Dr. Krugman v. Dr. Obama

Paul Krugman just published his most critical piece yet of Senator Obama and his health plan. Those who read this blog know that I think Krugman is a thoughtful political and economic analyst, but I have to wonder if he's missing a few critical points this time. One focus of the piece is Senator Obama's favorable portrayal of his own health plan's lack of an individual mandate for adults. I think a mandate makes a lot of sense, but that Obama's position is not unreasonable for an advocate of universal health care. Further, Obama's overall rhetoric around his lack of a mandate does not necessarily play into conservative hands as neatly as Krugman argues.

First, Krugman does not address the cost issue raised in an earlier post in this blog. This is a critical point. Even if, Senator Edwards, whose plan includes a mandate, proposes to automatically enroll non-enrolled folks who file taxes, that policy will not only continue to disproportionately leave out lower-income folks--many of whom do not file taxes, but it does not itself ensure an adequate subsidy for these folks. Affordability concerns are particularly salient under an individual mandate as the LA Times recently highlighted with regard to California and the Progressive States Network recently highlighted with regard to the Massachusetts individual mandate. (This doesn't mean that the Edwards automatic enrollment proposal isn't a good idea.)

Second, as Krugman recently noted--although not very favorably--the highly respected health care economist David Cutler and others have produced estimates suggesting "that a combination of subsidies and outreach can get all but a tiny fraction of the population insured without a mandate."

Third, is Senator Obama really "giving aid and comfort to the enemies of reform"? The words seem unduly harsh at best and there is certainly something to be said for Senator Obama's framing of the mandate issue as one of affordability. Senator Obama says that "the reason people don’t have health insurance isn’t because they don’t want it, it’s because they can’t afford it," which is mostly true now, but Krugman thinks this will be less true under Obama's plan. It's unclear why though. Of course some healthy folks will take the chance of remaining uninsured and their eventual medical care will end up costing the insured, but these folks are likely talking a chance primarily due to a lack of knowledge about enrollment or a decision that the plans are not worth their price. But that first issue is addressed through outreach and the second through subsidies and other mechanisms to make health plans more affordable. No less (and possibly more) than Senator Clinton or Senator Edwards's plan, Senator Obama's plan seems to do both. More importantly, Senator Obama's framing of health care enrollment as primarily an issue of affordability rather than choice for example--in part embodied by his lack of a mandate--might actually promote universal access by couching health care coverage as a need and desire among all Americans, largely limited by affordability rather than individual preference, as some conservatives argue.

Further, the lack of a mandate could boost support for subsidies to lower-income folks. One can imagine a situation 4 years from now, under any of the frontrunners plans, where we learn that some percentage of low-income folks aren't enrolled in plans. With a mandate, a debate on increasing access might be more likely to focus on increasing penalties for non-enrollment. Without a mandate, that same debate might focus more on increasing subsidies. Obama is emphasizing the carrot over the stick.

Importantly, Obama's decision not to have a mandate probably does not hinge so much, as Krugman argues, on the notion that Obama "doesn't want the government to “force” people to have insurance, to “penalize” people who don’t participate." More likely, the Senator doesn't want the government to force lower-income people to pay for insurance or penalize people who don't participate.

The point here is not to argue that individual mandates are bad (I think they may well be the right way to go.), but rather to say that Krugman and others might be misunderstanding the motives behind Obama's proposal and that Obama's proposal is quite reasonable.

Whenever I can find them, I'll post contrary opinions, and here's one from Ezra Klein. While there are other important points to make, I'll leave that to commenters. Oh, and here's a great piece from The Onion about universal health care.

[In the interest of full disclosure: I have contributed to Senator Barack Obama's campaign.]

UPDATE: Here is a great--if now old--explanation from Matthew Yglesias of the purpose of mandates (adverse selection and free-riding) and why maybe only massive government intervention can truly make health coverage universal. Len Nichols has a very different idea of the potential effectiveness of mandates. And while Ezra Klein lays out the argument that Obama's plan's lack of a mandate suggests a "lack of audacity," while Mark Schmitt makes the point, easily missed in Paul Krugman's columns, that objections to mandates have most often come from the left.

More on Inflation and People with Lower Incomes

Consistent with an earlier post on this blog, Paul Krugman's column from November 26th notes that comparing the inflation, as measured by the Consumer Price Index, to income growth understates the extent to which lower income folks are failing to experience income growth.

[UPDATE - 3/21/2008: Inflation Hits the Poor the Hardest]

Universal Health Coverage and Mandates

For progressives, it's exciting to see that at least all of the leading Democratic Presidential candidates have issued thought plans for affordable, quality, universal health coverage. The Edwards plan and Clinton plan are broadly similar. One striking difference between the Obama plan and the Clinton and Edwards plans is that Obama's does not require insurance for all adults. This, in Paul Krugman's view, among others, makes Obama's plan less comprehensive. The main reason for this sentiment is that without a mandate, some people will not choose to purchase insurance, with their bills falling in part on society at large when they seek medical care. I am enormously sympathetic to this view, but I think what matters here is the total share of the population covered and that the differences in that share under the Obama plan on the one hand and the Clinton and Edwards plans on the other is not fully known in the abstract. Keep in mind that even a "universal" plan with a mandate may not in reality cover many immigrants, lawfully or not lawfully present, and even a mandate cannot practically ensure that all adults are covered. Obama's plan relies on the expectation that coverage will be so affordable that few people will not sign-up for it. Additionally, mandates may largely punish lower income people who find coverage costs to be prohibitively expensive, even under plans like those proposed by Edwards and Clinton. Today's Progressive States Network's Stateside Dispatch highlights this concern, relying in part on the Massachusetts experience, concluding, rightly I think, that "As a means to achieving quality and affordable health care for all, individual mandates are problematic absent strong affordability protections for consumers."

[In the interest of full disclosure: I have contributed to Senator Barack Obama's campaign.]

Inflation, Poverty...and Climate Change?

Inflation is not often a big focus of conversation among advocates for those with lower incomes. When it is, it is often in the context of perceived or actual trade-offs between inflation and unemployment rates. However, inflation has indirectly come up in recent discussions among anti-poverty advocates insofar as automatic inflation adjustments to the Child Tax Credit's refundability threshold punish workers whose earnings do not keep up with inflation. Occasionally, folks point out that the primary inflation index used by the Federal Government, the Consumer Price Index for All Urban Consumers (CPI-U), overstates inflation, and that this fact means that annual adjustments to the poverty threshold exceed what they ought to be. While the CPI-U does indeed seem to overstate inflation, the criticism misses the point altogether with regard to what the poverty threshold ought to be. I'll leave that discussion to a future post and this link to a hearing I worked on.

I do want to highlight here interesting papers by the Swiss investment bank UBS on the economies a few rich countries, including the United States: "Unequal economics?" and a follow-up "Income inequality revisited". The papers are focused on inequality--and have a lot of interesting things to say about it, and I'll highlight those points in a future post--but I bring these two papers up because they are among the few analyses I have seen that look at whether low-income folks face higher inflation than higher income folks. And the answer is yes. According to the analyses, this is in part, as many would expect, because energy costs have tended to rise faster than other expenses and are a larger share of lower-income folks' budgets. More interestingly, the analyses also find that this divergence in inflation rates between lower and higher income groups is in part due to increasing inequality. I guess that's one more downside to increasing inequality.

With regard to the higher share of income income folks devote to energy expenses, Bob Greenstein at the Center on Budget and Policy Priorities delivered an unsurprisingly thoughtful testimony before the House Committee on the Budget on how climate policy might impact the federal budget and household budgets of people with low incomes. The testimony is well worth a read and highlights a few principles that ought to be considered as we mitigate against and reverse the damage of global warming. The conclusion of the testimony is critical: distributional effects of climate-change policy need not hurt the poor or increase inequality, but without special attention to these concerns, they certainly might.

In essence, inequality and increased energy costs--the later a near certainty in any effective climate policy, something we desperately need--can fuel higher inflation, i.e. costs for goods and services, for lower-income Americans. These phenomena can and should be addressed, and maybe one starting point is a proposal to create millions of new Green Jobs, which, as Van Jones has vigorously advocated, could simultaneously fight poverty and climate change.

Spotlight on Poverty

A new website, "Spotlight on Poverty and Opportunity," was launched on October 30th, 2007 and it is well worth a visit for all those who care about improving the economic conditions of those at the lower end of our income distribution. Notably, the website is a genuine bipartisan (I would say "nonpartisan," but many of those involved are decidedly partisan.) effort to raise the priority of poverty and its solutions among Presidential candidates during this election cycle

One of the few substantive things a Presidential might be able to unilaterally affect vis-a-vis domestic poverty policy is the decision to set--or not set--a national goal for poverty reduction. The Spotlight on Poverty website has already received responses from several candidates, from both major political parties, on this issue, and they are worth reading or watching--some responses are in video format and some are written. I previously worked for the Center for American Progress's Task Force on Poverty, which did call for an initial, bold, though certainly attainable goal of cutting poverty in half within ten years. These sorts of goals do have their drawbacks, but the experience of the United Kingdom, well-summarized by my former colleague Elisa Minoff in "The UK Commitment: Ending Child Poverty by 2020," has seemed to prompt a renewed interest in such goals with regard to poverty reduction in the US.

[Additionally, in the interest of full disclosure, I have previously worked with Mark Greenberg, a member of the Spotlight's Advisory Council, and for Freedman Consulting, which is part of the Spotlight's Steering Committee for this effort. While Freedman Consulting's website still lists me as a Research Assistant, in fact I have no contractual or employment relationship with Freedman consulting.]

Economic Mobility in America

The US Department of the Treasury has released a "new" study on intra-generational income mobility in the United States from 1996 to 2005, which a recent Wall Street Journal editorial describes as "a careful, detailed piece of research by professional economists that avoids political judgments." The Journal says that the results "show beyond doubt that the U.S. remains a dynamic society marked by rapid and mostly upward income mobility." Is this true? A closer look at the actual study suggests that there is neither nothing new about the findings, nor anything particular careful or helpful about them. Sadly, as economist Tom Hertz, among numerous others, have found, both intra-generational and intergenerational mobility are distressingly low in the US when compared both to what a society with true equal opportunity might look like, as well as to mobility in other prosperous economies. For example, economists Katherine Bradbury and Jane Katz have found that "In the 1990s...53 percent of families that began the decade in the poorest quintile were still there ten years later... [and that] 40 percent of families ended the 1990s where they began..." Bradbury and Katz note that mobility in the 1990s was lower than in previous decades, giving "cause to worry." Chicago Federal Reserve economist Bhashkar Mazumder finds that some studies of intergenerational income mobility overstate mobility by up to 30 percent, and that, "Given the rising evidence from studies in other countries it appears that the U.S. may be among the most immobile countries." Nevertheless, the good news is that the US is not a rigid caste-based society. Table 2 in the Treasury study does somewhat adequately highlight the fact that there is substantial movement in and out of various income quintiles, though certainly not to the extent one might expect.

It's important to understand what Americans generally understand as "income mobility," as well as what a helpful study of income mobility might look like, thus revealing the flaws in analyses like the one just released by the Treasury Department.

How is income mobility defined?
First, income mobility is generally though about as either mobility within a lifetime (i.e. intra-generational) or mobility relative to one's parents and even grandparents (i.e. intergenerational). Second, income mobility is generally thought about as either absolute (i.e. increased or decreased real income over time) or relative (i.e. increased or decreased position in the income distribution). A society can have high levels of one without the other, with absolute mobility stemming largely from shared economic growth and relative mobility stemming largely from efforts to ensure equal opportunity. Thus, a prosperous nation that values equal opportunity would have high levels of both.

When should we care about absolute mobility versus relative mobility?
Because those on top have high initial incomes, we might expect small increases or even decreases in absolute mobility over 10 years, and because those at the bottom have low initial incomes, we might expect large increases in absolute mobility over 10 years. This is in part the statistical phenomenon of regression towards the mean. The Treasury study does confirm this phenomenon in Tables 3 and 8. Still, broadly shared absolute mobility is important for any society interested in continuously improving living standards, but it tells us little about whether or not our "society [is] stratified by more or less permanent income differences...[which] can breed class resentments and unrest." Relative mobility, on the other hand, tells us about the extent to which opportunity to move up and down within a society is equal or unequal for all.

How is income mobility related to income inequality?
There are at least three ways income mobility and income inequality relate to each other directly. First, income mobility might assuage some concern about income inequality. If high or low income status are temporary and people have an equal chance of finding themselves with high or low incomes (excluding the importance of merit in determining income), then the difference between high and low incomes, i.e. income inequality, might not matter so much. As the Treasury study argues,

"Economic historian Joseph Schumpeter compared the income distribution to a hotel where some rooms are luxurious, but others are small and shabby. Important aspects of fairness are that those in the small rooms have an opportunity to move to a better one, and that the luxurious rooms are not always occupied by the same people. The frequency with which people move between rooms is a crucial aspect of the trends in income inequality in the United States."

Second, the meaning of mobility depends in part on the extent on inequality; this is the other side of the same coin. The value of moving up or down depends in part on the income differentials in a society.

Related to that point is the third reason why one might care about income inequality even in a highly mobile society: income inequality can distort occupational choices in ways that are inefficient and harmful society as a whole. For example, Robert Frank points out that there are currently many "winner-take-all markets," in which the very best and brightest in particular fields are paid exorbitant sums relative to others. Robert Frank goes on to note that,

"The lure of the top prizes in winner-take-all markets has also steered many of our most able graduates toward career choices that make little sense for them as individuals, and still less sense for the nation as a whole. In increasing numbers, our best and brightest graduates pursue top positions in law, finance, consulting, and other overcrowded arenas, in the process forsaking careers in engineering, manufacturing, civil service, teaching, and other occupations in which an infusion of additional talent would yield greater benefit to society.

One study estimated, for example, that whereas a doubling of enrollments in engineering would cause the growth rate of GDP to rise by half a percentage point, a doubling of enrollments in law would actually cause a decline of three-tenths of a point. Yet the number of new lawyers admitted to the bar each year more than doubled between 1970 and 1990, a period during which the average standardized test scores of new public school teachers fell dramatically."

Are all changes in relative income also examples of relative income mobility?
No, and to answer otherwise would misunderstand what we mean when we think of income mobility. To understand clearly this apparent paradox--i.e. of some income changes not equaling income mobility--consider what we might expect to see and experience with regard to intra-generational mobility among those age 25 and over-- the focus of the Treasury study. First, most Americans would probably expect absolute and relative incomes to start off low around age 25; increase over a few decades, possibly plateauing; and then decrease nearing and during retirement. The fact that nearly all people's incomes follow this sort of trajectory is hardly a sign of meaningful relative income mobility.

What does income mobility look like then?
Rather, Americans interested in income mobility are interested in comparing people over time to others of similar age. The question we really care about is, "How likely am I to move up or down relative to others my age over my lifetime?" Thus, a thoughtful study of income mobility might track 30-year olds against each other over a decade. The Treasury study fails to do so. As University of Chicago labor economist Kevin Murphy pointed out 15 years ago in response to a horribly similar Treasury study, "This isn't your classic income mobility...This is the guy who works in the college bookstore and has a real job by his early 30's." Unsurprisingly, the Treasury study finds "There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period with roughly half of taxpayers who began in the bottom quintile moving up to a higher income group within 10 years."

Unlike the Treasury study, Americans do not consider the movement of a recent college or graduate student into a substantive job 10 years later to be a significant sign of upward mobility in society.

Unlike the Treasury study, Americans do not consider the movement of a high-earning 65-year old into retirement to be a sign of downward mobility in society.

Unlike the Treasury study, Americans do not consider the entry of new workers into the labor force to be a sign of upward mobility for everyone else in society.

Unlike the Treasury study, Americans are interested in mobility among all, not just those who file taxes.