Thursday, September 9, 2010

Why a Payroll Tax "Holiday" Is Such a Bad Idea

Lately you may be hearing lots of people from the Right and even some advisors to former President Clinton such as Robert Reich and Laura Tyson proposing a payroll tax holiday in order to boost hiring. I do not believe, based on the evidence I've seen, that this will have the effect they claim yet it will have severe repercussions damaging institutions that millions of Americans rely on. It is also somewhat telling that the Clinton era economists that came up with the idea of killing Glass-Steagall are the ones proposing this.

Some Quick Background

On every paycheck you receive, you will see some tax deductions: federal income tax, state income tax, maybe a municipality or county tax, Social Security and Medicare. It's those last two that make up your portion of payroll taxes also known as FICA taxes. Your employer (if you're not self employed) also pays an equal amount of Social Security and Medicare taxes for you. This adds up to 7.65% of your income below $90,000.

This money is then used to fund current beneficiaries of these systems with the promise that future workers will pay for you to collect benefits. Most years, the money being paid in is more than what is paid out to beneficiaries so the money is saved (in treasury bonds for the most part) in order to pay out in worse years. Unfortunately, as I'm sure you've heard, more workers are due to retire in the next several years than new workers entering the workforce. Also, during the current recession, more people are taking early retirement and fewer people are working, which has caused the Social Security Administration to pay out more this past year than it took in. Overall though, it is projected that the trust fund will be able to afford full benefits for at least the next 25-30 years.

Medicare on the other hand is not in quite as good a shape. Health care costs have been rising quickly and again the ratio of workforce to beneficiaries has been steadily shrinking. This has left the Medicare trust fund (PDF) at about 1/7th the size of Social Security.

What a Payroll Tax Holiday Will Mean for Business

Currently, the average worker earns about $32,000 a year which means each business pays less than $2,500 per worker per year in payroll taxes. Just to equal the salary of a minimum wage worker (a little more than $15,000 per year), it would take more than six other employees' payroll taxes. It would take 13-14 employees' payroll taxes to equal a new average worker. That new employee would also require training and time to get up to speed in the new job, not to mention any other benefits the company offers. Then in a year or so, when the "holiday" expires, that average employee will suddenly cost almost $35,000 and all the other employees start to cost $2,500 more as well.

What a Payroll Tax Holiday Will Mean for Workers

In general, most workers won't immediately notice anything. Depending on how it's done, workers may see those FICA deductions no longer in their paycheck, giving them an extra $2,500 per year, but most plans that I've heard about only discuss the holiday in terms of removing it on businesses, since the intent is to get them hiring. However, long term, workers will see significant harm. A retiree's benefits are based on how much they paid into the system and how long they paid. Remove a couple years' payments in and most workers will see a significant drop in projected benefits, ask any woman who has taken an extended maternity leave. Add this on top of the 30-50% drop most people have seen in their invested retirement funds and the drop in home values and you have a significant portion of the population unable to afford retirement, even at 70 or 75.

What a Payroll Tax Holiday Will Mean for Social Security and Medicare

Put simply, these already strained systems may collapse. Unless the funding is replaced by government spending, Medicare could lose $250-500 billion, nearly or completely bankrupting it (their current trust fund is $381 billion). Social Security has a bit more of a cushion, but it too would lose $400-800 billion. This could shave five or more years off of it's trust fund easily. If someone wanted to kill these programs, I can not think of an easier way.

What Would Most Likely Happen

I want to preface this by saying I am not an economist and have nothing on Reich or Krugman when it comes to big economic questions (I'm happy when I can keep my own budget in order). But I can look at what people have done and have been doing and put two and two together. Right now, people aren't buying: many don't have jobs, many more are afraid of losing their job and other have lost sometimes considerable wealth when their home value plummeted and credit dried up. This means companies aren't selling as many products and so don't need as many people on their factory floors or behind their cash registers. If a payroll tax comes through, companies will have more money, but they still won't be selling products and so still won't need workers. Thus, as they have already been doing, most corporations will instead pay their CEOs bonuses for "earning" the company more money and wealthy investors will get a dividend. Meanwhile, unemployment will hardly be affected and workers retirement funds will get that much smaller.

What Should Be Done

As I said above, the problem companies are facing is a demand problem. Same store sales have fallen or are flat for most retailers. Home prices are still falling. 50% more businesses rate sales as the most important problem than any other issue, including taxes. What we have is a catch-22: businesses won't hire because they aren't getting sales, consumers aren't buying because the job market is in the toilet. The thing that will get the most companies hiring again is increasing demand and the only organization willing or capable of doing so is the federal government. This has already been started and had great effect, but what was done was too small for the pit we were put in. When $2-4 trillion worth of wealth has been destroyed, spending $300 billion a year isn't going to replace the demand lost.

Obama has proposed some things that will lead to increasing demand: tax credits for business investments will get companies buying equipment (unlike employees, equipment doesn't cost more each year) increasing demand and creating jobs for equipment manufacturers. A $50 billion infrastructure investment fund, while small, will put people back to work directly and as proposed will pull in private investment, getting money moving again. Tax credits directly related to new hires are already working.

There are ways, both with targeted tax policy and direct government spending to increase hiring. The stimulus act was able to create at least three million jobs (or at least prevent people from getting fired, like police and teachers). But it can't be done with half measures by people who are afraid of a bunch of self absorbed know-nothings.

Congress, get out there and do your job. Go big or go home.

Friday, May 14, 2010

The Myth of the Placebo "Effect"

Thursday, May 12, NPR carried a story on their Talk of the Nation program about the placebo effect, and more specifically, using placebos as medical treatments. While they mentioned the ethical concerns in passing, I was really disappointed that they presented a largely unskeptical view of such practice. It also showed a completely lack of understanding about what the placebo effect really is, further perpetuating a lie that has been used to support some quite dangerous practices.

A little quick background, placebo treatments are treatments that have no active ingredients. Often in drug trials this is the classic sugar pill: a pill made to look exactly like the actual drug, but with the active ingredients replaced with sugar or other inactive ingredients. In a trial, participants are split into two (or more) groups, with one given the active drug, and the other the sugar pill. After a period of time, participants symptoms are measured and they are given a brief survey asking them to detail how they feel about the symptoms being studied and whether they thought they were on the placebo or the real thing. Then, in a perfect world, the results of the study group is compared to the results of the placebo group and, if the drug is statistically equal, or worse, than the placebo it doesn't go to market.

The name "placebo effect", and the reason for the placebo based control at all, stems from the fact that the mere act of treating someone can appear to cause an improvement in the treated condition, whether or not the drug itself is having the effect. The important thing to realize is that appearance is largely all it is; the drug or other studied treatment itself is not having the effect, the effect, if there is one, is happening due to some other cause. By introducing a placebo (and proper blinding) to the study, you are able to remove the act of treating as a possible cause for the effect. The "placebo effect" is just the name applied to these other, untracked causes.

This brings me to my problem with the Talk of the Nation story itself. They treated the placebo itself, this empty sugar pill, as a cause itself, as opposed to a control stand-in for the untracked (or untrackable) variables in these clinical trials. This is an easy mistake to make, and one that human brains are evolutionarily developed to encourage. Back in the day, it was safer to think a pattern of shadows was a tiger and be wrong than to see a tiger and think it was a pattern of shadows. These days, it's a fun thing to be able to see fish and dragons in clouds or to see the face of Jesus on a potato chip, but it can cause issues when we see patterns in data that aren't real.

Specifically, the doctors interviewed by Jennifer Ludden made two critical mistakes in describing what is happening in placebo controlled studies. The first is confusing correlation and causation, or making the assumption that because effect x happened after doing action y, y must have made x happen. A simplistic example of this (stolen from Fraggle Rock) is to imagine a person who saw a group open umbrellas, and then felt it start raining. That person could believe that opening those umbrellas caused the rain. The same thing happens with medicine: People see a doctor, receive a treatment, or take a pill (or goes to their local faith healer); their illness goes away; thus whatever they did fixed their illness, ignoring anything else that may have also happened.

Well controlled trials limit or eliminate many of these variables so that only one thing, the drug or treatment, is being studied. The placebo is just one of those controlling mechanisms, removing such variables as doctor attention, the comfort and stress relief of being treated and many other environmental factors. It also helps to control for the body's natural ability to heal, even (rarely) from the most serious illnesses. This is true because in theory, the same number of people receiving both the real treatment and the placebo will have these externally caused effects. Thus if you give a fake treatment to 100 people, and a real treatment to 100 people, and 25 people from the fake treatment group get better, but 50 from the real treatment group get better, you have good reason to believe that the extra 25 people got better because of the treatment itself, not from shared causes.

The other common, related mistake, which Dr. Arthur Barsky touched on very briefly in the interview, is what is known as selection bias. This effect is manifested by people expecting things to happen, so when it does happen, they notice it more. An example of this is the "full moon myth" in hospitals. The myth goes that on nights with full moons, there are more injuries admitted to hospitals. This gets reinforced to hospital workers because on some nights, the number of admittances either is, or feels, higher, and when they look outside they see the full moon. Other nights when the volume is high, but there is no full moon, they don't think about, but they remember the nights that confirm the myth because they're told to expect that. If you remove this expectation, and look at the statistics, no such pattern is shown.

The same thing happens with medical treatments. People expect a treatment to have an effect. Thus, when someone is on a drug and feel the illness subside, they attribute it to the medicine. If a their symptoms get worse, a they just say "oh, it's a bad day" or the like; conversely if the symptoms get better while off the medication, they just feel lucky or attribute it to lingering effects of the medication. The change in symptom severity could be completely random, but it's attributed to the treatment because it's expected that the treatment would help with the symptoms.

In the same way, you notice such variation more because you're asked to pay more attention to it. Using chronic pain as an example, day to day, the severity of such pain varies. While a victim of the pain may notice strong differences, mild changes in pain go largely unnoticed. When they go on a treatment however, they are often asked to rate their pain level on a daily, if not more frequent, basis. This forces them to pay attention to even small changes that they would not have noticed before. This aspect is highlighted by the fact noted by Dr. Barsky that 25% of study subjects on placebo report side effects. Taking a sugar pill doesn't make you feel more tired or nauseous, but when you feel tired or nauseous while taking a sugar pill, you notice it more because you're expecting a side effect. This is another variable that properly blinded placebos are supposed to control for because with or without active treatment, this effect will still happen.

Another pair of issues that cloud medical studies, especially of subjective ailments, and is controlled by placebos is both the natural desire to help others and the desire to get something for your actions. The first is a problem because people might over-report the benefits of a treatment because they believe the doctor worked hard to help them. You may rate your pain somewhere between a 5 and a 7, but if you think the doctor tried hard to help you, you'd rate it at a 5, but if you got no aid or your doctor acted distant or uninterested, you'd rate a 7. This isn't a conscious choice (in most cases), but it will affect overall scoring. Similarly, if you are very involved in something (for example a long term diet/exercise regimen) or you pay a lot for something you feel you deserve more out of it whereas if you did not have to invest much time, effort or money (for example, sitting and watching a video), you wouldn't feel as invested in the treatment.

None of the above is to say that the variables a placebo controls for have no actual effect. I do not know any scientist or physician who would not say spending more time with a patient is a good thing (insurance companies on the other hand...). However, it does say that just the act of prescribing a placebo is not a substitution for real treatment. The placebo itself, sugar pill, acupuncture, faith healing, etc. has no effect in and of itself. It is only a stand in for many variables that are not tested. It is one, or many, of those unnamed, untracked variables that is having the effect, not the placebo itself. Don't replace that active cause with the inactive placebo; you short-change your patient and yourself.

NPR, I strongly recommend you get an alternate view on this. A set of doctors I know would be willing to speak with you are the ones that run Science Based Medicine, specifically Dr. Stephen Novella. For further reading see Science Based Medicine's coverage of the placebo effect. Also a great listing of common logical fallacies to watch for.

Thursday, April 15, 2010

Tax Day Myths Debunked

It's that day again. The day when people who actually care about a functioning government pay their taxes and self proclaimed "patriots" walk around in silly costumes protesting that their taxes are too high, even after receiving tax cuts over the past year. They do this, in part, because they believe the lies and misdirection given to them by those who would manipulate them and echoed by the uncaring news media outlets.

1) "47% of Americans pay no federal income tax."

While this statement, word for word, is factually true, it is incredibly misleading. The key word in this phrase is "federal income tax." Federal income tax is only one of many taxes people pay: there are also payroll taxes, state and local income taxes, property taxes, and sales taxes. Payroll and sales taxes are much more regressive than income taxes and are designed so that lower income earners pay more, as a percent of income, than higher income earners. If you include all taxes paid, the United States already has a largely flat, non-progressive tax system: the lowest earners pay about 14-15% of income, and the highest earners pay about 15-16% of their income.

2) "The top 10% of earners pay 71% of federal income tax revenue."

Again, while roughly accurate, this is even more misleading than the first myth. The problem with this myth is that it assumes income is even distributed across earners. Instead, the reality is that the top one tenth of one percent of Americans earned as much as the entire bottom 50% of Americans. Let me repeat that: 300,000 Americans earns as much as 150,000,000 Americans. And those numbers are based on only what the IRS can actually capture, which it admits is about 70% of income from investments. So when you hear the top 10% pay a large chunk of income returns, remember that that is actually a low compared to the actual income disparities.

3) "Democrats are raising taxes."

This is abjectly false. In 2009, the average tax refund was 10% higher than 2008. Between the "Making Work Pay" tax credit ($300-500/person), the first time home buyer tax credit (about $8000), the various greening tax credits (insulation, windows, etc.) and many others, taxes have been cut significantly. This was done for the express purpose of increasing money on hand as part of the federal stimulus program.

If you have any more myths you'd like me to tackle, add them in the comments.

Friday, March 26, 2010

Political Spectrum

Since last week, political violence reacting against the now law health care reform has been escalating to dangerous levels. This past weekend, bricks were thrown through office windows for Congresswomen Slaughter(NY) and Giffords (AZ) and DNC offices in New York and Kansas. In DC, racial and homophobic slurs were hurled at Congressmen as they attempted to enter the Capitol. This week, death threats have become endemic. Gas soaked torn up flags, unknown, possibly hazardous white powders and other things have been mailed to numerous Congresspeople.

Sadly, it didn't start last week; it didn't even start with health care reform. In 2008, Sen. John McCain and Sarah Palin ran on a campaign that boiled down to "hate Obama." They called him a terrorist, or friend of terrorists. They call him or anyone who supported him un-American and evil. This rhetoric lead some people to cry out "Kill him" at a Palin rally. But it didn't even start there: Rove and Bush, Reagan, Nixon, McCarthy all have attempted to turn their political opponents into something other than American, other than human. This dehumanization creates an excuse for the more violent among us to act on their tendencies. It is much easier to harm someone that you believe is "other" than it is to harm your fellow citizens.

Now, Republican Congressmen are trying to play both sides. John McCain has said "The language we should be using is the language we are using." House Minority Leader Boehner said "But, as I've said, violence and threats are unacceptable" but "Washington Democrats just aren't listening." Minority Whip Cantor, in a fit of total hypocrisy, claimed "Democrats are fanning the flames [of violence]."

Many on the right also attempt to create false equivalencies. They claim the rhetoric used against Bush was just as bad, or that violence from extremists on the far left is the same. The thing they don't mention is that no ranking Democrat ever endorsed such statements or acts. The anarchists Glenn Beck pointed to yesterday don't have conventions led by Rep. Pelosi or Rep. Weiner. Code Pink was as, if not more likely to shout down a Democratic event than a Republican one.

The mainstream news media itself is complicit. They treat a report on a bullet hitting Rep. Cantor's Richmond office as violence from the left, even hours after police report it was a random bullet fired into the air, possibly from miles away. They'll report on phone calls calling a Republican representative racist as comparable to phone calls threatening the life of Democratic representatives and their children. They compare fringe rhetoric from organizations like Code Pink to direct threats from Tea Party organizations that have been embraced by Republican leadership. These are not equivalent.

Political sentiment doesn't really fall on a strait continuum; if you go far enough left, the rhetoric is no different from the far right. To demonstrate this, I've used a circle instead of the usual line:

In a normal climate, even to a point during the Bush administration the political spectrum looked like this. The majority of people are moderates (bottom) who flow back and forth between the parties. On the left and the right are the major parties bases. And at the extreme are Anarchists (top). The colors demonstrate party affiliation, left, mostly Democratic being blue and right, mostly Republican, being red with the moderate independents purple and anarchic independents in black. You'll usually find some overlap at the edge, on the left being represented by people like Michael Moore and Dennis Kucinich and on the right by Ron Paul and Ayn Rand. These people aren't generally embraced by the mainstream of the parties and so stay on the fringe.

This balance has shifted significantly in the past decade, especially since Obama's election. Now the spectrum looks more like this:

Republicans have abandoned the center moderates (i.e. Sens. Specter, Snowe and Collins) and embraced their far fringes (i.e. Rep. Bachmann, Glenn Beck). Even those typically seen as far right are being challenged as not "pure" enough (such as Ron Paul being primaried by those further right). Some normally considered solid conservatives are being dropped from conservative organizations (David Frum ousted from American Enterprise Institute).

This can not continue. If this nation is going to hold together, the violence has to stop, the threats need to end, and the Republican party has to stop embracing the fear and hatred they have created. Their decades of creating an "us" vs. "them" environment and demonizing their opponents have created this monster and they must kill it before it consumes them.

Wednesday, February 24, 2010

Visualizing climate change

In the heart of winter with all the snow around, it can be hard to accept that the globe is getting warmer. It is easy to confuse short term localized weather with the much longer term global changes that a climate change researcher must monitor. I've put together a couple charts that show global temperatures over the longer term to see how stark a difference the change over the past fifty years has been. All of the data is available at NASA's Goddard Institute for Space Studies.

This chart shows the average global temperature per decade since 1860. The more red a bar is, the hotter it is compared to the year before. To highlight these decade changes further see below:

What I find most disturbing is that there has been only one decade in the past century cooler than the preceding one.

This is something that has to be stopped. An strong snow storm in Washington DC during winter doesn't change that fact.