seeking. Read more.

Another brief interlude

Since I was recently in Denver, I thought it would be fun to post about this shirt, made by the police union to commemorate the 2008 convention:



Ha ha! It's funny because they abuse the power they're given and get away with it. Ell oh ell! Read more.