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by Logan Zoellner
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I suspect there are a fair number of people on this site who self-identify as libertarian or neo-liberal.

 

This question is more for neo-liberals--those who believe "the market should do what markets are good at, governments should do what markets are bad at"-- but I would appreciate a libertarian perspective as well.

I have a basic intuition that goes like the following:

If the government is going to mandate something, it should also pay for it.

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For example, rather than mandating a minimum wage, it would be preferable if the government were to provide a minimum income--and pay for it using government funds.  This provides the benefit of guaranteeing people a certain level of income, but avoids the drawback of tying people to certain jobs and mandating that those whose skills are worth less than the minimum wage remain unemployed.

 

Applying this same logic to health care, it seems one would conclude that "Medicare for all" is superior to a Public Option or requiring that employers pay for their employees health care.

 

The intuition is this:  if the government has already identified a minimum level of health care, there is no additional benefit to privatizing the task of buying that health care.  If coverage for a certain treatment is mandatory, then it becomes an inelastic good--demand no longer depends on price--therefore the only thing that matters is negotiating power.  By negotiating "on behalf of us" the government has the most negotiating power possible and hence should be able to get the best prices.

 

This heuristic has the additional benefit of forcing the government to internalize the costs associated with its policy.  No longer can the government create unfunded mandates only to discover they have a devastating ripple effect across the rest of the economy.

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So my question is: does this heuristic seem correct?  What are some obvious drawbacks or counter-examples?  What are some unintuitive cases where this heuristic could be applied--perhaps with foreseeable good or bad results?  How would this be codified into law?

One interesting case is, how would this heuristic apply in the case of "negative mandates"?  For example "emitting carbon dioxide is forbidden" is a foreseeable government mandate, but the best policy is generally agreed to be a carbon-tax.  Perhaps this simply means that the proceeds of the carbon-tax should be refunded on a per-captia basis rather than used to fund other programs?

For the purpose of this question, assume that all government revenue comes from a VAT with a UBI prebate that is set at a level to ensure government deficits are zero "over the course of the business cycle".  Adding additional spending will require raising the VAT or lowering the prebate.  Set the prebate according to your own political preferences: 

  • 0 = libertarian
  • minimum wage=neo-liberal
  • living wage=liberal
  • level which maximizes income for the poorest=leftest

 

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PS.  Is there a shorter word for "level which maximizes income for the poorest"?

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Libertarianism, Neoliberalism and Medicare for All?
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AnthonyC

30

I'm American, and I'm answering based on my understanding of how the US government operates. I'm sure there are differences elsewhere.

I share much of your underlying intuition, and many of the types of policies you outline do in fact get proposed, regularly, by people who actually study policy, and not just from the viewpoints you highlight. 

Then we run straight into Inadequate Equilibria and what gets passed as law, if anything, looks completely different. If we're lucky, we end up with what we hope are crude kludges that nevertheless approximate good policy in practice, and leave the huge flaws for future generations with slightly fewer overwhelmingly important problems to resolve.

That said, "If the government is going to mandate something, it should also pay for it," is not something I fully agree with in all cases. 

First, sometimes a mandate is effectively a way to counteract already-existing externalities without needing constant legal battles that make it too inefficient for civil lawsuits to fix. "Clean up your own mess" is, I think, a reasonable government demand on private actors who are already (though legally) harming others. Any assistance, financial or otherwise, should be temporary, transitional, or a way to level the playing field for domestic versus foreign participants in a market.

Second, the government controls both the supply and demand for money, and without going all Modern Monetary Theory, it's still important to acknowledge that what budgeting means for a sovereign government that buys and sells and taxes in its own currency is different than what it means for anyone else. The question isn't whether the government makes private entities pay, it's which private entities do so, which for a funded mandate would be determined by tax policy in all its complexity, which makes the question mostly invisible to many onlookers.

In that sense, I'm not sure an unfunded mandate is any different than a tax increase on a specific activity with the goal of reducing or offsetting that activity. It's the opposite of a tax deduction or credit, where the government pretends it is not spending money by reducing the taxes on specific sets of individuals or business who meet certain qualifications. It just looks different to most voters and thereby alters what the leaders in power can get away with doing without losing their jobs. 

You list the minimum wage as an unfunded mandate. The implication seems to be that a UBI or targeted cash welfare payments are better policies than minimum wage, and I agree. But what about extending that logic? Aren't "taxes" in general an unfunded mandate, backed only by threat of force? Diehard libertarians are the only ones I've seen bite the bullet of opposing all taxes on that basis.

Suppose tomorrow the US government passes a law that abolishes the federal minimum wage, but imposes a tax on all businesses calculated to be exactly the difference between the wages paid to any employee making less than $7.25/hr and what their wage would be at $7.25/hr. Also, because why not, a tax equal to the value of any federal benefits its employees qualify for. Then without eliminating any federal welfare programs, you've eliminated the need for them, because it makes no difference to companies whether money they pay goes to employees or government, but the former is better for morale and retention. Technically there's no mandate, and any tax increase is completely avoidable and therefore optional. Business would see right through it of course. Voters might be fooled for a while. Also, part of the upshot is fewer opportunities for politicians to look like they're delivering something to their specific constituents, and they may get voted out of office just for changing the labels on things without changing the substance.

I've kinda lost the thread somewhere in all that, but basically: I think your intuitions are good but don't survive contact with the average level of intelligence, sanity, and knowledge in political practice.

[-]Logan Zoellner60

First, sometimes a mandate is effectively a way to counteract already-existing externalities without needing constant legal battles that make it too inefficient for civil lawsuits to fix.

 

How is a mandate better at avoiding "constant legal battles" than e.g. a tax? 

 

In that sense, I'm not sure an unfunded mandate is any different than a tax increase on a specific activity with the goal of reducing or offsetting that activity.

I think this intuition is correct.  I'm just advocating that the government should explicitly acknowledge it is a... (read more)

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2Logan Zoellner
  I do agree there is an important truth here.   A "punitive tax" and a "funded mandate" are exactly identical from a Pareto-optimum point of view.  In one case the costs show up as higher prices, in the other as higher taxes, but the net effect should be the same.  But sometimes I think we should have a funded mandate (Medicare for all) and sometimes we should have a tax (carbon tax).   Why? I think it partly boils down to political expediency.  Most people agree that health-care is good and so it should be subsidized.  Most people think global warming is bad, hence it should be taxed.   I also think we should choose whichever one is simpler. Imagine a counter-factual world where we taxed "non health insurance" and subsidized "negative carbon emitting activities".  Because everyone--presumably--needs the same type of insurance, we are creating addition work in which each individual is required to seek out and buy a product that is ultimately supposed to be identical for everyone.   Conversely, in order to subsidize  negative carbon emissions, the government would be required to determine the carbon footprint of every individual and subsidize individuals whose footprint was lower than this amount.   This would be massively more complex than simply taxing carbon "at the source".  In fact the easiest way to implement such a subsidy would be to implement a carbon tax and then give every individual a "carbon subsidy" that they could use to pay for the tax.  This is precisely what a carbon tax+UBI rebate does anyway.
1AnthonyC
Fair point, both definitely lead to legal battles. I didn't mean to compare it to a tax, I meant to compare it to a subsidy on corrective measures (contra the point on not having unfunded mandates specifically) in the case of negative externalities being the reason for the mandate. I think there is a good argument for a general principle in most cases of not subsidizing bad actors for stopping causing harm. The "legal battles" in meant were the idea of private actors using the courts to recoup their losses, which is something I often hear from libertarians but rarely workes in practice.  I agree that having everything out in the open (n hidden taxes) is almost always better as far as taxes and laws go. When that doesn't happen, I usually assume it's a kludge for getting around a political block that makes no sense from an "optimize the general welfare" perspective. I also don't think any MMTers think taxes should be zero, sorry if I implied anything like that. But "avoiding introducing economic distortions" is, to me, not an obvious goal for a tax policy. I also disagree with your claim that VAT and flat tax achieve or even approach it. A poll tax distorts in favor of the rich, a flat tax or VAT doesn't account for the declining marginal value of money to individuals (regressive in utility if not dollars), a progressive income tax leads to arguments over rates and brackets, a capital gains tax disincentivizes savings and investment, and so on. Yes, but for the same reason I don't see how this is a difference between a minimum wage (unfunded mandate) and a tax equal to the difference between market wage and minimum equal. Believe me, I would much rather have a UBI in place than a minimum wage, if that choice were in front of me.
1Logan Zoellner
A carbon tax refunded in the from of a UBI is economically equivalent to a "low carbon subsidy" in which each citizen is paid for the amount of carbon they consume below the defined threshold.  In one case we are "penalizing bad behavior" in the other we are "subsidizing people for avoiding bad behavior".   I agree that for the sake of optics we should "tax bad things" and "subsidize good ones" but from an economic point of view this is irrelevant.   Given two tax systems which produce the same amount of "income" for the government, we should prefer the one which leads to higher welfare overall.  This is why, for example, raising all of a government's income from tariffs is bad, because it uneconomically disadvantages imports leading to a less efficient economy overall. I was suggesting a flat tax on income or consumption (VAT).  These should be identical over a lifetime.  A poll tax would be bad for obvious reasons. I think that we should solve for "regressiveness" by doing a UBI, not by messing with the tax code. WRT "declining marginal utility of money", I think this is over hyped.  Rich people don't consume dramatically more than those in the middle class.  To the extent that they spend their "excess" income on charity or investment, the marginal utility of those dollars is possibly higher than giving the same money to a already well-off middle class family. I think we agree here
1TAG
Utility to whom? The point is that the utility of an extra dollar to an individualdeclines in relation to how much money that individual has already. It's not aggregate utility, as in utilitarianism. The fact that wealthy people are willing to give their excess money away shows that it doesn't have that much utility to them, in line with the "declining marginal utility of money” ,andthe fact that doing so increaes overall utility shows that money has more utility to the poor, which is the flipside of the declining marginal utility of money -- it has more utility if you have less of it already.
1AnthonyC
  First, there are more than two levels here. UBI would alleviate a lot of suffering for the poor and working class, but realistically the middle class (definitions vary, but Pew defines it as 2/3x to 2x the local median income, so I'll go with that) will have to see no change or a decrease, since creating a UBI doesn't create net income in the economy (and that range includes mean as well as median income, and a UBI would bring those two numbers closer together).  And if you truly believe that wealthy people's charity and investment dollars have, on net, higher marginal utility than the same dollars in someone else's hands, doesn't that make it much harder to argue for a UBI? Whether tax rates are flat (or VAT) or progressive, the level needed to support a UBI will reduce wealthy people's income relative to the poor and working class, but a progressive rate leaves the middle class better off. That means potentially less charity (but also less need for certain forms of charity), and less investment (but more people with the means and resources to become entrepreneurs at less personal risk, less resistance to automation, and greater ability for people to move and change jobs and improve their own lives). After so many points arguing (correctly, I think) about the equivalence of taxation and subsidy, I found it jarring to see support for a UBI but opposition to progressive taxation. That said, I do think progressive taxes can cause lots of unwanted side effects in our current system, where lots of government support programs phase out right around the same income levels, creating ridiculously high effective tax rates that make it uneconomical for some poor people to accept raises or better jobs.  Mostly, though, I worry about flat tax systems because when the wealthy save and invest more, wealth inequality goes up, and when they use that wealth to buy political influence, soon whatever UBI you set up suddenly won't get increased to keep pace with overall economic
2Logan Zoellner
There's a lot to get into here, maybe I will start a separate post about "ideal tax policy".     I think the "ideal" reference case for non-distortionary tax policy is one with zero taxes in which all public services are provided for by a magic genie somehow.
[-]Phil Scadden10

I am unfamiliar with Medicare or in fact the US health system, but an example of "By negotiating 'on behalf of us' the government has the most negotiating power possible and hence should be able to get the best prices." would perhaps be the Pharmac scheme operated here in NZ? Basically, the government assigns $x to Pharmac who negotiate deals with pharma providers. The drugs bought by Pharmac are available to public at considerable subsidy. The losers can still attempt to sell their drug (not excluded from market) but will have to convince the public their... (read more)

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1AnthonyC
It should be very possible, and many countries seem to manage it, but in the US the federal government essentially banned Medicare and Medicaid from negotiating on drug prices.
1Phil Scadden
I dont suppose that would have anything to do with donations from Pharma by any chance? When the TPP free trade agreement was being negotiated, one of the concerns here was that US would insist on Pharmac being demolished

Kevin Lacker

10

If the government is going to mandate something, it should also pay for it.

This isn't really how government mandates work. The government mandates that you wear seat belts in cars, but it doesn't pay for seat belts. The government mandates that all companies going public follow the SEC regulations on reporting, but it doesn't pay for that reporting to happen. The government mandates that restaurants regularly clean up the floor, but it doesn't pay for janitors. The government mandates that you wear clothes in public, but it doesn't buy you clothes. Etc, etc.

So I think your intuition is simple, but it largely does not map to reality.

[-]Logan Zoellner10

Yep.  This definitely not how it's done in the "real world".

In the "seat belts" example, this would involve replacing a law mandating seat-belts what a (presumably high) tax on selling vehicles without seatbelts set to equal the economic/social benefits of seat belts.

I think as a matter of pragmatism, there are cases where an outright ban is more/less reasonable than trying to determine the appropriate tax.  For example, I don't think anyone thinks that the "social  cost" of dumping nuclear waste into a river is something we actually want to contemplate.

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