The Sharp Increase in the Food Stamps Program

Casey B. Mulligan is an economics professor at the University of Chicago.

The poor economy is not the only reason that safety-net programs are spending more. The food stamp program is another example of a safety-net program that is significantly more costly than it was before the recession began.

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The Department of Agriculture’s food stamp program, now known as the Supplemental Nutrition Assistance Program, or SNAP, provides money to low-income households for the purpose of buying food, often in conjunction with cash assistance programs. Adjusting for inflation, the program spent more than twice as much in 2010 as it did in 2007, before the recession began.

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The Department of Agriculture found that the food-stamp spending increase “is likely attributable to the deterioration of the economy, expansions in SNAP eligibility, and continued outreach efforts.” Of particular relevance for the SNAP program is the fact that the poverty rate increased 18 percent, to 153 per thousand in 2010 from 130 per thousand Americans in 2007.

At least two eligibility expansions have occurred since the recession began: work requirements were lifted from April 1, 2009, through Sept. 30, 2010, and monthly income limits were 10 percent higher in the 2010 fiscal year than they were in the 2007 fiscal year, an increase about twice the rate of inflation over that period.

In addition, the American Recovery and Reinvestment Act increased maximum benefits by 13.6 percent, and the minimum benefit increased in October 2008. Increasingly, potential program participants have been given the opportunity to apply for benefits on the Internet.

The declining economy alone, under the previous rules, would have raised the spending on food stamps by 18 percent. But the revised provisions, enacted largely in response to the recession, are responsible for a greater share of the increase. The following table breaks down the program’s spending growth into three components: deterioration of the economy, relaxed eligibility rules and increased maximum benefits.

The top row of the table is actual program spending for 2007 and 2010, adjusting for inflation and population. The second row of the table estimates the program’s hypothetical spending growth with 2007 eligibility rules, by assuming that real spending per capita increased since 2007 only in proportion to increases in the poverty rate, plus the 13.6 percent benefit increase of the American Recovery and Reinvestment Act. The last row assumes that real spending per capita increased only with the poverty rate. Under either scenario, the hypothetical spending increases are significant but well less than half of the actual spending increases.

Over all, the table suggests that most growth in spending on SNAP is due to changes in eligibility rules and increases in payments per eligible person. The program’s spending would certainly have grown if benefit rules had remained as they were in 2007, but much less than it actually did. And those more generous provisions are now likely to be here to stay, even if the conditions that prompted them abate.

Tackling Income Inequality

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

The Occupy Wall Street protesters have focused attention on rising income inequality in the United States, and they are right to do so.

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Income and wealth disparities have reached levels not seen in the United States since the Roaring Twenties. And the concentration of income and wealth contributed to the speculative excesses that brought on the 2008 financial crisis (see Robert Reich’s “Aftershock” and Raghuram Rajan’s “Fault Lines”).

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According to a recent report by the Congressional Budget Office, rising income inequality is a long-term trend that began in the late 1970s and strengthened during the last two decades. The report confirms the protesters’ belief that the rising gap between the income of the top 1 percent and the income of everyone else is a major factor behind escalating inequality.

In the last 20 years, inequality has been largely a story of a small elite – not just the top 1 percent, but the top 0.1 percent – pulling away from everyone else in every source of household income: labor income, capital income and business income.

The top 1 percent’s share of national income has also been rising in most other advanced industrial countries, but it is by far the largest and has grown the most in the United States (see Jacob Hacker and Paul Pierson’s “Winner-Take-All Politics”).

Why have incomes of those in the top 1 percent soared? Their occupations provide some clues. From 1979 to 2005, nonfinancial executives, managers and supervisors accounted for 31 percent of the top 1 percent, medical professionals for 16 percent, financial professionals for 14 percent and lawyers for 8 percent.

Together, executives, managers, supervisors and financial professionals accounted for 60 percent of the increase in the top 1 percent’s income, with a widening compensation differential between those in the financial sector and those in other sectors of the economy after 1990.

Superstar athletes, actors and musicians, often portrayed among the super-rich, accounted for about 3 percent of the top 1 percent from 1979 to 2005, far less than the less glamorous people (mostly men) who lead and advise America’s businesses.

Researchers have identified several reasons for the rapid growth in incomes for the occupations that make up most of the top 1 percent, including “winner take all” technical innovations that have changed the labor market for superstars in all fields; increases in business size and complexity; a growing premium for highly specialized skills; changes in the forms of executive compensation, including the rise of stock options and weaknesses in corporate governance; and the increasing size of the financial sector.

All of these factors have played a role, but there is no definitive evidence on their relative significance.

Growing inequality in labor compensation played a major role in increasing income inequality between the top 1 percent and the rest of the population from 1979 to 2007. Over the period, however, both the growing inequality in business income, including income from small firms, partnerships and S corporations, and in capital income in the form of dividends, interest and capital gains, as well as the rising share of these forms of income in household income, played a more significant role, especially after 2000.

According to the Congressional Budget Office, from 2002 to 2007 more than four-fifths of the increase in income inequality was the result of an increase in the share of household income from capital gains, with the remainder the result of an increase in other forms of capital income.

Capital and business income are much more unevenly distributed than labor income and have become more so over time. Capital gains income is the most unevenly distributed — and volatile — source of household income.

The top 0.1 percent earns about half of all capital gains, and such gains account for about 60 percent of the income of the top 400 taxpayers.

Large cuts in federal tax rates on capital and business income have been very beneficial to the top 1 percent over time. In 1978, a Democratic Congress and a Democratic president reduced the top tax rate on most long-term capital gains to 28 percent from about 35 percent. It was reduced again to 20 percent in 1981 and then raised back to 28 percent in 1987, where it remained for a decade.

While serving as President Clinton’s national economic adviser, I led a study by his economic team of the likely effects of reducing the rate. We concluded that a cut would decrease future tax revenue, would contribute to rising inequality and would not increase saving and investment as its advocates asserted. Despite these warnings, in 1997 the president agreed to cut the rate to 20 percent, as part of a budget compromise with the Republican Congress.

Then, with Democratic support, President Bush reduced the tax rate on capital gains and other forms of capital income to a record low of 15 percent in 2003. Under the “carried interest” provisions of United States tax law, this rate also applied to fees earned by hedge fund and private equity managers, a rapidly rising cohort within the top 1 percent.

As a result of these changes, along with President Bush’s across-the-board cuts in income tax rates, federal taxes as a share of household income fell for the top 1 percent. Over all, the Bush tax cuts were the largest — not only in dollar terms but also as a percentage of income — for high-income households and increased the concentration of after-tax income at the top. Far from curbing escalating inequality, the Bush tax cuts exacerbated the problem.

While the federal tax code is still progressive, its progressivity has eroded, with a significant percentage of the richest now paying a much lower tax rate than the merely rich and the middle class. (Warren E. Buffett pays a lower tax rate than his secretary because most of her income comes in the form of wages that are subject to both federal income tax and the payroll tax while most of his income comes in the form of capital gains and dividends that are taxed at 15 percent and that are not subject to the payroll tax.)

A credible plan to reduce the long-run deficit requires a significant increase in revenue. Polls indicate that the majority of Americans, like the Wall Street protesters, believe that higher taxes on the rich are warranted both to reduce the deficit and to contain mounting inequality. I agree.

Restoring the top income tax rates and capital gains and dividends tax rates to their levels under President Clinton, as President Obama has repeatedly proposed, would be useful first steps. Taxing some carried interest as ordinary income would make the tax system more efficient and curtail outsize compensation in the financial sector. Adding a progressive consumption tax would augment revenue while encouraging saving and discouraging spending on luxury goods, both by the very rich and by those down the income ladder struggling to keep up.

The majority of Americans, like the Wall Street protesters, also believe the corporate tax rate should be raised. I disagree.

For reasons I discussed in an earlier Economix post, I believe that this rate should be reduced – a position advocated by both President Obama and former President Clinton in his new book. Raising tax rates on capital gains and dividends to the levels under President Clinton would curb the growth of income for the top 1 percent and could finance a substantial cut in the corporate tax rate that would bolster wages and job opportunities for American workers.

Why Not Break Up Citigroup?

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Earlier this week, Richard Fisher, the president of the Federal Reserve Bank of Dallas, captured the growing political mood with regard to very large banks, observing, “I believe that too-big-to-fail banks are too dangerous to permit.”

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Market forces don’t work with the biggest banks at their current sizes, because they have great political power and receive almost unlimited, implicit subsidies in the form of protection against downside risks — particularly in times like these, with Europe’s financial situation looking precarious. Mr. Fisher added:

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Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy.

Mr. Fisher is a senior public official and also someone with a great deal of experience in financial markets, including running his own funds-management company. I increasingly meet leading figures in the financial sector who share Mr. Fisher’s views, at least in private.

What, then, is the case in favor of keeping mega-banks at their current scale? Vague assertions are sometimes made, but there is very little hard evidence and often a lack of candor on that side of the argument.

So it is refreshing to see Vikram Pandit, the chief executive of Citigroup, go on the record with The Banker magazine to at least explain how his bank will generate shareholder value. (Viewing the interview requires registration, however.)

Citi is one of the world’s largest banks. According to The Banker’s database, which includes data from the end of 2010, it had total assets of just under $2 trillion — putting it in the top 10 worldwide. Over all, The Banker places it as No. 4 in its “Top 1,000 World Ranking.” Citi is No. 39 on the Forbes list of the top 500 global companies, with total employment of 260,000.

Is there indication in Mr. Pandit’s vision that mega-banking will be good for the rest of us in the future? Don’t look for Citi to drive any kind of rethinking of the consumer market in the United States; Mr. Pandit just wants to downsize that part of his business.

The engines of growth, Mr. Pandit said, will be “the global transactions services business” and “emerging markets.”

Transaction services are important, but they do not require a very large balance sheet; these can equally well be performed by a network of small, nimble financial firms. Global commerce existed for centuries before banks built up risks that are large relative to their home economies.

And emerging markets are risky. Mr. Pandit is essentially betting that Citi can ride the cycle in those countries. Probably there will be relatively good profits for a number of years, and this will justify high compensation levels. But when the cycle turns against emerging markets, as it did in 1982, what happens?

In 1982, Citi had a large loan exposure in the emerging markets of the day — Latin America, and the Communist nations of Poland and Romania — and it was saved from insolvency by “regulatory forbearance,” meaning that the Federal Reserve and other regulators did not force it to recognize its losses. Citi was a relatively big bank at that time, but much smaller than it is today.

And its complex global operations are exactly what would make it very hard to put through orderly liquidation under Dodd-Frank. I argued here in March that there is no meaningful resolution authority for global banks; before and after that post I’ve taken this point up in private with senior officials in the United States and Europe responsible for handling the potential failure of such entities.

No one disagrees with my main point: we cannot handle the collapse of a bank like Citigroup in “orderly” fashion.

Jon Huntsman put mega-banks on the agenda for the Republican primaries, with a blistering commentary in The Wall Street Journal a few weeks ago: “Too Big to Fail Is Simply Too Big.”

Other contenders for the Republican nomination have followed his lead, including most recently Newt Gingrich. Whoever ends up going head to head with Mitt Romney is likely to make good use of this very theme — because Mr. Romney already has so much financial support from the top of Wall Street, it will be very hard for him to respond effectively.

Breaking up the biggest banks is not a fringe idea to be brushed off. Mr. Fisher is speaking for many people who work in financial services, who agree that the big banks are not good for the rest of us. Mr. Pandit’s interview just reinforces this point.

Any Republican candidates who say they are fiscally responsible must eventually confront this issue: What was the role of big banks in the enormous recession and consequent vast loss of tax revenue since 2008? Which sector poses clear and immediate danger to our fiscal accounts, looking forward — and in a way that is not yet scored properly in any budget assessment? As Mr. Fisher put it, rather graphically,

Perhaps the financial equivalent of irreversible lap-band or gastric bypass surgery is the only way to treat the pathology of financial obesity, contain the relentless expansion of these banks and downsize them to manageable proportions.

I suggest that Mr. Fisher could reasonably begin with Citigroup.

The Balanced Budget Amendment Delusion

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 coming book “The Benefit and the Burden.”

This week the House of Representatives will take up a balanced budget amendment to the Constitution. An idea that has been kicking around for ages, it has never overcome the hurdle of needing a two-thirds approval vote in both houses of Congress. (After which it would not require the president’s signature but would need to be ratified by three-quarters of the states to take effect.)

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The concept of balancing the budget annually is a bad idea but not an unreasonable one. However, the idea of mandating a balanced budget through the Constitution is dreadful. And the proposal that Republican leaders plan to bring up is, frankly, nuts.

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The Founding Fathers took the necessity of balancing the federal budget to be self-evident – with no need to mandate it because economic circumstances severely constrained the government’s ability to spend more than taxes covered.

The memory of the hyperinflation of the War of Independence was fresh, and people were rightly concerned that deficits would lead to the printing of money to cover budgetary shortfalls, restarting inflation. Moreover, the domestic capital market was virtually nonexistent during the early years of the republic, and all Americans were wary of borrowing from abroad unless absolutely necessary.

Consequently, the budget was usually balanced for the nation’s first 150 years, except during wartime, and strenuous efforts were made to pay down the debt as soon as hostilities ended. This budgetary norm didn’t change until the 1930s, when economic stagnation and widespread deprivation made balancing the budget impossible. Also, the economic theories of John Maynard Keynes became popular and argued that large deficits would be necessary to restore growth.

Conservatives view the adoption of Keynesian economics as original sin, opening the door to a vast expansion of government. Instead of being paid for with politically unpopular tax increases or spending cuts, new spending programs were to a large extent financed with seemingly costless deficits. The economist James Buchanan called this “fiscal illusion.”

He had a point. We would have less spending if its tax cost was fully apparent. If people knew their taxes would go up or they would lose government benefits whenever spending increased, we would have a lot less spending.

Unfortunately, conservatives intentionally destroyed the remnants of the implicit balanced budget constraint in the 1970s so they could cut taxes without having to cut spending at the same time. Finding enough spending cuts to pay for big tax cuts would have doomed their efforts, so they concocted a theory, “starve the beast,” to maintain a fig leaf of fiscal responsibility.

Under this theory, deficits are intentionally created by tax cuts, which puts political pressure on Congress to cut spending. Thus, cutting taxes without cutting spending became the epitome of conservative fiscal policy. Unfortunately, it didn’t work.

We gave starve-the-beast theory a test during the Reagan administration, but as I have shown previously, when push came to shove, Reagan was always willing to raise taxes rather than allow deficits to get out of control.

We gave starve-the-beast theory another test during the George H.W. Bush and Clinton administrations. They both raised taxes and, according to the theory, this should have caused spending to rise, because tax increases feed the beast. But they didn’t. Spending as a share of the gross domestic product fell to 18.2 percent in 2000 from 22.3 percent in 1991, according to the Congressional Budget Office.

We gave starve-the-beast theory another test during the George W. Bush administration. Taxes were slashed, but spending rose – again, the exact opposite of what the theory said should have happened. The economist Bill Niskanen asserted that the result was not surprising because the Republican position on taxes effectively reduced the tax cost of spending.

Nevertheless, conservatives like Grover Norquist insist that starve-the-beast theory works, which is why they relentlessly push for still more tax cuts despite the obvious failure of previous tax cuts either to stimulate economic growth or restrain spending, and oppose even the most trivial tax increases no matter how big the deficit.

Historically, one problem conservatives had with a straightforward balanced budget requirement was a concern that it might lead to tax increases. It would also make further tax cuts more difficult to achieve.

Today, most conservatives support a constitutional requirement that will only restrain spending but make tax increases effectively impossible, while continuing to permit tax cuts regardless of the deficit. This is the essence of the “balanced budget” amendment that Republicans plan to vote on.

The amendment reported by the House Judiciary Committee in June would limit federal spending to 18 percent of “economic output” (whatever that is) without a three-fifths vote in both the House and Senate and would require a two-thirds vote to raise taxes. The latter requirement is even more stringent than it appears because it applies to the full membership of both houses, not just the percentage of those present and voting. Taxes, on the other hand, can be cut with a simple majority vote.

Space prohibits a full discussion of all the technical problems with this poorly drafted amendment. A July 8 report from the Congressional Research Service does a good job of going through some of them.

These include the fact that gross domestic product is nowhere defined in law, nor could it be because it is a continually evolving concept; 18 percent of G.D.P. is a totally arbitrary figure that couldn’t be achieved this year even with the abolition of every federal program other than Social Security, Medicare, national defense and interest on the debt, because the deficit is twice as large as total nondefense discretionary spending.

Outlays would actually have to be well below 18 percent of G.D.P. in practice because future spending is held to 18 percent of the previous fiscal year’s G.D.P., and there is no practical way of enforcing the amendment through the federal courts. For more details, see my July 11 article in Tax Notes magazine.

The truth is that Republicans don’t care one whit about actually balancing the budget. If they did, they would want to return to the policies that gave us balanced budgets in the late 1990s.

The crucial one was higher taxes, which virtually all Republicans opposed in 1990 and 1993, and budget controls that prevented tax cuts unless offset dollar-for-dollar with cuts in entitlement programs, which Republicans abandoned in 2002 so they could cut taxes without constraint.

Of course, no Republican favors such policies today. They prefer to delude voters with pie-in-the-sky promises that amending the Constitution will painlessly solve all our budget problems.

What Percentage Lives in Poverty?

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Do poor people represent the bottom 16 percent of the population or the bottom 15 percent? The answer matters more than you might think.

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The difficulty of measuring economic well-being helps explain why it’s hard for people to figure out what economic percentile they belong to or which public policies would best serve their interests.

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A difference of one percentage point in the overall poverty rate is no big deal. But the new Supplemental Poverty Measure, or S.P.M., developed by the Census Bureau, which yields the slightly higher overall estimate, shows lower rates of poverty among children and higher rates among the elderly than the traditional measure. An estimate based on a measure similar to the S.P.M. suggests that poverty has increased less over time.

The S.P.M. goes beyond consideration of money income to estimate the value of such in-kind transfers as food stamps, net taxes paid to government (taxes paid less the value of tax credits received), and medical and work-related expenses (such as child care and commuting costs). It also employs a new standard of need, linked to what low-income families actually spend.

Children are the beneficiaries of more of the in-kind transfers measured by the S.P.M. than people over age 65 and have fewer out-of-pocket medical expenses. As a result, they look less susceptible to poverty under the new measure than the traditional one, especially compared with older adults. Safety net programs such as food stamps expanded during the Great Recession.

Any income-based measure that takes such transfers into account is likely to show a smaller increase in poverty resulting from the recession than one that does not. Indeed, a good measure of poverty should register the impact of major public policies.

Unfortunately, the S.P.M. suffers some painful limitations. Like the traditional poverty measure, it understates the relative economic well-being of older adults because it ignores the value of their wealth – which doesn’t count as income although it can reduce or help cover their living expenses.

Also, some low-income families simply can’t afford expenditures on health and go untreated. They are not necessarily better off than similar families who spend money on health, though the S.P.M. might make them appear so.

Shawn Fremstad of the Center for Economic and Policy Priorities effectively details these shortcomings. But like others who acknowledge the S.P.M.’s limitations, including Arloc Sherman of the Center for Budget and Policy Priorities and Heidi Hartmann of the Institute for Women’s Policy Research, he agrees that it provides important new information.

Much depends on how researchers, journalists and public policy makers interpret the measure and how they explain the difficulties of measuring economic well-being.

The in-kind benefits that people receive from government go far beyond those measured in the S.P.M. and include big-ticket items such as spending on public education and Medicare expenditures. Tax benefits range from implicit tax subsidies for employer-provided health insurance to the mortgage-interest tax deduction.

The value of these benefits to individual families is not measured in any comprehensive survey. Both in-kind and tax benefits to the poor are more politically visible, and they phase out rapidly as family income increases above the poverty line, where both federal income and Social Security taxes begin to bite harder.

This differential visibility probably intensifies political resentments that some middle-income working families feel toward the poor.

Yet taking net taxes and work-related expenditures into account shows many families closer to the poverty line than they would otherwise seem. Using the traditional income-based measure, about 36 percent of Americans lived in families with income more than four times the poverty level in 2010. Using the S.P.M. measure of economic well-being, the size of that top group declines to 17 percent.

Major government transfers and benefits are directed at different age groups. As a result, age-based politics now greatly complicates political alignments based on class. Most individuals enjoy large transfers from the government as children (through public education) and as retirees (Social Security and Medicare) paying net taxes only as working-age adults. As a result, voters are often confronted by choices that might help them now but hurt them later, benefit their children or harm their parents.

We are now a demographically diverse population with enormous variation across households in the extent of time devoted to the care of dependents, whether children, individuals with health or disability problems, or the frail elderly. Yet we don’t factor either the costs or the benefits of this work time into estimates of family living standards.

When differences across income groups are extreme and increasing over time — as between the bottom 99 percent and the top 1 percent – they can trump these complexities.

But any political movement that aims to unify American voters must devise strategies to improve their standard of living. Such strategies should be informed by serious efforts to go beyond conventional measures of family income to develop more comprehensive measures of economic well-being.

Equalizing Payments for Medical Care

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

For some time now, health policy makers around the world and the analysts who advise them have been exploring reforms of the methods by which the providers of health care are paid or, as the latter prefer to call it, are “reimbursed” – an unfortunate, mind-altering expression on which I have already commented in an earlier post.

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Several papers in the current issue of Health Affairs are devoted to that topic. They include one by me, another by David Miller that addresses large variations in Medicare payments for surgery and one by Peter Hussey about bundled payments for treatments of an entire episode of illness.

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My paper focuses on the fact that every private health insurer in this country pays different physicians, hospitals and other providers of health care different prices for identical services. The flip side of this practice is that a given provider charges different payers – insurers or patients – different prices for identical health service. Economists call that practice “price discrimination.”

Figure 1 below illustrates this phenomenon from the insurer’s perspective for colonoscopies in New Jersey. Figure 2 shows payments in 2007 by one large private insurer for appendectomies (then code DRG 107) and coronary bypass grafts with cardiac catheterization (code CABG, then DRG 107) in California at what are known as “tertiary hospitals” — those with the ability to support medical specialists in medicine, pediatrics, obstetrics and gynecology, surgery, their subspecialties and ancillary services.

While there evidently is pervasive price discrimination within the private health-care sector, there are also sizable price differentials between public payers on the one hand and private payers on the other. Figure 3 illustrates this phenomenon by means of the so-called payment-to-cost ratio paid to hospitals by Medicare, Medicaid and private health insurers. This ratio is calculated as a fraction of the full costs that hospitals report to have incurred for patients covered by these three payers.

We can see that in many years, hospital report that the two public payers have covered the full cost (including presumably allocated fixed-overhead costs) of the care for the patients covered by these programs. Private payers, on the other hand, pay a sizable margin on top of the full costs of treating their covered clients.

Private health insurers and their principals, private employers, deplore this phenomenon as a “cost shift” from public payers to them. Of course, by similar reasoning, private insurers and individual self-paying patients who pay relatively high prices for given services can lament that they are the victims of a cost shift from private insurers with stronger market power vis à vis hospitals, which enables them to bargain for lower prices for identical services.

Many economists do not buy into this contention, asserting that price discrimination can exist without a cost shift. Explaining how economists arrive at that conclusion goes beyond the limit of this post. Interested readers, however, might consult my previously cited paper in Health Affairs, or, if they are not daunted by more formal economic analysis, read Austin Frakt’s critique of the cost-shift theory.

Whether or not one accepts the cost-shift premise, the question arises of whether price discrimination in health care has served the United States well. On this point, the business school professors Michael Porter and Elizabeth Teisberg have this to say in their book “Redefining Health Care”:

This administrative complexity of dealing with multiple prices [for the same service] adds costs with no benefit. The dysfunctional competition that has been created by price discrimination far outweighs any short-term advantages individual system participants gain from it, even for those participants who currently enjoy the biggest discounts. The lesson is simple: skewed incentives motivate activities that push costs higher. All these incentives and distortions reinforce zero-sum competition and work against value creation.

Similarly, in commenting critically in The New England Journal of Medicine on another study of administrative costs of Canadian and American health care, Henry Aaron of the Brookings Institution offered this preamble to his critique:

I look at the U.S. health care system and see an administrative monstrosity, a truly bizarre mélange of thousands of payers with payment systems that differ for no socially beneficial reason, as well as staggeringly complex public systems with mind-boggling administered prices and other rules expressing distinctions that can only be regarded as weird.

Other nations with multiple insurance carriers – for example, Germany and Switzerland – avoid price discrimination in health care through negotiations over prices between regional associations of health insurers and counterpart associations of health care providers, subject to some overall budget constraint informed by macroeconomic conditions (e.g., growth of the payroll on which premiums are based or per capita income). The negotiated prices then apply uniformly to all insurers and all providers in a region (states in Germany and cantons in Switzerland). In the United States, Maryland has operated such an “all payer” system for hospitals for several decades.

An all payer system has the potential to reduce health care costs in several ways, including the discipline of a fee schedule on providers, the schedule to be negotiated with providers on a regional basis, and a reduction in the enormous complexity and high administrative costs of the current system.

If it is desired, an all payer system can also serve as a way to constrain the future growth of health care to some desired path – e.g., with total national health spending growing annually only 0.5 percentage points faster than the growth of the rest of gross the domestic product, rather than the traditional two percentage points faster that prevailed over the last four decades. A two percentage point differential is simply not sustainable.

In my above-cited paper, I advocate an all payer system for the United States to eliminate the pervasive price discrimination inherent in American health care and, to the extent it exists, the much-lamented cost shift. For readers of this blog, Health Affairs has graciously provided access to the paper until Nov. 16. I invite readers to take a look at my argument for an all-payer approach and share with us their reaction to it.

Is Europe on the Verge of a Depression, or a Great Inflation?

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The news from Europe, particularly from within the euro zone, seems all bad.

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Interest rates on Italian government debt continue to rise. Attempts to put together a “rescue package” at the pan-European level repeatedly fall behind events. And the lack of leadership from Germany and France is palpable – where is the vision or the clarity of thought we would have had from Charles de Gaulle or Konrad Adenauer?

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In addition, the pessimists argue, because the troubled countries are locked into the euro, no good options are available. Gentle or even dramatic depreciation of the exchange rate for Greece or Portugal or Italy is not in the cards. As a result, it is hard to lower real wages so as to restore competitiveness and boost trade. This means that the debt burdens for these countries are likely to seem insurmountable for a long time. Hence default and global financial chaos seem likely.

According to the September 2011 edition of the Fiscal Monitor of the International Monetary Fund, 44.4 percent of Italian general government debt is held by nonresidents, i.e., presumably foreigners (see Statistical Table 9), on Page 72). The equivalent number for Greece is 57.4 percent, while for Portugal it is 60.5 percent.

And if you want to get really negative and think the problems could spread from Italy to France, keep in mind that 62.5 percent of French government debt is held by nonresidents. If Europe has a serious meltdown of sovereign debt values, there is no way that the problems will be confined just to that continent.

All of this is a serious possibility – and the lack of understanding at top European levels is deeply worrisome. No one has listened to the warnings of the last three years. Almost all the time since the collapse of Lehman Brothers has been wasted, in the sense that nothing was done to put government finances on a more sustainable footing.

But perhaps the pendulum of sentiment has swung too far, for one simple and perhaps not very comfortable reason.

There is no way to have just a little debt restructuring for Italy. If Italian debt involves serious credit risk – an end to the view that government debt has “no credit risk” and is a “risk-free asset,” with zero probability of default – then all sovereign debt in Europe will need to be repriced downward.

Will Germany will remain a safe haven? Even that is far from clear. According to the I.M.F., gross government debt in Germany will be 82.6 percent of gross domestic product at the end of this year (Statistical Table 7 of the Fiscal Monitor, on Page 70; the net government debt number for 2011, in Statistical Table 8, on Page 71,is 57.2 percent). Reports of German fiscal prudence have been greatly exaggerated.

German policy makers and the German public will not do well in the event of a major sovereign-credit disaster. Credit would tighten across the board. German exports would plummet. The famed German social safety net would come under great pressure.

There is an alternative to a decade of difficult austerity. The Germans could agree to allow the European Central Bank to provide “liquidity” support across the board to the troubled governments.

Many things are wrong with this policy – and it is exactly the kind of moral hazard-reinforcing measure that brought us to the current overindebted moment. None of us should be happy that Europe – and the world – has reached this point.

Among others, the bankers who bet big on moral hazard – i.e., massive government-backed bailouts – are about to win again. Perhaps the Europeans will be tougher on executives, boards and shareholders than the Obama administration was in early 2009, but most likely all the truly rich and powerful will do very well.

But if the German choice is global calamity or, effectively, the printing of money, which will they choose?

The European Central Bank has established a great deal of credibility with regard to keeping inflation at or close to 2 percent. It could probably offer a great deal of additional support – through creating money – without immediately causing inflation. And if the bank is providing a complete backstop to Italian government debt, the panic phase would be over.

None of this is a lasting solution, of course. Europe needs a proper fiscal center – much as the United States needed in 1787 and got under Alexander Hamilton’s policies from 1789. When he became Treasury secretary, the United States was in default and the credit system was almost completely broken. Some centralized tax revenue and control over fiscal deficits are needed.

Silvio Berlusconi stood in the way of all this. Other European leaders would not trust him to tighten Italian fiscal policy. But if he is really gone from power – and we should believe that only when we see it – there is now time and space for Italy to stabilize and, with the right help, find its way back to growth.

Of course, if the European Central Bank provides unconditional financial support to Italian, or other, politicians who refuse to bring their deficits under control, we are heading for another Great Inflation.

Who Rules the Global Economy?

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Most economists today don’t ask who rules the global economy, visualizing it as a decentralized competitive market that cannot be ruled. Yet new evidence suggests that global economic clout is highly concentrated among large interlocking transnational companies.

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Three Swiss experts on complex network analysis have recently examined the architecture of international ownership, analyzing a large database of transnational corporations. They concluded that a large portion of control resides with a relatively small core of financial institutions, with about 147 tightly knit companies controlling about 40 percent of the total wealth in the network.

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Their analysis draws heavily on network topology, a methodology that biologists use to good effect. An article in the British magazine New Scientist describes the research as evidence of a global financial oligarchy.

The technical details of economic network analysis are daunting, but the metaphors evoke a “Star Trek” episode: the network is described as a bow-tie shaped “super entity” of concentrated corporate ownership. One cannot help but worry about threats to the safety of the starship Enterprise.

In recent years, research on industrial organization has focused more on corporate strategy than on social consequences. A recent article in the socialist journal Monthly Review, by John Bellamy Foster, Robert W. McChesney and R. Jamil Janna, criticizes both mainstream and left-wing economists for their lack of attention to monopoly power.

Focusing on the United States, they note that the percentage of manufacturing industries in which the largest four companies account for at least 50 percent of shipping value has increased to almost 40 percent, up from about 25 percent in 1987.

Even more striking is the increase in retail consolidation, largely reflecting a “Wal-Mart effect.” In 1992, the top four companies accounted for about 47 percent of all general merchandise sales. By 2007, their share had reached 73.2 percent.

Banking, however, takes the cake. Citing my fellow Economix blogger Simon Johnson, the Monthly Review article notes that in 1995, the six largest bank-holding companies (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) had assets equal to 17 percent of gross domestic product in the United States. By the third quarter of 2010, this had risen to 64 percent.

Some of these companies have undergone name changes in the process. A graphic published about a year ago in Mother Jones beautifully illustrates their merger history.

Large companies are often able to offer lower prices than small ones because they can take advantage of economies of scale. On the other hand, if their market power reaches a certain level, they can increase prices as much as they like. The consequences of economic concentration for consumers are complicated by more difficult-to-trace impacts on small businesses, American workers and small businesses.

The concentration of economic power at the top distills political power in ways described long ago by the sociologist William Domhoff in his classic “Who Rules America?” The related Web site provides updated information, exhorting today’s “change agents” to conduct social scientific research seriously.

Public concerns about economic concentration are stoked by hard times. Congress authorized a full-scale investigation of the topic back in days of the Great Depression.

Seems like the time has come for a fully international update.

Who Gets Unemployment Benefits

Casey B. Mulligan is an economics professor at the University of Chicago.

It’s commonly assumed that unemployed people not receiving unemployment benefits have been unlucky enough to go without a job for so long that their benefits have run out. But often more important are limited work histories and a low propensity to take benefits that are available.

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Historically, many unemployed people have not collected unemployment payments because of ineligibility, lack of awareness or simple unwillingness to collect benefits. But some of those patterns changed during the recent recession.

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The chart below shows the number of unemployment compensation beneficiaries per unemployed person, for people 16 to 24, people 25 and over and all people 16 and over. This ratio can be less than one for all of the reasons mentioned and because some unemployed people may exhaust their benefits sometime during the calendar year.

Not surprisingly, more than three-quarters of young unemployed people do not receive unemployment compensation, in large part because they are much less likely to have the employment history that is required for eligibility. Young people are disproportionately represented among the unemployed, and their limited work histories are the primary reason why a large fraction of the unemployed does not receive benefits.

More striking is the increase to 85 percent from 50 percent among people 25 and over. Before the recession began, about a quarter of unemployed people that age had been unemployed for more than 26 weeks, when unemployment benefits were typically exhausted.

The remaining quarter of the unemployed did not receive benefits for a variety of other reasons: they may not have been interested in or aware of benefits, or they may have been ineligible because they quit their jobs (rather than lost them).

By 2010, unemployment was lasting much longer, but the time for receiving benefits had increased even more. Ninety-two weeks was a typical unemployment benefit period in 2010 (in some states it was 78 weeks, in others 99 weeks), yet only 12 percent of the unemployed 25 and over were unemployed that long.

That means as many as 88 percent of the people that age who were unemployed could have received benefits. That 85 percent received benefits tells us how rare it was for eligible people to forgo benefits during the recession.

The recipiency rate change from 2007 to 2010 is thus a combination of a decreased likelihood of exhausting benefits and an increased propensity to receive benefits early in the unemployment spell. These two factors change so much that even though the average weekly number of unemployed people 25 and over increased by more than six million from 2007 to 2009, the average weekly number of those people not receiving unemployment insurance actually fell by 700,000. (For the purposes of this calculation, I assume that, consistent with the law, nobody received unemployment benefits for a week that she or he was employed.)

This absolute decline in nonparticipating unemployed suggests that people are more willing (equivalently, less unwilling) to collect unemployment benefits than they were before the recession began.

Unemployment insurance is known for its ability to expand eligibility as a recession gets going, whether through the “extended benefits” that take effect at given jobless rates or through legislative action beyond that. But an adjustment almost as important has occurred in the labor force itself: during the recession, people increased their propensity to take advantage of available benefits.

Can the Fed Stimulate Growth or Only Inflation?

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 coming book “The Benefit and the Burden.”

Many economists, myself included, believe that a more aggressive Federal Reserve policy is needed to turn the economy around. Additional fiscal stimulus would also help. As the chairman of the Federal Reserve Board, Ben Bernanke put it at a Nov. 2 news conference, “It would be helpful if we could get assistance from some other parts of the government to work with us to create jobs.”

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However, such assistance will not be coming. President Obama’s jobs package has been blocked by Republicans in Congress, and the order of the day is fiscal tightening, with the Joint Select Committee on Deficit Reduction poised to offer recommendations for $1.5 trillion in additional deficit reduction by Nov. 23.

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With fiscal stimulus off the table, monetary stimulus is all that is available. But the Republican view is that monetary policy is incapable of stimulating real growth – that it will stimulate only inflation. This view is regularly enforced by The Wall Street Journal editorial page, which establishes the ideological line for Republicans on Fed policy.

In an editorial on Feb. 29, 2008, The Journal said it was certain that higher inflation was on the way, calling it the “Bernanke reinflation.” An editorial on June 9, 2008, warned that easy money and Keynesian stimulus “is taking us down the road to stagflation.” On Feb. 6, 2009, the Journal editorial writer George Melloan said the inevitable result of economic stimulus would be inflation. On June 10, 2009, the economist Arthur Laffer wrote on the Journal editorial page that the increase in the Fed’s monetary base was “a surefire recipe for inflation and higher interest rates.”

Echoing the party line, Representative Paul Ryan of Wisconsin, in a New York Times op-ed article on Feb. 14, 2009, said it was a virtual certainty that 1970s-style stagflation was coming back. In The New York Times on May 4, 2009, the conservative economist Allan Meltzer wrote that enormous budget deficits, rapid growth in the money supply and a sustained currency devaluation were “harbingers of inflation.”

More than two years later, none of those predictions has come to pass. According to the Federal Reserve Bank of Cleveland, inflationary expectations have been falling for years and continue to fall. Indeed, recent reports from Reuters and CNNMoney found that deflation – falling prices – is a growing problem.

Although the anticipated inflation rate is falling and the “risk premium” — the difference between a bond that doesn’t adjust for inflation and one that does, in the same maturity — has scarcely changed, conservatives continue to warn that inflation is right around the corner, especially if the Fed were to adopt a new operating procedure called nominal gross domestic product targeting.

This is an idea supported by Christina Romer of the University of California, Berkeley, economists at Goldman Sachs and others. The idea is to permit a period of catch-up inflation to get nominal G.D.P. back to its prerecession trend, which would increase incomes, employment and household balance sheets.

But conservatives want nothing to do with N.G.D.P. targeting. Amity Shlaes, a columnist with Bloomberg News and a former Wall Street Journal editorial writer, denounced the idea in a Nov. 2 column, calling it “a license to inflate.”

Her view is that if a recession causes growth to fall, unemployment to rise and home prices to crash, people should just suck it up and learn to live with it. Allowing prices to rise from wherever they are, even if there has been a deflation that caused them to fall, opens the door to stagflation and even hyperinflation. It’s a risk too great to take. The risk of continuing the status quo is, apparently, nothing to be concerned about.

It’s tiresome to read such rationalizations for doing nothing about the second-greatest economic crisis in our history, especially from someone like Ms. Shlaes, who is well versed in the history of the Great Depression.

Then, too, there were those just like her, like Henry Hazlitt, an editorial writer for The New York Times, and Benjamin M. Anderson, an economist with Chase National Bank, who also said people should just suck it up, that unemployment was only caused by excessive wages and greedy workers and that inflation was a cure worse than the disease, even as the price level fell 25 percent from 1929 to 1933.

With fiscal stimulus off the table and Republicans gambling that continued economic stagnation will hurt Democrats more than them, the Federal Reserve is the only institution with the freedom of action and power to stimulate growth. But it is constrained by conservatives who charge that it is fostering inflation whenever it tries to provide monetary stimulus.

The fact that conservatives have consistently been wrong about this for the last three years has done nothing to diminish their confidence. They are like the French Bourbons, who learned nothing and forgot nothing.

Of course, no one wants to go back to the 1970s, when we had both rising inflation and rising unemployment. But the risk of inflation is now as low as it’s been since the 1950s, while slow growth and high unemployment impose a crushing burden on a huge portion of the population. If the Fed believes it can help, it has a responsibility to do so.

The European Debt Crisis and the G-20 Summit Meeting

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The April 2009 London summit meeting of the Group of 20 is widely regarded as a great success. The world’s largest economies agreed on an immediate coordinated approach to the global financial crisis then raging and promised to work together on banking reforms that would support growth. President Obama got high marks for his constructive engagement.

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The G-20 heads of government have met twice a year since then, and in Cannes this week they meet again. Could this meeting help stabilize the world economy? Can President Obama again play a leading role? The answer to both questions is likely to be no.

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In 2009, the primary problem was slumping economies in the United States and Western Europe. It was in the perceived individual interest of those economies to engage in some fiscal stimulus – and they were happy to present this as a joint approach. China was also willing to stimulate its economy, as its policy makers feared that slowing global trade would reduce Chinese exports. President Obama’s appeal for fiscal stimulus around the world was pushing on an open door.

Now the issue is quite different. We have a sovereign debt crisis within the euro zone, in which countries that have borrowed heavily are facing the prospect of restructuring their debts. The euro zone summit meeting last week established that Greek debt would fall by about half (relative to face value), although this does not clearly put Greece onto a sustainable debt path. Prime Minister Andreas Papandreou announced a plan on Monday for a referendum on the plan, a move with the potential to build political support for the needed reforms, and on Wednesday his cabinet offered its full support. But another outcome — if the government does not fall in the meantime, making the referendum plan moot — could be a Greek exit from the euro and a default on its debts in disorderly fashion, without any kind of international framework or outside financial support.

But the real issue is Italy, as it has been at least since the summer. The Europeans are only beginning to come to grips with the centrality of Italy in the European debt web – glance at Bill Marsh’s recent graphic to get the point. Italy has more than 1.9 trillion euros in debt outstanding; this is the third-largest bond market in the world. In the aftermath of the Greek referendum announcement, the yield on Italian debt rose above 6.1 percent. The standard view is that if this reaches 6.5 percent, Italy will need to seek assistance in the form of a backstop fund to guarantee there will be no default.

But the International Monetary Fund does not have enough resources available and the existing European Financial Stability Facility is also likely to be too small. People in the know talk of the need for more than two trillion euros in a “stabilization fund,” and while a lot of fuzzy math is involved in contemporary international financial rescues, the I.M.F. and the stability facility combined would be hard pressed to provide more than a third of that.

This might seem like a good time for a summit meeting – so the hat can be passed around among world leaders. And some people do hope that China can provide an enormous loan, either directly or working with the I.M.F. China, after all, has more than two trillion euros’ worth of reserves (not all in euros, of course; much of this is in dollars).

But it’s not clear China that wants to take the credit risk of lending directly – the Europeans might not repay, after all. And the United States is not keen to have China funnel such a large amount through the I.M.F.; this would undermine the traditional American predominance there. In today’s budgetary environment, there is no way that the United States can come up with anything like matching funds at a level that would make a difference – would you like to ask the House of Representatives for $100 billion right now to help keep Silvio Berlusconi in power?

And the heart of the problem is really European, not global. Specifically, the euro zone needs to address its underlying fiscal structure, which has become severely dysfunctional. It needs a proper fiscal union, with the right to tax and to issue debt – backed ultimately by the European Central Bank. And the ability of member governments to issue debt must be severely curtailed.

The United States faced a similar problem, long ago. The original Articles of Confederation proved inadequate, largely because there was no centralized fiscal authority. The Constitutional Convention convened in 1787 in large part because the United States had defaulted on its debts, incurred during the War of Independence – and there was no way forward without a new agreement among the original 13 states and greater fiscal powers (and more) for the federal government.

Europe needs the equivalent of a constitutional convention. But today’s financial markets move so much faster than 200 years ago, and the delay in Europe has already been excessive. The Europeans need to move fast. Will the Cannes summit meeting speed them up?

How Unemployment Benefits Became Twice as Generous

12:48 p.m. | Updated to revise reference to standard benefit period.

Casey B. Mulligan is an economics professor at the University of Chicago.

Government spending on unemployment insurance has soared, and it’s hard to imagine the program ever shrinking back to its prerecession size.

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Unemployment insurance is jointly administered and financed by the federal and state governments, offering money to people who have lost their jobs and have as yet been unable to find and start a new job. On average they receive about $300 a week until they start working again, they stop looking for work or their benefits are exhausted.

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Between 2006 and 2010, inflation-adjusted spending on unemployment compensation by federal, state and local governments more than tripled.

The program has been around for decades, but the most recent recession and continued economic weakness has created an especially large group of laid-off workers who, despite an extensive search, cannot find another job. More unemployed people equals more spending for the unemployment insurance program, so we expect the program to be spending a lot during a recession.

However, the unemployment program has also become more generous in recent years. Before the recession, an unemployed person in a state without high unemployment would often exhaust benefits after 26 weeks; that is, the program would stop paying after the 26th weekly benefit, even if the beneficiary was still without work.

The federal law in place before the recession included some local labor market “extended benefit” triggers that, based on the statewide unemployment rate, would automatically lengthen the maximum benefit period. These automatic triggers began to extend benefits around the nation in the middle of 2008.

About the same time, new “emergency unemployment compensation” legislation extended maximum benefit periods for the entire nation. The American Recovery and Reinvestment Act of February 2009 further extended these “emergency” periods to up to 99 weeks, and legislation later in 2009 and in 2010 permitted the 99-week maximum to continue. (Among other unemployment insurance expansions, the act also increased monthly benefit amounts and excluded from federal personal income taxation the first $2,400 of benefits received in 2009.)

The chart below shows the size of the “emergency” and extended-benefit expansions, by quarter, measured as a fraction of the entire unemployment insurance program. Essentially, no “emergency” and extended-benefit benefits were paid in 2007 or in the first half of 2008. “Emergency” and extended-benefit benefits immediately became about a quarter of all unemployment insurance benefits and beneficiaries and were a majority of all unemployment insurance benefits by the end of 2009 (the two measures are slightly different because they come from different data sources).

Because “emergency” and extended-benefit benefits are paid to people only when they have exhausted the normal benefits, the fraction shown in the chart is a measure of how much unemployment benefits are paid pursuant to unemployment insurance rule changes, as opposed to payments that occur merely because more people were losing their jobs.

If we assume, merely for simplicity, that the expansions had no effect on the number of people unemployed or on the length of time they were employed, then setting “emergency” and extended-benefit payments to zero as they were in 2007 would have cut total unemployment insurance benefit payments by the fraction shown in the chart. In this case, it appears that the unemployment insurance program is at least twice as generous as it was in 2007, thanks to the federal changes in benefit rules.

The unemployment insurance program is a good example of how federal government spending has grown and how tough it will be to bring it back to pre-recession levels. People are now used to having well more than one year’s unemployment benefits available to them, and politicians will have a lot of trouble asking them to make do with just 26 weeks.

This post has been revised to reflect the following correction:

Correction: November 2, 2011

An earlier version of this post misstated the typical benefit period. Before the recession, 26 weeks, not 13, had become the typical maximum for states to pay unemployment benefits.

A Close Look at the Perry Tax Plan

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 coming book “The Benefit and the Burden.”

In an effort to rejuvenate his flagging campaign for the Republican presidential nomination, Gov. Rick Perry of Texas announced his support for a flat-rate income tax in a Wall Street Journal op-ed article on Oct. 25.

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Mr. Perry said he would establish a single rate of 20 percent on corporate and individual incomes, with individuals receiving a personal exemption of $12,500. The estate and gift tax would be abolished, and there would be no taxation of dividends and capital gains. All deductions, credits and exclusions would be eliminated except for mortgage interest, state and local taxes and charitable contributions.

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The flat tax is an idea that has been kicking around Republican circles for 30 years. The publisher Steve Forbes made it the centerpiece of his unsuccessful 1996 and 2000 runs for the G.O.P. nomination. He is now advising Mr. Perry and was glowing in his praise for the governor’s plan. Writing in The New York Post, Mr. Forbes said it would “usher in a great economic boom.”

Larry Kudlow of CNBC, who has never seen a Republican tax cut he didn’t like, was so excited by Mr. Perry’s flat tax and Herman Cain’s 9-9-9 plan that he attributed the recent stock market rise to their influence. In a National Review column on Oct. 21, he said the stock market rally was “discounting a new G.O.P. growth plan that will replace the dreary Obama tax-the-rich mantra.”

Although Mr. Perry praised the simplicity of his plan, it would actually complicate the tax computation for many people, because they would have to calculate their taxes two or even three different ways when the alternative minimum tax was also included. That was because Mr. Perry’s flat tax would be an optional tax system; those who wanted to stay in the current system could do so.

This is really just a gimmick to allow Mr. Perry to say with a straight face that everyone would get a tax cut. “Taxes will be cut across all income groups,” he said. His plan allows Mr. Perry to skirt every difficult issue about the impact of tax reform, like the huge increase in taxes that would be paid by the poor because they would lose all refundable tax credits, including the earned income tax credit.

Keep in mind that refundable credits give many people a negative tax rate. That is, they pay no income taxes but still get a Treasury refund. Going from a negative rate to zero would mean a tax increase for such people, as a Tax Foundation analysis illustrates.

To prevent people from gaming the system, Mr. Perry would insist that all those choosing the flat tax would have to stay in that system permanently. It’s not clear if those paying income taxes for the first time would be permitted a choice.

The idea of an alternative flat tax system was originally cooked up by a Wall Street Journal editorial writer, Steve Moore. But at least his idea was that the alternative system would be something like a pure flat tax with no deductions whatsoever. However, Mr. Perry would keep three key deductions in his system, which undermines the whole point of the flat tax, which is to wipe the slate clean. It also makes no sense because those who want to keep the deductions for mortgage interest, charitable contributions and state and local taxes could simply stay in the current system.

One consequence of Mr. Perry’s flat-tax deviationism is that his proposed tax form is lengthened to a full page from the original postcard that Mr. Forbes promised. Because the 1040EZ tax form that most people use is also one page, it’s hard to see those who care about the length of their tax return flocking to the Perry plan.

Of course, if everyone could simply choose to be taxed less or not, it absolutely guaranteed that Mr. Perry’s plan would be a massive revenue loser. In 2007, the Tax Policy Center analyzed a plan similar to Mr. Perry’s that had been proposed by Senator Fred Thompson of Tennessee, who briefly competed for the 2008 Republican nomination. The analysis found that revenues from allowing people to choose would be substantially less than if everyone were forced into the new system.

Giving people a choice also substantially mitigated whatever positive economic effects would be achieved from a flat tax. Its whole point is to change economic behavior by, for example, forcing people to stop investing so much of their savings in owner-occupied housing and investing instead in corporate stock or other forms that will add to the economy’s productive capacity.

Because no one is forced to change their behavior under the Perry plan, there is no reason to think that there will be an increase in economic growth if it is implemented. It would just lose revenue and complicate the tax code. That’s all. Edward Kleinbard, a University of Southern California law professor, calls the Perry plan “a promise to put a unicorn in every pot.”

Mr. Perry has countered with an “analysis” by John Dunham, a former tobacco industry economist, that shows growth will explode under his plan. The analysis states that it was commissioned by the Perry campaign and presumably was not done free. Using “dynamic scoring,” the analysis says gross domestic product will be an astonishing $3.5 trillion larger by the year 2020. Implausibly, it says that federal revenues would be $407 billion higher than under the Congressional Budget Office’s current projections and will rise even as a percentage of G.D.P.

There is no explanation whatsoever for how these estimates were arrived at, and they appear to have come from some sort of black box. When I asked Professor Kleinbard, who was formerly staff director for Congress’s Joint Committee on Taxation, what he thought about this, he corrected me. The estimates came from a “black magic box,” he said.

As Simon Johnson of the Massachusetts Institute of Technology recently explained on this blog, studies show that perhaps a third of a tax rate cut might be recouped through higher growth, and only if spending is cut enough to keep the deficit from rising.

Governor Perry says he will slash spending to 18 percent of G.D.P. from its current level of 23 percent. No explanation was offered of how this would be done or how such a huge spending cut would ever be enacted by Congress. It should be noted that even if every domestic program other than Social Security, Medicare and Medicaid is abolished, that would not be enough for Mr. Perry to reach his goal — all those programs together come to just 4.2 percent of G.D.P.

Thus, Mr. Perry’s plan cannot be taken seriously. I don’t think it’s meant to be, at least by those of us who don’t plan on voting in Republican primaries. It’s just a signaling device, telling the Republican faithful that they can trust Mr. Perry on the tax issue.

Whether the plan makes any sense as a matter of policy is irrelevant to its purpose, which is to win him the Republican nomination. With an Oct. 25 ABC News/Washington Post poll showing the flat tax much more popular among Republicans than Mr. Cain’s 9-9-9 plan, it might just work.