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True Security

by 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 percent of

married-couple families 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 good behavior.

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 economic growth.

· 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 efficiency.

· 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 from welfare.

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 2.11.

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 everywhere else.

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 goodies.

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.

The biggest 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 peoples’ children.

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 plan.”

· 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 rate

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

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