Social Safety Net
Social Safety Net
UC Davis Department of Economics and Center for Poverty Research
Republican legislators and the Trump administration have proposed
converting Medicaid to a block grant. This type of transformation of a safety net program has been done before: Welfare reform replaced an entitlement program with a federal block grant. What can we learn two decades after the change?
- Entitlement programs such as Medicaid and the former Aid to Families with Dependent Children serve all who are eligible. Total federal spending depends on the size of the covered population and their needs.
- Block grants are promoted as controlling costs and giving states flexibility because the federal government sets spending and gives states an annual lump sum to fund programs of their own design (likely within some federal requirements).
- In the 20 years since the conversion to a block granted program, federal spending on Temporary Assistance to Needy Families has remained fixed at $16.5 billion, for a reduction in real, inflation adjusted federal spending of 30 percent.
Replacing Medicaid with block grants could reduce future Medicaid spending or substantially slow down its growth. However, substantial costs savings would likely require reductions in the number of elderly and disabled receiving health care. Because these populations would likely receive medical care somewhere, costs of care or pressures on other parts of the health system could increase.
The concern that people or corporations might try to influence those in power to pursue private goals at the expense of the public crosses party lines. However, one common mistake in estimating the cost of these efforts is to imagine that it largely consists of the value of bribes paid, lobbying efforts exerted, or ill-gotten profits obtained. In fact, more damage is almost surely done by the way it affects who gets ahead, and the resultant impact on firms’ incentives and how the economy is organized.
- Once it is clear that connections dictate success, firms devote resources to favor-seeking rather than developing valuable products and services. Economist Anne Krueger, in an influential 1974 essay, coined the term, “rent-seeking society” to describe this unproductive state of affairs. Rents, in this view, are profits that are generated without creating anything of value to society.
- Washington is hardly new to favor-seeking. Access is obtained through direct lobbying or campaign contributions.
- The election of Donald Trump raised questions about two potential sources of rent-seeking that are relatively new to the American political landscape: The President's extensive portfolio of business holdings and his willingness to single out individual companies for praise or criticism regarding their business decisions.
- Research from other countries indicates that extensive business holdings by the country's leader can lend itself to a form of "indirect lobbying". A recent study found that during the administration of media mogul Silvio Berlusconi in Italy, companies – particularly those in more heavily regulated industries – advertised more on the Berlusconi-owned TV network, and paid higher prices for those ads as well.
- A leader's direct involvement with specific companies and their business decisions presents similar rent-seeking issues. Individual companies may find that they need to spend time and resources in order to avoid being on the wrong end of a leader's desired outcome --rather than on product development or other business-related endeavors. Moreover, the resulting business decision might end up not being the most efficient or productive.
Without diminishing the seriousness of Trump’s business conflicts – a number of which are unprecedented in nature – one should probably be circumspect in assessing whether it represents a marginally more toxic form of lobbying-as-usual, or is in fact something worse. Reasonable people can disagree on this question.
Trump’s populist brand of industrial policy of direct involvement with specific companies --and associated rent-seeking-- is a particular worry, focused as it is on domestic production. The distortions these sorts of practices can lead to on a large scale can hamper growth, as other countries have learned.
The Consumer Financial Protection Bureau (CFPB) was established in the wake of the Great Recession by the 2010 Dodd-Frank Act
to protect consumers from "unfair, deceptive, or abusive acts and practices” of financial service providers. It writes rules, supervises banks and non-bank financial institutions, conducts research on consumer use of financial services, and maintains a public consumer complaint database. Opponents charge that it lacks accountability, that it publicizes unverified complaints against financial institutions, and that it promulgates rules without regard to costs, reducing the availability of financial services. Several bills
have been introduced this month by Congressional Republicans that would curtail or eliminate the CFPB.
- Many people are ill equipped to make financial decisions in today's complex financial system: 28 percent of men and 44 percent of women cannot correctly answer more than two out of five basic finance questions --a lower score than can be achieved by guessing randomly (see chart). Yet many feel confident of their abilities so they may not seek help even if they need it.
- The CFPB researches consumer patterns, such as repeated borrowing at high interest rates from banks and payday lenders, to inform its rulemaking and the legislative process in Congress and the states. With over 700,000 complaints, its consumer complaint database also provides insight into existing and emerging issues.
- In its short existence, the CFPB has issued a relatively small number of major new rules through a deliberate process that required it to consider the cost of its rules relative to their benefits. None of the rules currently in effect are plausibly responsible for major changes in the availability of household credit.
Consumer financial protection is just as reasonable an endeavor as regulation of health care provision and access to pharmaceuticals. The CFPB is a young agency that has acted responsibly under its Dodd-Frank mandate. The intensity of opposition to the CFPB is incommensurate with the scope of its actions to date and is not based on any evidence of harm to the economy. Under these circumstances it is important to preserve the CFPB’s independent ability to regulate financial services in the interests of consumers.
University of California, Davis
Expert opinion is under fire. The Trump administration has downgraded
the role of the Council of Economic Advisers and, more than a month into the administration, has not named anyone to that body.
- The Council of Economic Advisers (CEA) is designed to provide the highest-quality advice to the President, bridging the gap between the cutting-edge research tools developed in academia and real-time policy needs.
- The CEA analyzes how proposed policies affect big-picture issues like income distribution, employment, and long-run growth and prosperity. When economists within particular agencies disagree on relevant numbers or outcomes, the CEA offers technical support to help synthesize the different approaches as the issue moves up the decision-making chain.
- Ph.D.-trained economists across a number of other government agencies and offices collect, report, and analyze economic data used by virtually all economic analysts in the private and public sectors. The quality and transparency of these data are critical to effective governance. Argentina’s government repeatedly lost face when academic economists showed it was manipulating inflation statistics for political purposes.
Experts matter. The combination of expertise and commitment to serve the President make the CEA an important tool when the White House needs fast, objective, research-based analysis to provide relevant facts under time pressure. Politicizing or cutting funding to data collection and reporting in the U.S. government could cause instability in the wider economy.
H-1B visas allow companies to hire specialized foreign workers in the U.S. on a temporary basis. Critics contend that the program does not attract the "best and brightest" foreign workers, pays lower wages, and facilitates offshoring of services. Four bills
by lawmakers from both sides of the aisle aiming to reform the H-1B visas have been introduced in the House and Senate since January.
- The H-1B visa program allows temporary employment of foreign specialized workers in the U.S. who have a bachelor’s degree or equivalent --and of fashion models. In fiscal year 2014, 124,326 petitions of new H-1B visas were approved.
- Rather than constituting an abuse, the use of the H-1B for offshoring is something the U.S. has committed to by making 65,000 H-1B visas available for temporary foreign workers under the General Agreement on Trade in Services of 1995.
- The system of H-1B prevailing wages provides an incentive for employers to hire inexperienced, and therefore less skilled, workers.
One way to raise the skills of H-1B workers would be to restructure the prevailing wage schedule, based on data relating salaries and experience, which is not currently the case. Other visas, such as the O-1 temporary visa, could also be used to address a need for the "best and brightest" foreign workers.
Changes aimed at reducing the number of H-1B visas awarded to computer and information technology service companies, including the prioritization of applications for workers with the highest salaries or education, would likely trigger a complaint against the U.S. at the World Trade Organization (WTO). A successful complaint would permit retaliation in the form of tariffs.