Brookings: Projects - The Hamilton Project

Is Starting College and Not Finishing Really That Bad?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 07 Jun 2013 11:36:00 -0400

Editor's Note: In this month’s employment analysis, The Hamilton Project's Michael Greenstone and Adam Looney examine whether starting college is still worth the investment for students who fail to complete a degree. The findings suggest even completing “some college” has a higher rate of return than many conventional investments including stocks, bonds, and real estate.

Employers added 175,000 jobs in May, according to today’s employment report from the Bureau of Labor Statistics, about the same average pace of job creation over the prior year. All of the job increases were in the private service-providing sector; employment edged down in both the goods-production sector, which includes construction and manufacturing, and in government. This reflects a longer-term pattern: over the prior year, employment in the service sector has increased by almost 2 million jobs, while employment in the goods-producing sector has been essentially flat, and public employment has declined. Also in May, the unemployment rate edged up to 7.6 percent. The broadest measure of employment—the employment-to-population ratio—was 58.6 percent, the same as a year ago. It has remained roughly at the same level since late-2009.

These latest jobs and unemployment statistics, however, do not tell the full story of how all Americans are faring in today’s economic climate, as workers with more education continue to be employed at higher rates and earn more than their less-educated counterparts. Indeed, as previous Hamilton Project work has shown, the rates of return to a two- or four-year college degree are high. In recent years, however, there has been increasing concern about students who begin two- and four-year colleges but fail to complete a degree—particularly in light of the large increase in student debt and growing talk about the high costs of college.

In this month’s employment analysis, The Hamilton Project examines whether starting college is worth it for students who fail to complete a degree. Our startling finding is that it is: these students’ lifetime earnings are roughly $100,000 higher (in present value) than that of their peers who ended their education after high school. Measured by the rate of return, getting some college is an investment with a return that exceeds the historical return on practically any conventional investment, including stocks, bonds, and real estate. (Of course, the return to some college is considerably smaller than the return to finishing either an associate’s or bachelor’s degree.) We also continue to explore the nation’s “jobs gap,” or the number of jobs needed to return to pre-recession employment levels.

The College Earnings Premium

More education corresponds to better employment opportunities, even in the current, tepid job market. In April 2013, according to BLS data, the unemployment rate for individuals age twenty-five and older without a high school diploma was 11.4 percent; for high school graduates, 7.2 percent; for individuals with an associate’s degree, 5.0 percent; and for graduates with a bachelor’s degree or higher, unemployment was only 3.6 percent. Based on a more expansive measure of employment—the employment-to-population ratio—these disparities are even larger. Of all individuals without a high school diploma, age twenty-five and older, only 39.9 percent had a job; for high school graduates with no additional education, the employment rate was 54.5 percent; for individuals with an associate’s degree it was 68.6 percent; and for graduates with a bachelor’s or higher it was 73.2 percent. Interestingly, the unemployment rate for individuals that reported some college but no degree was below the national average at 6.6 percent and the employment-to-population ratio was 60.9 percent. These numbers, and all the calculations presented in this report, are described in detail here.

In addition to increasing the chances of employment, education also has a substantial effect on one’s earnings potential. The graph below shows the average annual earnings of individuals with varying levels of educational attainment. Those with a bachelor’s degree earn a premium of roughly $30,000 each year relative to those with just a high school diploma. Over a lifetime of work, a college graduate with a bachelor’s degree would earn over $500,000 more than an individual with just a high school diploma.

What has not been previously appreciated is that even those who enroll in a two- or four-year program but do not attain a degree also experience substantial increases in earnings. On average, these individuals made about $8,000 per year more than those with just a high school diploma. Over a lifetime, this results in over $100,000 more in earnings.

Are the Increased Earnings Worth the Investment?

In today’s job market, where even some college graduates are struggling to find work, many wonder whether the high cost of college is worth the eventual earnings payoff. First, students face the out-of-pocket costs of tuition. On average, annual tuition and fees are about $3,000 at two-year colleges, $13,000 at four-year colleges, and $27,000 at professional degree programs.

But the true cost of college is more than just tuition; it also includes the opportunity cost of being in school and not working, as college students forgo income that they could have earned by being in the classroom. (The cost of college does not, however, include the price of room and board; all individuals must pay for food and shelter regardless of if they are in college.) Between the ages of eighteen and twenty-one, the earnings of individuals with only a high school degree (and not in school) rise substantially, from $8,000 to $15,000—and that’s among individuals that actually have a job. Thus, the forgone earnings associated with going to college are about $49,000 for a four-year program and $20,000 for a two-year program.

Despite these daunting costs, as we showed in earlier work, the annual rates of return of investing in an associate’s or bachelor’s degree are two to three times higher than those from alternative investments including stocks, bonds, gold, treasury bills, and the housing market. But what about students who start college but find that they are unable to complete their degree? Do the costs they incur for achieving some college outweigh any benefits they receive for their years in school?

In the graph below, we extend our earlier analysis to include the returns to investing in a professional degree and investing in some college. The graph shows that, on average, attending some college but not receiving a degree also has a higher return than all other conventional investments. The annual rate of return of an investment in some college was 9.1 percent. This rate of return is more than 3 percentage points higher than the average stock market returns and 7 percentage points higher than the returns from investing in Treasury bonds.

Of course, the high rate of return associated with attending a few years of college does not imply that dropping out of college is a better option compared to completing a bachelor’s or associate’s degree. Graduates with a bachelor’s degree annually make about $32,000 more than individuals with only some college. Instead, what this analysis suggests is that the downside risk of trying for a college degree but not making it all the way to a degree is not that bad, and could still be worth the investment of time and tuition.

Our method of analysis does not reveal whether college education causes the increased earnings. It is likely that college graduates have different aptitudes and ambitions that might affect earnings. However, a large body of academic research suggests that there is a causal relationship between education and later earnings, and that the investment in education causes the later increased earnings. Our analysis also only looks at the average returns for those who have attended some college; these returns may not apply to potential students considering attending but who have lower levels of preparation or determination than this group. And, naturally, the outcomes for any one person may be higher or lower than these averages.

The May Jobs Gap

As of May, our nation faces a jobs gap of 9.9 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

Ifthe economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by January 2017.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the j obs gap chart for each state here.

Conclusion

As the unemployment rate continues to decline, it is important to remember that Americans without a college or high school education are still experiencing above-average rates of unemployment. Addressing this problem requires not only creating new jobs but also ensuring that the workforce has the skills necessary to fill these jobs. Although some people currently question whether the cost of college is worth the investment, the evidence suggests that rate of return is much higher than many alternative investments, even for students that don’t ultimately finish a degree.

Unfortunately, the college attendance and completion rates of low-income students have not kept up with those of their better-off classmates leaving them further behind in today’s challenging labor market. To help shed light on this disturbing trend, The Hamilton Project will host an event this month focusing on the economic imperative of increasing college opportunities for low-income students. As part of the event, the Project will release a new proposal by Caroline Hoxby of Stanford University and Sarah Turner of the University of Virginia that outlines a strategy for identifying promising low-income, high-achieving students and providing them with customized information to help improve their college opportunities. The identification and implementation of policies that increase such opportunities, especially for low-income students, is critical for the economic mobility that is part of the social fabric that has bound our country together. For more information or to register for the event, click here.

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Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Brian Snyder / Reuters

Supporting Broad-Based Economic Growth and Fiscal Responsibility through Tax Reform

Adam Looney — Wed, 22 May 2013 02:30:00 -0400

Chairman Murray, Ranking Member Sessions, and Members of the Committee: Thank you for inviting me to share my views on the role of tax reform in supporting broad-based economic growth and fiscal responsibility.

The United States faces a daunting outlook for budget deficits, an increasingly challenging global economy for many American workers and businesses, and rising income inequality.

Improvements in tax policy could help address these challenges by making our tax system more fiscally sustainable, more efficient, and more fair. Indeed, any tax reform will be evaluated based on how it affects each of those three criteria.

But improving on all three dimensions simultaneously is increasingly difficult because of tradeoffs between competing goals of efficiency, revenues, and equity.

Today’s long-term budget outlook means that we’re likely to need higher tax revenues in the future. And rising inequality means that changes in policy will be increasingly scrutinized for how they affect the progressivity of the tax schedule. But a tax reform that devotes revenues to deficit reduction and retains our progressive system would have much more difficulty achieving other goals—such as lowering tax rates.

In my testimony today, I want to describe some of these tradeoffs and some potential paths forward.

Tax Reform and the Budget

Much of the energy surrounding tax reform focuses on the model of the Tax Reform Act of 1986. In that reform, tax rates were lowered substantially and the lost revenue was restored by cutting tax breaks, deductions, exclusions, and other so-called tax expenditures. That reform enhanced economic efficiency without increasing the deficit. In the 27 years since then, however, the economic context has changed, making such a reform harder to achieve.¹

First, we face a dire long-run budget outlook; most believe that putting the budget on a sustainable path will require contributions from both spending cuts and revenue increases. Many hope that tax reform can help produce those revenues.

This makes tax reform more difficult because revenues allocated to deficit reduction are revenues that cannot be used to reduce rates, and vice versa.

Moreover, raising revenues and cutting rates at the same time is a tall order. At first glance, the list of tax expenditures is projected to add up to $1.4 trillion in 2015.² But that figure dramatically overstates the revenue gains that are available from cutting expenditures.

Some expenditures, including obscure items like imputed rent, would be difficult to eliminate for practical or administrative reasons; others, like credits and deductions for working families with children are integral to combating poverty and encouraging employment. These categories account for roughly one quarter of all tax expenditures.³ An additional one-third of the tax expenditures arise from the preferential treatment of savings and investment. And the largest non-savings-related expenditures include those for health insurance, mortgage interest, state and local taxes, and charitable contributions. These, and many others, tend to serve substantive goals, remain on the books because they were too difficult to eliminate in 1986, and, as you well know, are backed by popular constituencies.

In addition to political difficulties, there are basic practical issues to consider. Certain tax expenditures exist for the purposes of simplifying the tax system, to reduce record keeping, or to minimize the filing burden on taxpayers. Eliminating those provisions or scaling back others could make the system more complicated and onerous.

Because of such considerations, the Congressional Research Service warns that “it may prove difficult to gain more than $100 billion to $150 billion” each year from reducing tax expenditures.⁴ And those estimates are based on a 35 percent top rate; if marginal tax rates were reduced, eliminating a dollar’s worth of deductions would raise proportionately less revenue. In other words, if eliminating a dollar of mortgage interest today raised 39 cents, under a top rate of 25 percent, it would raise only 25 cents—37 percent less.

To put these numbers in perspective, in order to be revenue-neutral, the tax plan included in House Budget Committee Chairman Ryan’s budget would require eliminating roughly $450 billion worth of tax expenditures each year just to balance out the individual income tax rate cuts targeted in his plan.⁵ The plans initially developed by the Domenici–Rivlin Task Force and the Bowles–Simpson Commission, which reduce rates and contribute to deficit reduction, likely require reductions in tax expenditures of a similar or larger magnitude.

The gap between the reductions in tax expenditures required by such plans and those that could be agreed upon illustrates the challenge of formulating a plan that achieves both lower rates and higher revenues.

Tax Reform in a Progressive System

A second consideration is the issue of rising income inequality and its relationship to the tax code. Earnings have risen dramatically at the top—by more than 250 percent over the past 30 years for households in the top one percent of the income distribution. At the same time, many households at the middle and bottom have experienced stagnating or even declining earnings. Changes in the tax system over the past 30 years have exacerbated these problems; the very people who have received the biggest income gains in the past three decades have also seen the largest tax cuts. A progressive tax code is perhaps the most significant and powerful tool available to counteract income inequality. Indeed, there are increasing calls for policymakers to use the tax code for that purpose.

Such concerns were much less salient the last time we did tax reform. In 1986, the phenomenon of rising inequality had yet to be fully discovered or understood, and the technical expertise to measure how the tax system affected inequality had yet to be developed.

Today not only are concerns about the progressivity of the tax schedule heighted, but so is our ability to measure how tax changes affect different groups. That raises the level of scrutiny directed to reform and also reveals a substantive tradeoff: that any changes in rates and tax expenditures must balance out within income groups in order to retain a progressive tax structure.

In a series of papers, colleagues at the Tax Policy Center and I analyzed these tradeoffs by examining a hypothetical reform with the stated goals of maintaining tax revenues, lowering marginal tax rates, while at the same time ensuring a progressive tax system.⁶ We took as an example a plan that lowered the top rate from 35 to 28 percent and continued the low rates that apply to savings and investment. These rate reductions are roughly the same levels specified in earlier plans from Bowles–Simpson and Domenici–Rivlin, but are substantially smaller than those specified in Chairman Ryan’s plan. We asked what it would take to achieve other goals of revenue and progressivity.

In that analysis, we estimated the revenue losses due to lower rates, and then tried to pay for those revenue losses by eliminating tax expenditures. We assumed that certain tax expenditures were off the table because of the administrative difficulty of closing certain breaks; others were off the table because they provided preferential treatment for savings and investment.

Overall, the available tax breaks were enough to offset revenue losses from lower rates. But this resulting tax schedule, we found, was less progressive. Even when we implemented the most progressive way of reducing the remaining tax breaks, there was simply not enough revenue from these breaks in the top brackets to offset the revenue losses from lower marginal tax rates.

This result—that this sort of base-broadening reform led to a less progressive tax system—was true even when we incorporated revenue feedback, not just according to the standard dynamic effects used by Tax Policy Center, Treasury, and the Joint Committee on Taxation, but also additional feedback effects from optimistic estimates of potential economic growth, drawn from theoretical models.

The implication is that such a tax reform must give up on at least one of its stated goals: either higher-income taxpayers would receive a tax cut and middle- and lower-income taxpayers a tax increase; the deficit would go up; preferences for savings and investment would have to be reduced; or marginal tax rates would need to be higher.

Prospects for Reform

Of course, these considerations don’t rule out tax reform; indeed, many experts have put forward plans that provide more incremental reforms that simultaneously achieve efficiency gains, higher revenues, and a more progressive tax system. But such plans require substantial compromises.

For instance, certain plans proposed by the Domenici–Rivlin Task Force and the Bowles–Simpson Commission achieve their distributional goals by eliminating preferential rates for capital gains and dividends and curtailing other savings and investment-related tax breaks.

A host of other incremental reforms propose improving the efficiency of the tax system not by reducing rates but by reducing inefficient or wasteful tax expenditures. For example, deductions and exemptions—like for mortgage interest, that currently provide tax savings of up to 39.6 percent—could be replaced with flat credits of, say, 15 percent, providing continued support for homeowners but in a less-costly and more progressive way.⁷ An overall limit on the value of tax expenditures at 2 percent of income would provide an across-the-board reduction in costly tax expenditures.⁸ The President’s Budget includes a provision to limit the amount that certain tax deductions and preferences can reduce tax liability by to 28 percent. And at a meeting convened by the Hamilton Project last February, a bipartisan group of tax experts presented proposals to reduce benefits from the mortgage interest deduction, subsidies for fossil fuels, preferences for retirement savings, and the overall value of deductions.⁹ A common thread is that all of these proposals enhance economic efficiency, raise revenues, and increase progressivity.

Beyond economic appeal, proponents of this approach hope for political appeal. To paraphrase Harvard Professor Martin Feldstein: if Republicans want to reduce the deficit by cutting spending and Democrats want to increase revenues, by focusing on tax expenditures we should find a middle ground.¹⁰

1. For a further discussion see: Greenstone, Michael, Dmitri Koustas, Karen Li, Adam Looney, and Leslie B. Samuels. “A Dozen Economic Facts About Tax Reform,” The Hamilton Project (May 2012).

2 Marron, Donald B. “How Large are Tax Expenditures? A 2012 Update,” Tax Notes (April 9, 2012): 235.

3. For a description of these expenditures, see Nguyen, Hang, James Nunns, Eric Toder, and Roberton Williams. “How Hard Is It to Cut Tax Preferences to Pay for Lower Tax Rates?” Tax Policy Center (July 10, 2012): Table 1.

4. Gravelle, Jane G. and Thomas L. Hungerford. “The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening,” Congressional Research Service (March 22, 2012): 3.

5. Tax Policy Center Table T13-0110

6. Brown, Samuel, William Gale, and Adam Looney. “On the Distributional Effects of Base-Broadening Income Tax Reform,” Tax Policy Center (August 1, 2012); Brown, Samuel, William Gale, and Adam Looney. “TPC’s Analysis of Governor Romney’s Tax Proposals: A Follow-Up Discussion,” Tax Policy Center (November 7, 2012); Marron, Donald. “Understanding TPC’s Analysis of Governor Romney’s Tax Plan,” Tax Vox (August 8, 2012); and Nguyen et al. (2012).

7. Batchelder, Lily L., Fred T. Goldberg, Jr., and Peter R. Orszag. “Reforming Tax Incentives into Uniform Refundable Tax Credits,” The Brookings Institution Policy Brief 156 (August 2006).

8. Feldstein, Martin, Daniel Feenberg, and Maya MacGuineas. “Capping Individual Tax Expenditure Benefits,” NBER Working Paper 16921 (April 2011)

9. See Alan Viard, “Replacing the Home Mortgage Interest Deduction,” Joseph E. Aldy, “Eliminating Fossil Fuel Subsidies,” Karen Dynan, “Better Ways to Promote Saving through the Tax System,” and Diane Lim “Limiting Individual Income Tax Expenditures” in 15 Ways to Rethink the Federal Budget, The Hamilton Project (February 2013).

10. Feldstein, Martin. “A Simple Route to Major Deficit Reduction,” The Wall Street Journal (February 20, 2013).

Authors

Adam Looney

Image Source: Chris Maddaloni

Should the United States Have 2.2 Million More Jobs?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 03 May 2013 10:30:00 -0400

Employers added 165,000 jobs in April, according to the Bureau of Labor Statistics, following upwardly revised gains of 332,000 in February and 138,000 in March. The three-month average pace of job gains of 211,000 was slightly above the average pace of 173,000 jobs over the last twelve months. The unemployment rate edged down to 7.5 percent, and the fraction of the population reporting a job edged up. The unemployment rate has now declined 0.6 percentage point since last April, although much of this change can be attributed to declining rates of labor-market participation rather than increases in employment.

These numbers continue a pattern of steady growth in the labor market, but they also confirm that America’s recovery from the Great Recession is still very much a work in progress. The public sector, especially, has been a drag on the economy in recent months. While the private sector has added roughly 2.2 million jobs over the past year, employment in state, local, and federal governments has declined by 89,000, including significant losses to teachers and emergency responders. In this challenging economic climate, there is growing concern about how sequestration—the across-the-board budget cuts to discretionary spending that took effect on March 1—may negatively impact the recovery even more. Indeed, forecasters at the Congressional Budget Office project that the sequestration could reduce overall GDP growth in the United States by 0.6 percentage point and cost the economy 750,000 jobs by the end of 2013.

In this month’s employment analysis, The Hamilton Project examines the trajectory of public-sector employment since the onset of the Great Recession and contrasts this decline to periods of economic recovery after previous recessions. We find that the last several years’ policy choices are starkly different from those following previous recessions. Specifically, there are 2.2 million fewer jobs today, relative to what would have occurred with the policy response typical of the five preceding recessions. We also continue to explore the “jobs gap” and find that the country needs to add about 10.0 million jobs to return to pre-recession employment levels.

Government Employment Since the Recession

The downward trend in public-sector employment, described in a Hamilton Project report last summer, has continued into the opening months of 2013. While the private sector has added jobs to the economy in every month since March 2010, a total increase of approximately 6.8 million jobs, the public sector has contracted. To put this in perspective, federal, state, and local governments added jobs in only twelve of the thirty-eight months since March 2010 and have lost more than 625,000 jobs over this period.

The graph below shows the ratio of government employment to the civilian non-institutional population (every civilian in the United States sixteen and older who is not in prison or a live-in care facility) going back to 1980. For the twenty years prior to the Great Recession, this ratio stayed relatively constant, but since then it has dropped precipitously, except for the temporary uptick in 2010 when government employment rose to accommodate demand for U.S. Census workers.

This figure shows that the percentage of individuals working for federal, state, and local governments is at a decades-long low. In fact, the ratio of government employment to population has not been below 9 percent since the mid-1960s. The result, as detailed in last summer’s Hamilton Project report, is over 200,000 fewer teachers, 50,000 fewer policemen, and 6,000 fewer air-traffic controllers since 2009.

Government Policy: It's Different This Time

By cutting jobs during a period of already high unemployment, budget policies have contributed to the tepid pace of labor-market recovery and stand out as a departure from typical policy responses after recessions. The figure below shows the change in government employment forty-six months after every recession in the United States going back to 1970. (The double-dip recessions of 1980 and 1981, which ended in November 1982, are counted as a single event.) The bars are scaled by the population of the United States in June 2009 so that the magnitudes of employment changes are comparable.

The ongoing recovery, which began when the Great Recession ended in June 2009, dramatically deviates from the usual pattern. In the forty-six months following the end of the five other recent recessions, government employment increased by an average of 1.7 million. During the current recovery, however, government employment has decreased by more than 500,000. Put together, the policy differences have led to 2.2 million fewer jobs today. Such a large contraction of the public-sector during a recovery is unprecedented in recent American economic history.

The April Jobs Gap

As of April, our nation faces a jobs gap of 10.0 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Policymakers are currently faced with the unenviable task of simultaneously increasing employment and addressing America’s long-term budget deficits, but—at a time when the rate of government employment is at a historic low—sequestration threatens to further slow the growth of the public sector and lengthen the time it will take to close America’s jobs gap. Even when ignoring any indirect impacts, a typical policy response to the Great Recession would have led to a jobs gap that is 2.2 million jobs smaller than current gap of about 10.0 million and commensurately reduced the amount of time until the economy returns to full employment.

It is critical to achieve both employment gains and fiscal stability. The textbook approach is for government to continue to support the recovery and credibly enact deficit reduction that will not take hold until the employment crisis has been mitigated substantially. With respect to deficit reduction, The Hamilton Project recently released a collection of fifteen proposals that seek to reduce the deficit while improving efficiency and promoting broad-based economic growth. To see how these proposals could impact the long-term deficit, you can try our interactive budget calculator here. The Hamilton Project also continues to explore policies to boost employment, including a recent discussion paper on improving worker training programs.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Mike Segar / Reuters

Using Data to Improve the Performance of Workforce Training

Louis Jacobson and Robert J. LaLonde — Wed, 17 Apr 2013 08:00:00 -0400

Abstract

Training programs provide opportunities for low-income individuals to qualify for better jobs and enter the middle class. These programs also provide opportunities for workers who lost long-held jobs to qualify for new positions that can offset a substantial fraction of their earnings losses. Although millions of workers seek out career and technical training options in the pursuit of financial security and better lives, many ultimately choose programs that do not suit their needs. Some individuals do not complete their training programs, some find that their new skills do not match the needs of local employers, while many others, uncertain of the outcomes, hesitate to invest time and money into training programs altogether. Too many workers are making poor choices in training, but fortunately, this problem can be resolved by helping workers select programs that they are more likely to complete and that are more likely to raise their earnings potential. This paper proposes a state-by-state solution, relying on a competitive framework to encourage states to help prospective trainees make better-informed choices. The plan will increase the return on training investments by developing the data and measures necessary to provide the information prospective trainees need, by presenting the information in user-friendly “report cards,” by providing help for prospective trainees to use the information effectively, and by creating incentives for states to implement permanent information systems once they prove cost-effective. Using a mix of online systems coupled with assistance from career counselors, the ultimate goal of this proposal is to provide unambiguous evidence about how information systems can improve training outcomes for prospective trainees. With the earnings divide between skilled and unskilled workers at a historic high, it is imperative that we raise overall workforce skills in order to enhance America’s competitiveness and ensure economic growth for all Americans.

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Using Data to Improve the Performance of Workforce Training -- Full Paper

Authors

Louis Jacobson
Robert J. LaLonde

Publication: The Hamilton Project

Image Source: Catherine Yeulet

Building on Recent Advances in Evidence-Based Policymaking

Jeffrey B. Liebman — Wed, 17 Apr 2013 08:00:00 -0400

Abstract

The current fiscal environment makes it imperative that we produce more value with each dollar that government spends. Doing so will require better use of evidence in policymaking. The good news is that over the past decade new government strategies have begun to emerge—at the federal, state, and local levels—that simultaneously offer the potential to make better use of taxpayer dollars and speed up progress in addressing serious social problems. These strategies: subsidize learning and experimentation so that new solutions are developed, increase the amount of evidence on the effectiveness of existing and potential new programs, make greater use of evidence in budget and management decisions, make purposeful efforts to target improved outcomes for particular populations, and spur innovation and align incentives through cross-sector and community-based collaborations.

This paper describes the new strategies. It also proposes several steps to advance the use of evidence-based policy in the federal government, including giving agencies the authority to reserve a percentage of program spending to fund program evaluations and expanding the use of tiered evidence standards in grant competitions. Finally, it recommends two initiatives that would supplement the diffusion of these evidence-based practices with a more-focused approach that aims to supply solutions for specific high-priority social problems. The Ten-Year Challenge would tackle ten social problems by establishing data-driven, outcome-focused initiatives in one hundred communities. A federal Pay for Success initiative would help state and local governments establish Pay for Success projects in areas like early-childhood education where state and local activity has the potential to achieve important federal policy objectives or produce significant federal budget savings.

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Building on Recent Advances in Evidence-Based Policymaking -- Full Text

Authors

Jeffrey B. Liebman

Publication: The Hamilton Project

Rethinking the Federal Budget: Build Your Own Deficit Reduction Plan

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 12 Apr 2013 11:25:00 -0400

Just over a month ago, The Hamilton Project released a menu of options for achieving responsible deficit reduction while promoting broader economic benefits in a new report, 15 Ways to Rethink the Federal Budget. Through a new interactive feature on The Hamilton Project’s website, you can build your own deficit reduction plan by choosing different combinations of these proposals and see how this package could affect the ten-year budget picture.

Click here to try your hand at rethinking the federal budget »

The proposals address topics ranging from immigration to transportation to tax deductions and were written by leading budget and tax experts from a variety of backgrounds, including academia, the private sector, and a range of NGOs such as the American Enterprise Institute, the Brookings Institution, and Pew Charitable Trusts. Each expert was asked to share his or her proposal for reducing spending or raising revenue in a way that also promotes broad-based economic growth. The individual proposals offer discrete, innovative ideas for achieving budgetary savings and broader economic benefits. However when viewed in combination, they could contribute meaningful deficit reduction and help the country confront its most pressing economic challenges. Of course, a balanced approach to deficit reduction might require other changes but a package of these proposals can serve as a starting point for illustrating what is possible.

The new interactive feature allows you to see the potential budgetary effects of implementing these proposals—either individually or several at a time. Additionally, you can see the total deficit reduction produced by the proposals you select and the Budget Control Act of 2011 (BCA) and the American Taxpayer Relief Act of 2010 (ATRA). The feature also provides a breakdown of what fraction of the deficit reduction comes through increased revenues, decreased spending, and lower interest payments.

It is important to bear in mind that no fiscal policy occurs in a vacuum. While the feature displays the ten-year deficit reduction and projected debt-to-GDP ratio in 2023 given your selection of proposals, these calculations are estimates that do not take into account budgetary interactions or macroeconomic effects that some of the proposals may have.

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

An Evidence-Based Approach to Improving Worker Training Programs

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 05 Apr 2013 09:13:00 -0400

The pace of job gains slowed last month, according to the Bureau of Labor Statistics. In March, the economy added 88,000 jobs, down from the higher-than-expected gains of 148,000 and 268,000 jobs in January and February, and below the average monthly gain of 169,000 per month recorded over the prior 12 months. The unemployment rate was little changed at 7.6 percent and the fraction of the population with a job edged down. Since March 2012, the unemployment rate has declined from 8.2 percent to 7.6 percent, but much of this decline appears to reflect changes in labor force participation--the fraction of the population employed is unchanged over the year. Over the last twelve months, the private sector has added roughly 2 million jobs; in contrast, employment in state, local, and federal governments has declined by more than 75,000.

Reducing unemployment and building the foundation for a more robust job market are just two of the challenges facing policymakers at every level of government. But given today’s austere budget outlook, the resources available to address the nation’s most pressing problems—from recidivism to school readiness to obesity to workforce development—are shrinking. Indeed, continuing to make progress on these social issues necessitates producing more value with each dollar that the government spends. The solution is to take advantage of the tremendous opportunities for using data and evidence to identify the highest-payoff uses of taxpayer dollars.

One area where better use of evidence could significantly improve outcomes for many individuals is workforce training programs. Covering a wide range of fields—from information technology to healthcare to auto repair—these programs offer the prospect of boosting incomes, increasing employment, and improving the nation’s productivity. Too often, though, these benefits go unrealized, largely because prospective trainees have little access to the information and guidance necessary to make well-informed decisions. These lost opportunities are especially poignant in the current environment of elevated unemployment.

In this month’s employment analysis, The Hamilton Project explores how policymakers can better gather and disseminate evidence on worker training programs to help displaced and low-income workers determine which programs can help them find employment and increase their earnings most effectively. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The Potential of Training Programs

Education, in some form or another, has always been the key to the American Dream, as the development of new skills—paired with hard work and good fortune—leads Americans to better jobs and increased prosperity. For some, these skills are gained in primary and secondary school and culminate in a four-year college degree. But many others, particularly students pursuing career or technical training, obtain important education and skills at community colleges or through other workforce development programs that can help them secure a good job.

Indeed, for some workers, the benefits of worker training programs are large. The chart below, which draws on cutting-edge research and data systems from Florida, shows that students who complete two-year degrees in high-return fields, or who complete two-year programs that lead to four-year degree programs, earn more than $35,000 per year after graduating. Students who receive certain career-oriented certificates earn similar salaries.

But these positive outcomes are too often the exception rather than the rule. Students who complete low-return programs or who drop out before finishing a degree earn 33 percent less than their counterparts in high-return programs. The median salary for those who complete two-year degrees with low returns is a mere $24,100. As the light green bars in the figure above show, the vast majority of students fall into these lower-earning categories. More than 40 percent take less than a year of credits before leaving school, almost a quarter spend more than a year in community college before dropping out without a degree or certificate, and another 12 percent complete a degree in a field that does not lead to a good-paying job.

What is most concerning about these results is that the qualifications of many of these students are similar across the groups. Many, for example, have comparable high-school GPAs and work experiences. Yet too many end up in programs that they are unlikely to complete, or complete programs that are unlikely to raise their earnings. And furthermore, even more workers who could benefit from training fail to enter programs at all because they are unsure of the potential benefits. The result is that the economic opportunities of training for these workers are not adequately realized.

Developing and disseminating information on the effectiveness of various training programs, and helping prospective students use that information in their decision-making, are important parts of the solution. Today, prospective students make their enrollment decisions without knowing whether they are likely to succeed within a particular program, or whether they are likely to find a good-paying job in that field after completion. Gathering the information necessary to help students make better choices and guiding trainees to more appropriate courses of study could help increase the returns students realize on their investments of time and money.

The March Jobs Gap

As of March, our nation faces a “jobs gap” of 10.1 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Workforce development programs are just one example of how the use of evidence in policymaking can create government programs that more effectively serve the American people. Evidence-based policymaking allows lawmakers, in essence, to do more with less. While this is especially important in today’s era of tight budgets, a key goal of government—regardless of the fiscal climate—is always to achieve the most social good with taxpayer dollars.

To that end, The Hamilton Project, in partnership with Results for America, will host an event and release two new proposals on April 17th focusing on the importance of evidence in policymaking. A new paper by Louis Jacobson and Robert LaLonde provides a roadmap for using evidence to guide students to higher-return training programs that could vastly increase the economic benefits of career and technical education. A second proposal by Jeffrey Liebman discusses how the federal government can adopt strategies for more effective evidence-based policymaking across the board. The event will also feature a roundtable discussion with Senators Rob Portman (R-OH) and Mark Warner (D-VA), Chairman of the President’s Council of Economic Advisers Alan Krueger, and former U.S. Treasury Secretary Robert E. Rubin on the importance of evidence in driving public dollars toward policies that work.

The full agenda for the event can be found here. For more information about the event and new papers, follow us on Twitter @hamiltonproj and join the conversation using #evidenceworks.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Sequestration’s Threat to America’s Most Vulnerable

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 08 Mar 2013 09:23:00 -0500

The labor market continued to improve last month, according to the Bureau of Labor Statistics. In February, the economy added 236,000 jobs and the unemployment rate edged down to 7.7 percent. Over the last twelve months, the private sector has added 2.1 million jobs; in contrast, employment in state, local, and federal governments has declined by more than 100,000 jobs.

Despite this progress, millions of Americans are still experiencing the effects of the Great Recession; indeed, many workers have suffered protracted periods of joblessness or lower wages. A range of government safety-net programs have assisted those Americans who have found themselves struggling in a weak economy. But recent budget cuts, notably the sequestration that went into effect on March 1, threaten to weaken this social safety net even while employment remains far from pre-recession levels.

In this month’s employment analysis, The Hamilton Project looks at current poverty trends in the United States, the important role of government support programs, and how sequestration could damage critical aspects of the safety net in the midst of continued labor-market weakness. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

A Look at America’s Poverty Rate

According to the official poverty rate as measured by the U.S. Census Bureau, 12.5 percent of Americans lived in poverty in 2007, prior to the start of the Great Recession, a figure only slightly below the poverty rate in 1980. In the wake of the recession, the official poverty rate has increased significantly, reaching 15.1 percent in 2010—its highest level in recent decades—and remained at that elevated level in 2011. At first glance, then, it might appear that the nation has made little progress—or even gone backwards—in fighting the war on poverty, but this official rate doesn’t tell the whole story.

Some experts argue that the official rate is an inaccurate measure of the well-being of low-income Americans because it omits the effects of taxes and many anti-poverty programs that provide valuable support for low-income American families. In a 2008 discussion paper for The Hamilton Project, Rebecca Blank and Mark Greenberg explain why the official poverty rate is flawed and how it could be improved.

Blank and Greenberg advocate using an alternative measure of poverty, developed by the National Academy of Sciences (NAS) in the 1990s. This NAS rate accounts for changes in the costs of goods other than food—notably, health care—and makes different adjustments for family size and inflation. But most importantly, the official poverty rate only considers a family’s pre-tax money income, while the NAS measure also accounts for tax credits and noncash benefits like the earned income tax credit (EITC), child tax credit, housing stipends, energy assistance, and food and nutrition programs like the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps).

The graph below, based on measures from a recent paper by Bruce Meyer and James Sullivan, illustrates the difference between these two poverty metrics.

A frequent criticism of anti-poverty programs is that they incentivize people to work less, which in turn raises the official poverty rate. While certain programs, such as unemployment insurance, may have this effect for some individuals (although evidence suggests that this effect is not very large), Bruce Meyer and Dan Rosenbaum and Nada Eissa and Jeffrey Liebman have shown that other key anti-poverty programs like the EITC actually provide very strong work incentives. While the overall effect of anti-poverty programs on the official poverty rate is, therefore, ambiguous, it is clear that government programs have greatly reduced the more-accurate NAS poverty rate.

The Role of Policy in Alleviating Poverty

The striking fact about the above graph is that, since the 1990s, the NAS poverty rate has fallen significantly and was 3.4 percentage points below the official measure in 2010. In human terms, this means there are more than 10 million fewer people living below the poverty line, according to the NAS rate. Intuitively, this makes sense: the development and expansion of effective anti-poverty programs like the EITC, expansions in health insurance for low-income children and families, and more recent temporary expansions in the safety net during the Great Recession have reduced the number of Americans living in poverty over time. What’s more, the temporary recovery measures that policymakers enacted during the recession cushioned families against the most devastating effects of the weak economy.

Many of the current anti-poverty programs, therefore, are having a very real and positive impact that is not reflected in official poverty statistics. While too many Americans are still living in poverty, even more families would struggle to get by in the absence of support programs that have been enacted and expanded during the past three decades.

Despite the success of these policies in assisting at-risk families, some of these programs will be scaled back significantly as a result of the March 1 sequestration. The Center on Budget and Policy Priorities, for instance, estimates that the extended unemployment benefits that were enacted during the recession kept 3.4 million Americans above the poverty line in 2010 alone. Yet under sequestration, extended unemployment benefits will be cut by almost 10 percent. Other longer-term safety-net programs that have been important in reducing the NAS poverty rate in recent years—including housing vouchers for very low-income Americans and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC)—will also be reduced. Sequestration, therefore, could have disproportionately negative impacts on those Americans who most need assistance in recovering from the recession.

Recently, The Hamilton Project released 15 Ways to Rethink the Federal Budget, a report including a range of proposals—written by experts from many policy and political backgrounds—for reducing the deficit through pro-growth policies that do not hinder the United States’ recovery efforts. While there has been progress on improving the deficit and labor-market situations over the last few years, it is clear that more work remains to be done to help many American families in their transition back to full employment.

The February Jobs Gap

As of February, our nation faces a “jobs gap” of 10.2 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by November 2016. You can also try out our interactive jobs gap calculator by clicking here and view the jobs gap chart for each state here.

Conclusion

Although poverty—by any measure—has increased since the beginning of the recession in 2007, the evidence suggests that many anti-poverty programs enacted during the past several decades and the federal government’s response to the recession have played an important role in keeping many American families above the poverty line. Indeed, while much work remains to be done in supporting low-income families, the nation’s social safety net has been successful over the past few decades in giving many Americans the support they need to get ahead. Sequestration threatens to throw many American families back into poverty during the economic recovery by cutting the very programs that are helping them stay above water.

In the coming months, The Hamilton Project will continue to look at trends in poverty and how the federal government can do more to provide low-income Americans opportunities to become self-sufficient and succeed. From increasing access to post-secondary education to increasing incentives to work, there are many ways for government to reduce poverty in a way that promotes broad economic growth. Pursuing such policies will improve the lives of millions of Americans and strengthen our economy.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Publication: The Hamilton Project

The Many Benefits of a Carbon Tax

Adele Morris — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Adele Morris proposes a carbon tax as a new source of revenue that could also help address climate change. She suggests that a carbon tax would reduce the buildup of greenhouse gasses, replace command-and-control regulations and expensive subsidies with transparent and powerful market-based incentives, and promote economic activity through reduced regulatory burden and lower marginal tax rates.

IMPACT

Deficit Reduction (10-year): $199 billion

Broader Benefits: Reduces the buildup of greenhouse gas emissions; replaces command-and-control regulations and expensive subsidies with transparent and powerful market-based incentives; promotes economic activity through reduced regulatory burden and lower marginal tax rates.

INTRODUCTION

This paper proposes introducing a modest carbon tax to finance reforms to the U.S. tax system to promote economic growth, reduce budget deficits, reduce redundant and inefficient regulation, reduce unnecessary subsidies, and reduce the costs associated with climate change. The revenues from the new levy could fund permanent reductions in more distortionary taxes on capital income while also contributing to deficit reduction. And by providing simple, transparent, but powerful market-based incentives to reduce damaging greenhouse gas (GHG) emissions, this levy could supersede the array of costly regulatory command-and-control approaches and expensive subsidies aimed at reducing dependence on fossil fuels and promoting clean energy. In addition to these benefits, of course, is a contribution to stemming the global buildup of GHGs and improving the United States’ standing to foster the broader international action necessary to stabilize GHG concentrations and avoid catastrophic climate disruption. As this proposal shows, with a carbon tax these gains are possible with less-adverse, potentially even positive, consequences for economic activity, unlike other revenue raisers. Indeed, within twenty years a modest carbon tax can reduce annual emissions by 12 percent from baseline levels, generate enough revenue to lower the corporate income tax rate by 7 percentage points, and decrease the deficit by $815 billion, all while protecting the poorest households from undue burden.

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Authors

Adele Morris

Publication: The Hamilton Project

Image Source: PonyWang

Creating an American Value-Added Tax

William G. Gale and Benjamin H. Harris — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — William Gale and Ben Harris consider how a value-added tax could be designed to help address the nation’s fiscal challenges.

IMPACT

Deficit Reduction (10-year): $1.6 trillion

Broader Benefits: Raises revenue in a manner that does not distort saving and investment choices.

INTRODUCTION

The Great Recession and its aftermath have left the United States with a difficult fiscal situation: a weak economy that would benefit from short-term stimulus, but also projected medium- and long-term budget shortfalls, even after the economy recovers, that indicate the need for fiscal consolidation. Addressing these medium- and long-term problems will likely require a combination of spending cuts and revenue increases. While tax reform would be a laudable goal even in the absence of a fiscal problem, building a better tax system becomes even more imperative when revenue requirements rise and the equity and efficiency of the tax code are put under greater scrutiny and pressure.

We propose a value-added tax (VAT) to contribute to the U.S. fiscal solution. A 5 percent broad-based VAT, paired with subsidies to offset the regressive impacts, could raise about
1 percent of GDP, or about $160 billion, per year. Although it would be new to the United States, the VAT is in place in about 150 countries worldwide and in every non–U.S. OECD country. In recent years, the VAT has raised about 20 percent of the world’s tax revenue (Keen and Lockwood 2007). This experience suggests that the VAT can raise substantial revenue, is administrable, and is minimally harmful to economic growth. Additionally, the VAT has at least one other potential advantage worth highlighting: a properly designed VAT might help the states deal with their own fiscal issues. Although a VAT would be regressive relative to current income, this regressivity can be easily offset by transfers that would make the net burden progressive. A VAT should only be imposed after the economy has returned to full employment, as the depressing effects of increased taxation in a demand-driven economy would suppress the economic recovery.

As the United States faces heightened long-term fiscal pressure, policymakers face the challenge of raising revenues in a way that puts as little burden on the economy as possible. While much of the discussion so far has focused on changes to income taxes, a consumption tax—here offered in the form of a VAT—offers advantages over higher income tax rates in terms of economic efficiency.

Like a retail sales tax, a VAT is a tax on consumption. Under a VAT, businesses pay taxes on the difference between their total sales to other businesses and households and their purchases of inputs from other businesses. That difference represents the value added by the firm to the product or service in question. The sum of value added at each stage of production is the retail sales price, so in aggregate the VAT simply replicates the tax patterns created by a retail sales tax and is like other flat tax rates on aggregate consumption. The key distinction is that VATs are collected at each stage of production, whereas retail sales taxes are collected only at point of final sale. This distinction makes the VAT more administrable than a retail sales tax.

In the most common implementation of the VAT, producers are taxed based on their total output, and then receive credit for taxes they have paid on purchases to other firms.1 The tax credit thus acts as an incentive for compliance, and the VAT in practice is less likely to be evaded than is a retail sales tax.2 The VAT is therefore widely preferred to a retail sales tax when considering options for taxing consumption.

A VAT is also border-adjustable, since taxes on exports can be rebated at the border and imports can be taxed at the VAT rate. While this is sometimes touted as providing economic benefits, it is actually a neutral treatment of these items. Taxes assessed on imports ensure an even playing field across imported and domestic consumption goods, and the rebate for exports ensures that exporters are only taxed on the consumption of their product.

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Authors

William G. Gale
Benjamin H. Harris

Publication: The Hamilton Project

An Evidence-Based Path to Disability Insurance Reform

Jeffrey B. Liebman and Jack A. Smalligan — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Jeffrey Liebman and Jack Smalligan propose a path to improve our disability insurance system, through demonstration projects and administrative changes, that could potentially increase employment and economic engagement among workers with disabilities and provide more rapid and reliable resolution of disability insurance claims for those who cannot work.

IMPACT

Deficit Reduction (10-year): $10billion to $20 billion

Broader Benefits: Potential to increase employment and economic engagement of workers with disabilities and provide more rapid and reliable resolution of disability insurance claims for those who cannot work. Results of pilots would inform broader reforms of the disability insurance system, leading to additional longer-term benefits.

INTRODUCTION

Disability insurance is the leading edge of the demographic tsunami that is starting to flood U.S. social insurance programs. Americans who are between the ages of fifty and sixty-five are four times more likely than those between the ages of twenty and forty-nine to be receiving disability insurance benefits. For the past decade, the same baby boomers who are just beginning to create fiscal challenges for Medicare and Social Security have been in their peak years of disability insurance receipt. Spending on disability benefits through the federal Disability Insurance (DI) and Supplemental Security Insurance (SSI) programs has increased from 0.7 percent of GDP in 1980 to 1.2 percent of GDP in 2013. Spending on Medicare and Medicaid benefits for DI and SSI recipients is also slightly more than 1 percent of GDP.
The good news is that spending on disability cash benefits appears to have peaked. With baby boomers transitioning off disability benefits and onto Social Security retirement benefits, and with the next cohorts slightly smaller than the baby boomers, the Congressional Budget Office (CBO) projects that spending on DI will fall by 0.1 percent of GDP between now and 2022 (CBO 2012).

But even though the fiscal burden of disability insurance is not expected to worsen, the program is in significant need of reform. This policy note summarizes the conclusions of a year-long research project designed to establish an evidence-based path to disability insurance reform. Our complete findings are available in Liebman and Smalligan (2013). The project was motivated by the observation that, while a consensus is emerging that changes are needed to the U.S. disability insurance system, there is no agreement around any specific reforms, nor does there appear to be a path in place that will lead to such agreement. Moreover, in most cases we lack the evidentiary base necessary to judge whether specific reforms would do more good than harm.

We therefore recommend a path that identifies promising reforms that are administratively realistic, pilots them or otherwise acquires the evidence necessary to judge their merits, and then rolls them out more broadly if proven benefits are established.

Two immediate steps are needed to start down this path. First, Congress should authorize three demonstration projects centered around early intervention. The key to reducing disability insurance costs is to intervene as early as possible to assist individuals in remaining at work. Waiting until after an individual has been approved for benefits is too late. Second, Congress should give the new Social Security commissioner the tools necessary to improve the disability determination system. Most important, funding for state disability determination services should be placed on the mandatory, rather than the discretionary, side of the budget. This will allow the Social Security Administration (SSA) to make investments in administrative capacity that will reduce spending on benefits—for example, by reducing the backlog of continuing disability reviews.

Like reforms to other social insurance programs, these changes will have a relatively small budget impact over the next ten years, but have the potential to produce much larger savings in later years. A package with these two reforms could save $10 billion to $20 billion over the coming decade, mostly through more thorough initial reviews. If the early intervention pilots are successful and taken to scale, annual savings of as much as 0.1 percent of GDP would be possible. ^[1].

^[1] We reach this estimate by assuming that roughly one-third of DI recipients are potentially able to be targeted for employment services and that the services enable one-third of that one-third to work rather than receive benefits. Net of the cost of the employment services, the savings would be around 0.1 percent of GDP.

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Authors

Jeffrey B. Liebman
Jack A. Smalligan

Publication: The Hamilton Project

Image Source: Keith Brofsky

Eliminating Fossil Fuel Subsidies

Joseph E. Aldy — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Joseph Aldy proposes eliminating twelve subsidies to help level the playing field among fossil fuel producers relative to other businesses, and lead to potentially lower global fuel prices by providing the United States with increased leverage in negotiations over eliminating fossil fuel subsides in the developing world.

IMPACT

Deficit Reduction (10-year): $41 billion

Broader Benefits: Levels the playing field among fossil fuel producers and relative to other business investments; leads to potentially lower global fuel prices by providing the United States with increased leverage in negotiations over eliminating fossil fuel subsidies in the developing world.

INTRODUCTION

The federal government has subsidized the production of fossil fuels through the tax code for a century. While such subsidies may have once supported incremental investment in what was a very risky economic activity—drilling that may not yield a productive hydrocarbon field—the advances in technology and the high prices for oil in recent years have significantly changed the risk–reward calculus for domestic hydrocarbon investment. Indeed, the impact of these tax preferences on investment decisions is dominated by factors driving world oil prices (e.g., Asian demand and political events in the Middle East) and by the technological improvements in drilling for shale gas and oil and tight oil. Today, the U.S. government effectively transfers by way of tax expenditures more than $4 billion annually from taxpayers to fossil fuel producers (primarily oil and gas firms) with very little to show for it.

This proposal calls for eliminating twelve tax provisions that subsidize the production of fossil fuels in the United States. Implementing this proposal will contribute to a leveling of the playing field among oil and gas companies, since independent producers enjoy greater tax benefits than the oil majors, and will promote the efficiency in allocating capital across the U.S. economy. Since these subsidies have a very small impact on production, their removal will not materially increase retail fuel prices, reduce employment, or weaken U.S. energy security. This proposal complements other proposals to simplify the corporate tax code, and thus could facilitate the political support necessary to enact a simpler, more efficient corporate tax code. In addition, removing U.S. fossil fuel subsidies would enable the U.S. government to make the case more effectively that large developing countries (such as China, India, and energy exporters) should phase out their fossil fuel consumption subsidies that contribute to higher oil prices in the United States.

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Authors

Joseph E. Aldy

Publication: The Hamilton Project

Funding Transportation Infrastructure with User Fees

Jack Basso and Tyler Duvall — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Tyler Duvall and Jack Basso suggest looking to user fees as a way to raise revenues, reduce congestion on major roadways, reduce pollution, and promote wiser infrastructure investments.

IMPACT

Deficit Reduction (10-year): $312 billion

Broader Benefits: Raises revenues, reduces congestion on major roadways, reduces pollution; promotes wiser infrastructure investments.

INTRODUCTION

Federal surface transportation programs are intended to improve the quality, utility, and productivity of the surface transportation system by enhancing the system's safety (e.g., achieving reduced vehicle crashes, including fatalities) and operating performance (e.g., reducing congestion, increasing freight throughput etc.); and by reducing the environmental impact of surface transportation. Although federal transportation spending is less than 2 percent of the overall federal budget, that spending—like spending in the rest of the budget—is currently on a collision course with reality. Unlike most federal programs, the federal surface transportation program has historically been funded by dedicated taxes on gasoline, diesel, and other transportation-related taxes. These taxes are deposited into the Federal Highway Trust Fund and then invested in roads, bridges, transit systems, and a variety of other surface transportation projects through state and local governments.

After being replenished by the general fund multiple times in recent years (adding billions to the federal deficit in the process), however, the Highway Trust Fund (the Fund) is currently projected to go negative again in 2015, with the negative balance growing rapidly each year after that (figure 9-1).

The 2012 federal surface transportation legislation Moving Ahead for Progress in the 21st Century Act (MAP-21) bought several years of solvency in the Fund, but did not address the long-term trajectory of the program. Going forward, it is undisputed in transportation policy circles that a new approach will be needed to sustainably fund surface transportation in the United States. The key questions that remain unanswered are these: How do we balance a looming near-term funding cliff with the long lead times associated with funding reforms that are more fundamental? And what role does the revenue policy choice play in improving transportation performance outcomes, particularly as it relates to congestion levels? If one accepts the premise that continued deficit spending to fund surface transportation projects is undesirable (some would argue this point), there are two distinct near-term options: (1) reduce federal spending to match revenues, or (2) adjust certain federal taxes in the near term. Given the growing costs to rehabilitate, maintain, and operate existing surface transportation, some experts express concern that state and local governments would not increase their own investments to fill the gap left by a shrinking federal program. Today, forty states rely on the federal government for more than 25 percent of their transportation funding.

Revenue options begin to expand when we look beyond the next two years, however. One approach that has been implemented relatively narrowly in the United States but that has achieved success in other countries is a direct road- pricing system where motorists pay fees directly to drive on certain roads (as opposed to paying taxes indirectly as they do today), potentially combined with some form of dedicated local taxes tied to specific transit projects. Economists from all backgrounds have strongly supported some form of direct pricing for roads, similar to the way other utilities are priced. In fact, Nobel Prize–winning economist William Vickrey proposed a specific road-pricing system to reduce congestion in Washington, DC, as far back as 1959 and in the New York City subway system in 1952. Vickrey said, “You’re not reducing traffic flow, you’re increasing it, because traffic is spread more evenly over time. . . . People see it as a tax increase, which I think is a gut reaction. When motorists’ time is considered, it’s really a savings” (quoted in Trimel 1996).

According to the U.S. Department of Transportation, an effective road-pricing system—once fully implemented— could generate between $38 billion and $55 billion annually in revenue while simultaneously reducing road congestion and reducing environmental impacts (U.S. Department of Transportation 2008a). Singapore’s broad use of fully electronic road pricing is one of the key reasons the World Bank perennially ranks it number one in the world in terms of logistics performance. With a population of more than 5 million and only 250 square miles of land, Singapore’s transportation system achieves free flow speeds on its expressways and arterials every day. Indeed, the key strength of such a solution is not only that it raises revenue to support surface transportation investments and operations, but also that it does so in a way that confers additional benefits including reduced congestion and pollution.

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Authors

Jack Basso
Tyler Duvall

Publication: The Hamilton Project

Image Source: Ron Chapple Stock

Limiting Individual Income Tax Expenditures

Diane Lim — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Diane Lim’s discusses an approach to individual income tax expenditures that would raise revenue more efficiently and progressively by reducing tax expenditures, limiting potential negative impacts on subsidized sectors by preserving certain tax incentives, and equalizing implicit subsidies across middle- and higher-income taxpayers.

IMPACT

Deficit Reduction (10-year): $1 trillion

Broader Benefits: Raises revenue more efficiently by reducing tax expenditures; limits potential negative impacts on subsidized sectors by preserving certain tax incentives; equalizes implicit subsidies across middle- and higher-income taxpayers.

INTRODUCTION

It is often said that base-broadening tax reform—that is, expanding the definition of taxable income—should be an important part of solutions to address the fiscal trilemma of reducing the deficit, promoting fairness, and encouraging economic growth. Such reform would be expected to garner bipartisan support, but getting policymakers to move from that vague sound bite to specific policy proposals, without the usual ideological bickering, is another story. In this paper I argue why an across-the-board reduction in broad classes of individual income tax preferences, rather than targeting certain tax expenditures within a comprehensive overhaul of the tax system, could be an easy step to ensure we achieve our nation’s fiscal and economic goals, despite our seemingly dysfunctional political system. Indeed, if implemented correctly, base-broadening reform could raise tax revenues by more than $1 trillion over the next decade.

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Authors

Diane Lim

Publication: The Hamilton Project

Image Source: Stepan Popov

Restructuring Cost Sharing and Supplemental Insurance for Medicare

Jonathan Gruber — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Jonathan Gruber proposes reforms to Medicare cost sharing that insures consumers against high out-of-pocket costs, aligns the costs faced by consumers with the actual cost of care, and discourages incentives in private plans that encourage excess use of Medicare benefit.

IMPACT

Deficit Reduction (10-year): $125 billion

Broader Benefits: Insures consumers against high out-of-pocket costs; aligns the costs faced by consumers with the actual cost of care; discourages incentives in private plans that encourage excessive use of Medicare benefits.

INTRODUCTION

As the federal government considers options for deficit reduction, all eyes are on the Medicare program. Medicare is the single biggest driver of the long-run deficit problem facing the United States. According to the most recent projections from the Trustees for Medicare, our long-run obligations in terms of Medicare exceed the taxes we will collect to finance that program by $42.7 trillion over the entire future path of the program (Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds 2012).

Traditionally, efforts to control the costs of the Medicare program have focused on the “supply side,” changing the method and amount that Medicare pays its providers. There has been much less focus on the “demand side,” using financial incentives to encourage less medical spending by enrollees. Indeed, the most important change in the demand side of Medicare in the past fifty years was the introduction of the Medicare Part D program, a prescription drug benefit, which substantially increased program spending.

Yet efforts both to improve the value of the Medicare program for beneficiaries and to lower its costs to the government would benefit from some focus on the demand side. Medicare confronts enrollees with a very poorly designed set of financial incentives. Some services are provided at no enrollee cost while others expose enrollees to uncapped financial risk, without regard to value. Facing such exposure, most enrollees have obtained some form of supplemental coverage from the government (Medicaid coverage of the “dual” population) or employers (employer-provided retiree health insurance), or have purchased coverage on their own (so-called Medigap coverage or Medicare Advantage plans). Supplemental insurance is typically expensive, and the self-purchased products deliver much less value per dollar of premium than does traditional health insurance. Moreover, because supplemental insurance covers the patient costs of care, it encourages enrollees to consume more care. Supplemental insurance thus induces increased medical spending, the bulk of which is financed by Medicare, and imposes an important fiscal externality on the program.

In this chapter, I present a proposal to address these shortcomings with the existing Medicare cost-sharing structure. I propose a new cost-sharing structure within Medicare that will provide more protection to elders than the existing program, and will save many of them money by removing the costs of supplemental coverage.

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Authors

Jonathan Gruber

Image Source: Catherine Yeulet

Overhauling the Temporary Work Visa System

Pia M. Orrenius, Giovanni Peri and Madeline Zavodny — Tue, 26 Feb 2013 00:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Pia Orrenius, Giovanni Peri, Madeline Zavodny present a strategy to change the U.S. employment-based immigration system to make the system more efficient, increase the economic benefits of immigration and raise revenues by using market-based auctions to allocate visas.

IMPACT

Deficit Reduction (10-year): $7 billion to $12 billion

Broader Benefits: Maximizes the economic benefits of work-oriented visas by allocating visas to firms (and immigrants) based on market needs; raises revenue from auctions.

INTRODUCTION

Immigration creates economic value and potential fiscal revenues when workers move from countries where their productivity and wages are low to countries, such as the United States, where their productivity and wages are relatively high. Highly educated immigrants contribute substantially to technological and scientific innovation, entrepreneurship, and productivity growth. Less-educated immigrants supply useful skills by providing much-needed labor to fill jobs in agriculture, construction, and personal services—sectors where local demand from employers is increasingly not matched by a supply of American workers. The country’s employment-based immigration policies should encourage the inflow of workers who make the greatest contributions to the U.S. economy.

Unfortunately, the complex and outdated U.S. immigration system, even in its employment-based component, imposes significant inefficiencies and costly restrictions on the inflow of foreign-born workers. Current immigration policies ultimately lead to inferior economic outcomes. Instead of being allocated to the workers who make the greatest economic contributions, employment-based visas are typically allocated to those who happen to be first in line, or are distributed randomly via a lottery. The difficulty of obtaining employment-based visasdiscourages highly educated potential immigrants who would contribute significant value to U.S. employers and generate tax revenues. At the same time, less-educated potential immigrants have extremely limited options for legal entry despite being in high demand from U.S. employers, who often end up turning to unauthorized workers.

The goal of this proposal is to introduce simple but significant changes to the U.S. employment-based temporary immigration system that would make that system more efficient. The proposed changes also would increase the economic benefits of employment-based immigration for the U.S. economy and contribute additional revenue to the federal budget. The proposed system uses market-based auctions to allocate temporary permits that allow employers to hire foreign workers. An employer who purchases a permit effectively purchases the right to hire a foreign worker for a specified period. The foreign worker selected for that job, in turn, receives a temporary worker visa after passing a background check, and will be fully mobile across employers who own permits. The employer can resell the permit in a secondary market if the foreign worker leaves that job. These auctions would first be implemented to replace the current H-1B, H-2A, and H-2B visa programs, and would ultimately replace most of the current temporary employment-based immigration system. To succeed, the auctions need to be accompanied by increased workplace enforcement, such as mandating that all employers use E-Verify.

Auctioning permits to hire foreign workers would offer a number of economic benefits. It would lead to a more efficient allocation of foreign workers across employers while protecting workers through visa portability and employer competition. Permits would be allocated to employers who value these workers’ contributions the highest and who hence would bid the most for permits.

The auctions would generate revenue for the federal government. Baseline estimates suggest that auctioning of employer permits would generate from $700 million to $1.2 billion in revenues annually, with the higher end of the range possible if more visas are available for high-skilled workers. In the long run, a more efficient immigration system would have an even bigger budget impact by increasing productivity and gross domestic product (GDP).

This proposal focuses on temporary employment-based immigration, which plays an important role in the employment-based immigration system. Most immigrants,however, are admitted permanently on the basis of family ties. Among permanent immigrants, employment-based immigration accounts for only 14 percent of permanent resident visas awarded each year, with about half of those going to accompanying dependents. The economic and fiscal gains would be far greater than those discussed here if the immigration system put a greater emphasis on employment and skills. Similarly, there could be important implications of providing currently undocumented immigrants with a path to legal permanent residence. These are complex and controversial issues; this proposal focuses on more circumscribed reforms to employment-based temporary visas.

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Authors

Pia M. Orrenius
Giovanni Peri
Madeline Zavodny

Publication: The Hamilton Project

Image Source: Digital Vision.

Increasing the Role of the Private Sector in Housing Finance

Phillip Swagel — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Phillip Swagel proposes to increase the role of private capital in housing finance improves incentives for risk taking and investment, reduces taxpayer exposure to risk, and fosters competition and innovation in housing finance.

IMPACT

Deficit Reduction (10-year): $134 billion

Broader Benefits: Improves incentives for risk taking and investment in the mortgage market and market for homes; reduces taxpayer exposure to risk; fosters competition and innovation in housing finance.

INTRODUCTION

This paper proposes reforms of the U.S. housing finance system to increase the role of private capital in funding housing, reduce taxpayer exposure to housing risk, sell off the government stakes in the mortgage finance firms of Fannie Mae and Freddie Mac, and charge appropriate premiums for secondary insurance provided by the U.S. government on housing securities. These measures would generate revenues for the federal government, improve the allocation of capital within the U.S. economy, and focus governmental assistance for affordable housing on those most in need. With reform, private firms would securitize qualifying mortgages into mortgage-backed securities (MBS) and pay for a secondary government guarantee, while considerable private capital would take losses ahead of the government. The U.S. government would support homeownership and access to housing financing, but with transparent subsidies rather than implicit guarantees, better protection for taxpayers, and a clear delineation of the roles of the public and private sectors.

At the center of housing finance reform is an agenda to unwind the conservatorship of Fannie and Freddie that has stabilized these two government-sponsored enterprises (GSEs) since September 2008. Taxpayer support has ensured that mortgages have been available throughout the financial crisis even while other credit markets have been strained, but at a cost to taxpayers of roughly $132 billion so far, including $187.5 billion put into the two firms less $55.2 billion in dividends received (FHFA 2012e).

Moving forward with reform will return some or perhaps a good deal of the money put into Fannie and Freddie to the government, but not necessarily the full amount. Indeed, a key point of this proposal is that actions that maximize the financial return to taxpayers do not align with desirable housing policy. The U.S. Treasury now receives all of the profits of the two GSE firms and might well maximize revenue through an indefinite conservatorship in which private capital is effectively shut out of securitization for government-guaranteed MBS. A reform that brings in private sector competition would not necessarily maximize the value of the government stake in Fannie and Freddie, but it would mean better possibilities for the innovation and beneficial risk taking that go along with private sector incentives. The crisis gave financial innovation a deservedly bad name, but innovation is still valuable in the financial system. This can be seen today: borrowers with imperfect credit histories have trouble obtaining loans, even though low interest rates and the tight rental market mean that monthly mortgage payments for many might be no greater than rent. Housing finance reform that leads to a system with diverse sources of mortgage funding including both guaranteed and nonguaranteed mortgages would provide channels by which private investors can extend mortgage credit to borrowers who are now unable to obtain loans.

Similarly, Fannie and Freddie would be most valuable in a privatization sale if they are allowed to dominate the business of mortgage securitization as in the past rather than face new competition. It would be better policy, however, for reform to foster a system in which new firms can compete in the business of securitization of guaranteed MBS. The (inevitable) underpricing of government insurance gives rise to an implicit subsidy. Competition would help ensure that any such implicit subsidy flows through into lower mortgage rates for homeowners rather than being kept by shareholders and management as in the past when Fannie and Freddie had considerable market power as duopolists. The federal government will not assure any homeowner any particular interest rate. But entry by new firms into securitization and origination will place competitive pressure on banks and securitizing firms that reduces excessive interest rate spreads between yields on MBS and mortgage interest rates paid by homeowners. The importance of competition is illustrated by the present situation in mortgage origination, in which the absence of competition means that low yields on MBS do not fully flow through to reduced mortgage rates for borrowers.

Such a proposal could have a budgetary impact of roughly $134 billion. Any gap between the budgetary recovery and the amount of the bailout will represent the cost of the former housing finance system under which the government provided an implicit guarantee on Fannie and Freddie and thus took on housing risk without proper compensation, while allowing the private shareholders and management to capture part of the benefits of government support for homeownership.

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Authors

Phillip Swagel

Publication: The Hamilton Project

Better Ways to Promote Saving through the Tax System

Karen Dynan — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Karen Dynan examines the design of government incentives for personal savings, outlining how reforms to these programs would improve saving and economic security for low-income households and reduce expensive and ineffective federal subsidies for high-income households.

IMPACT

Deficit Reduction (10-year): $40 billion

Broader Benefits: Improves saving and economic security for low-income households; reduces expensive and ineffective federal subsidies for high-income households.

INTRODUCTION

The U.S. personal saving rate has declined dramatically over the past several decades and is currently very low by historical standards. Americans saved about 4 percent of after-tax personal income in 2012, down from average saving rates of 5.5 percent in the 1990s, 8.6 percent in the 1980s, and 9.6 percent in the 1970s (figure 6-1).

Increasing personal saving in the United States is a desirable policy goal. To be sure, over the near future there would be a downside to households saving more because that means they would be spending less, and, in turn, the economic recovery would not be as strong as it otherwise would be. But, over the longer run, higher personal saving would lead to stronger economic growth. The correlation between a country’s saving rate and its investment rate remains large and significant despite the globalization of international capital markets (Obstfeld and Rogoff, 2000). Hence, higher personal saving in the United States should increase investment in this country, which, in turn, should raise our capital stock and our productive capacity.

In addition to promoting higher personal saving in the aggregate, policy also should encourage higher saving among individual households. Households need savings in order to cope with unforeseen disruptions to their income and unanticipated consumption needs. Having such reserves is even more important now than it was in the past because household income volatility has trended upward amid ever-more-competitive and dynamic labor markets: recent research has found that the share of households experiencing a 50 percent plunge in income over a two-year period climbed from about 7 percent in 1971 to 10 percent in 2008 (Dynan, Elmendorf, and Sichel 2012). Moreover, as policymakers look for ways to reduce growing budget deficits, they may cut social programs so that the need for households to have precautionary reserves may be even higher in the future.

Saving also provides households with opportunities. Funds accumulated through saving can be used to pay for college tuition and to purchase big-ticket items such as cars and homes. Saving is likely even more important to attaining homeownership than it was in the past, given the greatly reduced availability of low-down-payment mortgages in the wake of the recent mortgage crisis. In addition, saving puts some households in a better position to establish businesses.

Finally, higher saving is important to households because it means that they will enjoy a better standard of living in retirement. Although most people can expect to receive social security benefits when older and many will receive regular payouts from defined benefit pensions, these sources of income are generally not sufficient to make up for the step down in earnings that occurs at retirement. As a result, many older households will need to supplement pension income with accumulated wealth if they wish to maintain the consumption levels they had when younger. Encouraging adequate retirement savings among lower-income households is particularly important given the available evidence suggesting that these households are much more likely than other households to experience a material drop in their consumption at retirement (Hurst 2008). The possibility of austerity-driven cuts to programs that help older Americans makes the issue even more pressing.

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Authors

Karen Dynan

Publication: The Hamilton Project

Reforming Federal Support for Risky Development

David R. Conrad and Edward A. Thomas — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — David Conrad and Ed Thomas explore how the National Flood Insurance Program and other federal disaster relief programs could be reformed to better align the costs and benefits of living in disaster-prone areas and help put the budget on more sound footing. This proposal aims to reduce budget costs of natural disasters and reduce risk to life and property of Americans living in disaster-prone areas.

IMPACT

Deficit Reduction (10-year): $40 billion

Broader Benefits: Reduces budget costs of natural disasters; reduces risks to life and property of Americans living in disaster-prone areas.

INTRODUCTION

Within the past decade, citizens of the United States have experienced a series of devastating natural disasters, including Hurricanes Sandy, Katrina, and Rita; the tornado outbreaks of 2011 and 2012; and an annual slew of increasingly destructive wildfires. These disasters have exerted a significant human toll, destroying homes, uprooting families, and bankrupting local businesses. The devastation caused by these disasters has increased substantially in recent years, and unfortunately the forecast does not predict a respite: most climate experts and economists expect that the United States will continue to experience escalating damages from natural hazards such as severe weather, floods, and wildfires.

As these tragedies have proven time and again, Americans are generous in times of disaster. We have seen communities come together as neighbors help one another recover and rebuild, and we have witnessed outpourings of support and charitable contributions from concerned citizens across the country. Considerable amounts of federal aid are also often sent to areas affected by natural catastrophes, and the federal government insures many Americans living in flood-prone regions through the National Flood Insurance Program (NFIP), which was created in 1968 as an agreement between the federal government and local communities, wherein the federal government makes flood insurance available to residents of communities that adopt and enforce a floodplain- management ordinance. Through such relief efforts and
programs, the federal government plays an important role in insuring losses incurred in disasters and in reducing the costs and harms of future disasters.

The increasing frequency, intensity, and costs of disasters have placed tremendous budgetary pressure on the institutions intended to avert and mitigate disasters and to provide relief to disaster victims. Because federal taxpayers often cover much of the bill for the damages of a natural disaster, individuals, developers, and local governments can face incentives to develop and redevelop areas that are at risk for natural disasters. The first step in reforming federal disaster support is for policymakers to reduce unnecessary damage caused by human occupancy of at-risk areas. We believe the federal government should continue to play a strong role providing much-needed assistance to Americans who are the victims of natural disasters, but that the federal role should also require and incentivize steps to ensure that residents and communities make decisions and undertake investments to mitigate future losses.

The federal government neither does nor should dictate where people can live, own property, or operate their businesses. The federal government can, however, rethink and reform its appropriated and nonappropriated support for development activities and postevent reconstruction to support and nurture better zoning regulations, building codes, and natural-hazards management programs, to help ensure that individuals avoid especially hazardous locations.

To make the federal government’s disaster-relief efforts more effective, from both environmental and economic perspectives, we propose a series of reforms that fall into three broad categories:

Incentivize and otherwise implement higher disaster- resistant development standards for any type of federal support for new or reconstructed public and private housing, industry, and infrastructure investments.
Require greater private and local cost-sharing of disaster costs.
Further reform the NFIP.

Natural disasters are, by their nature, unpredictable, and this makes calculating the fiscal effects of our proposals difficult, but our conservative estimate is that our reforms would save the federal government at least $40 billion over the next ten years. In addition, these proposals will promote a safer, less- disaster-prone future, and will mitigate potential harm to those that choose to remain in areas that Mother Nature regularly visits with wildfires, earthquakes, storms, and floods.

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Authors

David R. Conrad
Edward A. Thomas

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Replacing the Home Mortgage Interest Deduction

Alan D. Viard — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Alan Viard proposes to replace the mortgage interest deduction with a refundable credit as a way to reduce the artificial incentive for the construction of high-end homes by better targeting the tax breaks for housing.

IMPACT

Deficit Reduction (10-year): $300 billion

Broader Benefits: Reduces the artificial incentive for the construction of high-end homes by reducing and better targeting the tax breaks for housing.

INTRODUCTION

The federal tax treatment of owner-occupied housing cries out for reform. Current tax policy offers unwarranted subsidies for the purchase of expensive homes by high-income taxpayers, but does little to promote homeownership by those of more modest means. To address these problems, I propose to replace the mortgage interest deduction with a 15 percent refundable credit and to reduce the size of the mortgages eligible for the credit while providing transition relief. Although this proposal is not ideal in every respect, it offers an effective way to scale back and better target the tax system’s housing tax breaks while raising revenue in a progressive manner. Over ten years, such a proposal could increase revenues by approximately $300 billion.

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Authors

Alan D. Viard

Publication: The Hamilton Project

Image Source: Ryan McVay