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Unformatted text preview: PADP 8670 POLICY ANALYSIS I Insurance and Cushions Angela Fer7g, Ph.D. Overview Ra+onale Safety net Could be efficiency Mul+plier effects Automa+c stabilizing effect Poverty Measures and Policy Insurance Cushions Govt subsidized or provided Mandated Insurance Welfare Stockpiling 1 Ra+onale Equity and Efficiency? Clearly insurance provides a safety net for vulnerable groups OIen a trade-off between equity & efficiency: create work disincen+ve to remain eligible However, there could be efficiency arguments for government providing health insurance: Addresses externali+es (neg=communicable diseases, pos=produc+ve workers) Mandated insurance address adverse selec+on Encourages efficient use of medical services (preven+ve care vs. ER) Samaritan's dilemma: If govt will give $ to people in hard +mes, people will not save enough to prevent hard +mes So, if we won't deny ER services, then might as well provide insurance Ra+onale Economic S7mulus: govt-purchases mul+plier A liXle macroeconomics... When the govt spends money, it raises income, higher income raises consump+on, which further raises income, which raises consump+on more, etc. Total effect of govt purchases on income: First change in govt purchases = G First change in consump+on = MPC *G Second change in consump+on = MPC (MPC*G) Third change in consump+on = MPC (MPC (MPC*G) GDP = (1 + MPC + MPC2 + MPC3 + ...) G GDP/G = 1/(1-MPC) because infinite geometric series MPC=marginal propensity to consume (how much of your income you spend, not save) 2 Mul+plier effect So, if MPC=0.6 (spend 60% of income), then mul+plier effect is GDP/G = 1/(1-0.6)=2.5 A $1 increase in govt purchases raises equilibrium income by $2.50. Different groups of people have different MPCs (poor spend a greater frac+on of their income than rich, etc.) Tax mul+plier effect Taxes have a different mul+plier effect than government purchases because the first consump+on increase comes from consumers, not the government. Total effect of tax decrease on income: First change in consump+on = MPC *T Second change in consump+on = MPC (MPC*T) Third change in consump+on = MPC (MPC (MPC*T) GDP = (MPC + MPC2 + MPC3 + ...) T GDP/T = MPC/(1-MPC) So, if MPC=0.6, GDP/T = 0.6/(1-0.6)=1.5 A $1 decrease in income taxes increases GDP by $1.50. However, evidence suggests that tax mul+pliers are bigger than govt spending mul+pliers. The possible reason is that tax cuts produce a bigger boost to investment demand, which also s+mulates the economy. 3 Another ra+onale Automa7c stabilizing effect Policy tends to influence the economy aIer a substan+al lag in +me, which makes it difficult for ac+ve policy to stabilize the economy Automa+c stabilizers are policies that s+mulate or depress the economy when necessary without any deliberate policy change: E.g. income taxes fall and UI and other transfer payments increase when there is a recession Automa+c stabilizers are par+cularly effec+ve at stabilizing the economy because there is no lag Poverty Measures and Policy In the US, official defini+ons of poverty are determined at the na+onal level and do not account for regional differences in living costs. Methodology developed in 1960s by Mollie Orchansky based on assump+on that food costs account for 1/3 of a family's budget. 2 main measures: Census Bureau Poverty Thresholds (calculate # of poor households) Health and Human Services Poverty Guidelines (determine eligibility for many programs) 4 Poverty Thresholds (Census 2010) Size of family unit One person Under 65 years 65 years and over Related children under 18 years Avg None One Two Three Four Five Six 11,139 11,344 11,344 10,458 10,458 Seven 8+ Two people 14,218 Householder <65 years 14,676 14,602 15,030 Householder 65+ years 13,194 13,180 14,973 Three people 17,374 Four people 22,314 Five people 26,439 Six people 29,897 Seven people 34,009 Eight people 37,934 Nine people or more 45,220 Source: U.S. Census Bureau. 17,057 22,491 27,123 31,197 35,896 40,146 48,293 17,552 22,859 27,518 31,320 36,120 40,501 48,527 17,568 22,113 26,675 30,675 35,347 39,772 47,882 22,190 26,023 30,056 34,809 39,133 47,340 25,625 29,137 33,805 38,227 46,451 28,591 32,635 31,351 37,076 35,879 35,575 45,227 44,120 43,845 42,156 Figure 5.
Percent Poverty Rates by Age: 1959 to 2010
50 45 40 35 30 25 20 15 10 5 0 1959 18 to 64 years 65 years and older Census Thresholds used to calculate Poverty Rate Recession Under 18 years 22.0 percent 13.7 percent 9.0 percent 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Notes: The data points are placed at the midpoints of the respective years. For Information on recessions, see Appendix A. Data for people aged 18 to 64 and 65 and older are not available from 1960 to 1965. Source: U.S. Census Bureau, Current Population Survey, 1960 to 2011 Annual Social and Economic Supplements. 5 Poverty Guidelines (HHS 2011) Persons In Family 1 2 3 4 5 6 7 8 For each addi+onal person, add 48 Con7guous States + DC $10,890 14,710 18,530 22,350 26,170 29,990 33,810 37,630 3,820 Programs that use HHS Poverty Guidelines DHHS: Head Start, Parts of Medicaid, CHIP, Medicare subsidized por+on of Part D, Community Health Centers, etc. D of Ag: SNAP, WIC, Na+onal School Lunch Program, etc. D of Treas: Low-income Taxpayer Clinics And more... Major means-tested programs that do not use poverty guidelines: TANF, SSI, EITC, Sec+on 8 vouchers, public housing 6 Problems with Poverty Measures Does not take into account living costs (housing, medical care, etc.) Does not take into account govt transfers Does not take into account taxes Census has new Supplemental Poverty Measure Na+onal Academy of Sciences expert panel recommended new measure Will not replace official poverty measure Will not be used for resource alloca+on or program eligibility Takes gross money income + value of near-money federal in-kind benefits (SNAP, housing subsidies, EITC) income & payroll taxes and non- discre+onary expenses (medical out of pocket, child care, child support) 7 Poverty rates for all people and by age group: 2010
25.0 20.0 15.0 Percent 10.0 5.0 0.0 Official** SPM All People 15.2 16.0 Under 18 years 22.5 18.2 18 to 64 years 13.7 15.2 65 years and older 9.0 15.9 **Includes unrelated individuals under age 15. Source: Current Population Survey, 2011 Annual Social and Economic Supplement. 9 9 Poverty rates by race and ethnicity: 2010
30.0 25.0 20.0
Percent 15.0 10.0 5.0 0.0 Official** SPM White, not Hispanic 10.0 11.1 Black 27.5 25.4 Asian 12.1 16.7 Hispanic (any race) 26.7 28.2 **Includes unrelated individuals under age 15. Source: Current Population Survey, 2011 Annual Social and Economic Supplement. 10 8 Composition of total and poverty populations by region: 2010 SPM 16.2 17.7 37.7 28.4 Official** 15.1 19.8 41.2 23.8 Northeast Midwest South West Total 17.9 21.6 37.0 23.5 0% 20% 40% 60% 80% 100% ** Includes unrelated individuals under age 15 Source: Current Population Survey, 2011 Annual Social and Economic Supplement. 13 Insurance: Govt provided or subsidized If insurance is under-consumed by ci+zens because of lack of informa+on, myopia, etc., then govt may want to encourage purchase by incen+vizing ci+zens to obtain insurance by making it free or low-cost However, if people do not bear the true cost of an event (or of the insurance), then they will not take the necessary precau+ons to avoid the bad event (moral hazard): Choose to live in disaster prone areas if govt provides disaster insurance Take jobs in industries with high risk of unemployment if govt provides unemployment insurance Take on risky investments if govt will bail out e.g. Flood insurance is expensive here, so a flood must be really likely May be beXer to mandate insurance if possible, which provides informa+on to consumer 9 Ra7onales Adverse selec+on may limit the availability of health insurance (healthy won't buy, poor can't afford) > Incomplete insurance market > High na+onal health care costs due to inefficient use of resources and poor health One type of insurance mandate: Mandated Employer-Provided Health Insurance If want to regulate insurance industry (no pre-exis+ng condi+ons clauses allowed), need mandate to avoid adverse selec+on problem Paternalism: govt is pushing people to do what is good for them Mandated Employer-Provided Health Insurance Employer mandate requires employers to compensate workers more shiIs labor demand curve back by the per unit costs of the insurance (z) If workers value the benefit exactly z, then the labor supply curve shiIs out by z Wage falls by z and employment stays the same Workers pay for the insurance with lower wages Won't raise labor costs of firms, won't affect global compe++veness of US firms 10 Graph Mandate could be good for economy If workers value the benefit more than z (group plan is beXer than cash cost), then LS shiIs out by more than z Wage falls by more than z, employment increases 11 Graph Caveat: Mandate + Minimum wage If eqbm wage falls below the minimum wage, Those who keep job are really beXer off But some get laid off 12 Providing compensa+on aIer a bad event Welfare (formerly AFDC, now TANF) Provides cash transfers to people who have very low income (eligibility determined by state) Goal is equity But causes work disincen+ve (labor-leisure diagram), which leads to dependence AFDC also caused perverse incen+ves with respect to family structure easier to get if not married, not living with parents Cushions: Another Cushion: Stockpiling Ra+onale To protect US consumers from price shocks or disrup+ons in supply due to unexpected global events (oil, food) To raise agricultural prices (grain) to help farmers US defense policy if cri+cal for military, do not want to depend on poten+al enemies for this input e.g. Strategic Petroleum Reserve Buy extra when price is normal and release when price is high Why does govt need to do this? Wouldn't a private producer come forward to earn this profit? Mechanism: 13 Graph 14 ...
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This note was uploaded on 01/18/2012 for the course PADP 8670 taught by Professor Staff during the Fall '10 term at University of Georgia Athens.
- Fall '10