(cross-posted at Blog of the Century).
I like Harvard economist Greg Mankiw. He’s a terrific writer and economist. A year ago today, I wrote a complimentary column about Mankiw’s support for gas taxes. Wow, do I disagree with his social policy vision. In today’s Times, he has a column on federalism, “Competition is healthy for governments, too.†I find this a pretty sound argument for the other side.
Our federalist system has long proved problematic when it comes to meeting the basic needs of severely disadvantaged people. State governments face tight constraints on taxation. Their administrative capacity is often limited. Moreover, states are often expected to do the most in helping the needy at precisely the moment when national or global economic forces are battering the state economy.
When wealthy people can move, states face clear limits on progressive taxation. When poor people can move, states face very strong incentives not to be the softest touch. In the resulting competitive equilibrium, many states end up with much less progressive policies than their citizens would otherwise want, and much less progressive than the optimal national policy would be.
Whether generous states truly are “welfare magnets†remains unclear. The empirical literature is a bit mixed. In the disability arena, I would not be surprised to find that the story has substantial validity. Consider the following story….
Last summer, the Chicago Tribune ran an article titled, “Parents of disabled children giving up on Illinois.†Reporters Bonnie Miller Rubin and Monique Garcia described families buying property in neighboring states or moving to more liberal places when a child was diagnosed with autism, cerebral palsy, or other challenging disorders. The story was entirely anecdotal. I don’t know how widespread this is. Illinois ranks near the very bottom in national measures of disability services. If you really need these services, it’s obviously sensible to check out the alternatives.
The Tribune noted two families, one of whom receives residential treatment at an annual cost of $85,000, another who put her house on the market one week after her preschooler’s autism diagnosis: “She was headed for Kenosha for Wisconsin’s generous funding of intensive therapy.†It’s hard to imagine that Wisconsin lawmakers are overjoyed at the prospect of becoming a magnet for people who require costly autism services. The proximity of Chicago’s huge low-income population has always provided a strong argument for retrenchment of Wisconsin and Indiana social services.
In the case of really expensive disability services, it’s fairly obvious that some degree of coordination and basic national standards are required to keep states from racing to the bottom, to ensure (a) that families can get reasonable services, and (b) that the burdens of costly care are fairly distributed among the states.
None of these issues of fiscal federalism should surprise anyone with a passing glance at the economics literature. As one commentator put things:
Anyone who finds the Massachusetts health insurance mandate objectionable can easily move to live-free-or-die New Hampshire. A national mandate leaves people with fewer options. This is one way the health reform advanced by Mr. Romney as governor differs from that pursued by President Obama, and why the Massachusetts law raises fewer constitutional objections than does the national one.
While conservatives embrace governmental competition, liberals have good reason to worry about it. The left has a more expansive view of the role of public policy. Liberals want the government not only to provide public services but also to redistribute economic resources. In the words of President Obama, they want to “spread the wealth around.â€
Yet redistribution is harder when people and capital are free to move to other jurisdictions that offer better deals. If you are going to take from Peter to pay Paul, Peter may well decide to leave. It is perhaps no surprise that state and local tax systems are less progressive than the federal one.
These words come from Mankiw’s column. There’s nothing exactly incorrect there. There’s nothing apparently amiss, either. There are two nondescript guys, Peter and Paul. Some states wish to “spread the wealth around†by grabbing some Peter cash and handing it to Paul. Others don’t. What’s the big deal if Peter moves someplace that won’t grab his cash for someone else?
You don’t read this cheerfully complacent passage and presume that Paul might be a wheelchair-bound kid with cerebral palsy. You don’t consider what might happen if families flee live-free-or-die New Hampshire for a more generous polity when they actually run into trouble. You don’t consider what would happen to the more generous polity if this sort of thing starts to happen a lot. You don’t really consider why Peter doesn’t want to do more to help.
You certainly don’t consider the punishing real-world consequences of a House Republican budget Mr. Mankiw’s advisee Mitt Romney called “marvelous” which would deeply cut and block grant Medicaid with obvious consequences for the aged, poor, and disabled.
Mankiw concludes by noting:
If the government’s job is merely to provide services, like roads, schools and courts, competition among governmental producers may be as good a discipline as competition among private producers. But if government’s job is also to remedy many of life’s inequities, you may want a stronger centralized government, unchecked by competition.
These are two fundamentally different visions. The next election, and to some degree every election, is about which one voters find more compelling.
Is it just me, or did Mankiw pen an argument for Obama here? I and other liberals are happy to have local governments discipline each other through competition. We’re happy to outsource and to use market mechanisms in other ways, where appropriate. President Obama’s “race to the top†is one example of such thinking.
It’s the other piece I’m trying to understand. Mankiw asks “if government’s job is also to remedy many of life’s inequities…†As if this were a puzzling question. Especially in these troubled times, I find it strange to wonder.
“cheerful complacency” — a perfect description of the comfortably-off for whom these issues are Not My Problem (it helps if they have never had bad luck).
“The left has a more expansive view of the role of public policy. Liberals want the government not only to provide public services but also to redistribute economic resources.”
This neatly begs the question as to how those resources were distributed in the first place, and the huge role that government played in that allocating process. The “fundamentally different visions” are merely about who wins.
Well, no. Nobody wants to take Romney’s several houses away from him. What liberals want in this country is not that different than our good friends in Euope. Heath care, baseline unemployment assistance when the market goes south. Which is does, with disturbing regularity We are actually to the right of, say, Norway. We put up with corporate raiders who don’t add value. The issue is, right here, that apparently the self-proclaimed “job producers” want even more tax cuts, from a historically low basis, and they want to kill social services, nominally in the name of religious silliness, but mostly to enforce retrograde notions of sexuality and social norms, and depress wages among the blue-collar class.
Not on my watch.
The word “competition” in this context is a totally b.s. red herring. States “compete” by promising less taxation, because most of our population are brainwashed into thinking their number one priority is “lower taxes,” also synonymous with “no new taxes.” Politicians get elected-frequently in the federal government, and more frequently in the state and local governments-by promising lower taxes, rather than promising better government.
I used to blame the politicians, but I long ago realized it is the gullible voters who get what they deserve. Concepts of “community responsibility” are alien to the dialog these days. And try explaining to your voters that life is a non-zero-sum game, and “a rising tide raises all ships,” even if it costs a few bucks to pump the water. Good luck with that one.
Meanwhile, of course, the label “libertarian” has suffered the same fate as “conservative.” When I was growing up Eisenhower was conservative, and Bob Taft was VERY conservative. Libertarian meant “let me do what I want to do so long as I don’t harm anybody else.” Now they have both been perverted to mean “government = evil; leave my money alone.” And along with “leave my money alone” we also have NIMBY, which is another subset of “leave me alone.”
The smartest sentence Greg Mankiw ever wrote was the last sentence in a column he wrote in the NY Times six weeks ago. The subject of the column was the arcane accounting problems of income vs capital gains vs carried interest. His final words in the column: “Not all problems have easy answers.”
“It’s the other piece I’m trying to understand. Mankiw asks “if government’s job is also to remedy many of life’s inequities…†As if this were a puzzling question.”
Are you so totally lacking in the capacity to understand people who don’t share your views, as this statement would suggest? If so, I wouldn’t be going out of my way to shout my incomprehension from the roof tops.
Even if we do away with the race to the bottom by standardizing levels of assistance to the needy and disabled across states(and I am in favor of that 100%), there will still be legitimate disagreement as to how far the nation can go in “remedying life’s inequities.” Everyone has a different idea as to what that would look like, and how much redistribution and direct services (they are not the same thing) we can squeeze out of our economy. Since we are far from levels of redistribution (or services) that would pose any threat to econmic growth, that’s an academic argument right now. But in fact, there are many inequities that can be mitigated but not remedied; there are many that even the most generous European social democracies don’t attempt to remedy (and in the area of disability, some of them don’t try very hard to mitigate). So, although I generally find lots to disagree with in Brett’s comments, in this instance he has a point.
Reminds me of the argument that California and New York better be careful, nobody wants to live in your states because of all the taxes.
As a former NYC and current SF resident, I look forward to all the “job creators” moving to Texas or wherever. My rent would go down, and I’d find it easier to hire people.
Of course, I’m not holding my breath. Nor does it bother me that my federal taxes flow to states that are less generous to those in need. I suspect the pendulum will swing back. I do wish certain of the would spend less on growing corn.
“Since we are far from levels of redistribution (or services) that would pose any threat to econmic growth,”
I think that is, given our anemic economy, which still outperforms European welfare states, far from established.
Anyway, my point here is that disagreement about the extent to which *government* should mitigate inequalities is not the same, in principle, as disagreement over whether inequalities should be mitigated. To some extent they’re disagreements over who should be mitigating them, and how.
That’s a fair point. But who then, if not the government? It has long been a conservative position to view private charities or individuals as better to remedy certain things. Yet there are two substantial problems with both groups.
Private charities do great work, but it is scattershot and the holes in its provision of service immense. These days, even a combination of state and private charity can’t begin to provide the level of service that is required in many areas.
Expecting individuals to provide their own services completely misses the point! This is obvious in cases such as catastrophic disability or unemployment. But what about problems that owe to limited human capital, which, by definition non-intrinsic, must be somehow learned or developed from some outside resource? Public education falls into this category, and is considered obvious to most when it is easy to assume low levels of human capital in children. But for adults, it is harder to imagine low levels of human capital, and many are assumed to have more than they do. Incorrect choices are assumed to be made *in spite* of levels of human capital that are present, as opposed to *because* of a lack of human capital. To begin to rectify inequities in human capital requisition, we return to government and private charities, at which point we must consider the efficacy of specific programmatic responses.
= = = That’s a fair point. = = =
It’s a fair point if one ignores that fact that a wealthy, productive modern industrial/post-industrial society cannot exist without (a) its social and physical infrastructure provided equally to all [a point made quite strongly by Bill Gates for one] (b) all of its members. Point (b) is particularly problematic if that society chooses to use free[sic] markets and differential compensation to labor to organize its economy, as the society still requires large amounts of labor from low-paid persons (e.g. hotel maids at the 5-star hotels where all those libertarian computer guys attend technology conferences at their employers’ expense), but given the differential rewards system those people will _never_ be able to pay for, e.g. a special needs child.
Cranky
Eli says it well. I would just add, my company spends significant (for us, we aren’t big) money on helping the homeless in Bekeley. We do it in a fairly narrow way, because, well, we have to make a living in the mean time. And that is the problem. Hippies with money can’t fix big problems. Catholics with agendas are arguably worse, depending on how you see that.
There is simply no way that I can see that charity replaces a safety net. Of course, as a dirty hippy, I embrace the bleak, horrible future of living in a social compact like Norway. and in fact, I’m living it, and business, if not good, is OK.
Brett, he’s talking about life’s inequities, not inequalities. An inequity is an injustice or unfairness. Such as being born with a disability. I personally couldn’t care if Warren Buffet pays less taxes than I do (inequality), but I do care a lot if my fellow citizens suffer needlessly (inequity). I am also very interested in solutions that minimize government influence (where they exist). What I don’t buy is a claim that the free market fairy will somehow, magically fix it.
If the best (or only realistic) solution available is a government solution, then I’ll take that, ideological purity be damned. I’m sorry if you don’t like this, but the small discomfort that you suffer from this minuscule perceived infringement on your liberties is nothing compared to the discomfort another American may suffer who dies in an ER because he could not afford preventive healthcare.
As to whether our economy outperforms Europe’s welfare states, thats subject to debate (not to mention that there are a whole lot of different European welfare states with varying characteristics).
Many of these welfare states have lower unenmployment than we do and have a lower percentage of their population below the US poverty line than we do. America may enjoy a higher GDP/capita, but does that actually buy us anything? If you look at consumer spending on culture, entertainment, and recreation, it turns out that most other countries seem to have more money left over to spend on stuff that people enjoy (plus, more vacation time to actually do so).
Remember, GDP is not a quality of life measure, as RFK observed decades ago. GDP is generally correlated in some way with quality of life factors, but it does not determine them.
All ‘Life begins at conception and ends at birth’ proponents of race to the bottom should try spending some time in a room full of the truely disabled kids at a nursing facility. Kids who need round the clock professional care, can’t hold their heads up, can’t eat unassisted, whos’ lives are one medical emergency after another with life expectancies in single digits.
A couple hours of that kind of eye opener tends to take some of the glibbness out of policy discussions. Helps instill a bit of “There but for the grace of God go I” or any one of us. No easy answers indeed.
I thought government provided schools to remedy inequities in educational access. It’s a bit cute to insist that a government-provided basic level of education (or legal representation, or access to roads and transportation) is “merely providing services,” while providing healthcare represents a fundamentally different vision of the role of government.
Mankiw writes:
The argument applies not only to people but also to capital. Because capital is more mobile than labor, competition among governments significantly constrains how capital is taxed.
More than that, it constrains how business is regulated, and it also leads to wasteful subsidies to businesses to relocate. In other words, businesses will tend, sometimes, to go where the state gives them a lot of privileges and exempts them from tiresome rules about pollution, safety, etc. Why Mankiw regards this as a good thing I don’t understand.
Is it his idea that any tax on business, any rule it must follow, is bad, so this race to the bottom he glorifies is a wonderful thing? I don’t think it is.
Further, the whole notion of “competition” among states is pretty suspect. Businesses compete for profits. What do states compete for? What should they compete for?
The difference that the blogger points to and that Mankiw cops to is virtually definitional, but apparently not well understood or recognized on either side. Classical or economic liberalism of the sort inherited by Mankiw and generally represented by the Republicans is more interested in formal “inequities” (usually put positively in terms of “equality of opportunity”), while social liberalism of the sort represented by the blogger and generally by the Democrats is more interested in substantial ones (results). Self-regulating free market economics not only tolerates “life’s inequities” but utterly relies on them, and is dedicated to preserving and even enhancing them, under the belief that the end result will be better overall. Government’s role is to be limited as much as possible to allow this economic engine to function. The role of ideologues is to insist on the higher justice of this approach, and to ridicule the dysfunctional and self-defeating sentimentality of those who think that making life easier for the poor at the expense of the rich works out well in the end, or is morally just on the front end, since it always implies some level of confiscation of “rightfully” gotten wealth. The degree to which this anti-utopian ideology is itself utopian has been grasped and accepted generally only in the aftermath of the socially apocalyptic crises it surprises itself with, and which it is ceaselessly inventive in assigning to every other possible cause than its own development. That larger process, seen from inside the ideological stance, is also just another “inequity” that “government” (i.e., human beings working collectively outside market-validated relations) must not be expected or allowed to address.
= = = Self-regulating free market economics not only tolerates “life’s inequities†but utterly relies on them, and is dedicated to preserving and even enhancing them, under the belief that the end result will be better overall. = = =
I was with you up to the “under the belief that the end result will be better overall”. Even if there is any evidence that it was historically the case that this belief was part of radical right economics, it has clearly been replaced over the last 30 years by the underlying desire to return to the extreme difference of wealth and power seen in the Gilded Age and a very direct belief that those with less money should, quite simply, die in the street.
Cranky
There’s no contradiction. “Better overall” is a utilitarian designation in which the “losers,” like cerebral palsy-suffering Paul, are all but invisible except as an abstract category. The focus is on abundance, dynamism, growth, and so on, the rising tide that lifts all boats - don’t talk about the boatless (especially the foreign boatless). The assumption or belief is that the poor are always with us anyway, and that any attempt to construct a system in which everyone has a seaworthy boat will result in everyone floating a crappy boat to their Soviet breadline, until everyone sinks. Since most real-existing social liberals have more than half bought into this philosophy anyway, attempts to critique it will tend to be compromised. At the same time, and I think this is the authentic difference between “mainstream” Republicans and right-libertarians, most on the right have also bought in to the social liberal philosophy on some fundamental level - to soothe their consciences, among other reasons, which also means to suit pre-capitalist/pre-modern traditional moral systems. So, they are willing to sacrifice ideal economic efficiency in favor of the “social safety net,” and the permissible political conflict is over where to set the bar of Hayekian efficiency: Too much, and the political-economic externalities (mainly defined as relative human economic misery within a nation-state context, but increasingly only to be understood as ecological and global) can no longer be efficiently externalized - efficiency becomes inefficient. Too little, and the economic machine begins to seize up - the Holy Growth Rates become unattainable, political institutions built and justified on their basis fall into disrepute. The main question is how catastrophic we insist on making the process of encountering the system’s material limits, and what lies we decide to tell ourselves and believe along the way.
= = = There’s no contradiction. “Better overall†is a utilitarian designation in which the “losers,†like cerebral palsy-suffering Paul, are all but invisible except as an abstract category. The focus is on abundance, dynamism, growth, and so on, the rising tide that lifts all boats = = =
I’m fully familiar with the concept of Pareto optimality, and took that into account in formulating my reply to your 9:28. I just don’t think that hard-right economics ever had achieving the Pareto optimum (or even a near-optimum) for the US social economy as one of its goals, and if it did it certainly no longer does since the Reagan era.
Cranky
I guess it depends on where you want to start explaining. In the ’40s-’50s, making the moral case for capitalism seemed a more pressing task than in the ’80s. By the “end of history” ’90s, the discussion disappeared amidst free market triumphalism, and it wasn’t until the crisis of ’08 that a space opened up for renewing it. So we now have the spectacle of Obama needing to remind us of the minimal premises of social liberalism, and being portrayed as a socialist class warrior for doing so. What gives the portrayal an iota of credibility is the long-run unsustainability of the system. That in reality both paths, revived American social democracy via Obamian increments and Romney-Ryan free market fantasy-absolutism, eventually lead to similar destinations is a thought that’s not quite thinkable from within the system that both aim to preserve and extend. That’s not an argument for their equivalence: For a number of reasons I consider the former much preferable.
Let the generous people — in the generous states and in the generous churches, synagogues, and mosques — pay to take care of the poor and disabled! Let the bleeding hearts spend THEIR money. We’ll gladly leave it to you Thousand Points of Light suckers to pay for all our troubles, while I and my buddies use OUR money to buy up America’s state and federal governments, including judges.
And you WILL call my son, “Sir” when he tells you to shine his yacht. Don’t forget, I LIKE to fire people.
Alright, this part of Greg Mankiw’s article is something that I’m not buying; nor do I really follow his rationale for it:
If you look at Europe’s social democracies, then you see that many of them are not actually very centralized when it comes to welfare. In fact, many of them have significant parts of their welfare farmed out to not-for-profit organizations. Not necessarily for reasons of competition, but because some of them may have grown historically, because it keeps government bureaucracy limited, because local organizations can often better deal with local concerns, because it removes these organizations from direct partisan influence, or because not-for-profit organizations with a mandate to do charitable things can serve as a check on the government’s interest to cut social services in lean times.
Nor do I see any evidence that there is need for a centralized government (as opposed to a federation). Germany and Switzerland have federal systems, too (both of them loosely modeled after the US example), and that hasn’t stopped them from running a lot of their social services at the state level (i.e. within their Länder and Cantons). Germany, in particular, bases its welfare state explicitly on the dual principles of solidarity and subsidiarity (Switzerland uses the same principles, though not as explicitly). The principle of solidarity can be summarized as “one for all, all for one”; it explicitly does away with traditional notions of risk-based insurance; risk does not factor into contributions, and benefits are awarded based solely on need. The principle of subsidiarity was adopted from Catholic teachings; it specifies that matters be best handled by the least centralized authority (the one closest to the problem), with a central/federal government being the fallback position if something cannot be handled sufficiently by private individuals or local/state institutions. As an organizing principle, this seems to work reasonably well in a federalized system; it also provides tiers of backup and can reduce the risk of someone falling through the cracks of the safety net.
= = = Not necessarily for reasons of competition, but because some of them may have grown historically, because it keeps government bureaucracy limited, because local organizations can often better deal with local concerns, because it removes these organizations from direct partisan influence, or because not-for-profit organizations with a mandate to do charitable things can serve as a check on the government’s interest to cut social services in lean times. = = =
Without being familiar with the detailed structure of the social welfare systems mentioned, I would nonetheless wager a fair sum that the outsourced organizations operate under strict, professional, standards-based oversight and regulation from the federal government (or by their respective state governments, themselves inspected by the federal government).
Whereas in the United States the process has been:
1. Outsource to private agency
2. Private agency complains of excess oversight and regulation
3. Right-wing government voted in via pendulum swing; oversight and regulation greatly reduced
4. Private agencies start terminating services to undesirables, cream skimming, enforcing religious requirements and restrictions on service, and outright theft
5. Slightly more progressive Democratic government voted in via pendulum swing
6. Moderate attempts at oversight of private agencies by government
7. Massive noise machine response, claims of “soculusum!”, infringement of religious freedom, etc
8. Democrats give up; turn attention to supplicating Wall Street
9. Goto (1)
Cranky
Cranky Observer: Without being familiar with the detailed structure of the social welfare systems mentioned, I would nonetheless wager a fair sum that the outsourced organizations operate under strict, professional, standards-based oversight and regulation from the federal government (or by their respective state governments, themselves inspected by the federal government).
There’s an awful lot of variety there. For example, several European countries operate a healthcare system run by so-called sickness funds; sickness funds are generally public, non-profit organizations that administrate health insurance. Contributions are generally regulated strictly by law, so they have relatively predictable and stable finances. They are also required to provide a standardized health plan. They may, through cooperation with private corporations, sometimes sell addon plans for non-essential extras.
For a concrete example, consider the German sickness funds (gesetzliche Krankenkassen) are so-called “corporations of public law” (Körperschaften des öffentlichen Rechts). Unlike regular businesses, corporations of public law cannot go bankrupt; insolvency simply is not a legal possibility. Also unlike businesses, the sickness funds have administrative boards that are elected by members in so-called social elections (the administrative board then appoints an executive board to actually run day-to-day business). They are still subject to government oversight (“Rechtsaufsicht”), of course.
As an example of something that is far more removed from the government, there is the so-called Stiftung, a variant on the concept of a foundation. A Stiftung is a non-profit organization. It does not have owners: its purpose and organization is defined by its statutes and nothing else. The government (which is generally a state, not the federal government) is involved only insofar as it checks that the statutes for validity, whether they contribute to the common good, and whether initial funding is sufficient. After that, a Stiftung is essentially an autonomous entity and typically designed to exist indefinitely (indefinitely is to be taken literally — plenty of Stiftungen have existed for centuries, such as the Fuggerei in Augsburg). A Stiftung can be huge and influential. The Robert Bosch Stiftung has 92% ownership of the Robert Bosch GmbH, meaning that practically all of the shareholder profits of the company go towards humanitarian causes.
Another example is the German branch of Caritas (Deutscher Caritasverband). It is confusingly also classified as a corporation of public law, even though as a church-sponsored organization it is not subject to government oversight (it is not directly controlled by the Catholic church hierarchy, either, but through a delegate assembly). With a little over half a million employees, it also happens to be the single biggest private employer in Germany. The corresponding protestant organization, the Diakonische Werk, has about 450,000 employees and is organized as a general non-profit organization. They provide a large variety of social services at cost or for free (in some areas, there are limits to how cheaply they can offer services so as not to drive free market providers out of business and create holes in coverage).
“Competition” among states is like “free trade” or “market-based” setting of executive salaries. The ostensible market is riddled with information asymmetries, agency problems and lags that render ostensible equilibrium solutions a bunch of garbage. Pretty much the only thing you can guarantee is perverse incentives.
Note: as has been pointed out by Daniel Davies, an economy where one person owns *everything* is pareto-optimal.
Question - in what way is Mankiw anything other than a hack? As pointed out in the comments above, his logic is either bad or dishonest. And that’s not exceptional for him; I was reading his blog up until he turned the comments off. He did that because he lost too many arguments.
He’s on my “don’t bother reading” list. Saves a LOT of time.
“Greg Mankiw [is]a terrific writer and economist”
Maybe you misphrased something. One could easily read this as by “terrific writer and economist” you meant “terrific economist” and by “terrific” you meant ‘good’, not ‘terrifying’. And then again, one could think that by ‘economist’ you meant ‘practitioner of an intellectually honest scientific discipline’ instead of ‘person striving for personal gain by saying whatever people want to hear about money’.
I’m just saying, a casual reader might think you were calling Mankiw intellectually honest and rigorous. I’m sure you probably meant he was terrifying in his ability to constantly support whatever facet of economic theory would result in more money for rich people (and more harm for the poor), but you might want to be more clear.