“Medicare Extra” Shows the Convergence of Progressive and Conservative Healthcare Thinking

In public debate, progressives and conservatives often seem poles apart. Yet, behind the scenes, when pragmatic reformers take on a problem, their conclusions often converge, regardless of their political starting points. The Medicare Extra proposal recently released by the Center for American Progress (CAP) is a case in point. Filtering out any ideological language, Medicare Extra bears a strong resemblance to universal catastrophic coverage (UCC), an approach to healthcare reform that originated in conservative circles, but is now attracting wider attention. This post compares the two side by side.

Similarities of Medicare Extra and universal catastrophic coverage

The CAP bills Medicare Extra as an enhancement of traditional Medicare that would ensure that all Americans have healthcare coverage they can rely on at all times. It would cover a broad spectrum of healthcare needs, including dental, vision, and hearing care. Newborns, the currently uninsured, and people turning 65 would be enrolled automatically, while those who now have public or private coverage would have the option of enrolling.

In those respects, as well as in its name, Medicare Extra bears a strong resemblance to Senator Bernie Sanders’ Medicare for All. However, whereas Sanders’ plan would provide first-dollar coverage of healthcare spending for everyone, Medicare Extra builds in a substantial amount of cost sharing. Individuals and families with incomes below 150 percent of the federal poverty level (FPL) still get first-dollar coverage, but those with higher incomes would pay premiums according to a sliding scale that reached 10 percent of income for households at 500 percent of the FPL. Middle- and upper-income families would, in addition, face deductibles and copays. Those would be structured to give Medicare Extra policies an “actuarial value” sufficient to cover 80 percent or more of a household’s expected healthcare costs—the same standard of coverage as a gold plan purchased on today’s ACA exchanges.

UCC takes a similar approach to cost sharing. There are many versions, but for the sake of comparison, we can use a proposal by Kip Hagopian and Dana Goldman, recently outlined in Forbes. That plan would issue everyone a health insurance policy with a deductible equal to 10 percent of their “discretionary income,” that is, the amount by which their income exceeded the federal poverty level. The maximum deductible would be twice that amount for families of two or more.

In the simplest case, the catastrophic policy would pay all medical expenses once the deductible was met. People with incomes over 300 percent of the poverty line would also be required to pay a premium, estimated to be about $3,200. Some versions of UCC envision an additional tier of income, say another 10 percent, in which a copay would be required, but we do not consider copays here.

Both Medicare Extra and UCC would make special provisions for covering essential preventive services free or at reduced rates. With that exception, they would provide fully prepaid care only to those with very low incomes. Everyone else would be responsible for a significant, but affordable, share of their annual healthcare costs. They could meet those costs in cash, by making withdrawals from health savings accounts, or with some form of private supplemental insurance, as they chose.

As Hagopian and Goldman put it, “health insurance, like other forms of insurance, should perform one fundamental function: to protect against serious or catastrophic financial loss.”

Neither the Center for American Progress nor Hagopian and Goldman provide fully detailed schedules of premiums, deductibles, and copays. However, the general principles they outline are enough to make some back-of-the-envelope estimates of how the plans would work for households in various income categories. In constructing the table below, I have used the following assumptions in addition to what the sources provide:

  • A family consists of two adults and two children.
  • The federal poverty level is $25,000 for that family.
  • The columns for moderate family expenses include premiums and out-of-pocket expenses based on annual use of $1,000 worth of services by each family member. That is about 10 percent of the national per capita mean for personal healthcare expenditure. Given the highly skewed distribution of spending, I estimate it to be close to, or a little above, the median.
  • For UCC, the columns for maximum family expenses include the premium and assume that two or more members of the family meet or exceed the deductible. For Medicare Extra, they include the premium plus the family maximum out-of-pocket cost.
  • For Medicare Extra, for incomes of 500 percent of FPL and up, I use a hypothetical plan with 80 percent actuarial value that has an annual premium of $12,500 (10 percent of an income of $125,000), a deductible of $1,000, and a 20 percent copay, up to an out-of-pocket family maximum of $10,000. Those parameters are based on a representative ACA gold plan.

For low- and moderate-income families, the two plans produce similar results: Full coverage for the poor and near-poor, and substantial but affordable expenses for the middle class. It would be easy to tweak the values used for premiums, deductibles, and copays to make the two plans even more similar for low- and middle-incomes.

For incomes over 500 percent of the FPL, maximum expenses under the UCC and Medicare Extra plans appear to diverge. Paradoxically, the “progressive” Medicare Extra gives a bigger break to high-income families than the “conservative” UCC plan. However, the difference is at least partly illusory, since the CAP calls for financing Medicare Extra largely through tax surcharges on high-income individuals. If we lumped those taxes together with the explicit premiums, the amount of cost-sharing for high-income families under Medicare Extra would be much larger.

Significant differences

Despite the many similarities, there are some significant differences between Medicare Extra and UCC. One is the way the two programs are financed. UCC keeps premiums down by having very high deductibles. Some versions of UCC keep premiums even lower by adding co-pays, up to some maximum out-of-pocket limit. Some versions dispense with premiums altogether. By comparison, Medicare Extra has lower deductibles and lower family maximums, but higher premiums, and has dedicated taxes on top of those.

One result of the different financing mechanisms is that Medicare Extra spreads the risk of healthcare expenses more evenly among members of a given income bracket, regardless of their health status. In that regard, it is more insurance-like. A program like UCC, with high deductibles, is less expensive for wealthy-but-healthy households, and costlier for wealthy-but-unhealthy ones. In a way, that seems fairer, but remember, the difference is large only for the very rich. Do we really have to shed tears if a family with an annual income of a million dollars has to spend $200,000 a year for healthcare? After all, that still leaves them with $800,000 to spare. If you view insurance primarily as a way of protecting families against financial catastrophe, the distributional differences between the two programs may not matter much.

Perhaps more importantly, the different financing mechanisms reflect different strategies for cutting total national healthcare spending. At 18 percent of GDP, healthcare spending in the United States is currently the highest in the world.

Many conservative reformers blame high costs on the fact that healthcare consumers are, too often, spending someone else’s money. They maintain that if people had more “skin in the game,” in the form of high deductibles and copays, they would spend their healthcare dollars more wisely. Smarter consumer behavior, in turn, would unleash market forces that would put downward pressure on healthcare costs.

Just how large the savings would be is a matter of some controversy. Compare, for example, the relatively optimistic assessment from RAND with the more skeptical take from the Kaiser Family Foundation. The amount of cost reduction from any market-based plan would depend, in part, on measures to facilitate wise consumer choice, such as greater price transparency and removal of barriers to competition and entry of new providers.

Although Medicare Extra, too, expects people to make substantial contributions to the cost of their healthcare, more of those contributions come from premiums, which do not affect spending decisions at the margin. Modest deductibles and co-pays would still give some incentive to shop carefully, but not nearly as much as under UCC. Instead of skin in the game, Medicare Extra, as outlined by CAP, would rely more heavily on direct regulation of reimbursement rates and drug prices. The plan also hopes to achieve significant savings in administrative costs.

The fragmentation problem

Although this review has been generally positive, CAP’s plan has some weaknesses. In particular, it is far too timid in attacking the fragmentation of the U.S. healthcare system. Although it offers everyone the option of enrolling in Medicare Extra, it leaves original Medicare, Medicare Advantage, employer coverage, TRICARE (for active military), Veterans Affairs medical care, the Federal Employees Health Benefits Program, and the Indian Health Service largely intact. In my view, that would seriously undermine the hope that Medicare Extra could realize significant cost savings. It seems wasteful to maintain multiple administrative bodies for separate programs, many of which are already small, and would become smaller still if, as would be likely, some of their current beneficiaries took up the option of switching to Medicare Extra. Furthermore, it seems that coordinating reimbursement rates and negotiating drug prices would be a nightmare with so many administrators in the game.

Even worse, Medicare Extra appears to envision indefinite continuation of employer-sponsored insurance (ESI). ESI, born by accident during World War II, is the original sin of the U.S. healthcare system. No other country has ever adopted anything like it. ESI further fragments an already fragmented system, distorting healthcare choices and raising administrative costs. It is seriously inequitable, lacking equal treatment both across employers and among employees of a single company. Furthermore, it is a source of “job lock” that undermines labor mobility at a time when we need even more labor market fluidity to react to trade and technology shocks. It is hard to say enough bad things about ESI, and hard to think of any reason why replacing it either with Medicare Extra or with UCC would not be a good idea.

The authors of the CAP’s plan do offer employers the opportunity of sponsoring Medicare Extra enrollment for their employees rather than maintaining their own plans. It may be that they expect that to happen on a large scale. However, as Sarah Kliff observes, writing for Vox,

Many smart health care observers thought that large companies would dump their workers onto the Obamacare marketplaces, where the federal government would subsidize their premiums rather than the employer. But that didn’t happen, and we saw that employers were quite reticent to disrupt their workers’ coverage.

Could it be that employers actually like job-lock? That is said to be the rationale behind the proliferation of noncompete clauses for low-wage workers and other abusive strategies that encourage monopsony in labor markets. Employer-sponsored health insurance seems to fit the pattern.

Theoretically, UCC could also be introduced in a way that left ESI untouched, but that is not what most of its proponents envision. For example, in a 2012 article in National Affairs, Hagopian and Goldman note the “virtual unanimity” among economists that the tax exclusion for health insurance is bad public policy, and is “an important part of the reason for the inefficiency of our health-care system and for the high number of uninsured.” They propose that UCC should replace the catastrophic portion of all employer-sponsored insurance, although they would allow employers to provide supplemental, non-catastrophic coverage if they chose to do so.

In principle, there is no reason that Medicaid and conventional Medicare, too, could not be rolled into UCC. UCC and Medicaid are close substitutes, in that both offer first-dollar coverage at no cost to families in or near the poverty level. In replacing Medicare with UCC, careful thought would have to be given to the treatment of retirement income and savings for purposes of setting deductibles. One solution would be simply to assign a uniform and low deductible to everyone after a certain age, as Medicare now does.


Despite some important differences, when we compare Medicare Extra with universal catastrophic coverage, we see many points in common:

  • Both plans agree on the goal of providing universal, affordable access to the healthcare system.
  • Both agree that doing so will require some form of first-dollar coverage for people at the lowest income levels.
  • Both agree that the middle class can and should make a substantial contribution to routine healthcare needs, and that they could afford to do so, given a safety net against medical catastrophes.
  • Both agree that upper-income households should make a larger financial contribution, whether through premiums, high deductibles, taxes, or some combination.
  • Both agree that reform of the way healthcare is paid for will be more successful if it is combined with intelligent reform of pricing, competition, and administration.

Within these shared principles, there is a genuine opportunity for negotiation and compromise among would-be reformers from all parts of the political spectrum.

Reposted from NiskanenCenter.com

Is There Any Real Political Appetite for Healthcare Reform?

Healthcare reformers spend a lot of time thinking about what a better healthcare system might look like, but they also need to pay attention to what kinds of reform, if any, people really want. The latest polling data from the Kaiser Family Foundation suggest that there is still a real appetite for reform, provided it is framed properly. Here are three key take-aways:

First, eighty percent of those who responded to the KFF poll think drug prices are unreasonable. Even though prescription drugs account for just 10 percent of U.S. healthcare spending, well behind hospitals, nursing homes, and doctors’ fees, doing something about drug prices beat out several other legislative priorities among those polled:

 Second, views on drug pricing are less divided along party lines than are those on many other issues. For example, although Democrats and Republicans were widely split as to whether the NRA or labor unions had too much influence in Washington, their views on the influence of the drug companies were much closer. Three-quarters of Democrats and two-thirds of Republicans agreed that Big Pharma has too much clout in the nation’s capital.

Third, views on drug pricing were not the only aspect of healthcare reform where there substantial cross-party agreement. Majorities of both parties—seven out of every eight Democrats and two out of every three Republicans—supported a national Medicare for All plan for people who wanted it, if those with other coverage could keep what they have. A different phrasing of the question, which implied an immediate switch to a single government-run plan for everyone, was much more divisive, drawing two-thirds support among Democrats but just one-third support among Republicans.

The implications for reformers are clear:

  • Prescription drug prices are a more salient issue for the public than the share of drug costs in total healthcare spending would suggest.
  • Prescription drug prices are a politically unifying issue.
  • Not everyone is unhappy with the healthcare system as it is. Politically viable reform will require attention to the wishes of those who do not want change as well as those who do.
Reposted from NiskanenCenter.org

The Chickens Come Home to Roost: EPA Seeks to Weaken Fuel Economy Standards as New Car Prices Soar

On Monday, the EPA announced that it is is getting ready to  relax the ambitious automotive fuel economy standards (CAFE standards) that were set during the Obama administration. Those standards would have required new cars sold in 2025 to average more than 50 miles per gallon. EPA administrator Scott Pruitt said that the Obama administration had set the standards “too high” and “made assumptions about the standards that didn’t comport with reality.”

CAFE standards are coming under fire, in part, because of the rising cost of new cars, which reached a record high of $36,000 at the end of 2017. The extra costs of building fuel-efficient cars might be worth it if CAFE standards were really an effective way to cut greenhouse gas emissions, but they are not. Instead, they are among the most notoriously inefficient of federal regulations.

The fundamental problem is that CAFE standards attack emissions only indirectly. Buying an efficient hybrid instead of a gas-guzzling SUV is just one of many ways you can cut back on fuel use. You can, instead, consolidate errands or make your next trip to the supermarket in your Honda, instead of your Ford F-250, if you have one of each. Given more time to adjust, you can switch to public transportation, move closer to work and shopping, or work at home.

CAFE standards encourage fuel saving only when choosing what car to buy. Once you upgrade to a low-mileage vehicle, though, the cost of driving an extra mile goes down, reducing your incentive to take other fuel-saving measures. As a result, the cost of cutting fuel use via CAFE standards is higher than achieving the same result more directly through a carbon tax or higher gasoline taxes—six to fourteen times higher, according to a study by a team of researchers at MIT.

So, if CAFE standards are such a bad idea, why do we have them? As I explained in an earlier post,

If you are an economist, choosing higher fuel taxes over CAFE standards looks like a no-brainer, but if you are a politician, fuel taxes have an obvious drawback. Fuel taxes make the cost of reducing consumption highly visible. You see the big dollars-per-gallon number right there in front of you every time you drive up to the pump. CAFE standards, in contrast, hide the cost. You pay the price of a higher-mileage car only when you buy a new one, and even then, the part of the price attributable to the mileage-enhancing features is not broken out as a separate item on the sticker. You may notice that your new car costs more than your old one did, but there are lots of other reasons for that besides fuel economy.

But that logic only goes so far. As new car prices push into the stratosphere, the chickens are coming home to roost. The administration is sure to get a lot of political mileage out of making cars more affordable, climate be damned.

Reposted from NiskanenCenter.com

Why the "Sound Money" Components of Popular Economic Freedom Indexes Should Be Used with Caution

Institutions matter. Economists of the classical period knew that well. In recent years, economists have increasingly included institutional variables in their empirical work. The economic freedom indexes from the Fraser Institute and the Heritage Foundation have been among the most widely used institutional indicators.

The purpose of an economic freedom index, according to Heritage, is to “document the positive relationship between economic freedom and a variety of positive social and economic goals.” Many studies support that claim, finding that countries with high economic freedom scores are, in fact, more prosperous and dynamic than those that are less free. However, not all aspects of economic freedom turn out to be equally important. In earlier posts, I have been critical of the components of the economic freedom indexes that focus on the size of government and regulation. Here, I take on those that focus on price stability—the Fraser “Sound Money” component and the Heritage “Monetary Freedom” component.

I find that these price stability components add little to our understanding of economic freedom. Furthermore, because they incorporate an exaggerated fear of even moderate inflation, an attempt to achieve maximum price stability, as defined by these indicators, would be less likely to bring prosperity than to undermine it.

Is price stability an institution or a policy outcome?

The first problem with the Fraser and Heritage price stability indicators is that they do not really measure economic freedom in the sense that it underlies other components of the indexes. Robert Lawson, a senior member of the team that publishes Fraser’s Economic Freedom of the World reports, once wrote that an economic freedom index is, or should be, only that—“not an index of economic growth policies, efficient government provision of public goods, macroeconomic stabilization policies, or ideal income distribution policies.” If so, then the sound money indicators, as indexes of the success of monetary policy, are just what an economic freedom index should not be.

Measures of inflation and money growth account for three-quarters of the data that go into the Fraser Sound Money indicator and four-fifths of the Heritage Monetary Freedom indicator. Rather than measuring the freedom of individuals to work, produce, consume and invest as they see fit, they measure the performance of central banks. To be sure, if we are going to have central banks, we want them to do a good job, but conceptually, good central banking and economic freedom are different things.

Instead, it seems to me that the natural meaning of economic freedom, as applied to monetary matters, ought to be the freedom to use and exchange whatever kind of money one wants for whatever purpose. To their credit, neither Fraser nor Heritage entirely neglects that notion of monetary freedom. Fraser’s Sound Money includes a subcomponent, weighted at 25 percent, that measures the extent of restrictions on ownership of foreign currency bank accounts. The Heritage Monetary Freedom indicator gives a weight of up to 20 percent to a measure of the extent of price controls. If I were to try to build a better measure of monetary freedom, I would begin by including both of those, but I would not stop there.

Why not, for example, include a measure of central bank independence, much as both the Fraser and Heritage indexes include measures of judicial independence in evaluating the quality of legal institutions? There is a large literature linking central bank independence to the desired policy outcome of price stability. (This IMF working paper discusses measurement issues and provides links to previous literature.) In a similar vein, it might make sense to rate central banks on their use of policy rules. Many economists have argued that using policy rules to constrain or even fully replace central bank discretion can improve price stability. (A recent conference sponsored by the Boston Fed provides a detailed airing of the case for policy rules and contained discretion.)

Another indicator for possible inclusion would be the presence or absence of black markets for foreign currency, and, where black markets exist, the spread between the official and black-market exchange rates. (Fraser does include a measure of black-market exchange rates, although it appears as a subcomponent of the Freedom of Trade category rather than of Sound Money.) The multiple official exchange rates for different types of transactions that some countries maintain also represent limitations on freedom.

Finally, we might try to measure the degree to which a country’s monetary system is open to competing forms of money—a subject that Larry White, among others, has written about at length. An up-to-date treatment would want to cover regulatory limits on the use of cryptocurrencies.

A greater emphasis on these and other institutional variables, and less on the rate of inflation itself, would make the monetary components of the Fraser and Heritage indicators more consistent with the conceptual framework that underlies their other components.

An exaggerated fear of inflation

Setting aside the conceptual question of whether sound money is a form of freedom, an institution, or simply good macroeconomic policy, we come to the second major problem with the Fraser and Heritage price stability measures. By enshrining zero percent inflation as the ideal, both of them reflect an exaggerated fear of even moderate inflation that is not supported by the preponderance of evidence.

To understand why, we need to dig into some technical details, starting with Fraser’s Sound Money. This indicator has four subcomponents: the growth rate of the M1 money stock (currency plus checkable deposits) relative to the growth of real GDP; the standard deviation of inflation over the previous five years; the rate of inflation in the most recent year; and a measure of the right to own foreign currency bank accounts. The raw data for each subcomponent are converted to a scale of 0 to 10, with higher numbers representing greater price stability, and then averaged to get the full Sound Money indicator.

Of the four subcomponents, M1 growth appears to be a holdover from Milton Friedman’s personal involvement in the early stages of Fraser’s Economic Freedom of the World project. Few, if any, economists today consider holding M1 growth equal to the long-run rate of real GDP growth to be a reasonable target for monetary policy. One of the main reasons is that the difference between the rate of money growth and the rate of real economic growth equals the rate of inflation only if M1 velocity (the ratio of nominal GDP to the money stock) is constant.

In practice, however, as the following chart shows, velocity can be highly variable. For example, from 2005 to 2008, the Fraser money growth index averaged an excellent 9.7, but because velocity was rising, inflation averaged 3.2 percent. From 2009 to 2014, inflation slowed to 1.6 percent, but the Fed’s policy of quantitative easing caused a rapid growth of the money stock matched by a sharp drop in velocity. During this period, the Fraser money growth index fell to 8.45, its lowest level in the 45 years for which it has been calculated.

Beyond the problems with M1 growth, there are problems with the way Fraser’s Sound Money indicator measures inflation itself. The inflation subcomponent is based on the rate of CPI inflation in the most recent year, but manipulates the raw data extensively. First, the distribution of inflation rates is truncated at 50 percent per year. All countries that experience hyperinflation, no matter how rapid, are assigned the same score. Next, any deflation, that is, any negative rate of inflation, is converted to its absolute value. Finally, the data are converted to a scale of 0 through 10. This procedure can be summarized by the formula

FINFi = (50 – |пi|)/5

where FINFi is the Fraser inflation score for country i and пi is the raw inflation rate. By this method, then, an inflation rate of 0 percent becomes a perfect 10, a rate of either +2 percent or -2 percent gives a score of 9.6, and any inflation rate of 50 percent or higher earns a zero.

This procedure exaggerates the harm done by moderate rates of inflation in three ways. First, it assumes a priori that the optimal rate of inflation is zero. Second, by arbitrarily truncating the distribution at an inflation rate of 50 percent, it makes the scores of countries with moderate inflation look worse than they otherwise would. (For example, if the maximum permitted value of inflation were 100 percent rather than 50 percent, the score for a country with 2 percent inflation would be 9.8 rather than 9.6.) Third, by using absolute values of inflation rates, it implicitly assumes that a rate of +2 percent inflation is just as harmful as deflation of -2 percent, something that few economists believe to be the case. (See here for a full discussion of deflation and its effects.)

The Heritage Monetary Freedom indicator uses a somewhat different method, but one that similarly exaggerates the harm done by moderate inflation and understates the risks of deflation. Like Fraser, Heritage uses absolute values to convert deflation to an equivalent rate of inflation. Rather than truncating the distribution of observed inflation rates, Heritage reduces the statistical impact of extreme hyperinflation values by basing its score on the square root of observed inflation rates, multiplied by a constant. Rather than the most recent year’s inflation, it uses a three-year weighted average of inflation rates, and rather than a scale of 0 to 10, it uses a scale of 0 to 100, with higher values indicating less inflation. The full procedure is given by the formula

HINFi = (100 – 6.33*√п*i) – CONTROLS

where HINFi is the Heritage inflation score for country i and п*i is a weighted average of the absolute values of the last three years’ inflation rates, and CONTROLS is a penalty of up to 20 points depending on the pervasiveness of price controls.

The effect of this formula is to reduce the scores of countries with moderate inflation rates by even more, in comparison to those with zero inflation, than does the Fraser method. For example, raising the inflation rate from zero to 2 percent lowers the Heritage inflation score from 100 to 91 (assuming no price controls), compared to a smaller relative reduction from 10 to 9.6 using the Fraser formula.
Rather than making a priori assumptions that idealize zero inflation, penalize moderate inflation, and understate the risks of deflation, it would make more sense to look at the actual effects of inflation as revealed by empirical studies. There is an abundant literature to draw on.

Probably the most extensively studied question is the relationship between price stability and economic growth. (See here and here for recent surveys of the literature.) The question is not simply one of whether inflation is good or bad for growth. Three frequent findings suggest that a more nuanced view is appropriate.

  • Many studies find a nonlinear relationship, in which inflation up to a certain rate is associated with higher growth and with lower growth after that.
  • The optimal level of inflation—that is, the rate associated with the highest growth rates—appears to be lower in more developed economies.
  • Country-specific effects are strong. Both the optimal inflation rate and the degree of harm from excess inflation vary according to circumstances.

Some of the studies that reached these conclusions were done years ago, raising the question of whether they continue to hold for the period leading up to the global financial crisis and the recovery from it. For a quick-and-dirty check, I examined the most recent ten years of IMF data on inflation and growth. The findings were generally consistent with those of past studies:

  • Nonlinear formulations of the inflation-growth relation produced significantly better fits than linear formulations.
  • The relationship of inflation to growth varied according to income level. The rate of inflation associated with the best growth performance was lower for countries in the highest income quartile than for middle- and lower-income countries.
  • Although there was a statistically significant relationship between growth and inflation overall, the fit was far from tight. As in previous studies, country-specific factors accounted for a large part of the cross-country variations in growth.

In addition to the literature on the relationship between inflation and growth, there are many studies of the relationship between inflation and unemployment, both in the short run and the long run. One strand of that literature suggests that there is a “backward bending Phillips curve.” The idea is that there is some moderate, positive rate of inflation that produces the lowest minimum unemployment rate that can be sustained without accelerating inflation. Proponents of this view emphasize behavioral factors, especially downward rigidity of nominal wages. The most widely cited paper proposing a backward-bending Phillips curve was published in 1996 by George A. Akerlof, George L. Perry, and William T. Dickens. Thomas Palley has proposed a simpler version of their model that reaches the same conclusion.

In short, whereas the Fraser and Heritage price stability indicators assign the highest possible scores to countries with zero inflation, economists who have studied the effects of inflation in the real world have found, more often than not, that a moderately positive rate produces better results.


Taking all of the above into account, I reach the following conclusions regarding the price stability components of the Fraser and Heritage economic freedom indexes:

  1. Conceptually, the idea of measuring economic freedom in the first place is motivated by the hypothesis that good institutions produce good outcomes. In my view, explorations of that hypothesis are best conducted using economic freedom indicators that focus on institutional quality. Including indicators of policy outcomes, such as inflation rates, only confuses matters.
  2. The price stability components of Fraser and Heritage economic freedom indexes, which assign the highest possible scores to countries with zero inflation, reflect an exaggerated fear of the effects of moderate inflation. By using the absolute value of inflation rates in their indicators, they also understate the detrimental effects of deflation.

These conclusions have important implications both for researchers and for policymakers.

Researchers should treat the price stability components of the Fraser and Heritage indexes with caution. The results of any statistical tests that use the economic freedom indexes as a whole should be checked against tests that disaggregate those indexes into their principal components. The results of statistical tests that use the Sound Money and Monetary Freedom indicators as independent variables should be checked against tests that use raw inflation data, instead, or strip out price stability data altogether. Researchers interested in exploring the relationship between macroeconomic performance and the quality of monetary institutions should consider augmenting the Fraser and Heritage data with additional institutional indicators, such as measures of central bank independence, the use of monetary policy rules, freedom to use competing forms of money, and exchange rate regimes.

At the same time, policymakers should be cautioned against using the Sound Money or Monetary Freedom indexes as performance benchmarks. There is little evidence to support these indexes’ implicit assumptions that zero is the optimal rate of inflation or that a given rate of deflation is no more damaging than the same rate of inflation. Far from promoting freedom and prosperity, any attempt to maximize the soundness of money as defined by Fraser or monetary freedom as defined by Heritage would be more likely to place economies in a low-growth, high-unemployment straitjacket.

Reposted from NiskanenCenter.com

Guaranteed Jobs, Hungarian Style

In a recent blog post, Niskanen Center’s Samuel Hammond expressed skepticism about the idea of job guarantees. In his view, such policies do not attack the real problem, they are easily politicized, and, as active labor market policy, are inferior to wage subsidies for private sector jobs.

To see how guaranteed jobs work out in practice, we need look no farther than Hungary, where Prime Minister Viktor Orban has made the replacement of welfare by workfare a centerpiece of the claimed Hungarian economic miracle that helped him win re-election in last Sunday’s election.

Writing recently for The New York Times, Patrick Kingsley and Benjamin Novak provide an overview of job guarantees, Hungarian style. Their article, which focuses on a small village in which 73 of 472 residents participate in the program, makes an effort to show both the positive and negative side of workfare. They note that although the guaranteed jobs pay only about half the minimum wage, that is twice what participants previously received in unemployment benefits. Participants told them that the pay, although minimal, was enough to make a difference. The program has also brought some small but welcome improvements in the town’s infrastructure.

“This little bit of money goes a long way in this village,” said Eva Petrovics, 60 who helps to clean the village nursery school. “The fridge is full now.”

The program has also helped to spruce up the village. Since 2012, workfare participants have built a small bridge, added a drainage system, and renovated the town hall and sports fields.

However, there are downsides to workfare, too. Hammond’s concerns about politicization seem to have been borne out. Kingsley and Novak note that the program have made participants more dependent on Orban’s Fidezs party, which is expected to retain power in this weekend’s election, and on the town’s mayor, who determines job assignments.

Moreover, despite better drainage and tidier soccer fields, workfare participants do not really put in all that much time doing useful work. Often, they report to work for an hour or so and then go home. There is especially little to do in winter.

Popular though it may be in the Hungarian countryside, Orban’s workfare policy has many critics, both in Hungary and in Western Europe. Annamária Artner is a Senior Research Fellow at the Centre for Economic and Regional Studies of the Hungarian Academy of Sciences. Writing for the progressive website Social Europe, headquartered in London, Artner maintains that

The implied threat of the punitive workfare regime is effectively sweeping the unemployed under the carpet. The unemployment insurance system in Hungary, introduced in the early 1990s following the transition to a market economy, effectively no longer exists.

Reposted from NiskanenCenter.com.