Ask an Economist (Post #1005 and counting)

[Cutlass]

Are you familiar with Peter H. Lindert's "Free Lunch Paradox", and have you formed an opinion about it?

Spoiler :

27 November 2002 draft
“Why the Welfare State Looks Like a Free Lunch”
Harvard University, 18 November 2002
Peter H. Lindert
University of California - Davis
ABSTRACT
The econometric consensus on the effects of social spending confirms a puzzle we
confront in the raw data: There is no clear net GDP cost of high tax-based social
spending on GDP, despite a tradition of assuming that such costs are large. This
paper offers five keys to this free lunch puzzle. First, it shows conventional
analysis imagines costly forms of the welfare state that no welfare states have
ever practiced. Second, better tests confirm that the usual tales imagine costs that
would be felt only if policy had strayed out of sample, away from any actual
historical experience. Third, the tax strategies of high-budget welfare states are
more pro-growth and less progressive than has been realized, and more so than in
free-market OECD countries. Fourth, the work disincentives of social transfers
are so designed as to shield GDP from much reduction if any. Finally, we return
to some positive growth and well-being benefits of the high welfare budgets, and
then pose theoretical reasons why democracy may exert a crude form of cost
control.
* * * * * * * * * * * * * * *
This paper draws on Chapters 10, 12, 18, and 19 in a two-volume book on Social
Spending and Economic Growth since the Eighteenth Century, forthcoming in late 2003
from Cambridge University Press. The seminar presentation begins with overall
conclusions, and then emphasizes Parts III and beyond.
Page 2
It is well known that higher taxes and transfers reduce productivity. Well known --
but unsupported by statistics and history. This paper dramatizes a conflict between intuition
and evidence. On the one hand, many people see strong intuitive reasons for believing that
the rise of national tax-based social transfers should have reduced at least GDP, if not true
well-being. On the other, the fairest statistical tests of this argument find no cost at all.
Multivariate analysis leaves us with the same warnings sounded by the raw historical
numbers. A bigger tax bite to finance social spending does not correlate negatively with
either the level or the growth of GDP per capita. How can that be true? Why haven’t
countries that tax and transfer a third of national product grown any more slowly than
countries that devote only a seventh of GDP to social transfers?1
This paper shows the width of the gap between intuition and evidence, and then tries
to explain it. All our well-known demonstrations of the large deadweight losses from social
programs overuse imagination and assumption. There are good reasons why statistical tests
keep coming up with near-zero estimates of the net damage from social programs on
economic growth. It’s not just that the tales of deadweight losses describe bad policies that
real-world welfare states do not practice. It’s also that the real-world welfare states reap
offsetting benefits from a style of taxing and spending that is pro-growth.
The keys to the free lunch puzzle are:
(1) For a given share of social budgets in Gross Domestic Product, the highbudget
welfare states choose a mix of taxes that is more pro-growth than the mix chosen
in the United States and other relatively private-market OECD countries.
(2) On the recipient side, as opposed to the tax side, welfare states have adopted
several devices for minimizing young adults’ incentives to avoid work and training.
(3) Government subsidies to early retirement bring only a tiny reduction in GDP,
partly because the more expensive early retirement systems are designed to take the least
productive employees out of work, thereby raising labor productivity.
(4) Similarly, the larger unemployment compensation programs have little effect
on GDP. They lower employment, but they raise the average productivity of those
remaining at work.
Page 3
(5) Social spending often has a positive effect on GDP, even after weighing the
effects of the taxes that financed the spending. Not only public education spending, but
even many social transfer programs raise GDP per person.
(6) The design of these five keys suggests an underlying logic to the pro-growth side
of the welfare state. The higher the social budget as a share of GDP, the higher and more
visible is the cost of a bad choice. In democracies where any incumbent can be voted out of
office, the welfare states seem to pay closer attention to the productivity consequences of
program design. In the process, those countries whose political tastes have led to high social
budgets have drifted toward a system that delivers its tax bills to the less elastic factors of
production, in the Ramsey tradition.

http://www.econ.ucdavis.edu/faculty/fzlinder/Freelunch/HarvardFreelunch1.pdf

 

[LightFang]

Imagine if everyone spent all their lives getting educated, who would work and create actual value?

Education is good, don't rag on it. Positive externalities, etc.

I'd rather have a nation of thinkers. I mean, the way you're thinking, we'll have Fahrenheit 451.

 

[Godwynn]

Imagine if everyone spent all their lives getting educated, who would work and create actual value?

Taking it to quite an extreme aren't we? I ask how over education is bad and all of sudden no one works and everyone is just crammed into lecture halls all of a sudden?

What I am wondering is how a well motivated population that seeks more education is somehow bad? What ever happened to night classes? I was planning on attending night classes or skills workshops well after I graduate with my degrees. It keeps the population skilled. Sure, there are people that spends a long time in university.

Do we really want to look at people as worth only their production? What happened to learning for knowledge's sake?

If given the choice of over education and under education, I will take over education. Every time.

 

[Ansar]

A bachelor's degree is equivalent to a high school degree in the past because our primary education system has gotten that bad.

Link please?

 

[LightFang]

Or, it's because people are just getting more and more competitive, which is a sign of how progressive we're getting. You need to know more before you can do things because everybody else knows more.

 

[Verbose]

Imagine if everyone spent all their lives getting educated, who would work and create actual value?

Machines, robots even, with the odd guy at a control panel. That's where we're headed anyway. Manual labour hasn't been a road to riches for any nation for quite some time.

 

[Homie]

Machines, robots even, with the odd guy at a control panel. That's where we're headed anyway. Manual labour hasn't been a road to riches for any nation for quite some time.

Who said manual labor is the only kind of work? Lots of jobs today entail no manual labor whatsoever.

Or, it's because people are just getting more and more competitive, which is a sign of how progressive we're getting. You need to know more before you can do things because everybody else knows more.

This is what I'm talking about people. Unlike Lightfang though, I dont think it's a good thing.

I see it a lot back home, more than you guys see it in the US: "Fagbrev" which is a certificate of education and training, 2 years of each, then you get your fagbrev. This is for trades/professions. The thing is, a lot of trades are easy, you could learn them on the job in a week, others require more skill and knowledge, but they're all 2 years education and 2 years training. This is silly, not every trade requires 2 + 2 years. Many (most?) require way less. So this leads to overeducation. Now to higher education. Most such jobs you learn on the job, and your education has little to do with it. A guy who spent one year working for a company in an office type job will do it better than a new guy who spent 4 years at college.
The thing is, now we all need bachelor's at minimum, probably masters in order to get a decent job. Not because the job really requires that kind of education, but because employers would rather hire someone with a college degree than someone without one, which leads everyone to get a college degree, which leads to the devaluation of college degrees in the market place, which means that we'll have to get a masters to stand out, until that too is common, then we'll have to get a Phd, where does it end?

Learning for its own sake is cool if you can afford that. Its not cool when education is free (Norway) and people keep spending more time in school, and more people go to school, people who should perhaps be tradesmen or something.

 

[Mise]

Over-education is growth, inextricably. The "optimal" level of education for a society is always greater than the society's current level of education.

However, if Homie means that there is an optimal ratio between hours spent working and hours spent learning, then he is probably correct. But an over-educated society is, by definition, exactly as productive as an equally under-educated society. If you work an extra hour, you will get an extra unit of production, say. If you learn for an extra hour, you will increase the value of that unit of production for all hours worked.

 

[dutchfire]

If you learn for an extra hour, you will increase the value of that unit of production for all hours worked.

I think Homie is saying that that isn't correct. A lot of time, you'll be learning things that won't increase your production.

 

[Mise]

I think Homie is saying that that isn't correct. A lot of time, you'll be learning things that won't increase your production.

You'd/he'd be surprised at what a person educated in one field can achieve in another.

 

[classical_hero]

How much more damage is still to come out of the Sub prime damage? Also what benefits will the Housing bill that recently passed do to the American economy?

 

[Whomp]

CH--Here are the basics.

Here are some of the new benefits:

RENEGOTIATING MORTGAGES Part of the bill is devoted to the creation of a program that may allow some people to cancel their old mortgage loans and replace them with new fixed-rate loans lasting at least 30 years. The amount of the new loans would be no more than 90 percent of what their property is actually worth now.

So who is eligible? You need to have originated your troubled loan or loans on or before Jan. 1, 2008. The loans in question must be on your primary residence. Vacation homes and investment properties are ineligible. You will also need to verify your income, which many borrowers did not have to do in recent years.

Also, as of March 1, 2008, your monthly housing payment (including the principal on all your various mortgage payments, interest, taxes and insurance) has to have been at least 31 percent of your monthly household income. So if you were earning $5,000 a month and had housing payments of $3,000, you are eligible. But if you had payments of just $1,400, you would not be, presumably because that loan is affordable given the size of your income.

Lenders, however, are not required to give you a better deal under the new law, even if you do meet the qualifications. They may not be willing to negotiate unless they think you are truly on the cusp of foreclosure.

If you manage to get a new loan, you cannot take out a home equity loan for at least five years after you get the new mortgage. You will also have to pay a 1.5 percent fee each year on the remaining balance. Finally, you have to hand over no less than 50 percent of any appreciation on the home to the government once you sell. Sell the house in less than five years, and you will have to turn over as much as all of the gain.

This program ends on Sept. 30, 2011. While it does not officially take effect until Oct. 1, lenders may be willing to start their negotiations with borrowers now.
Seems to help those on the cusp of foreclosure. Anyone else can fight it out.

BREAK FOR FIRST-TIME BUYERS If you are buying a home for the first time, and it is your primary residence, you are eligible for a federal tax credit of $7,500 or 10 percent of the purchase price, whichever is smaller. With a tax credit, you subtract the credit amount from the total you would otherwise pay to the Internal Revenue Service. So if you owe $1,500 and you qualify for the credit, you would end up getting a $6,000 refund.

There are two big catches, though. If you earn a modified adjusted gross income of more than $75,000, or $150,000 if you are married and filing your tax return jointly, the credit starts to phase out. For single people, it phases out completely at $95,000 of annual income, while for married people filing jointly, it phases out at $170,000.

But you have to pay back the credit over the next 15 years, in equal amounts each year when you pay your federal taxes. That makes this more like an interest-free loan than a true credit. According to the National Association of Realtors, there were about 2.5 million first-time home buyers in 2007. A large proportion of them would have qualified for this credit, but whether it is enough to push would-be buyers over the edge this year remains to be seen.

The tax credit is retroactive to home purchases on April 9, 2008, and expires on July 1, 2009. If you purchase a home from Jan. 1, 2009 to June 30, 2009, you can claim the tax credit on your 2008 tax return.
Fairly limited and seems to try and set a bottom on home prices by trying to bring new people to market but I doubt it will rectify the supply issue. The problem I see is this won't help many of the worst R.E. markets like Phoenix, LA and Miami since the problem in these markets is people who can afford more expensive homes (IE those who make $75,000+) don't receive the benefit.

ADDITIONAL DEDUCTION If you are a homeowner who takes the standard deduction on your federal income taxes and does not itemize, this one is for you. You can now take an additional federal tax deduction of $500, or $1,000 if you are married and filing your tax returns jointly. Again, this one is gravy; you get it in addition to the standard deduction. Since itemizers are often people who pay a lot of mortgage interest, this deduction will generally benefit people who pay little or none, like those who have paid off their mortgages entirely or close to it. There is one hitch here: you will need to report the property taxes you paid on your tax form. If they are less than $500 (or $1,000 if you are married and filing a joint return), your deduction will be limited to the amount of the property tax you paid.
Seems to only benefit retirees.

REVERSE MORTGAGE CHANGES Reverse mortgages allow older Americans, generally 62 and older, to get a lump sum or a monthly check that comes out of their home equity. They do not have to pay the money back until they stop living there permanently or their heirs sell the house.

The problem with these loans, however, is that they often come with high fees. Moreover, some salespeople pressure borrowers who are applying for the loan to purchase annuities, long-term care insurance or other financial products that are not necessarily in the borrower’s best interest.

The bill tries to address both issues. First, it limits origination fees on reverse mortgages at 2 percent of any loan up to $200,000 and 1 percent beyond that, up to a maximum of $6,000.

The bill also states explicitly that borrowers cannot be forced to purchase an annuity or other financial or insurance product as a condition of qualifying for a reverse mortgage.

Finally, the bill raises the maximum amount that people can borrow. Before, the limits were set on a county by county basis, according to AARP’s legislative policy director, David Certner. The biggest allowable mortgage available anywhere was just over $400,000. Now, there is a nationwide cap of $625,500.

There's pros and cons on these types of mortgages. I'm not sure this makes the most sense for some people if they can get a home equity line at prime +/- 0.5% at no cost. Depends on life expectancy, really.

REDEFINITION OF JUMBO LOANS Often, if you want the mortgage loan with the lowest possible interest rate, it has to be small enough to be purchased by Fannie Mae or Freddie Mac from whatever bank or other institution originated it.

Under the new bill, Fannie and Freddie have permanent authority to buy bigger loans in areas with high housing costs. (Temporary measures allow them to buy bigger loans, but those expire on Dec. 31.) They can buy loans up to 115 percent of the local median home price, though they cannot buy any loans larger than $625,500. Any larger loan will generally be a jumbo loan, which will cost more in interest.
Much needed since most metropolitan areas are already well above this range and jumbos are ~2% higher than conforming loans.

A BREAK FOR VETERANS Lenders will have to wait nine months, instead of 90 days, before beginning foreclosure proceedings on homes owned by someone returning from the military. Lenders must also wait a year before raising interest rates on a mortgage held by someone returning from military service.
This is the right thing to do

These provisions expire on Dec. 31, 2010.

This bill doesn't address the bigger problem which is declining prices and substantial supply. Unlike stocks, real estate takes a long time to work off excess because it doesn't disappear like some internet stocks did.

 

[JerichoHill]

Imagine if everyone spent all their lives getting educated, who would work and create actual value?

How is that proof that your claim was correct? That's a horrible counterfactual.

 

[JerichoHill]

Are you familiar with Peter H. Lindert's "Free Lunch Paradox", and have you formed an opinion about it?

Im sorry, I'm not that familiar with it. I know of it, but I've never read it.

 

[JerichoHill]

Link please?

That's fairly common knowledge, almost common sense now. I'm comparing generation to generation there, and that's...pretty much what's gone on. You have to have a college degree to be a McD's manager now. There's proof.

 

[JerichoHill]

What the heck, you work with people who have twice the degrees you have? I call that overeducated and a waste of resources. Geez, when everyone keeps getting more degrees it dilutes the value of higher education. A bachelor's today is worth as much as a high school diploma 50 years ago.
Let's stop this trend before we have to stay in school til we're 60!

Are you still trying to defend this gross oversimplification?

 

[JerichoHill]

CH--Here are the basics.


This bill doesn't address the bigger problem which is declining prices and substantial supply. Unlike stocks, real estate takes a long time to work off excess because it doesn't disappear like some internet stocks did.

agreed.

10 char

edit: btw, that chart is only for Cali, which is bubblicious

 

[bhsup]

This isn't so much an economics question so much as "how stupid can people be about economics".

This morning when I got up, I flipped on the tube and there was Kevin Trudeau peddling some economics book. I thought this guy was banned from all that crap after his health books. Really, who is dumb enough to listen to this guy, and how is he still allowed to sell his crap over the airwaves?

 

[History_Buff]

I see it a lot back home, more than you guys see it in the US: "Fagbrev" which is a certificate of education and training, 2 years of each, then you get your fagbrev. This is for trades/professions. The thing is, a lot of trades are easy, you could learn them on the job in a week, others require more skill and knowledge, but they're all 2 years education and 2 years training. This is silly, not every trade requires 2 + 2 years. Many (most?) require way less. So this leads to overeducation. Now to higher education. Most such jobs you learn on the job, and your education has little to do with it. A guy who spent one year working for a company in an office type job will do it better than a new guy who spent 4 years at college.
The thing is, now we all need bachelor's at minimum, probably masters in order to get a decent job. Not because the job really requires that kind of education, but because employers would rather hire someone with a college degree than someone without one, which leads everyone to get a college degree, which leads to the devaluation of college degrees in the market place, which means that we'll have to get a masters to stand out, until that too is common, then we'll have to get a Phd, where does it end?

Learning for its own sake is cool if you can afford that. Its not cool when education is free (Norway) and people keep spending more time in school, and more people go to school, people who should perhaps be tradesmen or something.

Bolding mine.

There are a number of trades that can be learned in a week on the job. Take surveying (because it's what I have experience in). I could teach you how to do it in a few hours. The day-to-day stuff is extremely simple. And yet, a lot of the guy in the field have Bachelors degrees, or diplomas from tech school in how to do it. Why? Not to learn to the job, but how to learn to make damn sure it's being done right. Because there's a lot at risk, the managers all have to be well trained. Hence the degrees.


As for excessive education, it's not that big a problem. When you're getting a masters, you're doing research work, so you're still contributing in some form. Moreover, not everyone would ever choose to do it, even if it is free. Some people just can't hack it in higher education. Many more people simply get more satisfaction out of working than academia.

 

[Homie]

Are you still trying to defend this gross oversimplification?

Oversimplification it might be, but you and Lightfang both seem to realize that we need degrees to get jobs that previously didn't require degrees, i.e. our diplomas are becoming less valuable in the workplace. Like you said yourself, it is common knowledge. Your example being that a McDonalds manager needs a bachelors now. Maybe in some years time they'll require a Masters.
More people are in school, and people stay longer in school. This takes up resources, is it worth it?

Did you see my post #927 before you replied? I kinda lay out my thoughts there.