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Quick Thought on New Hampshire

Tue, 02/09/2016 - 22:36

By James Kwak

From the Times (order of quotations reversed):

Mr. Sanders was the choice, nearly unanimously, among voters who said it was most important to have a candidate who is “honest and trustworthy.”

[Clinton] has gone so far as to promise to rethink and adjust her campaign strategy in hopes of connecting better with Democrats.

Part of the problem is that the Clintons have spent more than twenty years trying to say what their pollsters tell them people want to hear. When people no longer believe in the political class, feel (rightly or wrongly) like the government is controlled by distant socio-economic elites, and want someone “honest and trustworthy,” another round of message calibration is not going to fill the gap. If Clinton emerges from New Hampshire as the champion of the working man, it will be about as convincing as Al Gore’s desperate rebranding as a populist in late 2000.

Why Are We Beating Up on Single Payer?

Fri, 02/05/2016 - 10:01

By James Kwak

Single-payer health care has emerged as the primary symbol of the differences between Bernie Sanders and Hillary Clinton. For his supporters, Sanders’s plan is the centerpiece of his vision of a European-style, social-democratic society in which health care is a right that is fully funded by largely progressive taxes. For Clinton supporters, it is the best example of Sanders’s misguided utopianism—a naive plan that has no chance of passage and that would be less effective than incremental improvements to Obamacare.

The Clinton camp has been ecstatic about a critical analysis of Sanders’s plan by Kenneth Thorpe, a health care expert who has supported single payer in the past. Thorpe argues that the plan is underfunded by more than $1 trillion and, if fully funded, would cause most people to pay more for health care than they do today. Thorpe’s analysis was publicized by Dylan Matthews and highlighted by Paul Krugman as further evidence that all the serious people support Clinton. Clinton herself likes to say, “The numbers just don’t add up.”

I have a few points to make about Thorpe’s analysis and what we should take from it. The first, simplest, and most obvious is this: Even if Sanders’s plan has problems, if the goal is single payer, then Sanders is the only choice. We know a Clinton nomination will bring us no closer to single payer. A Sanders nomination will bring it within the spectrum of future possibilities, even if it won’t be passed in the next two years. (Remember Newt Gingrich’s crazy plan to voucherize Medicare in 1995? Well, now it’s not that far from passage.) A Sanders presidency would make it possible to develop a better, more realistic plan; that’s what advocates of single payer should be hoping for.

OK, now to the specifics. Thorpe’s most important conclusion is that Sanders’s plan will cost an average of $2.5 trillion per year, not $1.4 trillion, and that financing it will require significantly higher taxes. As a result, most Americans would end up paying more for health care (in additional taxes) than they currently do (in premiums they pay, premiums paid by their employers, and deductibles, co-payments, and coinsurance).[1]

But there’s something funny about this conclusion. We’re not talking about smart bombs and cruise missiles that will explode somewhere in the Middle East. We’re talking about health care services being provided to Americans. So if we (in the aggregate) have to pay more in taxes, we’re getting it back in the form of more health care. On its face, that’s not necessarily a bad thing.

As the country that already spends more money per person on health care than any other in the world, however, perhaps increasing spending is not a good idea. So let’s look at why total spending goes up.[2] For the total to go up, the price per unit of health care must go up, the number of units delivered must go up, or both. I’m pretty sure that Thorpe doesn’t think that the price per unit would go up under Sanders’s plan. He projects an overall payment rate of 105% of treatment costs. Medicare currently pays less, so it will pay more; but providers make up for that by overcharging private payers, and Thorpe’s model says those costs will go down by 20%. In addition, Thorpe projects 4.7% savings on administrative costs relative to the private system.

So the problem must be that the number of units is going up. And that is basically what Thorpe says. He assumes a 10% increase in utilization by people who already have insurance because the Sanders plan eliminates cost sharing, plus additional spending on people who are currently uninsured.[3] Again, this might be a good thing: not only is it good to provide coverage to the 11% of people who are still uninsured under Obamacare, but there are also plenty of insured families who are forgoing treatment because of high cost sharing.

But let’s assume for the sake of argument that higher utilization is bad. Then the obvious solution is not to toss out the baby with the bathwater, but to put some cost sharing back in. For example, we could have income-based, sliding-scale cost sharing, where the idea is that deductibles and co-payments should be roughly equally significant at different income levels. (Obamacare includes cost-sharing subsidies for low-income households.) So people on minimum wage face a $5 copayment, and people like me face a $100 copayment. I’m fine with that.

The point is, some of the projected increase in utilization is good, because it means people who currently are being underserved are getting the health care they need. And if we think some higher utilization is bad, we can limit it through smarter cost sharing.

What really matters as far as aggregate, long-term health care costs and outcomes are concerned are two things: the price per unit and the value delivered per service. And on both dimensions, we have every reason to believe that single payer will be more effective than Obamacare (and far more effective than not-Obamacare, which is all the Republicans are offering). Obamacare includes a number of tools to try to increase efficiency among providers and bend the cost curve: the Independent Payment Advisory Board, the incentives for Accountable Care Organizations, experimentation with different payment structures, tying hospital payments to readmissions, bundled payments, and so on. Do you know what all of those have in common? They’re all part of Medicare.

Even with Obamacare, the federal government’s influence over the private insurance market is limited. So in order to steer the health care sector toward more effective procedures and more accountability in payment practices, it works through Medicare and, to a lesser extent, through regulations governing the exchanges and employer-sponsored plans. The problem is that just because Medicare pioneers some value-based reimbursement practice doesn’t mean the private sector has to follow. If we really want to bend the cost curve in an intelligent way—and most Democrats do—then it would be much more straightforward under a single payer system than under Obamacare.

As I’m fond of saying, the government is just a tool that we use to arrange some of our affairs. Whether we buy our health care through private insurers or through a single payer, what matters are the outcomes we get for the money we spend. It’s OK to spend more money if we get truly universal coverage and better outcomes; the elderly get a lot more medical care today than they did before Medicare was created in 1965, and most of us don’t think that’s a bad thing. But if we think that we’re buying too much health care, or we’re getting the wrong kinds of health care, a single payer system is a more effective way of redirecting spending priorities—in a democratic manner—than the unwieldy public-private mash-up we have today. Single payer has its downsides, such as the bureaucracy (not that we don’t have one already). But whether we can afford it is not one of them.

[1] I agree with Thorpe that it makes sense to evaluate the plan on a fully financed basis. Contrast this with Republican tax cut plans, which talk about how much money people in each income quintile will save—but not how much they will lose in government transfers and services if the tax cut is fully financed by spending cuts.

[2] Technically speaking, it’s possible that total spending will not go up. As far as I can tell, Thorpe’s tables only say that most people will see an increase in total costs, assuming full financing. So maybe a minority of people will see their costs decline so much that they will balance out everyone else. That would be a good thing, both because total spending would go down and because risk-sharing would increase (basically, this would be a transfer from the healthy to the expensively sick).

[3] I still don’t quite see how total spending goes up with these assumptions. Spending on people who currently have private insurance—most of the population—clearly goes down by about 15%. (“We take private insurance and out of pocket spending … and make several adjustments to develop a single payer funding estimate. First we increase it by 10 percent to reflect the increased total health care spending that results from a reduction in out of pocket payments. Second we adjust downward by 20% to reflect the lower blended payment and finally we reduced the total by 4.7 percent to reflect potential administrative costs savings.”) Spending on the uninsured and Medicaid and Medicare beneficiaries goes up. Thorpe’s report doesn’t specifically compare spending under the Sanders plan to spending currently; the table only compare the number of households that would pay more or less under the (fully financed) Sanders plan than they do today. Matthews’s article compares Thorpe’s estimates to those of the Sanders team,[4] but also does not compare his estimates to current aggregate spending levels. But again, if total spending does not go up, then there’s no problem to begin with (see previous footnote).

[4] One quibble: Thorpe notes that Sanders assumes that the states continue spending the amount that they are currently spending on Medicaid, even though there is now way the federal government can compel them to. But if we’re going to cross out the revenue provided by state contributions, then we also have to cross out the state taxes that raise that revenue, so in aggregate its a wash (and those state taxes are often pretty regressive).

Donald Trump Is Running as a Conservative Republican

Wed, 02/03/2016 - 10:23

This guest post was written by Lawrence Glickman, Professor of History at Cornell University (and a friend from long ago when we were both graduate students at Berkeley).

As the summer of Trump turned into a phenomenon for all seasons, the Donald’s typical stump speech has grown into a bloated piece of performance art, lasting about one hour. A lot of that time is filled with bluster about how well he is doing in the polls, about how The Art of the Deal is his favorite, I mean second favorite book, after the Bible. And usually there are several more comments along the lines of, “by the way did I mention I’m doing well on the polls.”

In his speech in Des Moines on February 1, the evening of the Iowa caucus, Trump had to radically distill his campaign pitch into a two minute appeal. Presumably the pithiness forced him to highlight the most important parts of his campaign message. So what did he say? What can his candidacy be boiled down to? It turns out that for all the talk about Trump’s “populism” and his embrace of unorthodox positions, he offered talking points would have been familiar at a Rubio, Cruz, or for that matter, Jeb! rally.

Trump began by saying that “Obamacare is going to be repealed and replaced.” Then, he observed about the government that “everything that we’re doing has been wrong.” After condemning our unsustainable debt (“we owe 19 trillion dollars”) he discussed misplaced and wasteful priorities: “the budget that we just approved…funds everything that all of us in this room don’t want to see it fund.” He complained about the Iran deal and discussed the need to “build a wall” along the Mexican border.

Other than Trump’s signature claim that “Mexico is going to pay for the wall,” there was nothing outside the Republican mainstream in his litany. Compared to the other Republican candidates, who regularly spout apocalyptic rhetoric about ISIS or about dangerous trends in government overreach, his view that “we’re in trouble” seems completely in tune with the GOP chorus. Trump, being Trump, did toot his own horn, although, he assured the audience, not in a “braggadocious way” by talking about his “great, great company.” But that was only to highlight his credentials to run the country “the way it’s supposed to be run,” presumably in a business-like manner.

I recite the main points of Trump’s brief remarks to highlight the fact that on the issues he is running a remarkably mainstream campaign by the standards of the contemporary GOP. Trump is not much of a conservative apostate. To the extent that his campaign may have been weakened by his disappointing showing in Iowa, it is not because he has rejected the basic positions of the Republican Party. Indeed, his speech in Des Moines, not unlike most of his other stump speeches, was almost a comically generic species of conservative boilerplate: Condemn Obamacare; check. Denounce the dangerous direction of liberal government; yep. Caution about the dangers of the debt and the waste and misplaced priorities of the wasteful bureaucrats; done.

Let us stipulate that in his heart of hearts Trump himself may not be a true conservative. It is true that in the past (mostly pre-2000, when he was considering a Reform Party run) Trump expressed liberal positions on abortion rights, health insurance, and taxing the wealthy. The important fact is that this time around he has campaigned as a conservative, at least as the term is understood today. His deviations from party orthodoxy have been largely in the areas of tone and style rather than policy. Yes, he has demonstrated a willingness to push extreme positions to their ultimate limit (“I’ll see your anti-amnesty view and raise you by promoting the expulsion of eleven million undocumented people living in this country.”) But even this extremism has been utterly mainstreamed and embraced by the GOP’s relative moderates. Remember Mitt Romney’s call to “double Guantanamo” back in 2012, or his speech to the NRA in which he condemned the Obama administration’s “assault on our freedoms – our economic freedom, our religious freedom, and our personal freedom”? Trump may be the most effective purveyor of the stridently tough tone, but pretty much all of his fellow candidates aim for the same persona.

One of the fundamental ideas at the heart of modern conservative rhetoric has been the delegitimization of both government as an institution and those elected officials and “bureaucrats” entrusted with governing. This is what Trump did in Des Moines and what he has been doing since the summer. Trump describes the US as a failed state, but so does every other Republican candidate, who also share his views that government is incompetent (Obamacare), that its leaders are derelict (Iran deal), and that they are spendthrifts who prioritize the wrong things (a budget that fund things that “all of us in the room don’t want to see it fund.”). Many commentators have assumed that his views on government are substantially different from the other Republican candidates for the presidency. But there is very little evidence to support this view; all of the other GOP candidates have offered variations on the themes of decline and incompetent government. To the extent that Trump proposes statist positions that are unconventional for the contemporary Republican party, he does so by offering a strongman, “l’état c’est moi” justification. He has not articulated a vision of government spending for the public good, but rather a more personal, maybe even braggadocious, notion that he will get things done because he uniquely good at making “deals” and managing businesses. This is why he talks about “running” the country rather than governing it. But again this does not distinguish him from a movement that has valorized tough guys who get things done.

Another sustaining idea of the modern Republican Party is tax cuts for the wealthy. Trump’s tax plan, despite his claims to the contrary (“It would cost me a fortune”) is conventional red-meat conservatism: according to the Tax Policy Center, it would “benefit the wealthiest Americans while saddling the economy with trillions of dollars in new debts.” In recommending the elimination of the estate tax, Trump even uses the term “death tax,” the favored phrase of the Norquist wing of the party.

On the minimum wage, which he does not want to raise, he has staked out a position to the right of many Republicans. In the October Republican presidential debate, Neil Cavuto, the moderator, noting the protests of the “Fight for $15” movement to roughly double the federal minimum wage from its current level of $7.25, asked the candidates whether they “were sympathetic to the protestors’ cause since a $15 wage works out to about $31,000 a year?” Trump was blunt in response. “I can’t be” sympathetic, he claimed. The problem. Trump noted, is that with “taxes too high, wages too high, we’re not going to be able to compete against the world.” Although Trump said, “I hate to say it,’ the answer to the problem of low wages was that “people have to go out, they have to work really hard and have to get into the upper stratum.” Trump rejected the use of the helping hand of government as a means of promoting upward mobility. But it should be noted that Trump’s callousness toward the plight of working people is also consistent with a political party that views everyone as a budding entrepreneur and that rewards only “job creators.” As was demonstrated by Eric Cantor’s, the former House Majority leader, classic tweet on Labor Day in 2012—“Today, we celebrate those who have taken a risk, worked hard, built a business and earned their own success”—the party has trouble recognizing that workers might be a unique category in the American economy, whose needs are not coincident with venture capitalists.

An examination of Trump’s campaign website supports this interpretation of Trump’s candidacy as fundamentally conventional. Only five positions are laid out and three of them align with conventional contemporary conservatism: “Second Amendment Rights,” “Immigration Reform,” (although he does go farther than his rivals, with his calls for deportation), and “Tax Reform” (meaning, as we have seen, hugely regressive tax cuts). The other two positions (“U.S.-China Trade Reform” and “Veterans Administration Reforms”) arguably differ in emphasis from the mainstream Republican Party view. But both reflect his contention that terrible leadership is harming the country and about the incompetence of government officials, positions both entirely in keeping with Republican rhetoric. Although many commentators note Trump’s unorthodox support for Social Security and promotion of infrastructure spending, his website says nothing about either. To be sure, Trump has highlighted the benefits of infrastructure spending in Crippled America, his campaign book, and he mentions this often in speeches. But he has personalized these issues, as he has health care, which he promises will be provided, although he has released no plan. The impression he gives is that government might do some good things under a Trump administration but only in virtue of Trump, not because government has a unique role to play in binding our political culture and economy. Rather than offering an anti-conservative vision, these uses of government seem to rely on the kind of “magic asterisks” that have allowed tax-cutting Republicans, like Paul Ryan, to claim that they support popular spending programs. And in Trump’s case it is not great programs that he endorses but his singular ability to make good on them.

Commentators have settled on “populist” as the best label to describe Trump. And there is some justification for placing him in that tradition, especially because of his racial and economic nationalism, his willingness to bash leaders not just in government but in the world of business, his expressions of righteous anger, and his diagnosis of corruption and malfeasance (not to mention “stupidity”) on the part of elites. But traditionally populists have offered a vision of government that would serve, rather than undermine the (white) working class. Trump does not emphasize a positive state as a countervailing force to corporate power. Nor does he suggest that the nation can be resurrected by new programs, a new tax code or by better laws. Instead, his is a charismatic populism in which the nation can be saved by him and only him. But this personal politics does not challenge the antistatism embedded in contemporary conservatism.

If the egotism of his vison makes him an outlier, his statements about politics, policy, and governing are utterly mainstream.  With all the ink spilled in the reporting about Trump, the fundamental unoriginality of his positions has been underemphasized. Trump is surely a unique candidate but this is a uniqueness born of his embrace of celebrity culture, not because of his disclaiming of fundamental conservative positions. This may be the most disquieting thing of all about his campaign. For if Trump is running a campaign very much in the modern conservative grain, then the candidates, like Marco Rubio, being described as “mainstream” or “establishment” are, in fact, his near ideological twins.

The Future of the Democratic Party

Tue, 01/26/2016 - 06:30

What liberals can learn from conservatives

The future of the Democratic Party is the theme of the lead article in yesterday’s New York Times. The story more or less writes itself: you have Hillary Clinton, the face of the moderate Democratic establishment (and the spouse of the man who created it), versus Bernie Sanders, a socialist, in a battle most people thought she would have wrapped up months ago.

A lot of liberals like me spend our time wondering what the conservatives have done right—and why we can’t do it ourselves. The financial crisis and Great Recession should have debunked the ideology of deregulation, reinforced growing feelings of economic insecurity, and made people recognize the importance of the social safety net. Instead, we got the Tea Party and the most conservative Congress in living memory.

Seen in the broader sweep of history, conservatives have been relentlessly pushing the nation’s political agenda to the right on most issues (gay rights being almost the only exception), even as public opinion on most social and economic issues remains largely unchanged. Marco Rubio—just four years ago a darling of the Tea Party—is now the last hope of the Republican “moderate” establishment: what other proof is needed of the success of conservative ideology? Sure, extremism makes it hard for Republicans to win presidential elections. But although Democrats have won four and a half out of the past six contests, the result has been lower taxes on the wealthy, smaller government, no progress on climate change or gun control, and a solidly conservative federal judiciary.

So why can’t we do the same?

As liberals go, I spend a lot of time reading about conservatives, and particularly about the history of the modern American conservative movement. It was an important theme of 13 Bankers and a bigger theme ofWhite House Burning, and it will be an even more central theme of my next book (but that’s getting ahead of myself). There were many ingredients to the conservative ascendancy, including the wealth of conservative family foundations, the politicization of the business community, and the proliferation of right-wing think tanks. But one of the most important factors was the refusal to compromise.

Intransigence has been a core principle of the far right since the dark days of the 1950s, when activists seriously debated whether President Eisenhower was a practicing communist or merely a weakling who was soft on communism. Conservative true believers’ refusal to compromise has cost Republicans plenty of battles, from the futile quest of Barry Goldwater in 1964 to Ronald Reagan’s challenge to Gerald Ford in 1976 to the right wing’s abandonment of George H. W. Bush in 1992 (for violating the “read my lips” pledge.) But in the long run, it has enabled conservatives to take over the Republican Party, both houses of Congress, the Supreme Court, and many state governments, and has given them a plausible shot at putting Ted Cruz in the White House. And they have accomplished all this while continuing to hold positions that many of us in the reality-based community think are simply absurd (anthropogenic climate change is a fraud perpetrated by the scientific community, human beings do not evolve, and Barack Obama is a Muslim born in Indonesia).

You can see where this is going. Liberals have been compromising every four years. From Dukakis to Clinton to Gore to Kerry to Obama, the left has faithfully rallied behind the moderate with the best chance of keeping the White House out of Republican hands, because of the unspeakable evil that would result otherwise. And we have gotten pretty much what we paid for. It was an Obama administration with large majorities in both houses of Congress that did nothing about campaign finance, refused to consider a single payer health care system, and saved the Bush tax cuts for the wealthy in 2010.

In part, liberals’ willingness to fall in line is an acknowledgment of our overall weakness. With state legislatures and Congress drifting out of reach today, the struggle to hang onto the Oval Office has taken on increasingly desperate tones. In part, it reflects a lack of alternatives: Bill Bradley, John Edwards, and Hillary Clinton—to take the last three runners-up—are not exactly the second coming of Ted Kennedy, let alone Robert Kennedy.

Whatever the reason, the thing liberals have not done—and that conservatives did—is stand on principle and vote for the ideas that we believe in.

That’s the choice we face between Bernie Sanders and Hillary Clinton, more clearly than in any nominating contest in the past thirty years.

Yes, Clinton is far more electable than Sanders—even if Sanders can attract new voters to the polls, and even though anti-Clinton sentiment is probably worth at least 40% of the electorate to whoever the Republican nominee is. Sanders is a socialist, remember, and not terribly charismatic except to people who already share his ideals.

But could Sanders be our Goldwater?

Barry Goldwater’s crushing loss in 1964 led, via Lyndon Johnson’s victory and the overreaching of the Great Society, to the collapse of both the liberal agenda and the New Deal consensus. Reading historical accounts of American conservatism, it is also clear that the Goldwater campaign was a significant milestone in the unification of the movement and a formative event for many of its future leaders—most notably Ronald Reagan, who became a national figure with his “Time for Choosing” speech and soon won the California governor’s office. The Goldwater campaign demonstrated that conservatism could be a national movement with a coherent, ideologically driven platform, which only needed to attract additional supporters. It made conservatives a distinct political force that had to be reckoned with—grudgingly accepting Richard Nixon in 1968, revolting against Gerald Ford in 1976, and finally gaining control of the national party with Ronald Reagan in 1980.

A Bernie Sanders victory over Hillary Clinton increases the risk of a Republican victory in November. But it could also be a crucial step in the development of a real liberal movement—one that can consistently fight for progressive values, shift the center of gravity of political debate, and one day reverse decades of gains by conservatives. A Sanders campaign could reshape liberalism from a motley collection of well-meaning sentiments—help working people, slow down climate change, reduce gun violence, increase access to health care, and so on—into a battle-ready ideology focused on the theme of leveling the economic and political playing fields. It could make the “Elizabeth Warren wing of the Democratic Party” a real political bloc rather than a figment of our imaginations.

Unfortunately, a Sanders campaign could also lead to a Republican victory with no silver lining. A loss in November could discredit liberalism and push Democrats back into the moderate-Republican arms of the Clintons and their allies. (In November 1964, most observers thought that Goldwater’s defeat signaled the bankruptcy of the conservative movement.) Liberals lack most of the artillery necessary to fight conservatives today: funders willing to invest hundreds of millions of dollars for the long term; dozens of think tanks to incubate zealots and encourage zealotry during long years out of power; mass media organizations willing to attack the opposition without scruples or fact-checking; and activist organizations building a generation of leaders through elections to school boards and state legislatures. Without that infrastructure, a Sanders nomination could simply evaporate into the history books like the Occupy Wall Street movement.

If liberals want to emulate the success of conservatives, we need more than Bernie Sanders. Barry Goldwater’s nomination in 1964 was not the cause of Ronald Reagan’s victory in 1980; it was an effect of a historical trend that was already taking shape.

At the same time, however, the conservatives’ refusal to compromise their principles was a crucial element of their long-term success. Instead of compromising with the moderate Republican establishment on abortion, or evolution, or supply-side economics, instead of backing off of quixotic quests like illegal proxy wars in Central America or the impeachment of President Clinton, they stuck to their guns, recruited their foot soldiers, fired up their base, and waited. Eventually, the GOP came to them.

If liberals want to take over the Democratic Party, at some point we have to stop voting for Clintons and hoping for the best. We know where a Clinton nomination will lead: a decent chance of victory in November, four years of triangulation with Paul Ryan, and one or two Supreme Court seats—leaving us in more or less the same situation we’re in today. It will not fill the ideological gap that allows conservatives to reshape American politics despite losing the presidency over and over. At some point, aiming for the middle of a target that is slowly being tugged to the right becomes a losing strategy.

Voting for Hillary Clinton is doing the same thing one more time and hoping for a different outcome. Voting for Bernie Sanders is a way to show that liberals will stand up for their principles—while increasing the chances that the other side will control the White House for four years. That’s the choice we face. Conservatives in our position would go with principles. What will we do?

Also posted on Medium.

Mark Zuckerberg’s $45 Billion Loophole

Thu, 12/03/2015 - 17:47

Much of the Internet is giddy over Mark Zuckerberg and Priscilla Chan’s “pledge” to give “99%” of their Facebook stock to “charity.” Bill and Melinda Gates said, “The example you’re setting today is an inspiration to us and the world.” Unfortunately, it’s not a very good example.

Since the last gilded age, the super-rich have generally given to charitable organizations or to their own charitable foundations. That’s why we have the University of Chicago, Carnegie Hall, and the Getty Center, to name a few. Today’s new class of gazillionaires has largely followed in their footsteps: Gates created the Bill and Melinda Gates Foundation, Stephen Schwarzman gave $150 million to Yale, John Paulson gave $100 million to Central Park, and so on.

Well, Mark Zuckerberg has found a different way.

Instead, he’s creating an LLC that he owns (the Chan Zuckerberg Initiative), giving his stock to the LLC, and telling us all that the LLC will do wonderful things for the world.

Quick primer: A limited liability company is just a type of business organization, like a partnership or a corporation. It has owners, who control it, either directly or through managers whom they appoint. It can do anything that any other profit-seeking business can do. It doesn’t pay taxes; instead, its profits, losses, or deductions simply get transferred to its owners’ tax returns. Its primary advantage is that it is extremely flexible: you can design an LLC more or less any way you want.

So let’s say Zuckerberg and Chan give 99% of their stock to their LLC. What does that really mean?

First off, “give” is the wrong word to use in this context. That implies that the money is irrevocably going from them to something else.

In this case, they are investing in their own company. Because it’s an LLC, they still have complete control of the money.

That means they can, among other things:

  • Write checks from the LLC to themselves as its owners, pay themselves salaries for running the LLC, borrow money from the LLC, borrow money personally using LLC shares as collateral, sell some of their shares in the LLC to other people, or take cash right back out in many other ways.
  • Use the LLC to buy houses they live in, offices that they work in, etc..
  • Invest in profit-making companies.
  • Contribute to political campaigns or super PACs, engage in direct political activity, or lobby legislators.
  • Pay for his own political campaigns, if he so chooses.
  • Give money to charitable foundations or operating 501(c)(3) nonprofit organizations.

Essentially, Zuckerberg can do everything with the LLC’s money that he can do with his own money. So on the most substantive level, he hasn’t done anything except announce some vague intentions. The “99%” claim made a lot of headlines, but there’s a lot less there than meets the eye. A lot of things that other billionaires do with their own money—like invest in other companies—Zuckerberg can now do with the LLC’s money. The only thing he seems to be saying is that he and his family will restrict their personal consumption to 1% of his fortune (about $450 million), but even that is not entirely clear. He certainly retains the ability to take money back out whenever he wants, and the LLC will almost certainly do some things that really are personal consumption (like political contributions). In addition, whenever the LLC makes a contribution to a real charity, the associated tax deduction will flow back up to Zuckerberg and Chan. So to the extent that they have to sell stock to pay for their consumption, they will never pay tax on those sales. (Put another way, their remaining $450 million, as well as any money they make in the future, is now all after-tax money.)

Is this really so bad, though? I mean, he says he will use the LLC to make the world a better place.

But compare what he’s doing to what past tycoons, up to and including Bill Gates and Warren Buffett, have done. They donated directly to charitable organizations or to charitable foundations. There are a lot of criticisms you can make of the current “charity” system that exists because of the tax deduction for contributions: a lot of recipient organizations do little good for society, some do harm (like the NRA’s 501(c)(3)), and the tax deduction directs money from productive investments to mega-rich institutions like Harvard University. But Gates and his predecessors at least agreed to play by certain rules: not to take the money back if they changed their minds, not to use it to further increase their wealth, not to use it influence the political system (although that rule has some loopholes), and so on. The idea was that if you became a multi-billionaire, you would relinquish some of your control over a large chunk of your wealth and irrevocably dedicate it to attempting to improve society, according to rules that society has agreed on. That’s what the Giving Pledge was all about.

Mark Zuckerberg doesn’t want to play by the rules. He thinks he can do a better job. Maybe he can, although I don’t have any reason to believe that’s true. This is the next step in the privatization of philanthropy. No more Giving Pledge. Instead, we’ll have the Keeping Pledge:

I pledge to keep all of my wealth and use a lot of it to make the world better place, as long as I get to define “a lot” and “better.”

Mark Zuckerberg isn’t the first person to make the Keeping Pledge. The Koch brothers already did: they’ve given away lots of money to charity, but they’re keeping even more to spend on politics, because they believe that that’s the most effective way to make the world a better place (as they see it).

Zuckerberg’s LLC’s investments may end up having as much positive impact on the world as the Gates Foundation’s (although I’m not sure how high a bar that is to begin with). Most likely we’ll never be able to evaluate it in any kind of definitive way. But it is certain to have a different impact in the short term. Other super-rich people will feel no pressure to sign onto the Giving Pledge or donate their money to the traditional charity system. Instead, they will create their own LLCs, maintain complete control over their money, and spend it on their own pet projects and political issues. That’s not a good thing.

Also posted on Medium.

Request from Two JMU Professors for Help with a Research Project

Tue, 11/17/2015 - 11:36

By James Kwak 

I received the following this morning and thought it was interesting.

We are writing to ask your help in bringing some empirical measurement to the long-standing question: On matters of economic policy, do liberals understand conservatives better than conservatives understand liberals, or is the reverse true?  In response to Krugman’s claim that liberals have the edge in understanding rival views (http://fivebooks.com/interviews/paul-krugman-on-inspiration-liberal-economist), Caplan disagreed and suggested a type of ideological Turing test to measure the ability of individuals to “state opposing views as clearly and persuasively as their proponents” (http://econlog.econlib.org/archives/2011/06/the_ideological.html).  Specifically, could it be determined whether one is conservative or liberal through an online question-and-answer exchange?

Although we are unable to conduct the ideal test, we have developed a multiple-choice version of this Turing-like economic policy test. At http://econturingtest.com, we have posted a ten-question economic policy test. Respondents will take the test and then anonymously report some information about themselves. With the statistical results, we hope we can shed some light on this research question.

We have received approval from our Institutional Review Board (approval No. 16-016) to offer this online survey. Now all we need is traffic to the website, and that’s why we’re appealing to you now. We are asking the top 30 economics blogs in 2012 and 2013 according to the Onalytica rankings to post a note for us. When our study is complete, we will be providing results to all who ask and seeking appropriate publication outlets.

Thanks in advance for any help you may be able to offer. If you have questions, please let us know.

William Wood and Angela Smith
James Madison University-Economics

Voice: 540 568-3243
http://cob.jmu.edu/woodwc My thoughts after taking it are after the break …

I thought some of the questions were poorly written, most often because multiple possible answers said almost the same thing. But I believe in the methodology they are using that doesn’t matter, because they are trying to see how well side A’s perception of side B’s beliefs matches side B’s actual beliefs. That said, they would have to make sure that the “conservative” and “liberal” questions are equally vague, which is probably not the case—or find some way to correct for that bias. Also, if the study works the way I think it does, I’m not sure it addresses Krugman’s claim. Krugman’s claim was about how well one side understand’s the other’s position. By that I think he means its underlying economic logic. The study is about people’s motivations, which are something else. A given economic argument could map to more than one motivation. So I’m not actually optimistic that this will teach us anything, but who knows.

Talking About Inequality …

Thu, 11/12/2015 - 13:57

By James Kwak

How about this?

In Georgia, you can get a life sentence for a second or succeeding drug offense.

Right now, there are 375 people serving those life sentences. 369 of them—more than 98%—are African-American.

There’s no population base rate that can explain that discrepancy. One justice on the Georgia Supreme Court found that an African-American with two or more drug priors is 28 times as likely to get a life sentence than a white person with the same record.

Or this?

On Monday last week, the United States Supreme Court heard oral arguments in Foster v. Chatman. In that case—a death penalty case—the prosecution struck every black member of the jury pool. The law says that you can’t strike a potential juror because of race, so the prosecution came up with facially race-neutral reasons for all of their strikes. Their notes, however, showed that they highlighted the names of the black jurors, marked them with a “B,” identified one of them as the best “if it comes down to having to pick one of the black jurors,” and put the five black jurors at the top of their list of definite strikes—ahead of a white person who said she opposed the death penalty on principle. The all-white jury sentenced the African-American defendant to death. Even after the evidence came to light, the Georgia Supreme Court refused to overturn the verdict.

My favorite professor, Steve Bright, argued the case last week. Some of you may have heard him on NPR.

Or this?

Adel Edwards pled guilty to burning leaves in his yard without a permit. He couldn’t pay the $500 fine, so he was sentenced to a year of probation. His probation was “supervised” by a private company—that piled its own fees on top of the original fine. A year later, he owed more than $1,000, mainly to the probation company, and he was sent to jail immediately.

If you want to do something about injustice and inequality, please consider making a donation to the Southern Center for Human Rights—today. The Southern Center, based in Atlanta, is one of the best organizations fighting inequality in the justice system by challenging unsafe prison conditions, the criminalization of poverty, unequal access to justice for poor people, abusive practices by for-profit companies, and the racially biased imposition of the death penalty. I am a board member of the Southern Center and its attorneys and staff are the some of the most talented, hard-working, dedicated, and selfless people I know.

The reason to give now is that today is Georgia Gives Day, and one of our foundation supporters will match any gifts from new donors and any increased gifts from existing donors. So if this is an issue you care about,now is the time to do something.

Thanks for listening.

Also posted on Medium.

60% of Ted Cruz‘s Tax Cut Goes to the Top 1%

Wed, 11/04/2015 - 15:09

By James Kwak

I haven’t been commenting on Republican tax plans this season because, well, it takes a lot to impress me when it comes to absurd tax cut proposals. Ted Cruz has done it.

The major components of Cruz’s plan amount to this:

  • A flat 10% tax on individual income (labor and investments)—down from top rates today of 43.4% on labor and 23.8% on capital gains and dividends
  • No payroll taxes (15.3% for most people today), corporate income tax (average rate about 13% today), or estate tax
  • A 19% value-added tax (16% of gross business receipts, including the tax)

There are two big things that are crazy about this plan.

The first is that it eliminates an enormous amount of tax revenue: $3.6 trillion over ten years, according to the right-wing Tax Foundation’s “static” analysis—that is, before the growth fairy waves her magic wand. To put that in context, that’s more than we plan to spend on the military over the next ten years.

The second is the astonishingly naked handout to the very rich:

60% of the tax cut goes to the top 1%.

That leaves only 40% for everyone else.

This number is so embarrassing that you won’t find it in the Tax Foundation’s analysis. Unlike the Tax Policy Center, which typically shows how the dollar impact of a tax proposal is distributed across the population, the Tax Foundation only provided the percentage impact of Cruz’s plan on the after-tax income of each income group. What they tell us is that the tax cut will increase after-tax income by 1.2% to 1.5% for households between the 40th and 60th percentiles; by 29.6% for households above the 99th percentile; and by 9.2% for all households on average. But with a little arithmetic we can figure out the missing number.

Thanks to the World Top Incomes Database, we know that the top 1% receive about 21% of all income, including capital gains. The average total federal tax rate today is 19.8%; the average rate for the top 1% is about 30%, and the average rate for everyone else is about 17%. So for every $100 of pre-tax income, the 1% get $21 and the 99% get $79; after taxes, the 1% get $15 and the 99% get $65, for a total of $80. Since after-tax income goes up by 9.2% on average, total after-tax income goes up by about $7.40 in Ted Cruz’s world. But for the 1%, after-tax income goes up by about $4.40—just under 60% of the total.

Why this is should be obvious. A value-added tax is a tax on consumption. So if you’re in the middle class and need all your income for living expenses, you pay a 10% tax rate on money as you earn it (after the standard deduction and personal exemptions) and another 16% on money as you spend it.

The claim that a family of four pays no tax on its first $36,000 of income is basically a lie, since they will pay 16% when they spend the money.

If you’re a gazillionaire and can’t possibly spend all your money (real estate counts as investment, not consumption), you only pay 10% once—and you can defer most of your income by not taking capital gains. This makes Cruz’s tax system “flat” in name only; it’s actually highly regressive. This is also why any serious advocate of a value-added tax, and there are many, favors some provision for restoring progressivity.

What about the loophole fairy? Cruz, like most tax reformers, claims that he will eliminate those loopholes that big corporations and rich people benefit from. The problem is that he keeps all the big, distortion-creating loopholes: the deduction for charitable donations, the mortgage interest deduction, the exclusion for pension contributions, and the exclusion for employer-provided health care. Everything else is small potatoes.

Finally, what about that growth fairy? According to Cruz, lower tax rates will spur economic growth because of stronger incentives to work and save. It’s Economics 101, after all. But first, there’s less here than meets the eye, even on paper. The true marginal tax rate for most people will be 26%, not 10%; if you don’t save, and most people don’t, a consumption tax is virtually identical to a tax on labor income. Second, the growth fairy just doesn’t exist. Most empirical studies find very small or nonexistent effects of tax rates on labor force participation or on the propensity to save. Third, the Tax Foundation’s rosy economic projections assume that the tax cuts will be “appropriately financed”—which can only mean that government spending will be reduced to completely offset the losses of tax revenues. Yet at the same time, Cruz proposes to guarantee funding for Social Security and Medicare.

This is taking puppies and rainbows to 11.

Of course, none of this should be any surprise. Republican tax proposals became completely divorced from reality long ago. More importantly, the Republican nomination lies in the hands of a handful of donors who are in the 0.001%, so the rational thing for any candidate to do is pander to them as enthusiastically as possible.

The only policies we have that limit the transmission of wealth from generation to generation are the estate tax and taxes on investment income. Eliminating one and slashing the other, as Ted Cruz proposes, is the single biggest step we can take toward becoming an aristocracy of inherited wealth. As a member of the 1%, that would be good for my grandchildren—but it would be bad for the country.

Also posted at Medium.