Romney Gets Incoherent on Pre-Existing Conditions

Mitt Romney was on the Jay Leno Show last night (via @didkins4life) and gave a completely incoherent account of whether people with pre-existing conditions should be able to get insurance. As the author of Massachusetts' health insurance reform as Governor, he was able to articulate the free-rider problem of people waiting to get sick to get insurance--which is why Romneycare and the Affordable Care Act have an individual mandate.

But Romney stumbled badly when Leno asked him what should happen to people with pre-existing conditions. If they had had insurance before, Romney said they should be able to get it again. (Note, however, he says nothing about how long ago they'd had insurance.) But if they never had insurance before, Romney gave what was essentially a non-answer: a) You can't play games like that; b) "But you have to find rules that get people in that are playing by the rules.” That, of course, would be a mandate, but he can't bring himself to say it because of primary politics and, as Greg Sargent points out, perhaps his own beliefs as well.

The alternative, though, is to do nothing for the uninsured who get sick. Romney did not rule that out, but merely tried clumsily to finesse it. As Mark Thoma says,

If we could make people pay the full cost of this wager that they won't need insurance, i.e. if society could turn it's back and say you made your choice, now live (or die) with it, a mandate wouldn't be needed. But we can't (and I wouldn't want to live in a society that could).

 I wouldn't want to live in such a society, either, which is why we need universal coverage. Though I'd prefer single payer, right now the Affordable Care Act's individual mandate is as close as we are going to get. Romney's repudiation of it is as hilarious (and depressing) as that of the Heritage Foundation. As a result, his plans for the uninsured look distressingly like what Alan Grayson called the Republican health plan: 1) Don't get sick. 2) If you do get sick, die quickly.

The Best Data on Middle Class Decline (Updated)

The flurry of posts earlier this month on middle class decline (me, Lane Kenworthy, Matthew Yglesias, Kevin Drum) made me think some more about what the best way is to show what's happened since the peak of real wages in the early 1970s. While in my opinion there is no perfect measure, there are a lot of choices to be made, and I argue below why real wages for production and non-supervisory workers, with an adjustment for non-wage compensation, is the best single measure.

Choice 1: Household/family vs. individual

While we all live in households or families, over the past 40 years, there has been a decline in persons per household (see Kenworthy) and an increase in incomes per household as women's labor force participation has increased. The decline in persons per household means that a household needs less income than in the past to have a fixed per capita income. The increase in incomes per household has meant that households have had higher real income even as real individual income has fallen, as pointed out by commenter peggy_Boston in the comments thread of Drum's article. To my mind, this is partly causal; that is, because real wages have fallen, families have had to have more incomes in order to maintain their living standards. Indeed, falling real wages have forced families to run up high levels of debt, with non-mortgage debt reaching 1/3 of family income by 2005. Therefore, I think individual data is the right choice here.

Choice 2: Median income vs. production and non-supervisory workers' income

The median (middle value, with an equal number of observations above and below it)  has big advantages over the arithmetic mean in trying to show the typical situation in a distribution of values. It is especially useful for income distributions, where the presence of very high incomes means that the mean is much higher than the median. In fact, the literature on "decoupling" (see Kenworthy above) demonstrates just how much this is the case. But I think that "production and non-supervisory workers" captures our intuition about who is in the middle class even better than the median does. This series, in Table B-47 of the Economic Report of the President, is an average of the earnings of employed persons in private (non-government), non-agricultural jobs. It includes about 80% of the private workforce and 64% of the total non-agricultural workforce. Despite being an average, its exclusion of supervisory workers means that virtually all of the extremely high values that distort the mean of the entire workforce are eliminated. It is, essentially, the mean income of the bottom 80% of private workers. The biggest drawback to this dataset is that it does not include non-supervisory government workers, but I think that is outweighed by its broader coverage of the middle class than the pure median income (or middle quintile, as in Kenworthy's post).

For the counterargument, that changes in composition of production & non-supervisory workers can cause distortions that the median wage is not subject to, see Dean Baker (p. 9).

Choice 3: Weekly vs. hourly

Baker mentions hourly earnings rates in some cases. As I discussed in the comments section of my March 11 post, the decline in hours worked per week (from 36.9 hours in 1972 to 33.6 hours in 2011) suggests to me that we need weekly, not hourly, wages.

Choice 4: Which inflation data to believe?

Shortly after President Clinton's first election, I predicted to my students that, because his message of middle-class stagnation ("It's the economy, stupid") was dependent on how inflation was measured, that conservatives would soon attack the official Bureau of Labor Statistics inflation data. The issue is, if inflation is overstated, then the decline in real wages reported by the BLS could be overstated or even non-existent. Conversely, if BLS data understates inflation, then real wages have fallen even faster than shown in Table B-47.

Unfortunately, I did not publish this prediction, so you'll have to take my word for it that I predicted the attack on inflation data that culminated in the Boskin Commission in 1995. I always took this to be a political attack rather than a scientific one. My attitude has always been that trade theory (i.e., the Stolper-Samuelson Theorem; see Ronald Rogowski's great book Commerce and Coalitions for an explanation of this topic, which I intend to discuss in a later post) predicts that real wages in a relatively labor-scarce country like the United States will fall as trade expands, and the data shows that real wages indeed fell: so what reason do we have to question the data? In the end, though, the Commission concluded that inflation was being overstated by about 1.1 percentage points a year, and the BLS was mandated to adjust its methodology.

Barry Ritholtz takes an even more jaundiced view of the Boskin Commission than I do. Paul Krugman, on the other hand, is not convinced that inflation is now significantly underreported, citing the work of the Billion Prices Project. For the moment, I do not see reason enough to toss out the BLS data, despite the possibility that the Boskin Commission may have introduced distortions into it.

Choice 5: Wages vs. compensation

Martin Feldstein and other economists argue that it is not sufficient to look at wages alone, because the non-wage share of compensation has been growing over the past few decades. As I posted before, total employee compensation includes everyone from the CEO to the janitor, so it overlooks the fact that the top 1% have made almost all the gains from decades of economic growth. Nevertheless, it is clearly true that non-wage compensation has grown faster than wages, as we will see below. In fact, Yglesias suggests that the 2000s actually saw real compensation growth at the median, but it was all in the form of health insurance benefits. Of course, there is some debate over how much value actually comes from extra employer payments for health insurance, as Baker's paper (p. 10) details

A different way to factor in compensation that I had seen before on the Economic Policy Institute's website was explained to me in an email by Jared Bernstein and is documented in the footnote of his blog post here. It takes the ratio of total compensation to total wages, both of which are in National Income and Product Accounts Table 1.12 (you can set it to a wider range of years, as I did). Whereas he applies it to median wages, I apply it to Table B-47 and get the following results:

Year          Weekly Real Earnings     Comp/Wages     Weekly Compensation
                  (1982-84 dollars)                                     (1982-84 dollars)

1972          $341.83                         1.14                   $388.01
1975          $314.75                         1.16                   $366.63
1980          $290.86                         1.20                   $348.93
1985          $285.34                         1.22                   $347.10
1990          $271.12                         1.21                   $328.99
1995          $267.07                         1.22                   $326.23
2000          $284.79                         1.20                   $341.49
2005          $284.99                         1.24                   $352.87
2010          $297.67                         1.24                   $370.28
2011          $294.78                         1.24                   $365.77

Note: Last two columns rounded from spreadsheet calculations

Sources: Economic Report of the President 2012, Table B-47, National Income and Product Accounts, Table 1.12, and author's calculations

 By this measure, compensation in 2011 for most workers was still almost 6% below its 1972 peak. The advantage of this adjustment over Feldstein's procedure is it strips out the wage inequality of the compensation data, although there is still some overstatement based on inequalities in non-wage compensation. Still, I think this gives us our most accurate picture of what's happening to the bottom 80% of workers.

That is not to say that this is a perfect measure even with those caveats. It matters what is happening at the top, too. If high wage earners were seeing their income fall faster than middle-class workers, then inequality would be falling and we would probably object less to what would then look like the much-vaunted "shared sacrifice." But of course, as Kenworthy notes, the share of the top 1% more than doubled from 1979 to 2007, from 8% to 17%. With inequality rising as it is, we now seem to be in danger of a consequent sharp shift of political power to the 1%, as MIT economist Daron Acemoglu told Think Progress' Pat Garofolo.

I look forward to your comments, especially if I've gotten something wrong.


UPDATE: By way of comparison, here is Lane Kenworthy's chart.

 

In it, you can see that by either median family income or 3rd quintile household income, incomes started rising shortly after 1980, whereas in my table compensation-adjusted real wages continued to fall until 1995. You can also see the divergence in median family income and Q3 household income between 2000 and 2007, as noted by Yglesias. Whereas the increase is made up entirely of nonwage compensation in the Q3 household income series, in my table at the individual level we have an increase made up partly of wages and partly of nonwage compensation.

Apple Whines About Having to Pay Taxes

On Monday, Apple announced that it was going to start paying dividends to shareholders, and buy back $10 billion worth of stock. What caught many people's attention in the subsequent conference call, however, was the company's pointed statement that it would not be bringing back any of the cash it holds overseas, estimated at $64 billion, or over 64% of its current cash on hand.

The reason, as stated by Chief Financial Officer Peter Oppenheimer, is that it would have to pay taxes on this money if it were repatriated to the United States. Apple made the money, so it owes taxes on it just like you or I would. But because the money was earned overseas (though realistically, some of it probably got there through transfer pricing), it can defer paying taxes on it until the money comes home. Taxes deferred are taxes reduced due to the time value of money, but that's not enough for Apple. In good Mitt Romney fashion, Apple is working with other companies to try to get the tax laws changed in its favor.What they want, as Carl Franzen of TPM points out, is a "repatriation holiday" that will allow them to bring back the money at a greatly reduced tax rate, as in 2004. Franzen notes:

However, in that 2004 experiment, pharmaceutical companies were the largest beneficiaries and although $312 billion was brought back into the U.S. by some 800 companies, most of the money was spent on dividends and stock repurchases, as Bloomberg and the New York Times both reported, referring to numerous studies. In fact, some of the companies that benefited the most from the 2004 tax holiday ended up laying off employees.

 Today, despite having just gone through the worst economic crisis since the Great Depression, U.S. multinationals now have over three times as much overseas as was brought back in 2004, some $1 trillion, according to Franzen's article. Apple's action Monday suggests that more dividends and stock repurchases would be the order of the day once again if they got their way.

According to Justin Fox, the $64 billion is "sitting in Apple's overseas subsidiaries..." This almost certainly means it is in Ireland: According to Apple's 2011 Annual Report (Exhibit 21.1), it has only two "significant" subsidiaries outside the country (and one significant subsidiary in the U.S.), both of which are in Ireland. Apple, then, is simultaneously benefiting from Ireland's tax haven status and the deferral provisions of U.S. tax law.

What should be done? I agreed with Citizens for Tax Justice in January that not taxing worldwide corporate profits would give companies even more incentive to make their profits show up overseas than they do now. Fox notes a similar argument from tax attorney Edward D. Kleinbard, who says that ending the deferral provision is the right way to go. That way, companies' income would be taxed in the year it was earned, and multinationals would get no benefit relative to domestic companies that don't squirrel away their profits overseas. It would go a long way to ending our current situation where there is one tax law for the 1% and another one for the rest of us.

Basics: Real Wages Remain Below Their Peak for 39th Straight Year

The release last month of the Economic Report of the President has elicited a great deal of commentary, but none that I have seen touches on what I consider the best measure of long-term income trends, real weekly wages of production and non-supervisory workers, which is contained in Appendix Table B-47, "Hours and earnings in private non-agricultural industries, 1965-2011." According to a Bureau of Labor Statistics staffer I spoke to some years ago (so the percentages may have changed slightly), this covers 62% of the entire workforce and 80% of the non-government workforce. This lets us focus on average workers and excludes what is happening to high-salary workers. Using weekly rather than hourly real wages takes out the impact of varying hours worked per week over the years. The table below extracts from B-47 to reduce its size. The inflation is adjusted using 1982-84 dollars as its base.

Year          Weekly Earnings (1982-84 dollars)
1972          $341.83 (peak)
1975          $314.75
1980          $290.86
1985          $285.34
1990          $271.12
1992          $266.46 (lowest point; 22% below peak)
1995          $267.07
2000          $284.79
2005          $284.99
2010          $297.67
2011          $294.78 (still 14% below peak)

Thus, we have 39 straight years where real wages have yet to get back to their 1972 peak and, indeed, they are a long way from that peak still. This is doubly surprising when we consider that productivity has been increasing steadily throughout that period, approximately doubling from 1970 to 2011, as shown by the Federal Reserve Bank of St. Louis' data:

Loading ...

Due to the convergence of rising productivity with falling wages, we should not be surprised to see that labor's share of non-farm income has fallen:

Loading ...

There are other ways to track the income of average workers. The Economic Report of the President highlights median household earnings in its Figure 1-1, but these data are affected by changes in the number of incomes per household, primarily the result of increased women's labor force participation. The bottom line is that the increase in incomes per household obscures the fall in individual income for most workers.

Some conservative economists, such as Martin Feldstein, have argued that we should instead use real compensation instead of real wages and use the same inflation adjustment ("price deflator") when analyzing trends in compensation and productivity. There are multiple problems with his analysis. First, he claims that the growth of compensation (1.7% per year) is almost as high as the growth of productivity (1.9% per year) over the 1970-2006 period, but ignores the power of compounding. The 0.2 percentage point difference may not sound like much, but over 36 years productivity grew by 96.9% (1.9^36) and compensation by only 83.5% (1.7%^36) using his preferred measure (and I can't comment on its correctness), so workers' compensation should still have grown by substantially more than it did.

An even bigger problem is that the compensation series includes all workers, not just average workers, so it lumps CEOs and janitors together in a single measure even though we know that the 1% soaked up most of the income gains before and after the Great Recession. Moreover, the nonwage portions of compensation, such as health insurance and defined benefit pensions, have eroded much more for average workers than for the 1%. Thus, this measure is completely unsatisfactory for understanding what has happened to the average worker.

So, we come back to Table B-47 and the real wages of production and non-supervisory workers. The fact that, adjusted for inflation, wages still remain almost 14% below what they were 40 years ago, despite a doubling in productivity, is a national disgrace. It is one of the roots of the increase in multi-income households, in higher levels of indebtedness needed to maintain consumption levels, and of the sharp increase in inequality we have seen over recent decades.

Aggressive Tax Planning on the Rise, Says OECD

"Aggressive tax planning," which I would characterize as  exploitation of tax differences between countries that sits on the edge of legal tax avoidance and illegal tax evasion, is on the rise among corporations, according to a new report by the Organization for Economic Cooperation and Development (via Reuters and Reuters Tax Break).

The OECD report notably states that "concerns about distortions caused by double taxation also apply to double non-taxation." It points to practices such as deducting the same expense in multiple countries and generating multiple tax credits for the same tax payment as ways to make income "disappear." As Palan et al. (2010) have argued, corporations largely don't care whether their practices are deemed legal or not, If they get away with it, great; if not, well, paying fines is just a cost of doing business. Clearly on net this aggression has saved more in taxes than it costs in fines, if such behavior is actually increasing, as the OECD says.

Bear in mind, too, that whether the transactions are technically legal or illegal, their effect in reducing the corporate tax burden and passing it on to other taxpayers is the same.

Confirming what I have written here before that untold billions are at stake, the new OECD report gives examples of billion-plus settlements of such tax disputes. One involved four New Zealand banks that had to pay the government NZD 2.2 billion (i.e., an average of NZD 550 million per bank), a dozen Italian cases settling for 1.5 billion euro, and, largest of all, eleven tax credit transactions in the U.S. "evaded" (OECD's term) $3.5 billion in taxes owed to the government. The OECD did not make an estimate of the total cost of corporate tax planning, though the Tax Justice Network has estimated worldwide tax evasion to be $3.1 trillion annually.

The report recommends that countries introduce new laws and regulations to deal with abusive linked transactions, share information among governments, and initiate new disclosure requirements for firms to catch these transactions. While this is a step in the right direction, the OECD proposals are not very specific. Forcing companies to publish country-by-country instead of consolidated accounts would make clear what transfer pricing abuses they are perpetrating and make it politically more feasible to address them.

Swiss Bank Secrecy Reform

 Reprinted by permission of Mark Morris, h/t Tax Research UK.

The Travails of People with Health Insurance Are Not Trivial!

Austin Carroll at The Incidental Economist has posted what is at least the third installment of his saga to keep getting medication for a chronic condition. This is an excellent reminder that American health care does not just let down the 49.9 million uninsured, but fails those who have health insurance, too.

By way of background, it is important to note that Carroll is not just an expert on health care policy and IT, he is also a physician. He is, of course, insured by his employer, Indiana University. And it is there that this installment of his story begins:

Indiana University, in its infinite wisdom, changed the health care plans for the gazillionth time on January 1. This means that the laboratory I used to have to go to (which is NOT an IU [Indiana University - KT] lab – crazy) is no longer covered. So I needed to search for a new lab that would qualify as in-network. Of course, that meant that the standing order I had at the old lab needed to be reissued. So I had to call my doctor and wait for them to get me a new prescription for my labs. That took a few tries, because they couldn’t understand why I needed a new prescription. But, eventually, I got it.

 End of story? Hardly. His insurance had tripled in price, he had to get a new pharmacy, he had to navigate a labyrinthine website to request a new prescription from his doctor, only to find that the links were broken!

For those keeping score at home, none of the expense of working one's way through the bureaucracy of health insurance is counted as an expense when you see data on how much the United States spends on health care.

Is this an isolated story? Ask the approximately 6 million people who had to change pharmacies in January because Express Scripts and Walgreens couldn't reach agreement on reimbursement rates. My father, a military retiree on Tricare, was one of them. I was another one. I complained to the benefits people at University of Missouri-St. Louis that this would be horribly inconvenient to people like me who need to fill prescriptions in multiple parts of the country and benefit from Walgreens' nationwide reach. Of course this was in vain. Express Scripts is headquartered literally on my campus. The building next to mine is now Express Scripts Hall. The University of Missouri will never get rid of Express Scripts as its prescription benefits manager.

Having health insurance in America doesn't guarantee you access to health care (you have seen "Sicko," haven't you?), it doesn't deliver low costs, and it certainly throws up new kinds of bureaucratic roadblocks on a daily basis. As Carroll says, there is no way we have the best health care system in the world. Even Reason magazine editor-in-chief Matt Welch is convinced in practice, if not in theory (h/t to commenter Steve on Carroll's post).