Oren Cass believes conservatives have blundered by outsourcing GOP economic policymaking to libertarian “fundamentalists” who see the free market as an end unto itself, rather than as a means for improving quality of life to strengthen families and communities. The former domestic policy director on Mitt Romney’s 2012 presidential campaign quit his job as a senior fellow at the Manhattan Institute to launch a new group called American Compass that aims to reorient the right. He previewed their plans in an exclusive interview on Monday afternoon.
This is the first paragraph of a long Washington Post piece on Oren Cass: James Hohman, with Mariana Alfaro, “The Daily 202: Conservative intellectuals launch a few group to challenge free-market ‘fundamentalism’ on the right,” Washington Post, February 18, 2020. The title, by the way, is accurate. It’s Cass’s understanding that’s off.
Don Boudreaux, over at CafeHayek has done a nice job, as always, of homing in on a basic problem Cass has in understanding what free-market advocates believe. By the way, if you start a whole group based on a misunderstanding, what are the chances that you get a good result?
I want to focus, though, on another economic point Cass gets wrong. Of course I’m assuming that the reporters stated his thoughts correctly. In this case, though, since Cass has a track record of saying similar things, I think the odds that they got it right are high.
Here’s how the WaPo reporters quote Cass:
Likewise, if you are generating growth by trading off the non-market work that people historically performed within their households for a model where everyone goes to work and then they pay each other for the things they used to do in their own household, that’s not great either.
Actually, it is great, and a little economics shows why: it has to do with marginal tax rates.
The big advantage of non-market work within the home is that it’s not taxed. So, for example, if my wife raised our daughter in our home, which she did, and, as a result, did little free-lance work during our daughter’s formative years, the time spent raising our daughter was not taxed. But if instead my wife had done more free-lance work and put our daughter in day care for a few hours a day, the money we paid for day care would have been taxed. Similarly, if I had done gardening at our house, the time I spent gardening would not have been taxed. But if I hired someone to do gardening, which I have done, the money he makes is taxed.
Given those facts, what can we say when we observe people working outside the home and hiring others to do work inside the home? We can say is that even with the tax disadvantage, it’s worth doing. The tax system was distorting the choice between unpaid work at home and paid work. So when we observe people nevertheless finding it worthwhile to work outside the home and pay those taxes, that means that in spite of the higher taxes they still find it worthwhile.
And these taxes can be substantial, even on middle-income people. Remember that we’re thinking on the margin here. A middle-income man or woman will likely pay a marginal federal tax rate of at least 12%, a Social Security plus Medicare tax rate of 7.65% (and it really is 15.3% because even if the person is an employee, the income is taxed at 15.3% and that’s part of the tax wedge), and, likely a state income tax rate of at least 4%, for a total of 23.65%. And, the marginal federal tax rate for a substantial slice of the middle class is 22%, making the overall marginal tax rate 33.65%.
Cass could reply that I’ve got it wrong in the case of the parent outsourcing child care rather than doing it at home because I’m not taking account of the wellbeing of the kid. If that would be his reply, though, it’s not a good one. One of his recent tweets about his new enterprise emphasizes the importance of family. So let’s talk about families. While some families can make bad choices, who is likely to have the best interest of the child at heart: the parent who knows the kid intimately or Cass, who doesn’t even know the kid’s name?
There is one bright spot in the report, not that Cass sees it that way. The reporters write:
Running as a populist, Trump challenged Republican orthodoxy on free trade and tapped into the disaffection of blue-collar workers in the heartland who have been left behind by the growing, but uneven, economy. For the most part, however, he [Cass] said conservative elites in the think tank world have not followed suit.
We often hear that the Republican Party has caved to Donald Trump’s bad ideas on trade. And I admit that this is one of my very big worries. But that quote above made me slightly less worried.
READER COMMENTS
robc
Feb 18 2020 at 3:08pm
14.2% for Social Security. 15.3/107.65
If you count the employer portion of the tax as tax against the individual (which you should) then you also have to count it as part of the gross income.
David Henderson
Feb 19 2020 at 11:32am
Possibly good point. I’ve got to think about it.
robc
Feb 19 2020 at 1:26pm
I was going to respond that that is how the IRS calculates it for self-employed, but I was wrong. They tax 15.3% of 92.35% of your net income (The 7.65% “employer” portion is deducted before the calculation).
Which is a tax of 14.1%.
I think my calculation is more correct.
Vivian Darkbloom
Feb 19 2020 at 2:54am
I perceive a lot of confusion in these arguments. First, though, the title: ““The Daily 202: Conservative intellectuals launch a few group to challenge free-market ‘fundamentalism’ on the right,” Washington Post, February 18, 2020.
Am I to understand that WAPO’s title contained a howler of a typo and that it is accurate?
Next, Cass. I suspect that, as Henderson suggests, Cass is not making an economic argument but rather is stating a normative preference (having a spouse working at home is better for children and society as a whole than both working outside the home). Not surprising given his work for Romney. And, calling Paul Romer?
As for “trading off growth” I would grant that Cass has a point that due to our system of national accounts (which credits work outside the home but not un-reported work at home), the reported growth of this trade-off is at least *overstated*. I think he is also saying (indirectly) that this trade-off is “not great” not just due to the overstatement, but also ultimately due to his normative preferences.
I’m a bit lost by Henderson’s focus on “marginal tax rates”. The examples and the discussion seem to alternate between the marginal tax rate on the income a spouse must earn to pay someone else for this “trade off” and the tax the person supplying that substitute must pay (or both?). And, the caculation of “marginal tax rate” and incentives is fraught with problems. For example, what effect do the child care tax credit, pre-tax employer provided child care, flexible spending accounts, earned income tax credit, etc. have on these calculations? I suspect in some cases the “marginal tax rate” in the case of two working spouses is actually negative due to the subsidies! Likewise, treating FICA and Medicare as merely “taxes” is a gross simplification of the incentive calculus (these “taxes” don’t also carry with them future benefits? Was it Boudreaux who argued libertarian economists don’t think short term?)
Taxes distort economic behaviour. I would think that Cass and “fundamentalist libertarian economists” could break bread on eliminating the existing tax subsidies and preferences given to “work outside the home” but this is not politically feasible. What Cass likely wants is another set of market distorting preferences designed to encourage work at home (in addition to the existing preference that such labor is un-taxed).
Ultimately, I think the issue is better understood by eliminating the tax discussion. Imagine a world in which there are no taxes except opportunity costs. In this world, a spouse would work outside the home if the income (gross=net) of working elsewhere is greater than the cost of paying some else to do your “housework” (again, gross=net). It strikes me as a simple division of labor issue. My labor as a bookeeper might be economically more valuable than my labor as a housekeeper. But, nothing is that simple. Perhaps I get more social recognition and respect and I get more enjoyment out having adult company during the day, etc., etc. than the mere monetary calculus would suggest.
Alan Goldhammer
Feb 19 2020 at 8:45am
“Ultimately, I think the issue is better understood by eliminating the tax discussion. Imagine a world in which there are no taxes except opportunity costs. In this world, a spouse would work outside the home if the income (gross=net) of working elsewhere is greater than the cost of paying some else to do your “housework” (again, gross=net). It strikes me as a simple division of labor issue. My labor as a bookeeper might be economically more valuable than my labor as a housekeeper.”
This is the correct argument and from personal experience what was important to our family several decades ago when my wife twice went back to work following short maternity leaves. There was zero discussion of marginal tax rates but only consideration of the extra income.
Vivian Darkbloom
Feb 19 2020 at 9:29am
I have no doubt many if not most people think the same way. However, I was trying to get at a somewhat different point: if we eliminate all the distorting taxes and incentives (often going in opposite directions!), an efficient (or more efficient) division of labor *should* result in higher growth, at least as comprehensively and economically defined. As it is, all these opposing taxes and incentives, as well as the incomplete nature of our national accounts, make it very difficult, in practice, to tell exactly what effect and magnitude those “marginal tax rates” may have on work inside and outside the home and, ultimately, on “growth”. I suspect Cass’s cause is cultural, not strictly economic. I have no problem with that, so long as an economist clearly differentiates his economics from his (social) politics. If this is what Romer was saying, I’d agree with him.
robc
Feb 19 2020 at 9:54am
#1. Fleming v Nestor
#2. Ignoring that, the link between FICA tax and amount of SS received is weak at best, for most earners. PIA (primary insurance amount) increases at 15% of AIME (Average Indexed Monthly Income) above $5397 (and at 32% between $895 and $5397). It is 90% below $895.
#2b. Assuming you receive anything…which is health dependent. Nothing like dying at 61 1/2 to throw off your calculations.
David Henderson
Feb 19 2020 at 11:31am
Thanks, robc.
In addition re Medicare, if you pay the HI tax for 40 quarters (10 years), you qualify for Medicare. The vast majority of people who are married with children and, indeed, the vast majority of people in the United States period, will work at least 40 quarters even if they spend 20 years taking care of their children and being out of the work force.
Thaomas
Feb 21 2020 at 7:28am
If we want more “family friendly” incentives, raise the child tax credit and — if we create a child care subsidy — give it for family care not just public/commercial care.
Thaomas
Feb 19 2020 at 1:03pm
I think Mr. Cass has chosen the wrong enemies. Republicans have made a mistake in “outsourcing” their position on trade, immigration, and deficits not to Libertarians, but to the President. And the obstacles to their taking better positions on climate change, child care, EITC/CTC, and health insurance are not due, I think, to having given Libertarians a veto in these areas, but in their historic reluctance to taxing high income individuals.
Krishan Madan
Feb 20 2020 at 12:50am
The ideology that people know what choices are “best for them” has lead to widespread opiod addiction, rampant divorce, and the general breakdown of the family
Even though as an Integralist social conservative, I support paternalism, we still offer more freedom to women than libertarians do. A universal income for families with children children, like Catholic PiS has implemented in Poland, will give them the freedom to stay home and not work if they want to. If you truly support freedom, you should support a women’s freedom to stay home and raise kids without it hurting here finances
Mark Z
Feb 20 2020 at 2:54pm
It’s not freedom for the people who have to pay for it. You mistake being free to do something with being entitled to force someone else to pay you to do it.
Bob Johnson
Feb 20 2020 at 12:53am
As a social conservative, I want to expand the freedom of choice for women. That’s why I believe a women should have the right to stay home and raise children, and have as many children as she pleases, without it hurting her finances. In order to break the tyranny of the market, I support a universal income for families with children, like Catholic PiS did in Poland. Society has an obligation to families with children.
Jon Murphy
Feb 21 2020 at 5:08pm
Since that unfortunate event in the Garden of Eden, humanity has had to struggle to earn its living. The market is not tyrannical; the market is merely an institution for dealing with one inescapable fact: all resources are scarce.
nobody.really
Feb 21 2020 at 3:39pm
Ask Columbus?
1: I agree with Henderson’s critique of Cass’s populist subtext. But it’s possible to read Cass’s text to merely observe that the way we measure GDP does not take into account goods and services that are not traded in the market.
Imagine that A and B own identical houses, and pay identical mortgages. In scenario 1, each one lives in her own house. In scenario 2, they each live in the other’s house and pay rent. GDP will be greater under scenario 2—not because scenario 2 is objectively better, but because of quirks regarding how we measure GDP. So if we passed a law banning people from living in homes they own, we might observe a jump in GDP as people made similar arrangements to scenario 2—but that would not mean that society had grown richer; quite the opposite. Likewise, Cass is arguing that when we compare a world in which people tend to provide themselves with non-market services (e.g., the past) to a world when people are more prone to provide themselves with market services (e.g., the present), the growth in GDP may exaggerate the benefit.
Now, I also concur with Henderson that the fact that someone would CHOOSE to engage in a market transaction rather than a non-market transaction demonstrates that the person perceives some advantage from doing so, and taxation gives us cause to believe that this advantage is large. But that statement does not rebut Cass’s critique of the GDP.
2: In praising non-market (home-based) production, Cass echoes arguments developed in Elizabeth Warren’s Two Income Trap (2003). Warren cited data suggesting—contrary to expectation—that two-income households are more prone to bankruptcy. Henderson’s critique fails to address this dynamic.
I suspect this dynamic arises from non-populist reasons. First, while Warren rejects the “overconsumption myth” that blames household bankruptcy on mindless consumption, Americans indisputably buy bigger houses than their parents did. Admittedly, housing expenditures are not merely consumption; they are an investment not only in real estate, but also in access to a school district. Still, a big mortgage will result in more households becoming over-extended than if they’d simply bought their parents’ house.
Second, the US labor market in increasingly stratified. It increasingly favors “tournament economics,” wherein a person at the pinnacle of his profession—and who can be on constant call to his employer—reaps enormous rewards, whereas two people, each working a 40-hr week, will not. The high earner typically attended an elite school and marries a peer; his spouse then becomes a full-time homemaker to better enable to breadwinner to focus on his career. These households are unlikely to go bankrupt. Even if the breadwinner loses his job, the spouse is similarly credentialed and could leap into the market as needed. In contrast, if either spouse in the two-income household loses her income, the household will likely be unable to sustain itself.
3: Finally, Henderson’s critique of Cass neglects to address long-term consequences related to child-rearing. Many people (Cass?) argue that stay-at-home parents are better for child development—and this may manifest itself in future productivity.
On the farm, the choice to have a kid was an explicitly economic choice; it represented the farmer’s future labor force. [Insert discussion of masters, slaves, and child-production here.] But today, for most couples, the choice to have kids is akin to the choice to have pets; the parents may have little expectation of capturing the child’s future productivity. Yet, for society, these choices have enormous (and typically positive) externalities.
To make a fair comparison of policy alternatives that affect child-rearing, therefore, we’d need to consider long-term consequences. Parents, like any other private actor, cannot be expected to make socially optimal decisions in the face of externalties. That’s what public policy is for.
David Henderson
Feb 23 2020 at 11:33am
You wrote:
So Columbus is an expert on probabilities based on one sample point?
You wrote:
I think you and I have a big difference here: I don’t think these are big externalities. My view is that a large majority of parents care a lot about their kids’ futures. We can see evidence in the way they push sports, try to choose good schools, etc.
You wrote:
And what are the incentives that cause government officials, who don’t even know the kids, to make good long-run decisions for them? You’ve inserted a deus ex machina.
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