March 29, 2024

Today’s Economist: Bruce Bartlett: Why Hayek Isn’t Paul Ryan’s Guru

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Because the Republican presidential nominee, Mitt Romney, remains an enigma to almost everyone, those seeking insight into his core philosophy have focused on his choice of Representative Paul D. Ryan, who has been much more forthcoming about his intellectual influences, as his running mate.

Today’s Economist

Perspectives from expert contributors.

Mr. Ryan has credited a variety of people, from the Representative Jack Kemp to the libertarian novelist Ayn Rand, for his thinking. An article in this week’s New York Times Magazine credits another: the economist Friedrich von Hayek. Mr. Ryan mentions Hayek among his influences in the introduction to his Roadmap for America’s Future, which embodies his plan to slash the size of government.

Hayek has long been popular among conservatives mainly because of one book, “The Road to Serfdom,” published by the University of Chicago Press in 1944. Although written for a British audience – the Austrian-born Hayek was teaching at the London School of Economics when he wrote it – the book found its greatest success in the United States.

The New York Times had a great deal to do with the success of “The Road to Serfdom.” Its introduction was written by John Chamberlain, who had been The Times’s principal book reviewer in the 1930s. The Times’s book review was written by one of its editorial writers, Henry Hazlitt, who was effusive in his praise not only for the book’s substance but for its elegant style as well. It was featured on Page 1 of The Book Review on Sept. 24, 1944.

According to Hayek’s biographer, Alan Ebenstein, The Times’s review was the major reason that “The Road to Serfdom” became a best seller. Indeed, its influence continues, aided by recommendations from Representative Ron Paul, Republican of Texas, and the radio host Glenn Beck to members of the Tea Party movement.

Hayek’s basic thesis is that socialism inevitably transforms into totalitarianism. A key reason is that socialism cannot work economically, he believed. During the 1930s, Hayek was in the forefront of the socialist calculation debate, in which he, Ludwig von Mises and other economists proved that pure socialism had to fail because it lacked a true price system to guide efficient production and distribution.

The inevitable failure of socialism, Hayek thought, would eventually require authoritarian methods to try to make it work, as was the case in the Soviet Union and Nazi Germany. At the time he wrote his book, Britain, France and other European countries were adopting explicitly socialist policies, like state ownership of major businesses and industries.

Although there has never been much support for European-style socialism in America, World War II and the New Deal led to a great expansion of government. In 1944, it looked as if the United States were traveling rapidly in the same direction as Europe, and Hayek’s thesis was not implausible, given recent history.

The big problem for that those who continue to cite “The Road to Serfdom” as a guide is that they must essentially ignore everything that happened after 1944. Communism’s high-water mark occurred a few years later, and before long it became obvious that communism was not a path to prosperity. Nor has anything remotely like Nazism ever resurfaced.

By the 1970s, few reputable economists really thought that socialism was a good idea. Ironically, one of them was Gunnar Myrdal, with whom Hayek shared the 1974 Nobel in economic science.

In 1979, the conservative Margaret Thatcher, whom Hayek greatly admired, became prime minister of Britain and quickly began selling the state enterprises that had been acquired after the war. “Privatization” became a worldwide phenomenon, and the number of state-owned enterprises fell. Communism collapsed in 1989, and the Soviet Union dissolved in 1991.

Thus postwar history is exactly the opposite of what Hayek predicted. Liberalism did not beget socialism, which did not beget totalitarianism.

Another problem for conservatives like Mr. Ryan is that Hayek would have been likely to oppose many of their pet ideas, like abolishing Medicare. In “The Road to Serfdom,” Hayek explicitly endorsed social insurance:

Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong.

In “The Road to Serfdom,” Hayek also endorsed state aid to victims of floods and earthquakes, government policies to regulate working hours and to control poisonous substances. In other writings and interviews, he endorsed antitrust laws, a minimum wage and even the Tennessee Valley Authority, long a right-wing bête noire. In a 1982 interview with The New York Times, Hayek was even skeptical of Ronald Reagan’s economic plan, calling it “a very risky thing to do.”

Moreover, Hayek was not doctrinaire about the importance of political freedom. In a 1979 interview with The Times, he defended the Chilean regime of Augusto Pinochet, which combined political repression with free-market economics, calling the results “absolutely fantastic.” Asked whether this view was inconsistent with his philosophy, Hayek replied, “You can have economic freedom without political freedom, but you cannot have political freedom without economic freedom.”

For such transgressions, some on the right have long viewed Hayek as a dubious ally. For example, the libertarian economist Walter Block wrote a detailed attack on Hayek in 1996 for being at best a lukewarm defender of the free market.

I suspect that in his heart, Representative Ryan is more attracted to the dogmatism of Rand than the complex, nuanced philosophy of Hayek, who told the Cornell political scientist Theodore Lowi that Rand angrily called him “a compromiser” on the only occasion they met.

Article source: http://economix.blogs.nytimes.com/2012/08/28/why-hayek-isnt-paul-ryans-guru/?partner=rss&emc=rss

Republicans Call Obama’s Tax Plan ‘Class Warfare’

Representative Paul Ryan, chairman of the House Budget Committee, said the tax proposal, which Mr. Obama is expected to unveil on Monday, would also weigh heavily on a stagnating economy.

“It adds further instability to our system, more uncertainty, and it punishes job creation,” Mr. Ryan said on “Fox News Sunday.” “Class warfare may make for really good politics, but it makes for rotten economics.”

The pushback from Republicans — Mr. Ryan was not the only one to use the words “class warfare” — was in response to a White House assertion that Mr. Obama would call for a new minimum tax rate for individuals making more than $1 million a year to ensure that they pay at least the same percentage of their earnings as middle-income taxpayers.

With a special joint Congressional committee starting work on a bipartisan budget deal, the proposal adds a new and populist feature to Mr. Obama’s effort to raise the political pressure on Republicans to agree to higher revenues from the wealthy in return for Democrats’ support of future cuts to Medicare and Medicaid.

Indeed, Richard J. Durbin, a Democrat who is the senior senator from Illinois, took direct aim at the Republican speaker of the House when he said Sunday on CNN’s “State of the Union”: “I wonder if John Boehner knows what it sounds like when he continues to say the position of the Republican Party in America is you can’t impose one more penny in taxes on the wealthiest people. I wonder if he understands how that sounds in Ohio, where people are struggling paycheck to paycheck.”

Mr. Durbin said that taxes should be raised on “those who are wealthy and comfortable and wouldn’t even notice it.”

Mr. Obama, in a bit of political salesmanship, plans to call his proposal the “Buffett Rule,” in a reference to Warren E. Buffett, the billionaire investor who has complained repeatedly that the richest Americans generally pay a smaller share of their income in federal taxes than do middle-income workers because investment gains are taxed at a lower rate than wages.

The Senate minority leader, Mitch McConnell of Kentucky, said Sunday that there was “bipartisan opposition to what the president is recommending“ because it would slow growth in difficult times.

Still, “if Warren Buffett would like to give up some of his benefits, we’d be happy to talk about it,” he said on the NBC News program “Meet the Press” before adding, a bit more seriously, that Republicans were ready to consider means-testing as part of broader reforms to the big entitlement programs — meaning that the well-to-do would receive less.

Senator Lindsey Graham, Republican of South Carolina, who was among those to speak of “class warfare,” suggested on CNN that the proposed tax would bring in far less revenue than the administration has implied.

Mr. Graham said that raising taxes on billionaires and millionaires would add a minimum amount of money to the Treasury to pay off the debt.

Mr. Obama will not specify a rate or other details, and it is unclear how much revenue his plan would raise. But his idea of a millionaires’ minimum tax will be prominent in the broad plan for long-term deficit reduction that he will outline on Monday.

The proposal could invite scrutiny from some economists who have disputed Mr. Buffett’s assertion that the megarich pay a lower tax rate over all.

Two former government economists said Sunday they would like to see a more all-encompassing approach.

The economists, Alice Rivlin, who was director of the White House Office of Management and Budget under President Bill Clinton, and Douglas J. Holtz-Eakin, who led the Congressional Budget Office during George W. Bush’s presidency, said Mr. Obama’s proposal would simply add a complication to a tax code that needs more fundamental reform.

The special committee, said Ms. Rivlin, has a rare opportunity to “reform entitlements and reform the tax code and put us on a sustainable deficit track.” She and Mr. Holtz-Eakin both spoke on CNN.

The Obama proposal has little chance of becoming law unless Republican lawmakers bend. But by focusing on the wealthiest Americans, the president is sharpening the contrast between Republicans and Democrats. It is a theme he can carry into his bid for re-election in 2012.

It could also reassure Democrats who have feared that Mr. Obama would agree to changes in programs like Medicare without forcing Republicans to compromise on taxes.

The administration wants to replace the alternative minimum tax, which was created decades ago to make sure that wealthy taxpayers who have plenty of deductions and credits did not avoid income taxes, but which now hits millions of Americans who are considered upper middle class. Mr. Obama has said that many average Americans would see a tax cut if the system was overhauled, since ending many tax breaks would allow for lower rates while raising more revenues from the wealthiest.

The millionaires’ tax is among several changes Mr. Obama will propose in urging Congress to overhaul the federal income tax code next year in an effort to raise revenues, reduce deficits and make the tax system simpler and fairer, said administration officials, who agreed to speak in advance of the president’s announcement on the condition of anonymity.

The millionaires’ rate would apply to fewer than 450,000 taxpayers, they said; 144 million returns were filed for 2010.

Behind the arguments of Mr. Obama, Mr. Buffett and others about the inequity of the tax system is the difference between taxpayers’ marginal rate, popularly known as their tax bracket, and the effective rate they end up paying after subtracting for deductions, credits and other breaks.

Under Mr. Obama’s proposal, Mr. Buffett and others with taxable income of more than $1 million would pay a minimum tax rate closer to that of the people they employ. But Mr. Obama will leave the details of how such a rate would be calculated — whether to focus on the overall federal tax burden of middle-income individuals generally or on their marginal rates — to the debate over rewriting the tax code.

Mr. Obama, in his plan, will call for more than $300 billion in savings from Medicare and Medicaid, but not for any changes in Social Security.

Article source: http://feeds.nytimes.com/click.phdo?i=369f3656bdebe18c22971bffb0b82bd3

Economix: Ryan Plan and Health Spending

Today's Economist

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

My post last week, on the budget plan offered by Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, ended with the observation that the plan did not propose measures to control overall health spending in the United States, “nor does that appear to have been Mr. Ryan’s objective.”

To which one reader responded:

I do completely reject that there are no cost controls in the Ryan budget. If there is no federal, state, insurance or private money to pay for extremely expensive care such as in Post No. 7 above, such care will simply not be delivered or paid for.

Let me, for all to see, acknowledge this well-taken point. If less money were available to be spent on health care, then overall health spending would be lower.

But let me also reproduce a comment from that Post No. 7:

If cutting Medicare is so important, why not start now, rather than with today’s 55-year-olds? Start by not paying for life-support treatments for critically ill very old people, as Medicare did for my 92-year-old father’s PEG feeding tube three years ago. He got one, recovered enough to spend three more years in nursing homes and died last month after running up another $300K or so in medical bills paid by Medicare and his health insurance as a retired teacher.


Clearly, these comments land us smack in the middle of the treacherous terrain of cost-effectiveness analysis, end-of-life care and rationing of health care — all issues over which President Obama and his allies in Congress got into hot water during the health care debate of the last two years.

Among the harshest critics were Betsy McCaughey, the former lieutenant governor of New York, and Sarah Palin. Longtime readers of this blog may recall that I have explored all of these topics in a number of earlier posts, for example in a piece on rationing; a post on cost-effectiveness analysis and one on pricing human life.

The two readers I cite above advocate rationing of health care through the marketplace, by price and the patient’s own ability to pay, rather than by government. Furthermore, at least one of them argues, with apparent approval, that the Ryan plan will force that result.

The general idea is that, using whatever financial resources are available to them, patients or their loved ones will, of necessity, engage in a benefit-cost analysis and decide whether the anticipated benefits of end-of-life care exceed its expected cost to the household in terms of what that household has to forgo to buy the extra care. This is how markets work.

Economic theory suggests that, other things being equal, rich and less rich households will come to different conclusions on this question. If less money is available over all to spend on elderly Americans, it is the lower middle class that is likely to do most of the self-rationing.

Note that the Ryan plan proposes a means test to determine the federal contribution to Medicare — the very poor elderly will receive larger federal subsidies, although the size of these subsidies remain unspecified. But the middle and lower-middle class is likely to be on its own.

Another way of putting this issue is that patients and their loved ones will calculate the cost of end-of-life year per unit of medical outcome, measured by “quality-adjusted life years” (known as QALYs, pronounced KWAH-lee). That cost is, in effect, a price at which the household can purchase added QALYs from the health care sector.

Once that price is known, patients or those responsible for them can decide whether to buy the added QALYs yielded by end-of-life care at the available price. This forces patients or loved ones to compare the price with the monetary equivalent value of the benefits they anticipate from those QALYs.

This is the private version of what is known as cost-utility analysis, the analytic approach that is anathema in the halls of Congress (see the section starting on Page 519).

For reasons that escape me, many Americans do not regard rationing scarce resources through the marketplace, by price and ability to pay, as rationing at all, reserving that term for government withholding of marginally beneficial procedures, based on formal cost-effectiveness analysis.

I do beg to differ. In their well-known textbook “Microeconomics,” Michael L. Katz of Harvard and Harvey S. Rosen of Princeton, put it thus:

Prices ration scarce resources. If bread were free, a huge quantity of it would be demanded. Because the resources used to produce bread are scarce, the actual amount of bread has to be rationed among its potential users. Not everyone can have all the bread that they could possibly want. The bread must be rationed somehow; the price system accomplishes this in the following way: Everyone who is willing to pay the equilibrium price gets the good, and everyone who does not, does not.

That states the matter succinctly, although the authors could have been more precise by writing “willing and able to pay” rather than just “willing to pay.”

I have also applied the economist’s reasoning to an analysis of styles of rationing in Canada and in the United States and would be happy to hear what readers make of that.

Others commenting on last week’s post have suggested that privatizing Medicare along the Ryan plan will not lead to rationing, because the private health insurance system can deliver the same quality care more efficiently and more cheaply. They cite the prescription drug plan under Medicare Part D as support for their position. I will take up that proposition in the future.

Article source: http://feeds.nytimes.com/click.phdo?i=9e6d3477596f7f99115727f83e5c1e8a