Category Archives: Econ & Money

Researcher Casts Doubt on Effectiveness of Earned Income Tax Credit

The Earned Income Tax Credit is widely touted as a triumph of intelligent poverty relief.  Now Matt Bruenig suggests this is all wrong.

A bit of background: Suppose you want to give poor people money, but also don’t want to discourage work.  Yet you also don’t want to give money to people once they are earning enough not to be poor.  Imagine a program that provides, say, $6000 benefits up to an arbitrary cut-off, say earnings of $12,760 (the poverty line for a single person) per year.  The reason you don’t want to do that is that a person looking at a raise from $12K to $13K would likely find that the $1K raise actually cost them $5K when you factor in the lost benefits — a major disincentive.

The policy lesson was to do graduated cuts — none at first, so the first marginal extra dollar went right into the working poor pocket, and then on a percentage basis, so the marginal benefit of “working more” (actually, earning more) was always significant net of taxes.  A key feature of the EIC is the benefits are much more generous for persons with children: a key goal of the program has always been to target working single mothers with children.

Thus, as Wikipedia summarizes it,

EITC phases in slowly, has a medium-length plateau, and phases out more slowly than it was phased in. Since the credit phases out at 21% (more than one qualifying child) or 16% (one qualifying child), it is always preferable to have one more dollar of actual salary or wages considering the EITC alone. (Investment income, however, is handled far less gracefully, as one more dollar of income can result in the sudden 100% loss of the entire credit.)

Conventional wisdom, of which on this topic I’ve always been a happy consumer, says that while the EIC leaves behind those with no job at all (a political compromise to exclude the so-called  ‘undeserving poor’), for the population it targets EIC does a great job. And that, as far as know, is what most studies have shown.  Certainly back in the days I took economics EIC was touted as a substantial, if imperfect, success story.

But, comes now a heretic:

In order to determine whether the EITC works the same way in reality as it does on paper, policy researchers have historically relied upon the Annual Social and Economic Supplement (ASEC) microdata produced by the Census. Analyses of the ASEC microdata inevitably reveal that the EITC functions perfectly, pulling around 5.6 million people out of poverty.

But this is a mirage. The reason the EITC functions perfectly in the ASEC microdata is because the EITC values for each family are imputed using a tax simulation that assumes the EITC works perfectly. You cannot evaluate the effectiveness of a program by using data that is constructed by assuming its effectiveness. Yet that is precisely how most evaluations of the EITC are currently done.

If correct, that is a major gotcha.

The conventional figures that are produced through this tax simulation have three big problems that combine to dramatically overstate how many people the EITC pulls out of poverty.

The first problem is that the ASEC data counts EITC benefits in the wrong year. For example, EITC benefits that are actually paid out in early 2019 are counted as if they are received in 2018. This makes the program appear to be perfectly targeted to those with earnings right around the poverty line, even though it is not.

The second problem is that the ASEC data assumes 100 percent of eligible people participate in the program. In reality, according to the IRS, only 78 percent do.

The final problem is that the ASEC data assumes that eligible individuals receive their entire EITC benefit. Yet the IRS says that about 60 percent of EITC recipients use a paid tax preparer, and private surveys have shown that these preparers charge fees that are equal to around 13 to 22 percent of the average EITC benefit.

Adjusting the data to account for these problems reveals that the EITC only reduces poverty by half as much as is commonly reported. These adjustments also reveal that, due to its unique private administrative costs in the form of tax preparation fees, the EITC’s administrative overhead is around 11 percent of benefits received, making it one of the least efficient welfare programs in the country.

This is the one part of the analysis that looks suspect to the uninitiated (this is not my field): how many of the people paying a tax preparation fee would have done so anyway? In other words, is it fair to ascribe to the EIC 100% of the tax preparation fees borne by its beneficiaries or is the marginal cost much less?

Even so, the measurement circularity claim, if valid, seems like a very legitimate beef.  More studies please!

 

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Mental Whiplash (Oil Cartel Edition)

I remember when the major casualties of the OPEC oil cartel were Japan, the US, and Europe. I remember the oil shock, aka the oil crisis of 1973. I’m still stuck in a world in which higher oil prices are not in the short-term interests of the average US consumer, although given the effects on global warming and the need to transition away from carbon fuels, I understand that the longer-term picture is much more complicated.

Still, it creates mental whiplash when I read that the head of the US Government, some guy by the name of Donald Trump, just brokered a deal with the Saudis and the Russians, two of his favorite autocrats, to lower oil production by almost 10% in order to raise oil prices. Of course this also helps out his over-leveraged buddies in the US fracking business. It isn’t, I’m quite sure, motivated by concern for the environment.

The next election can’t come too soon.

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Florida’s Evil Policies Become More Visible

I hate to quote Politico, which I tend to think is both biased and given to the worst horse-race journalism, but when they’re right they’re right: ‘It’s a sh– sandwich’: Republicans rage as Florida becomes a nightmare for Trump:

Already anxious about Trump’s chances in the nation’s biggest swing state, Republicans now are dealing with thousands of unemployed workers unable to navigate the Florida system to apply for help. And the blowback is directed straight at Trump’s top allies in the state, Gov. Ron DeSantis and Sen. Rick Scott.

Privately, Republicans admit that the $77.9 million system that is now failing Florida workers is doing exactly what Scott designed it to do — lower the state’s reported number of jobless claims after the great recession.

“It’s a sh– sandwich, and it was designed that way by Scott,” said one DeSantis advisor. “It wasn’t about saving money. It was about making it harder for people to get benefits or keep benefits so that the unemployment numbers were low to give the governor something to brag about.”

Republican Party of Florida chairman Joe Gruters was more succinct: “$77 million? Someone should go to jail over that.”

With hundreds of thousands of Floridians out of work, the state’s overwhelmed system is making it nearly impossible for many people to even get in line for benefits.

The new online system was part of a series of changes designed to limit benefits. The ultimate goal — which it delivered on — was to lower unemployment taxes paid by Florida businesses. A 2011 analysis done by the Florida Legislature estimated that the changes pushed by Scott would save businesses more than $2.3 billion between 2011 and 2020.

Now, as thousands of people try to get help, the system crashes or denies them access. Nearly 400,000 people have managed to file claims in the last two and half weeks. It’s not known how many have tried and failed.

Most of those who do submit applications won’t qualify for aid, and the benefits that are paid out are among the most meager in the country — a maximum of $275 a week.

Posted in Econ & Money, Florida | 2 Comments

Strange Stuff Indeed

In a post entitled Strange Stuff on Wall Street: Big Job Cuts, Fed Bailout, Record Markets at Wall Street on Parade, authors Pam Martens and Russ Martens conclude,

…in a rational world, big Wall Street job cuts and the need for massive bailout money from the Fed would not correlate with a stock market regularly setting new highs. But Wall Street no longer exists in a rational universe. It exists in an alternative universe where Wall Street banks are allowed to put out a buy recommendation on a company and then trade its stock in their own Dark Pools; where trillions of dollars of risky stock derivatives are held by the country’s largest federally-insured bank; where initial public offerings of deeply indebted companies that have never made a dime of profits are hustled for listing on the nation’s stock exchanges; and where Wall Street is allowed by the U.S. Supreme Court to run a private justice system which draws an opaque curtain around the kinds of charges aggrieved investors are making against these Wall Street banks.

As we have stated previously, this is not so much a stock market as it is an institutionalized wealth transfer system moving money from the pockets of the 99 percent to the 1 percent who have concocted this market structure.

Millions of Americans are grappling with how to put food on their table while paying their 17 percent interest rate on their credit cards from these same Wall Street banks that are being provided loans from the New York Fed daily at 1.60 percent.

I started reading their blog because it seemed the most concerned by the strange doings in the repo market. The authors come off as a bit shrill, but there seems a lot to be shrill about — and even more to be deeply puzzled about, as this chart from Alhambra Investments shows:

If you go back to early September 2019, the US government was buying no repos at all; it stepped in when the market liquidity vanished suddenly for still-unexplained reasons. And, at last, the Fed beginning, maybe, to extricate itself from being the repo market lender of first as well as last resort, so maybe this will just be another squall before the storm. Then, again, that dark part of the line to the right in the graph is people who wanted the fed to buy their repos (at a great price) but were unsatisfied. So extrication may not be easy unless those sellers can find a market-clearing price on the private exchanges.

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BBVA Compass Bank Behaving VERY Badly

I confess to a learned bias against commercial banks.  (Don’t get me started on investment banks…) I have never found a good brick and mortar bank here in Miami, although I have had more luck with an online bank.

That said, this incident, BBVA Compass Branch Manager Retaliates Against Elderly Customer Via Trying to Have State Agency Deem Her Incompetent on Fabricated Grounds, is several orders of magnitude worse than anything I ever heard of.

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This Explains a Lot: Why Minimum Wage Increases Haven’t Reduced Employment

Source: https://www.flickr.com/photos/arcticpenguin/3366454549One of the striking features of the US economy is how much concentration we’ve allowed in major industries: national monopolies, regional monopolies (e.g. cable), oligopolies. Now come economists tying that trend to why raising the minimum wage doesn’t cause the job losses that micro-economics might predict: one of the things that makes market concentration profitable is that it allows firms to underpay workers (that is, pay them below their marginal productivity). So long as the raise in minimum wage doesn’t rise to a level exceeding the value of the work, businesses rationally decide to hold on to the workers.

José Azar, Emiliano Huet-Vaughn, Ioana Marinescu, Bledi Taska, and Till von Wachter: Minimum Wage Employment Effects and Labor Market Concentration:

Why is the employment effect of the minimum wage frequently found to be close to zero? Theory tells us that when wages are below marginal productivity, as with monopsony, employers are able to increase wages without laying off workers, but systematic evidence directly supporting this explanation is lacking. In this paper, we provide empirical support for the monopsony explanation by studying a key low-wage retail sector and using data on labor market concentration that covers the entirety of the United States with fine spatial variation at the occupation-level. We find that more concentrated labor markets–where wages are more likely to be below marginal productivity–experience significantly more positive employment effects from the minimum wage. While increases in the minimum wage are found to significantly decrease employment of workers in low concentration markets, minimum wage-induced employment changes become less negative as labor concentration increases, and are even estimated to be positive in the most highly concentrated markets. Our findings provide direct empirical evidence supporting the monopsony model as an explanation for the near-zero minimum wage employment effect documented in prior work. They suggest the aggregate minimum wage employment effects estimated thus far in the literature may mask heterogeneity across different levels of labor market concentration.

Spotted via Brad DeLong.

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