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May 24, 2009

Economist's View - 4 new articles

Geithner Interview

Geithner Dismisses GOP Socialism Charge as 'Ridiculous', Federal Eye: Treasury Secretary Timothy Geithner admits private investors are worried about investing in new government-backed commercial mortgage securities and dismisses as "ridiculous" a recent Republican National Committee resolution stating that Democratic policies bordered on socialism. ...

Update: Calculated Risk comments on Geithner's remarks:

Although there were many factors in the housing and credit bubble, the two keys were: 1) rapid innovation in the mortgage industry (securitization, automated underwriting, rapidly expanded wholesale lending, etc), and 2) a complete lack of oversight by regulators. ... Geithner failed to mention the rapid changes in lending and the failure of government oversight as the two critical causes of the bubble. Either Geithner misspoke or he still doesn't understand what happened - and that is deeply troubling.

Funding Universal Health Care

Robert Reich says that since other alternatives to fund health care have been closed off, it's time for Obama to consider taxing employer provided health benefits:

The Only Sure Way to Fund Universal Health Care, by Robert Reich: During the presidential campaign,... Obama ... criticized John McCain for proposing to tax all employer-provided health benefits. ... I worried that Obama would come to regret the position he took.

Half a year later, it appears that the President will need to tax employer provided health benefits in order to finance universal health care. Or at least the tax-free benefits now enjoyed by higher-income employees. Many in Congress and in the White House are convinced it's the only good option. ...

The White House is in a revenue bind. The President had intended to raise money for health care by limiting the income tax deductions that wealthy taxpayers can claim. This would have generated ... about half of Obama's proposed "health care reserve fund." But the proposal ran into a buzz saw of opposition from congressional Democrats. ...

With deficit vultures already circling, Obama has to come up with a far more reliable way to fund health care. That's where employee health benefits come in. According to the Congressional Budget Office, taxing all employee health benefits would yield a whopping $246 billion every year. Even limiting the tax to higher-income employees would go a long way to funding universal health care. Employer-provided health insurance is the biggest tax break in the whole federal income tax system.

Tax-free employer-provided health care is also, in effect, the government-backed health insurance system we now have. ... Seventy percent of the 253 million Americans with health insurance receive at least some of it through their employers. ...

But, face it, it's become a crazy system. You're not eligible for these benefits when you and your family are likely to need them most – when you lose your job and your income plummets. And these days, as we're witnessing, no job is safe. The system also distorts the labor market. It prevents lots of people from changing jobs for fear they'll lose their health insurance, or won't get the benefits they do now. And it invites employers to game the system by seeking young, healthy employees who pose low risks of ill health and will therefore keep insurance costs low... The system also encourages employers to try to push married employees onto their spouse's health insurance plan so that the spouse's employer bears the cost.

It's also an upside-down system. The biggest share of the $246 billion goes to upper-income people. ... Few people collecting $12 an hour at fast-food restaurants or big-box retailers see any part of the $246 billion. The higher your pay, the more health coverage you receive, and the bigger chunk of the $246 billion you get. Top executives and their families get gold-plated plans...

The good news is that a program providing universal health care doesn't need the full $246 billion a year... Obama's health care reserve fund needs around $650 billion over ten years. So a sensible and politically feasible alternative is to limit tax-free employer-provided health benefits to workers whose incomes are under, say, $100,000 a year, and subject those with higher incomes to progressively higher taxes on them.

It's still not the position Obama took in the campaign. But, hey, circumstances change.

The administration has signaled that this door is not closed, but it is not their first choice.

links for 2009-05-24

"How to Help the Poor Have More Money?"

Are there reasons to oppose this general approach to emergency aid beyond those noted below?:

How to help the poor have more money? Well, you could give it to them, by Laura Freschi: In 2007, people in the Western Province of Zambia lost their homes, their livestock and their crops when heavier-than-normal flash floods swept through their area. USAID's office of disaster assistance stepped in with $280,000 worth of with seeds and fertilizer, training for farmers, and emergency relief supplies.

Two NGOs working in Zambia, Oxfam GB and Concern Worldwide, tried a different approach: they handed out envelopes stuffed with cash—from $25 to $50 per month per affected family, with no strings attached. An evaluation found that common fears about cash transfers—that the cash infusion will cause inflation in the market, that the money will be squandered, or that men will take control of the money—were unrealized.

What did people buy with the money? The list includes maize, beans, salt, cooking oil, meat, vegetables, clothes and blankets, paraffin, transport, soap and body lotion, and lots of other mundane household items. They also loaned it to friends, used it to pay back debts, purchased health care, education and transport, and rebuilt their homes. Only a very small fraction of the money (less than .5%) was spent on "unproductive" items, like liquor for the men.

Unconditional cash transfer programs can be fast and cost effective. With no technical experts' salaries to pay, and no trans-Atlantic shipping costs for US-produced food aid, more of the cash can go straight to the recipients (in the case of the Concern Worldwide project 27% was spent on program administration, while 73% was distributed in the cash transfers.)

Cash transfers also acknowledge that poor people are capable of making good economic decisions without the help of outside experts armed with needs assessment checklists. An evaluation of another Oxfam cash transfer program, this one in Vietnam (summary here), found that villagers made sophisticated investment decisions, choosing whether to invest in seeds and fertilizer, family coffins and tombs, cows and buffalo, home improvements, debt repayment, and /or community roads.

As Duflo and Banerjee document in their study on the economic lives of the poor, the rich often assume that poor people have few choices about where to spend their money. And this notion allows aid agencies to assume the paternalistic role of decision-maker for the poor. Yet Duflo and Banerjee note that subsistence accounts for a lot less than 100 percent and the "poor do see themselves as having a significant amount of choice."

Cash transfers have plenty of potential drawbacks, as these studies also point out. Handing out large amounts of cash comes with its own set of logistical hurdles and could invite theft or corruption. And what if this approach puts women and children at a disadvantage, while men take and spend the cash? There are improvements to be made, in targeting the right population, and equipping people with better tools (like financial training and savings accounts) to help them make the most of the money. Two studies by Innovations for Poverty Action and the Poverty Action Lab at MIT in Morocco and Indonesia (both ongoing) should shed more light on when and how cash transfers can be most effective. (See also studies collected by the UK-based Overseas Development Institute).

When USAID provides blankets, seeds and fertilizer to flood victims, they are doing their best to decide for the victims what their most urgent needs are. With the cash transfers, the people can decide for themselves how to meet their most urgent needs. This gives people who have lost their livelihoods, belongings or loved ones a new feeling of control over their lives, builds money-management skills, and restores to them their power to make economic decisions. If you were in their shoes, which would you prefer?

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