U.S. Health Not #1: Deconstructing Legatum Part 1

As I reported on December 9, the Legatum Prosperity Index claims that the U.S. ranks #1 in the world in health. Like Aaron Carroll, I find this to be a dubious proposition. In the meantime, Nathan Gamester of the Legatum Institute was kind enough to help me learn my way around the website and find the data I wanted. He is not responsible for my conclusions, which still view the idea that the U.S. has the best health in the world as unsupported by the evidence.

To review, Legatum ranks the U.S. #1 largely based on the fact that it has by far the highest level of health care spending per capita in the world. In a defense of this outcome, the report states (p. 46):

Furthermore, the health expenditure variable is only one of the 17 variables in our Health sub-index and one of modest importance in comparison to the others....To further explore the importance of the healthcare expenditure on the overall performance of the United States, we conducted a simple exercise in which we substituted US expenditure with that of Norway. The result is that United States would rank 7th, still among the top 10 best performing countries in the Health sub index.

 This is more confusing than illuminating. While some variables are more highly weighted than health spending, for example, individuals' satisfaction with their health, the difference in scores are tiny; by contrast, the differences in health care spending are gigantic. As the report states, the U.S. spends "66% more than the next country (Norway), 84% more than Canada, 133% more than the UK, and 205% more than New Zealand." Let's take a look at the actual values for the 17 variables, which I will divide up between objective measures of health care outcomes, subjective measures of satisfaction with aspects of health, and health care inputs. I will compare the U.S. (health sub-index score of 3.54) with France (7th ranked with a health sub-index score of 2.77, but once ranked best in the world by the World Health Organization.

 

Variable			France	U.S.	Measure
Infant mortality			3.2	6.8	Per 1000 live births
Life expectancy			81.07	78.66	Years
HALE*			73	70	Years
Death from respiratory disease			26	66	Per 100,000 population
Tuberculosis incidence			6.1	4.1	Per 100,000 population
Undernourishment			5	5	Percent
DPT immunization rate			99	95	Percent
Measles immunization rate			90	92	Percent
Water quality satisfaction			85.72	89.65	Percent
Health satisfaction			86.49	85.81	Percent
Level of worrying			30.04	33	Percent
Well rested			67.07	71.72	Percent
Health problems			22.86	21.26	Percent
Environmental beauty satisfaction			90.57	89.91	Percent
Health expend per capita			3778	7536	PPP USD
Hospital beds			7.11	3.1	Per 1000 population
Sanitation 100% 100%			100	100	Percent
Health sub-index score			2.77	3.54
* Health-adjusted life expectancy

France has substantial edges on all but one of the objective measures (infant mortality is less than half the U.S. rate), is essentially tied on the satisfaction measures, provides more than twice as many hospital beds per thousand population, and only trails - by a huge margin, of course - in spending on health care. Spending almost exactly half what the U.S. spends, the French get an extra 3 years of healthy life, fewer than half the deaths from respiratory diseases, and less than half the infant mortality. As Carroll asked, how is spending a measure of health? This is a more methodological question I'll take up in a future post.

Why am I taking the time to show the weakness in this analysis? The short answer is that Legatum will not be going away anytime in the near future. It is funded by a Dubai-based investment firm that has founded, in addition to the Legatum Institute in London, the Legatum Center for Development and Entrepreneurship at MIT. We will be seeing a lot more of this report in the future.

Democrats' Continued Caves Threaten Middle Class

Via Mark Thoma, David Graham points out that Senate Democrats are caving in on an issue that looked won a week ago, the millionaire's tax.

 [Democrats] were calling for a tax cut, after all, and they had Republicans tying themselves in knots explaining why the party of Reagan and Tea didn't want lower taxes. All the Democrats wanted in exchange for extending the reduction was a small increase in how much the wealthy paid -- a position that was widely popular among voters.

And then Senate Democrats caved, without a peep from the President, despite his "big speech" in Kansas last week on economic inequality.

So what did Democrats get from the apparent deal to avert a government shutdown? A measly two months' extension of unemployment benefits and the payroll tax cut with the extraneous inclusion of language to force a decision within 60 days on the Keystone XL pipeline. No millionaire's tax. And it's not like tax cuts are the most effective form of economic stimulus anyway -- and this one takes money from Social Security.

Let's get a little historical perspective here. Political scientist Sven Steinmo, in his book Taxation and Democracy (1996), wrote that polls had long showed that Americans thought a major problem with the tax system was that the wealthy didn't pay enough tax. Yet the political system then, and in the 15 years since, has been delivering "tax reform" that has done exactly the opposite, reducing taxes on the rich. One has to question exactly how democratic a political system is that cannot deliver a reform favored by a large majority for at least 30 years.

So, here we stood on the verge of getting at least a little movement in the direction favored by a big majority, and Senate Democrats pull the rug out from under us again. As the Occupy movement has pointed out, something is very rotten in the state of American democracy.

As I wrote earlier, we face lots of hostage-taking opportunities in the future, especially if we are getting shutdown-averting deals that only last two months. If the Democrats keep caving in at this rate, they could give away most of the welfare state by election day.

Good story at Atlantic Cities on Job Piracy

Julie Irwin Zimmerman has a story at Atlantic Cities on job piracy, "The Folly or Corporate Relocation Incentives." She tells the story of Sears and other job blackmailers in Illinois in detail and quotes me on the failure of previous no-raiding agreements by states in the past. She points out that there are multiple reasons for opposing these subsidies, an equity argument that attracts liberals and an efficiency argument that brings conservatives and libertarians to the issue of investment subsidies.

Zimmerman does a great job; go read it.

FYI, when she quotes me as saying the cost of location incentives is almost $50 billion a year, that's correct. My other frequently quoted estimate of $70 billion annually includes all subsidies to business, including those which do not require an investment to receive them. Many sales tax subsidies don't require an investment, for example.

Whatever Happened to John Kasich?

Back in the 1990s, there was a Republican Congressman from Ohio named John Kasich who was a scourge on corporate subsidies. He even ran a "Stop Corporate Welfare Coalition" and had a joint news conference with Ralph Nader, Grover Norquist, and others to oppose it on January 29, 1997. "We've reformed welfare for those who don't have money or powerful Washington lobbyists," he said there. "Now it's time we did the same for those corporate welfare programs that aid the rich and powerful." (Newark Star-Ledger, Jan. 29, 1997, no link).

Interestingly, a guy with a similar name was elected governor of Ohio last year. But this Kasich indulges in the worst kind of subsidy abuse, offering incentives to companies to move existing facilities. Governor Kasich is offering Sears $400 million to move its headquarters, with 6100 jobs, from the Chicago suburbs to Columbus. At a time when the state is engaging in substantial budget cuts including, according to the linked story, funds for local governments and school districts, it's hard to justify $400 million subsidies that create zero net jobs for the country. Moreover, by dangling these subsidies in front of Sears, Kasich (and others like him in other states) is enabling the company to extort retention subsidies out of Illinois, just like it did in 1989 when it left the Sears Tower for Hoffman Estates.

Yet this Kasich has no shame. After poaching 500 jobs from Kentucky in September, he told Sean Hannity, "I was accused in the front page of the Cincinnati Enquirer by people in Kentucky of wanting to steal all their jobs. And guess what? They're right."

The John Kasich I remember would have seen that since the states can't help themselves (two voluntary no-raiding agreements between states have collapsed in the past), there is a need for federal action. Only the federal government can pass laws to prevent subsidies from being given for relocations, or tax them so heavily a company would have no incentive to accept such inducements. If he were still in Congress, maybe he could even be persuaded to author a bill like that.

I wonder whatever happened to that guy.

Cost of Tax Evasion Estimated at Over $3 Trillion Annually

The Tax Justice Network late last month published a new report that deserves much wider notice than it has received so far. Authored by Richard Murphy, it uses recent estimates by the World Bank on the size of the underground or shadow economy covering 98% of world gross domestic product to calculate the amount of tax lost as a result. The totals are simply staggering.

The report finds that over $3.1 trillion annually is lost to tax evasion worldwide. The calculation is quite simple, though necessarily imprecise. It takes the average size of the underground economy as given in the World Bank paper (1999-2006 average) and multiplies it by each country's GDP (mostly 2010) to determine the size of the shadow economy. This figure was then multiplied by the country's average tax burden (tax/GDP; 2010 or most recent available) as reported by the Heritage Foundation's 2011 Index of Economic Freedom.

Here are the top 10 countries in terms of gross dollars lost to tax evasion. The U.S. is number 1, by virtue of having the largest economy by far, even though it has relatively low tax rates and the second-smallest underground economy by percentage of GDP.

Country             GDP ($t)          Shadow Economy/GDP        Tax/GDP              Evasion ($b)

US                     14.6                          8.6%                           26.9%                   337.3
Brazil                    2.1                       39.0%                           34.4%                   280.1
Italy                      2.1                       27.0%                           43.1%                   238.7
Russia                  1.5                       43.8%                            34.1%                   221.0
Germany              3.3                       16.0%                            40.6%                   215.0
France                 2.6                       15.0%                            44.6%                   171.2
Japan                   5.5                       11.0%                            28.3%                   171.1
China                   5.9                       12.7%                            18.0%                   134.4
UK                      2.2                       12.5%                            38.9%                   109.2
Spain                   1.4                       22.5%                            33.9%                   107.4

As an example of the scale of tax evasion, the study ranks countries by tax evasion relative to a country's health care expenditures. Bolivia was the worst off, with tax evasion equal to 419% of health care spending; Russia was second at 311%. Overall, 67 countries saw tax evasion exceed health care spending, and for 119 countries total, it was 50% or greater.

The consequences of tax evasion are enormous. When we consider the European debt crisis or funding stress on social programs worldwide, it is clear that these figures mean the difference between solvency and insolvency for many countries. As a result, countries need a policy response equal to the task.

U.S. Health Care #1? Color Me Dubious, Too

Aaron Carroll has a good catch on The Hill's "Healthwatch" blog giving an uncritical eye to a recent study by a British conservative thinktank, the Legatum Institute. Its 2011 "Prosperity Index" ranks the United States #1 in the world for health. Not only that, the U.S. is far ahead of #2 Switzerland, with an index of 3.54 vs. 3.03, over 16% higher. Problem is, the U.S. scores only so-so on what both Carroll and I would consider the most important variables, healthy life expectancy (27th) and infant mortality (36th), does pretty well on some measures (tuberculosis, sanitation) and poorly on others (respiratory diseases), and only ranks #1 on one of the index components: health care spending. Since the U.S. has been seeing worsening bang for our health care spending bucks, this does not compute.

As Carroll notes, it is not clear how you weight these variables in such a way that the U.S. could possibly come out #1, and the explanation gives no real clue of the relative weights, just longer and shorter lines that are supposed to tell us the relative weights without any actual numbers. More confusing still (and I think Carroll misses this), the health variables have weight in both "income" and "well-being" regression analyses. While health spending per capita is more highly weighted than life expectancy and infant mortality on the "well-being" side, as Carroll notes, on the "income" side the reverse is true. Not that the weights, whatever they really are, make sense.

Searching the prosperity.com website for the promised detail on the methodology, I was unable to find any rationale for the choice of variables (let alone their weights) beyond the bland claim that the eight sub-indices were based "on decades of empirical and theoretical research done by established experts." That certainly clears it up. More curiously still, in response to why it uses such a complicated methodology, the FAQs answer, "The Prosperity Index is an assessment of the DRIVERS of prosperity. We do not seek to identify which countries are prosperous or not." I would have thought the latter was the whole point, given that they have already imposed a concept of "prosperity" that is 50% income and 50% "well-being." Compare this with the UN's Human Development Index, which is 1/3 income, 1/3 health, and 1/3 education.

So I'll email the folks at prosperity.com and see if I can find out the answers to these methodological questions. Meanwhile, like Aaron Carroll, color me dubious, too.

Are Incentives Ever Good Policy?

Most of my work on investment incentives is quite critical of their use. As a result, I often get questions about whether there are any good uses of incentives, or whether states have no choice but to offer them because other states or nations are using them. The research of Tim Bartik sheds important light on this topic, in terms of identifying types of incentives that can have positive national benefits. I consider also some circumstances in which using investment subsidies can be politically justified, as well as the question of whether governments are trapped in the incentive game.

According to Bartik, two types of intervention can have positive national benefits, as opposed to benefits for the local jurisdiction.His work shows that typical "smokestack chasing" incentives, while they have a positive local benefit, have negative consequences for other states, that exceeds the benefit to the state that offers the incentive: hence, a negative net national impact. This is consistent with my work at the theoretical level that governments face a collective action problem in their use of subsidies. It also is consistent with empirical finding in international work that when other countries in your region use incentives, it decreases the amount of investment your country receives.

As I said , Bartik identifies two types of cost-effective incentives: customized training for companies on the demand side, and early childhood education programs and generalized job training programs on the supply side. Neither of these is smokestack chasing, and they make up a small portion of the incentives most states offer. For example, in North Carolina, in fiscal year 2008-9, the state's Economic Development Inventory reports that total economic development spending came to $1.2 billion. Of this, less than $11 million (1%) was spent on all types of training programs. North Carolina has a well-known early childhood education program called Smart Start, which is not considered part of the economic development budget. After a "one-time reduction" (quotes because there was another reduction the following year), the program had $194 million in FY 2008-9, about 16% of what was spent on economic development subsidies.

There is one time when I consider smokestack chasing to be politically justifiable, when it is restricted to locations that meet objective criteria of economic deprivation. This is what the European Union does, and I show in Investment Incentives and the Global Competition for Capital that EU policy has reduced what individual governments have spent on incentives, and only allowed them in the poorer regions of the EU. Some U.S. states have crafted their incentive laws to favor poorer counties, but that targeting usually is weakened over time as big companies say they'll only come if they get the maximum subsidy in a richer county. With no centralized (federal) law to enforce targeting, states have repeatedly weakened it when they do have it. This is one reason I favor federal regulation of incentives.

The bigger reason is that the states don't take the impact of their incentives on other states into account when deciding their policies. Kansas' government is not elected to care if the jobs it "creates" are merely lured across the state line from Kansas City, Missouri, let alone whether Kansas' job creation indirectly reduces jobs in other states. Therefore, the states have to be restrained by federal action to get rid of the scores of billions spent on subsidies annually.

But what should states do until then? Can states unilaterally disarm? I think the answer is probably not, although the province of Alberta in Canada has done so (oil revenues are probably the reason it can do this). But you won't get credit from me for "responsible" policy if you aren't actively working for a federal solution to the problem. And as we saw as recently as 2006 when the U.S. Supreme Court ruled on Cuno v. Daimler-Chrysler, states were actively lobbying Congress to overturn the ruling should it have followed the Appellate Court's ruling in favor of plaintiffs. In other words, states don't want to give up their economic development tools, because they still fail to appreciate how they are bound in a collective action problem that is ultimately only solvable at the federal level.

In the meantime, critics need to highlight the enormous cost in cash and lost government jobs. Local successes do occur, such as the defeat this year of the $360 million Aerotropolis subsidy in St. Louis opposed by the liberal Missouri Budget Project and the libertarian Show-Me Institute. But there is still much work to do in ending the economic war between the states.