Michael J. Graetz and Jerry Mashaw
“He that will not apply new remedies
must expect new evils, for time is the greatest innovator.”—Francis Bacon
It took hundreds of years, but someone
on planet earth has finally produced a somewhat accurate big picture snapshot
our nation’s policies. Congratulations to Jerry Mashaw, Michael J. Graetz, and
their assistants. They have done more for the United States of America than
most celebrities combined. Their charts, graphs, and figures are the best I have seen.
The authors aim to clean up our policy
messes despite the truism that “most proposed changes are immediately
characterized by certain policy and political communities [read: greedy
interests] as either impossible or inevitable.”
The authors argue that the health care system
is profligate, yet fails to help many when illness strikes. Subsidies and
transfers target the wealthy (mortgage deductions, etc.) and the lucky non-wealthy (Medicaid, etc.). Policy makers are unable or unwilling to determine the proper roles of parental rights and
responsibilities. Retirement programs are a mess. “For reasons of
history, politics, inertia, and simple error, we have constructed a social
insurance regime that is riddled with gaps, overlaps, inefficiencies, and
inequities.” Objections to totalitarian markets (what some people mistakenly refer to
as free markets) are dismissed with: The economy is going good we can’t risk
screwing it up or the economy stinks and we can’t risk making it worse, meaning the minions of the super-rich have an objection to all policies that benefit ordinary Americans more than the rich. (Of course, certain interest groups do not oppose
blatantly destructive pro-rich policies for being “too risky.”)
True Security’s prescriptions
are boring, complex, and easy targets for distortion, shifting resources to where resources are would do more
benefit, including health insurance for the entire population.
The author's health care plan has several
parts, requiring everyone to buy catastrophic health care insurance to cover
costs above $2500. Most individuals would be responsible for the first $1,500
dollars in medical expenses and 20 percent of the next $1000. Individuals under
the poverty level would be fully subsidized. Between the poverty level and
$60,000 the subsidies would gradually phase out.
A counterargument claims that
this plan would prevent preventative care. The authors counter that under their
plan insurers will have an incentive to tailor policies to individuals. If
someone wants part of preventative procedures paid, they can choose a policy that
gives up some catastrophic procedures. The authors write that their plan will
cover routine costs for the poor and lower working classes, so preventative care
is built in. These two groups are currently the least likely to use preventative
care. They argue that we should deal with health risks and moral hazards through
“education, regulation, taxation and social norms” rather than by denying
health care to sufferers.
True Security argues for
dividing disability into partial and total, writing that partial disability
is one of a multitude of factors individuals should overcome. Markets and
non-disability programs should handle partial disability. They further divide
total disability into temporary and permanent. Under their plan temporary total
disabilities would be treated similar to unemployment insurance, except the
person would not have to look for a job until thier health improved.
Their permanent disability plan would
use the SSDI definition of disability: A medical impairment “that makes it
impossible to work at any job” earning at least $500 a month. The current
workers compensation system is a clunker. Graetz and Mashaw would scrap most
worker compensation payments.
The authors argue for federalizing
unemployment insurance because state programs are screwed up. They point out
that a part time worker who earns 15 dollars an hour can be eligible for unemployment
insurance in every state. Someone working twice as many hours at the minimum
wage is ineligible in many states. Federalizing would prevent downward spirals
resulting from interstate business climate competitions (also known as races to the bottom).
Graetz and Mashaw argue for 26 weeks of
unemployment insurance when the unemployment rate is below 7.5 percent, 52
weeks when the unemployment rate is greater than or equal to 7.5 percent. Their
plan would replace 60 percent of previous wages during the first ten weeks, up
to 50 percent of the local median wage.
During the next ten weeks, they would
replace 50 percent, and the remaining six weeks 40 percent. Unemployment
insurance would never be more than 50 percent of the local median wage.
Tight labor markets, meaning low levels
of unemployment, have the biggest influence on re-employment, according to the
indications of studies mentioned by the authors—not to mention most economic
models. Job training and other services save the unemployment insurance system
little or nothing.
Frankly, any economy without “labor
shortages” is badly run. So-called labor shortages should be described as an
adequate supply of jobs.
Some argue that no one has the right
to interfere with “free” markets the way Graetz and Mashaw do, no matter how
much benefit results. But they conveniently ignore all the interfering done on
behalf of the rich—for example, monetary policies that create “healthy”
unemployment so that the rich do not have to compete for employees and
pay a greater share of profits to employees. Unfettered capitalism is a
misnomer. Powerful individuals constantly use thousands of policies to increase their own
freedoms and limit the freedoms of the non-rich.
The Federal Reserve places much higher
emphasis on even mild inflation than unemployment and worker wages.
Superb arguments in favor of
tight labor markets abound. Tight labor markets improve the wages and treatment of lower income
workers. They keep more people working, producing more goods and
paying more taxes, preventing excessive deficits. They encourage innovation and efficient use of workers.They encourage better treatment of workers. (Loose
labor markets harm the unemployed and harm the employed by reducing their
alternatives.) They increase inflation, but not much. There is no one
for one correspondence between wage increases and inflation. Working class
wages are a small proportion of the total costs of most products. Inflation
caused by the greed harms overall economic growth, destroys human
capital, wrecks human lives, yet inflation caused by the rich is not interfered
with. Any businessperson who does not raise prices to maximize profit is
considered stupid by business gurus.
Graetz and Mashaw argue for a “Universal
Security Account,” taking three percent of income during periods of employment.
Twenty percent of unemployment benefits will come from the security account. At
retirement or death, the account will be paid to the worker or her heirs.
The authors describe current child policies
as “arrangements that might with only slight hyperbole be described as writing
America’s children out of the nation’s social insurance contract.” The current regime helps the lucky, the
lucky being those having rich parents, those in the right town, the first in
line, or having the right whatever. Imagine if the government designed policies
for the rich that were open only to the first to apply: Line right up, folks.
Get your tax cut. Be one of the first 12,000 in line or forget it.
According to the editors of The New Republic, only 15 percent those
eligible for Child Care and Development Fund block grants get grants.
Waiting lists are thousands long. George W. Bush plans on cutting the program
by $200 million.
By earning one dollar more a person
can be subject to cliff losses, losing benefits worth thousands. A
family, for example, loses government health care by earning $14,350 rather
than $14,349. The author’s claim the Earned Income Tax Credit is inadequate
and poorly designed. A family earning $9000 dollars per year can do better than a similar
size family earning $25,000 in income (when all government benefits are added in). The authors favor a mixture of in-kind
(vouchers) and cash supports. The advantage of in-kind benefits: They
minimize parental misuse. The advantages of cash are portability and lower
administrative costs. When expenditures vary because of health, location, childcare, and
number of children, the authors favor in-kind transfers.
When some individuals see family statistics,
they assume families with children are doing well. Bad idea. The
social and economic trends for families with minor children and those without differ. Ted Turner and Jane Fonda are or were a family. In 1998 fifty-five percent of
married couples had no minor children, a record high and likely to rise. Only 34.6 percent of households had children under 18 in 1990.
Fifty years ago, most working families
having incomes at or below the median and two or more minor children paid two
to six percent of their income in all taxes. Payroll taxes (work taxes) alone
increased from two percent to 15.3 percent. Sin taxes are rare.
Virtue taxes are rampant, a horrible incentive situation. Those who engage in low-paying work to support
families get rewarded with loads of state, local, and payroll taxes. Payroll
taxes are an abysmal failure. They punish work and encourage less beneficial forms of income seeking. Seventy-four percent of families pay
more in payroll taxes than any other tax. All non-work income—stocks,
bonds, theft, drug dealing (and work income above $68,400) is exempt from payroll
taxes. We should eliminate payroll taxes and replace them with progressive consumption taxes.
The political genius of payroll taxes
is that many individuals barely notice them. Individuals who would burn down city hall
over a puny local tax issue or pull their hair out on April 15 pay little
attention to payroll taxes.
We are face a great
tax leveling: Now the overwhelming majority of households pay 25 to 40 percent
of income in taxes, regardless of resources, burdens, and contributions to
others. By 1989 a median income working family paid 6.3 percent in federal
income taxes, 15.3 percent in payroll taxes on work income and up to twelve
percent more in state, local and other taxes. Whether a family has zero
children or ten, the tax rates are too similar. The number of dependents
supported has little impact on these percentages because most working class and middle class taxes
are now of the state, local, and payroll varieties. Within the next couple
of decades, American families in the middle-income brackets and below could
easily find themselves paying an additional ten percent of their incomes in
taxes. Parents contribute a huge number of social and economic goods to society
and do not get a just return, a nation
revamping itself to serve the well being of adults without minor children.
From 1979-1994 wages for the bottom 60
decreased, even while the hours worked by wives increased (36 percent between 1979
and 1989 alone) and hourly productivity per worker increased about one percent
per year. According to the United States Bureau of Labor Statistics, in 1990
dollars the median income of young families with children (householder under age
30) declined from $23,705 in 1970 to $16,219 in 1990, a 32 percent decrease. Between 1973 and 1990 the median annual
earnings of heads of young families with children declined 44 percent, a drop from $22,981 to $12,832 in 1990 dollars. Teenagers headed only three
percent of these households. Over seventy percent of householders were 25 to
29-year-olds. Increases in single parent families are not the sole factor.
Incomes for young families with children have probably increased some since
then, however, but so has the number of hours worked in the labor force. These families are also one-third less likely to own a home. The mean
discretionary income of retirees is well over twice that of individuals under
35 despite the fact retirees are not working. Politicians give lip service to moral
standing, but in practice they increasingly reward poor behavior and punish
In 2000 the “official” poverty level
for one person was $8,350. For a family of five it was $19,950. I am almost
certain that one person can live much better on $8,350 than a family of five
can on $19,950. The authors point out that it is much easier for a single
person to find housing by sharing apartments than it is for
families with children. In 1998 families with three or more children had a 29
percent poverty rate, more than double the 13 percent poverty rate for smaller
families with children. Children in these larger families make up 57 percent of
all children in poverty. About one million households with children in poverty
have a head of household who works year-round, full time, not counting millions
more year-round, full time low-income families. The right replies, “Hey,
it is only one million households.” What if we created a 50 percent marginal
tax rate for the to one percent and said, “Hey, it’s only about one million
earners.” According to Robert McIntyre, the top one percent in 1999 earned a
mean income of $915,000. The top one percent begins with those earning
$319,000. Those who think power
markets are sufficient for good family values are badly mistaken. Power markets
serve wealthy, hedonistic adults.
If we reduced the amount of income
redistributed to the top one percent, it would not reduce overall
government revenues. Most non-rich working families pay between 25 percent and
40 percent of their incomes in all taxes. The rich pay a mean of 32 percent of
their incomes in all taxes. If $15,000 increases a family’s income from $20,000
to $35,000, the government would net at least $5,000 in increased tax revenue,
reduced EITC, and reduced other costs. If an additional $15,000 is in the hands
of the rich, on mean, it would generate less than $5,000. Reducing
redistribution to the rich would also encourage small business growth, increase
competitiveness, increase social capital—not to mention provide non-economic
goods to the non-rich.
These are strange times: If you
disagree with power markets on behalf of lower-income workers, you are guilty
of “class warfare.” If you disagree on behalf of some marginal cause, you are
acceptable. They did not call it “class warfare” when payroll
taxes were increased from 2 percent to 15.3 percent. Or when regressive state
and sales taxes increased.
Jonathan Chait claims elsewhere that
tax cuts for the wealthy will not stimulate the economy because Alan Greenspan
will not let the economy grow faster. Tax cuts for the rich also create
more government debt than would otherwise exist, which increases government
interest payments, decreasing capital available for private
investments, creating vicious spirals and preventing virtuous growth spirals.
Tax cuts for the rich provide almost no incentive for the non-wealthy to work better. The incentive to the rich, research suggests, is much less than commonly
assumed. I have never heard of rich person who sits around contemplating
working less efficiently because of a somewhat higher taxes. Sixty percent of
100 million dollars is still colossally more than 67 percent of ten million
dollars. Power markets do increase wealth, but not as well as moral markets.
Some reasons why more
progressive taxes cause greater economic growth:
They serve as an incentive for lower income individuals
to work and lower income labor is more socially productive, improving long-term
Much of the work done by the wealthy merely transfers
existing wealth. When the income ratio of high earners to low earners is lower
human, energies are not tied up on activities such as yacht building, mansion landscaping,
and limousine driving. Energies are shifted toward goods that can be mass-produced
and goods that are more socially and economically beneficial, creating virtuous
spirals. Over the past generation we have had new
technologies, better management, fewer inefficient unions, greater entrepreneurial
spirit, more workers in their prime productivity years.
Yet productivity growth rates per hour worked lag behind
those of a generation earlier. Part of the story is a shift to
lower-productivity service industries.
Welfare state costs decline, reducing
the number of children in low-income families. Better conditions for children
improve long-term economic growth.
Fewer status preoccupation costs.
Less capital for the rich creates more opportunities
for small businesses, which increases competition and creates greater
Reduces money available for the rich
to dominate media and kleptocratic governments.
Reduces the incentive to gain wealth at enormous human
and economic costs.
Reduces money available to buy
environmentally harmful products such as personal jets. They increase the
income for lower income individuals to buy newer, cleaner cars.
The authors' plans for childcare tax
credits and housing vouchers are creative, thoughtful, and beneficial, yet inadequate.
having incentives for relying on relatives, yet providing little help to those who lack
relatives or have unhelpful relatives. The plan is an improvement
over the current system of public housing for the “lucky” poor and massive tax
expenditures for the homes of the wealthy and upper middle class. Their plans should also include a parental leave system that provides mandatory parental leave, with leave periods in proportion to productive years worked.
True Security argues for a more
uniform child support system.
A universal 30 percent childcare subsidy
up to 30 percent of average childcare costs in a location is among their
proposals. Vouchers or refundable tax credits would deliver the subsidy. This helps parents who need childcare, yet does not pay everything. The
incentive to use friends or relatives remains. The childcare credit
is a good idea and is probably too small. It would reduce welfare and the harms
The authors would eliminate the current child
deductions from the tax code and replace them with a $1500 refundable tax
credit for all children up to six and $750 for all children six to 13. In an
inexplicable twist (maybe I misread somewhere) they then argue for subtracting
the child care credit from the refundable tax credit. Why even bother with a childcare
credit if you turn around and take it right back? So what if it treats working
parents differently than stay-at-homers. Current policies discriminate against
working parents. Stay-at-home parents do not pay income taxes. They do not clean
hospital rooms. They do not stand watch in missile silos. The Nurture
Assumption and The Myth of the First Three Years have undermined
their intensive parenting ideology. They sit at home absorbing evil ideologies
from Rikki Lake, Laura Schlessinger, and I shudder to think where else. The
rest of us pay the costs for these ideologies. If stay-at-home parents want to
stay at home, that is their choice, but they should not get equal tax treatment
when they contribute less and would benefit less from the resources. Working
parents contribute both the social and economic goods of their childrearing and
the social and economic goods of their paid labor force efforts.
Some folks supporting misanthropy and
ultra-environmentalism believe that shifting economic resources away from
parents is a good way to reduce population. But that is a cruel and unjust
method to reduce population. If a nation wants to control population, it should
do so by education, policy, and legal measures, not by putting an economic vice
on parents and children. It’s worse than official state policies that specify how
many children a family may have. A nation with a population density of about 70
per square mile is not overpopulated. Switzerland, by comparison, has a
population density about six times that, and Switzerland is not overpopulated.
The current total fertility rate of 1.85 is well below the replacement level of
Frank F. Furstenberg writes elsewhere
that our perverse policies have “emiserated children by both failing to support
marriage and failing to support its alternatives. Instead, we publicly bemoan
the fate of the family and solely blame parents for their lack of commitment to
children.” Debates get framed this way: Increasing assistance to single parents
undermines marriage and others. Increasing assistance to married parents is
unfair to single parents and others. Therefore, let’s just gradually make
things worse for both types of parents.
In addition, according to Steven L.
Nock in Society, “the continued centrality of gender in marriage—and its
growing irrelevance everywhere else—explains many contemporary family problems.”
Women want men to do more housework, but many wives lower their respect for
their husbands for doing the unmasculine housework wives said they wanted their
husbands to do.
The challenge is to create an
institution where both partners gain lots for being married and those who
wrongfully exit the union face high costs while those who rightfully leave a
marriage should not be abused. Yet this is difficult to create when family
norms and the norms of moral reasoning conflict with the norms found almost
If you are a lower income worker and
you need a c-section, you get to pay for it yourself and you get to pay 20 to
30 percent of your income in taxes. If you are an imprisoned felon who engages
in self-mutilation, the government will pay millions stitching you back up. (I am not referring to body piercing. I am talking
about do-it-yourself a, b, c, d, e, f, and g-sections.)
The authors take on the current regime
of tax subsidies. “[I]n 1995 more than 10 million households spent more than
half their income on housing.” Things are not so great in the middle either.
They report that in constant dollars between
1976 and 1996 the cost of the
median-priced house nearly doubled, from $77,000 to about $136,000. So what
gets subsidized? Big mortgages for the wealthy. “Nearly 75 percent of the
nearly $50 billion of taxes saved annually through the deductions for home
mortgage interest goes to families with $75,000 or more of annual income.”
Apparently, a house with five bathrooms is a terrible thing to waste or to
never have at all. This is bad, very bad. Houses are not humans. Subsidizing
houses for rich people wastes resources and creates large opportunity losses.
It also creates longer commutes.
Thirty or forty years ago a young
person with an entry-level job could stay at the YWCA or YMCA for 10 percent of
their income. Where can a young person find housing for 10 percent of a low
wage job now? People with low wage jobs now pay 40 to 70 percent of their
incomes in taxes and housing alone. Total social insurance transfers and tax
expenditures are 23 percent of GDP, which translates to about 2.3 trillion
dollars. Stigma keeps many who are eligible from signing up for food stamps and
other lower income programs, yet there is no stigma with corporate welfare and
housing subsidies for the wealthy. Almost no one hesitates to take these latter
Suppose a person inherits a business worth
$10 million at age 18 and over the course of her lifetime the business
increases in value to $100 million. By not paying herself a salary she can go
her whole lifetime without paying income or payroll taxes. She can borrow at
least $100 million at generous rates to spend on houses, cars, collectables,
art, vacations and aircraft because she has large assets as collateral. This is
bad because it reduces the overall level of investment and investment in more
productive activities. It shifts resources to junk production. It reduces human capital. Others must pick up more of the tax burden. It
encourages others to cheat. Saying power markets are better than socialism is
less profound than saying a sixth grade basketball team is better than a first grade
basketball team. In neither case are we talking about the professional level.
It takes a nation to protect the copyrights
of moguls who produce infantile attractions. It takes a nation to help businesspersons
pay for $100 lunches. It takes a nation to support 50-year-old government
retirees. It takes a nation to make sure monetary policies help the rich most. And it takes a nation to rip
parents and their children off, then blame them for cultural decay.
difference between vouchers and tax credits, the authors point out, is rhetorical. Few object to
a billionaire receiving a housing tax credit, but many would be
outraged if she received a housing voucher, though both are the same.
Eliminate the current housing subsidies, they write, and replace them with a 30
percent housing subsidy for non-rich families with minor children, delivered
with a voucher or refundable tax credit. They reason a 30 percent subsidy
still encourages economizing. It avoids the work disincentive that an
income-based housing subsidy has.
This work has flaws. Because
of their one-size housing voucher, regardless of family size, their child
policies tilt toward families having one child. Bad idea.
The “official” poverty rate for families with three or more children is 29
percent. (It is actually higher due to mismeasurement and misapplication of
inflation and the omission of increased transportation, health care, and child
care costs in present day families, though welfare fraud and EITC fraud lower
it slightly.) The more children parents raise, the more benefits they provide third parties, therefore policies should be shifted toward families with
more children. Larger families would also benefit more because they earn less
per individual and have a greater workload. In addition families with only one
child are partial retirement free riders. The contribution of their
child-rearing activity is less than what they will eventually get from other
The authors shore up long-term care
for the elderly up with a tax used to purchase long-term care insurance from
insurance companies. They make the important point that “personal
responsibility must not be the equivalent of making individuals or families
into one-member risk pools.”
The authors argue against Social Security cronyization and for gradually
raising the Social Security retirement age to 70, keeping up with increases in
better health and life expectancy.
Many outstanding arguments
against privatizing social security exist:
Double billing: Those with privatized accounts pay for current retirees and future retirements. There is no free lunch
like "privatizers" seem
Mailing social security checks is among the few things
the government is efficient at. Privatization would eat into investments
with the costs necessary for the financial services scamsters to make a profit. Mashaw
wrote elsewhere “with administrative costs running at less than 1 percent
of expenditures, SSA is vastly more efficient than any private insurance or pension
You cannot predict the age of death and the amount
required for retirement accurately. Death at age 65 or 85 is both highly
probable. If you plan for a ten-year retirement, you could be in for a surprise.
The author’s retirement plan includes
a mandated savings program. Bad idea. It triple bills. Parents stuck with
paying for baby boomer retirements get stuck with paying for their own retirements
as well as part of their cohorts through their childrearing activities.
Mandated savings is not a good way to increase savings.
Mandatory retirement accounts are a
bad idea because the aforementioned age of death varies. There is
little point to a mandatory account that millions never use.
Individuals have better use for the money
when they are younger. Universal health care policies can help people with awful
luck. Universal retirement savings accounts do not help individuals with terrible
luck because they are dead. Social Security protects individuals from outliving
their assets and from working to acquire assets they never benefit
from. Mandatory retirement savings accounts do not change the fact that
retirement programs are inter-family transfers.
The author’s rationale for survivors
insurance is weak. Why should a widow or widower get a free ride while other
single parents work at difficult, low-paying jobs? The author's survivors
policy would also lead to more than a bus load of murders.
They overestimate the hazards
associated with wage subsidies and underestimate the hazards of disability
claims and unemployment insurance. They should require some human service work
with their unemployment plan. Spending billions on unemployment insurance in
the middle of a recession is helpful. Spending that much when the unemployment
eqals four percent is terrible, a giant
moral hazard for a mandatory government paid vacation lottery.
Policy works with careful, detailed analysis are rare. Most public policy books have a thing in common: No accurate big picture map of the size and arrangement of the economy. For too long, election by slogan has ended up in policy by K-street. Preventing Crime, Nobody’s Children, New Choices/Real Voices and this book are all examples of what happens to you when you stray from the left or right folds. You get ignored. “Being the bearer of new ideas is a lonely journey”—unless you have thousands media outlets at your disposal. Building the kind of land where people get what they should get takes moral courage. True Security is an excellent book and a boring book. The question for the reader is whether entertainment matters most. Highly recommended. [Note: All numbers are from the last year I could easily find them.]
—book review article by J.T. Fournier, last updated 5/09/09