Bryan Caplan  

Better Market-Oriented Proposals That Reduce Income Inequality

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I was initially excited to see that progressive Dean Baker has written a piece on "Eight Market-Oriented Proposals That Reduce Income Inequality" for AEI. It begins promisingly by criticizing overly strict occupational licensing for high-skilled workers.  But it then studiously avoids the really big wins.  Namely:

1. Immigration.  High-skilled immigration reduces conventionally measured inequality by making high-skilled workers more abundant relative to low-skilled workers.  And low-skilled immigration drastically reduces properly measured inequality by moving the absolutely poor to First World prosperity.  Estimates of the size of this effect are vast.

2. Housing deregulation.  Letting developers build more housing in expensive areas of the country directly reduces inequality by making housing more affordable.  And it indirectly reduces inequality by making it more affordable to live in high-wage areas of the country.  Estimates of the size of this effect are also vast.

To be fair, Baker does discuss occupational licensing as a barrier to high-skilled immigration.  But that's only the tip of the immigration iceberg.  And his only "market-oriented proposal" for real estate, bizarrely, is a surtax on vacancy!  On the surface, he's got a decent case:
A vacant property tax can have a similar effect on the real estate market to that of reducing unemployment benefits and other supports on wages.
But this misses the bigger picture: A vacancy tax also reduces the incentive to build housing in the first place, so it's a lot more like a tax on firing workers than a reduction in unemployment benefits.  In the short-run, such a tax saves jobs, but in the long-run, it makes employers nervous about hiring.  A vacancy tax, similarly, keeps rental units on the market during bad times, but reduces the long-run payoff for construction.  Baker is flatly wrong to say, "Unlike most taxes, all the side effects of this tax are positive."

Governments around the world willfully create poverty and inequality.  I'm glad to see Baker calling attention to these ugly facts.  But focusing on relatively minor and not-so-market-oriented examples spreads the false impression that government-sponsored poverty and inequality is but a marginal issue.  Alas!




COMMENTS (11 to date)
ZC writes:

His ideas with regards to 'Internationalization o Medicare' are laughably absurd to anyone who has any experience with how the overwhelming majority of Medicare patients incur health care costs. Neither emergent hospitalizations (think stroke or heart attack) nor multiple visits over an extended period of time (think radiation or chemo for cancer) or other chronic disease management (think M/W/F dialysis for life or until transplant) lend themselves to any sort of practical arbitraging of differences in costs between the US and other medically advanced countries.

I have no idea who Dean Baker is, but to offer up something so unfounded in any sort of reality doesn't do much for his credibility with regards to any of his other ideas.

Thaomas writes:

When a US economist writes about reducing inequality, it's a good bet is topic is inequality within the US. Baker is probably aware that income inequality world wide has decreased as it has increased in the US and other high income economies. Therefore it's a bit disingenuous to complain that increasing low skilled immigration (whose effect on inequality within the US is at best ambiguous) was not recommended as a remedy.

Concerning restrictions on business and residential development, I've seen lots on why this is bad for growth (the Chang-Tai Hsieh Enrico Moretti paper is not unique), but less or nothing on its effects on income distribution. If the Chang-Tai Hsieh Enrico Moretti paper cited implies large effects on distribution of incomes, it was not highlighted in the paper. Where does Caplan's estimate that the effect on income distribution is "vast" come from?

Thaomas writes:

@ZC

Hospitalization for an emergency does not lend itself to being done abroad, but " multiple visits over an extended period of time (think radiation or chemo for cancer) or other chronic disease management (think M/W/F dialysis for life or until transplant)" would work perfectly. The person moves to a place where the procedure is significantly cheaper for the period. The person would need to trade off the intangible costs and benefits of the move, but Medicare could save money by allowing it.

bill writes:

Vacancy tax: analogous to taxing people for being unemployed. :-)

ZC writes:

@Thaomas

Yes, because I'm sure shipping sick people abroad to foreign countries (where they may or may not speak the language) away from their family, friends, and everything else with which they're familiar to receive treatment like chemo or radiation for a life threatening illness would be really popular, right?

Then, to truly compare apples to apples between the current system and this pie-in-the-sky Medicare offshoring, you'll to pay for their travel and for a place to stay. You'd better pay for a trip for their kids/spouse/grandkids to see when during their hour of need, too.

In real life today, people get crazy mad when insurance doesn't pay for things they said they wouldn't pay for from the get go. You think there wouldn't be a national outcry if 'The Plan' was to ship grandma to Poland when she gets diagnosed with breast cancer as opposed to going the hospital down the street where she's gone her whole life because it might save a few grand?

Really? This proposal is so implausible that it's prima facie evidence that anything this guy puts forward in the rest of this proposal cabe be -- no, should be ignored.

Thaomas writes:

@ZC

I must not have explained myself well. I am talking about allowing Medicare to pay for treatment performed in other countries. If Grandma does not want to go to Panama, let her stay home. Nothing ventured, nothing gained. It could be trickier, if still feasible, to let Medicare pay for treatment plus travel and lodging but there are clearly cases where that would save money.

I do not advance this as an alternative to making it easier for professionals from abroad to immigrate and practice in the US but in addition.

Noah Carl writes:

The net effect of taking immigrants from developing countries could well be more inequality, since corruption begets inequality:

http://onlinelibrary.wiley.com/doi/10.1111/geer.12064/abstract

Matt Obenhaus writes:

Interestingly, a recent working paper from Mark Warshawsky at the Mercatus Center at George Mason indicates that inequality of earnings is really a problem of rising healthcare coverage costs, since this crowds out take home earnings as a proportion of total compensation much more significantly for middle and lower income workers compared to higher income workers. In other words, when viewed at an aggregate total compensation level, inequality is not widening. If we are concerned with earnings inequality, then it would seem that we have to address the rising costs of employer-based healthcare coverage.

Weir writes:

Dean Baker's doing a lot of good things in this paper. He's starting with the assumption that spending an extra hundred billion every year on doctor's bills is a bad thing.

He says straight out that cutting that bill by a hundred billion dollars is a saving. Think of all the progressives who will only ever use that word when they're talking about how hiking taxes would save the government some projected figure.

Admitting that the cost of something is not the same thing as its benefit is the first step for economists on the left. Keynes himself pointed out that "the community as a whole cannot hope to gain by making artificially scarce what the country wants." But progressives love making things artificially scarce.

Just by talking about savings and "better health outcomes" instead of simply spending more and calling that a reform, he's showing other progressives that there is an alternative to a policy of protectionism for wealthy professionals.

He could have denounced these rich people for being racists or fascists or nationalists, which is what we'd all be saying if poor people, instead of rich people, were collecting these rents and artificially enriching themselves at the expense of everyone else.

But notice that, instead of indulging in all that virtue-signalling and status-gaming, he calls it out as "a simple case of rent-seeking." Exactly right. And that's not just the case when rich people are trying to avoid competition, right?

Dean Baker's showing the way. So although he does frame everything in terms of "inequality" despite the fact that that word doesn't actually add any clarity to the analysis, the argument itself is full of good stuff.

Larry writes:

It's fine to say that not every effect of a tax is positive, it I'd rather hear about whether its net effects are likely positive and whether there are other, better options.

Granite26 writes:

I find it interesting that the two examples you sited were market oriented yet not traditionally conservative...

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