One of the first things you learn in Means-Tested Welfare Economics 101 is that means-tested welfare programs produce enormous marginal tax rates. Say you have a $5,000 benefit that’s available only to people making less than $10,000. If you have market income of $9,000, this means you have total income of $14,000. But if you have market income of $11,000 you have total income of $11,000. You’re essentially paying a marginal tax rate of over 100%.

Of course, you could spread this out. Instead of just taking away the entire benefit when you cross the $10,000 threshold, you could take away, say, $500 for every $1,000 in additional income. This means that for every additional $1,000 you make, your actual income only goes up $500. That’s better, but it’s still a 50% marginal tax rate, which is higher than the tax rate paid by any other income class on any kind of income.

This is all basic stuff, recognized by everyone since the dawn of time. Megan McArdle comments on it today:

Note two things: first, that in this case, at least, the supply siders seem to be completely right. Everyone I’ve spoken to about the problem seems to agree that the poor respond to these high marginal tax rates by either taking lower-paying jobs than they could, or working less — not in every individual case, but in aggregate.

And second, that this is not a problem that supply siders seem to be applying much brain power or political capital to fixing.

Nope. In fact, they mostly want to make it worse by applying means testing to programs like Social Security and Medicare. Unfortunately, despite plenty of high-wattage brainpower being applied to this problem, nobody’s ever figured out how to avoid this basic problem of means-tested benefits. If the means testing is strict (i.e., benefits phase out quickly) it creates a big incentive to simply save less or not work as hard. If the means testing is loose (i.e., benefits phase out slowly), the perverse incentives get smaller, but you end up barely saving any money. It’s an especially big problem for Social Security, which is a pure cash benefit.

This is why I’m pretty skeptical of means testing either of these programs more than we already do. Any version of this that avoids big negative incentives would phase out so slowly that it just wouldn’t save much money. So why bother?

Tyler Cowen on the latest news out of the eurozone:

At this point you have to be asking whether it is better to simply end the eurozone now, no matter how painful that may be….As a politician I probably could not bring myself to pull the plug, but as a blogger I wonder if that might not, at this point, be the wiser thing to do. Current crisis aside, does anyone out there see the euro’s governance structure — even with reforms — as even vaguely workable?

Nope, not me. But the sunk costs are simply too big for Europe’s leaders to be willing to dissolve the eurozone in response to anything short of a complete financial meltdown. As usual with financial crises, they can probably avoid this meltdown a lot longer than anybody thinks. But can they avoid it forever? It sure doesn’t look like it.

This has been a pretty busy year at Mother Jones: covering the Occupy protests, the Wisconsin sit-ins, the Arab Spring, human rights in trouble spots around the world, and a whole lot more. As you know, I write about this stuff from the comfort of my living room, but MoJo‘s other reporters don’t. They’re out there on the front lines, producing first-person accounts of the stories that progressives care about most.

But it’s expensive doing that, and next year is probably going to be more expensive yet. For starters, it’s an election year, and we’re planning to spend a lot of time investigating dark money and its increasing importance on politics in a post-Citizens United world. It’s an important topic, but it’s not a cheap one to dig into.

So with the end of the year coming up, we’re making one last fundraising push. If you appreciate our brand of reality-based journalism, please help us out by donating a few dollars to the Mother Jones Investigative Fund today. Even $5 or $10 makes a difference, and $50 or $100 makes an even bigger difference. Plus, your donation is tax deductible. So please take a minute right now to give via credit card or PayPal.

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The New York Times has uncovered yet another instance of Newt Gingrich supporting an individual mandate for health insurance:

Although he now says he is opposed to the so-called individual mandate, in a May 2009 conference call — previously unreported — he told health care executives, “We believe there should be must-carry; that is, everybody should have health insurance, or if you’re an absolute libertarian, we would allow you to post a bond.”

I imagine Newt will have yet another too-clever-by-half explanation for this, but there’s now quite a track record of him being a big fan of the mandate. At some point, his denials just aren’t going to wash any longer.

There’s also more in the article about his relentless lobbying-that-wasn’t-really-lobbying. His explanations for this are getting a little frayed around the edges too.

Andrew Sullivan responds to my post this morning about Ron Paul here, but he still doesn’t explain why there’s anything wrong with a journalist explaining—accurately, I think—how the Republican establishment would view a Ron Paul victory in Iowa. Answer: They’d consider it a freak accident and blow it off. That’s what Chris Wallace said, and it’s the kind of analysis that political reporters engage in all the time. It seems entirely nonremarkable to me.

But forget that. What I’m really curious about is this throwaway sentence:

I might add that up to this point in the last cycle, exactly the same things were said about Barack Obama.

At least, I’d normally think of it as a throwaway sentence except that he said the exact same thing yesterday:

I feel the same way about [Ron Paul] on the right in 2012 as I did about Obama in 2008. Both were regarded as having zero chance of being elected.

Who’s crazy here, Sullivan or me? I know I have an unusually sucky memory, but “this point in the last cycle” would be December 15, 2007. And no question about it: Hillary Clinton was considered the front-runner and enjoyed a sizable poll lead. But was Obama really not taken seriously? Considered a fringe candidate? Given zero chance of winning? Hated by the Democratic establishment? That’s sure not what I remember. I remember an extremely robust primary contest practically from Day 1, with plenty of support for both candidates from both the grassroots and the establishment. Nobody wrote Obama off, nobody claimed an Iowa victory would be meaningless, and nobody treated him as a vanity candidate. Nobody.

Am I missing something here?

The Wall Street Journal reports that there’s been a sudden outbreak of Christmas cheer on Capitol Hill, and the chances of a government shutdown on Friday are now almost nil. There’s also — maybe — been an outbreak of remarkable good sense. The biggest obstacle in the way of a deal has been figuring out how to offset the cost of an extension of the payroll tax cut, and the Journal reports that several new possibilities are now under consideration, including this one:

Another option is for the measure to be only partly offset by revenues or spending cuts elsewhere—an approach that Democrats and the White House have said they could support.

Well huzzah. The whole point of the payroll tax cut is that it’s supposed to be a short-term economic stimulus, and the best way to accomplish that is not to pay for it at all. If you cut taxes one place and raise them another, that doesn’t have much net effect. Likewise, if you give people more money to spend but then offset it with less government spending, that doesn’t have much net effect either. If you want to stimulate the economy via fiscal policy, the best way to do it is via straight-up deficit spending.

Unfortunately, the Journal says that lawmakers are only considering a plan to “partly” offset the payroll tax cut with other revenues or spending cuts. Too bad. That’s better than nothing, but better still would be to forget about offsetting it at all and just pass the damn thing.

I didn’t write about this when the results were announced last week, but we now have another year’s worth of data from the NAEP’s Trial Urban District Assessment, a measure of academic progress in big-city school districts. So how are our urban kids doing? Bob Somerby summarizes the results from 2003 through 2011:

Fourth grade math: According to those data, black fourth-graders gained eight points in reading during that eight-year span. So did Hispanic fourth-graders. Kids receiving reduced-price lunch gained nine points during that span. (This includes children of all races and ethnicities.) Kids receiving free lunch (the “really poor children”) gained eight points too.

Fourth grade reading: Black fourth-graders gained eight points. Hispanic students gained six points. Reduced-price students gained seven points. Free lunch kids also gained seven.

Eighth grade math: Black eighth-graders gained ten points. Hispanic students gained eleven. Reduced-price kids gained ten points. Free lunch kids gained twelve.

Eighth grade reading: Black eighth graders gained four points. Hispanic students gained seven points. Reduced-price students gained five points. Free lunch kids gained seven.

Not every big city participates in TUDA, but most of the biggest have participated since 2003, including Atlanta, Boston, Chicago, DC, Houston, Los Angeles, and New York. And these results are consistent with plenty of other NAEP results: poor and minority kids are still doing a lot worse than middle-class and non-minority kids, but they are making progress. Likewise, although there’s no data for 11th or 12th graders, which means we don’t really know if these gains are permanent, they are gains. Given the usual NAEP rule of thumb that ten points is equal to one grade level, these urban kids have improved their math and reading performance by anywhere from half a grade level to a full grade level in just eight years.

There are plenty of nits to pick with data like this, and I’ve picked some of them in the past. Still, why is it that progress like this so rarely gets reported? It’s fairly impressive, no?

As Matt Yglesias says, the latest Pew survey suggests that America is increasingly “a nation of hardened class warriors.” Even among independents, large majorities think that corporations and the rich are too powerful, our economic system unfairly favors the wealthy, and Wall Street is bad for the economy. What’s more, there’s a big decline in the number of people who think hard work leads to success and a big increase in the number of people who think they’re part of the have-nots.

But I wonder how much a survey like this really tells us. Remember the old saw about American being ideologically conservative but operationally liberal? What it means is that Americans like the idea of small government and rugged individualism, but in practice we’ve shown over and over again that in real life we want safety nets, we want environmental regulations, and we want government programs of all sorts. And we’ll fight like lemmings to keep them around.

Unfortunately the Pew poll doesn’t ask enough questions to test whether the same thing is true here. But I suspect it is. Americans say the current system is unfair and favors the rich, but if you ask about specific things we could do to change that, I’ll bet support drops off dramatically. You can see some of this in the question about threats to America’s well-being. Only 56% name the power of banks and Wall Street, while 76% think the national debt is a big threat. This is not a sign of a country that’s seriously bent out of shape about growing inequality.

Sure, lots of people support modestly higher taxes on the rich, but serious reform to cut Wall Street down to size or reduce the influence of corporations and the rich? The kind that people feel strongly enough to march in the streets about or elect a Congress that agrees with them? We’re not there yet. For the moment anyway, we’re ideologically class warriors but operationally in favor of the status quo.

Last night I read a couple of articles about a new bipartisan Medicare proposal cosponsored by Rep. Paul Ryan and Sen. Ron Wyden. However, the details were vague enough that I decided to wait until today to write about it.

So here it is: a 12-page white paper explaining the plan. (Though, tellingly, only six pages are dedicated to the plan itself.)  A shorter summary, coauthored by Ryan and Wyden, is in the Wall Street Journal today.

Overall, it doesn’t sound too bad. It has the usual unfortunate dodge of grandfathering everyone older than 55 into the current system, but I’m willing to concede that this is probably politically necessary. It caps Medicare growth at GDP+1%, the same goal as Obamacare. It institutes means testing, charging lower premiums to low-income seniors and higher premiums to high-income seniors. And it features an out-of-pocket cap to protect seniors from catastrophic costs.

None of this is especially new. What is new is their proposal to create a national exchange for Medicare providers. Basically, the federal government would set a minimum benefit level, and everyone who wants to provide Medicare services, including the traditional government-run Medicare program, would enter a bid:

The second-least expensive approved plan or fee-for-service Medicare, whichever is least expensive, would establish the benchmark that determines the coverage-support amount for the plan chosen by the senior. If a senior chose a costlier plan than the benchmark, he or she would be responsible for paying the difference. Conversely, if that senior chose a plan that cost less than the benchmark, he or she would be given a rebate for the difference. Payments to plans would be risk-adjusted and geographically rated. Private health plans would be required to cover at least the actuarial equivalent of the benefit package provided by fee-for-service Medicare.  

This is similar to Obamacare in a lot of ways. In fact, the entire Wyden-Ryan plan goes a long way toward making Medicare similar to Obamacare. Basically, Obamacare moves our current private insurance system in the direction of government support with competitive bidding, while Wyden-Ryan moves our current federal Medicare system in the direction of private support with competitive bidding. Somewhere in the middle they meet, and our entire healthcare system becomes a fairly homogeneous blend of public and private, similar in some ways to the systems in Switzerland or the Netherlands. Yuval Levin makes this point explicitly here, and as a conservative he’s not especially happy that this is where we could end up. But done right, it wouldn’t necessarily be a bad place to be.

At the same time, the Wyden-Ryan plan is still vague enough that it’s impossible to say anything firm about it. There are just too many open questions, many of which Austin Frakt outlines here. But competitive bidding, done right, could rein in cost growth somewhat, and it’s not something liberals should automatically oppose. The real question is whether it will have a substantial effect. Jon Cohn doesn’t think so:

Some advocates for premium support claim it would save money because private plans are inherently more innovative and efficient than old-fashioned, government-run Medicare. Not to be blunt, but the evidence for this is non-existent: Medicare has lower overhead, enormous economies of scale, and the ability to keep down costs by dictating prices to the providers of care. (Conservatives may not like that last part, but purely in terms of lowering prices it’s quite effective.)

In the end, the heavy lifting on cost control will most likely be done by the GDP+1% cost cap. This is not an inherently ridiculous cap, like the one in Ryan’s earlier plans, and Ryan and Wyden also claim it would work differently than other caps:

Unlike other proposals, spending that exceeds the cap would neither be addressed through bureaucratic cuts nor passed on to seniors by default as higher premiums. Instead, Congress would be required to do its job: Determine why the costs exceeded the cap and—when the evidence merits—reduce payments to providers, drug companies, or others who may be responsible for escalating costs.

I get nervous anytime a plan relies on “Congress doing its job,” but obviously this is the kind of detail that would end up getting completely transformed anyway if the Wyden-Ryan plan ever made it through the legislative sausage grinder. So there’s not much point in getting too worked up about it.

Bottom line: this isn’t necessarily a bad plan. Unfortunately, it’s also not clear if it’s really a very effective plan either. But I’d certainly put it into the broad bucket of plans that are reasonable starting points for conversation. Given Paul Ryan’s immense credibility with the tea party wing of the Republican Party, it’s significant that he’s put his name to this. It’s worth a conversation.

Andrew Sullivan thinks that Chris Wallace of Fox News ought to recuse himself from tonight’s debate because he said this about a possible Ron Paul victory in the Iowa caucuses:

Well, and the Ron Paul people aren’t going to like me saying this, but, to a certain degree, it will discredit the Iowa caucuses because, rightly or wrongly, I think most of the Republican establishment thinks he is not going to end up as the nominee. So, therefore, Iowa won’t count and it will go on.

“He’s basically saying that the votes of Iowans do not count in advance if they decide for Ron Paul,” Andrew says. Spare me. Wallace isn’t openly rooting for one side or another here. He’s just making the obvious point that the Republican establishment normally thinks of the Iowa caucuses as a bellwether, but if Ron Paul wins they won’t. They’ll figure it’s just a fluke and move on to New Hampshire.

Given the fact that Paul has always had a dedicated band of fanatic supporters willing to give him money and organize support for him, but at the same time has never in his life managed to gain even double-digit support nationally, this is actually perfectly rational. Ron Paul isn’t going to win the GOP nomination, and if he manages to pull out some kind of freak victory in a small state with a weird nominating process, well, it’s just a freak victory. Why shouldn’t Chris Wallace point out quite accurately that this is exactly how the Republican establishment would view it?