It was fun to see the economist who got me into the discipline - my older brother Patrick Nolan - write about the Iron Triangle of Welfare policy this weekend.
I appreciate your detailed attention to the nature of trade-offs WITHIN the iron triangle. It's useful stuff, so long as we also raise our heads from time to time to remember that we can always step OUTSIDE the triangle by using better taxes.
We don't need to agonise too much about optimising within an arbitrary constraint (though I appreciate that it is intellectually fun). Optimising within the whole choice set is more important.
Not coincidentally I have a report which frames land taxation in just that way.
Short version - if other states taxed land like the ACT, we could pay for all welfare taper rates to be halved. That would mean an effective tax cut of 20-30 cents in the dollar for over one million workers and extra cash in the pocket for around two million more.
In that context, mucking around within the iron triangle is just fiddling at the edges.
Although I agree that tax change, and productivity enhancements, I don't think this invalidates why we would want to concentrate "within the triangle" when discussing the trade-offs in the post.
If we could tax more efficiently then we should do so no matter what - the fiscal envelop available in the triangle above is contingent on us being willing to raise a certain amount of funds to spend on these items. Given those funds, we face a trade-off between the amount paid to those out of work and the "return" to work for that given envelope.
In your piece you use a larger fiscal envelop to push EMTRs further up the income distribution - so a lot of people end up with a greater payment, but workforce disincentives now bite for individuals closer to full-time work (rather than the purposeful choice to have sharp abatement now). This choice - relative to the choice to increase benefit rates, decrease income tax rates, or to some other form of fiscal expenditure - involves a trade-off, even if the tax itself has limited distortions. The Iron Triangle is then a powerful device for thinking about these trade-offs given the decision to spend more on welfare!
This isn't about intellectual fun, it is about clearly articulating trade-offs given political and social constraints on what society is willing to spend on welfare payments. The Australian system focuses on a very specific set of such trade-offs to achieve targeting efficiency (the highest payment for individuals with low means given the fiscal envelop available) and has chosen to deal with the workforce implications of this through enforcement of a mutual obligations system. Dealing with the reality of the system this creates really is first order for understanding how we can improve opportunities for Australians who are down on their luck.
Great comment Matt, and sorry for the slow reply. My comment probably read as a little trite. This kind of analysis clearly has value, and I wasn't disputing that.
I think the point I'm getting at is one of emphasis and priorities.
To the economist trained in constrained optimisation, and holding a worldview that centres on trade-offs between competing ends, it seems natural to analyse choices within the income tax and transfer system as if the fiscal envelope were fixed. We economists are trained in using a hammer, so we treat this policy area as a nail.
But in political reality there is no fixed budget for transfers, nor for the income tax and transfer system as a whole, nor even for the entirety of the government budget. There's no hard budget constraint in reality. That's not how political decisions and budgeting work.
The paradigm of thinking in which "governments must optimise within constraints so economists must advise them on trade-offs" is created by economists more than it is imposed by decision-makers.
In that light, the emphasis by economists on painful trade-offs is misleading. Technical analysis of trade-offs within the iron triangle is an example (even that name communicates an unwarranted futility). It puts the spotlight on the miserable choice set we face, without being fully transparent about and giving sufficient emphasise to the ways that set can be dramatically expanded. So the analysis you describe can be entirely correct and true, yet be given undue importance, most obviously by people skilled in that analysis who desire to elevate it in priority.
Amartya Sen has a nice paper entitled "description as choice", which the title well summarises. What we economists choose to focus on is a choice of what we consider important, and what we submit to others (politicians, the public debate) as being how they should see the world.
I'm lucky to be in a position of being paid to express just how non-dismal are the choice sets we face in Australia - whether that be to achieve widespread housing choice by copying Singapore, or grow rich off our resources by copying Norway. There's a high latent demand by policymakers to understand the opportunities to improve things by untying our hands, not just the difficulties we face with our hands tied in the traditional ways!
Hola Tim, it is always great to debate these things - I didn't see anything as trite. I just like to write in an exciteable way.
Perhaps it is just my dogmatic training or stubborness, but even within what you are discussing I still believe that the trade-offs are important - it is all about measuring and describing what is important.
My fear with welfare policy is that the opportunities for those who are vulnerable are ignored in a chase for abundance - what I see as the left-wing version of a "rising tide lifts all boats".
I can give an example. In New Zealand there was a push to reform labour markets and income support by introducing unemployment insurance. However, in the desire to get individuals pooling risk and push for greater job mobility policy makers lost sight of the realities of what would happen to individuals in disadvantaged situations - a part-time sole parent would end up solely worse off under the new policy, and without middle class buy in the level of the core benefit would decline as it has overseas.
If the political will to support those who are disadvantaged is limited (and hence involves a limited fiscal envelop) I would prefer we do so in a way that lifts up those most in need - which requires centering those individuals in the conversation. Otherwise the welfare state creeps towards subsidises for flashy industries and middle class families. Such a view requires a clear policy framework that explores trade-offs - which is our good friend the Iron Triangle ;)
Good comment, Matt. I agree that the "Koru class dole" would have reduced the political incentive for adequate welfare at the bottom.
My working view is that parallel systems will degrade the system used by those with less power (public schools in Australia) but broadening the scope of a single system will tend to preserve it for those people (NZ age pension).
Economists can analyse the trade-offs in system design but politicians and welfare advocates need to analyse these political dynamics too.
Agree those that want to suggest a policy need to both make a choice, and recognise the political economy available.
What is it that Keynes said though, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”.
My reading has always been that, how we communicate and measure the trade-offs will matter for where the political economy of these things can go - not just in terms of our descriptions being picked up by others, but also in our willingness to recognise the margins that may matter to others and genuinely measure how much they matter.
I think there is a fun and important debate about whether the Iron Triangle is doing that. My feeling is it does - as you could conceptualise a set of trade-offs in it that would support higher or lower benefit support for someone with certain values, and then based on a willingness to take peoples views seriously you can measure those margins and inform their choices and policy demands.
My reading of your statements is that we should do the same thing for tax. As a former tax economist I couldn't agree more ;)
"My reading has always been that, how we communicate and measure the trade-offs will matter for where the political economy of these things can go - not just in terms of our descriptions being picked up by others, but also in our willingness to recognise the margins that may matter to others and genuinely measure how much they matter."
And my angle on it is that we economists have spent too much time emphasising the existence of painful trade-offs, and not enough time showing the opportunities to relieve those trade-offs. I judge "not enough" and "too much" by what I understand of people's fundamental objectives (i.e. "what matters to others") mapped against what I understand to be the true opportunity set, i.e. the outcomes we could achieve with policies that are available.
Coincidentally on Twitter the other day I came across a Thomas Sargent list of "valuable lessons that economics teaches" which illustrates my very point:
Numbers 1, 2 and 5 emphasise the "dismal" nature of trade-offs.
Trade-offs are unavoidable when we're at the frontier of outcomes. Sargent's list assumes we're already there, and so we can't have our cake and eat it too (for example, number 5: "There are trade-offs between equality and efficiency").
But in the real world we're very often well within the frontier.
For example, in macroeconomics, we say "you can fit a lot of Harberger triangles [DWL of policy distortion] into an Okun's gap [output loss from an economy running under potential". Keynes would have emphasised this point too.
In tax (and welfare) policy, the idea of trade-offs between equality and efficiency only applies if you constrain the tax mix - for instance, by constructing an iron triangle by funding welfare only through income tax or a fixed budget.
The beauty of land tax is that we can achieve more efficiency and more (vertical) equality at once. This was the point of my EMTR report for Prosper.
Henry George was perceived as a dangerous radical because he pointed out how many apparently-unbreakable dismal trade-offs we claim to be constrained by are in fact arbitrary restrictions we have imposed on ourselves by deeming the income from land off-limits for public finance. The utopian potential of that idea needed quashing.
If you're interested, Mason Gaffney writes about this extensively and well in "Neo-classical economics as a strategem against Henry George", Chapter 2. He catalogues the different trade-offs relieved by Georgist land value capture (i.e. using the economic rent of land for public finance). There are close to a dozen such policy trade-offs relieved; vertical equity and efficiency is just one.
In short, I agree with you fully with the existence of potential trade-offs, but I think we economists have got it all wrong in emphasising trade-offs so often (it's a very depressing identity for a scientific discipline and its practitioners to have).
Economics needs a close look at how many trade-offs we emphasised are simply contrived ones, imposed by certain social pieties we economists have internalised and hidden from ourselves, most importantly the sacrosanct nature of privatised land rents.
I appreciate your detailed attention to the nature of trade-offs WITHIN the iron triangle. It's useful stuff, so long as we also raise our heads from time to time to remember that we can always step OUTSIDE the triangle by using better taxes.
We don't need to agonise too much about optimising within an arbitrary constraint (though I appreciate that it is intellectually fun). Optimising within the whole choice set is more important.
Not coincidentally I have a report which frames land taxation in just that way.
Short version - if other states taxed land like the ACT, we could pay for all welfare taper rates to be halved. That would mean an effective tax cut of 20-30 cents in the dollar for over one million workers and extra cash in the pocket for around two million more.
In that context, mucking around within the iron triangle is just fiddling at the edges.
https://www.prosper.org.au/wp-content/uploads/2024/03/2024_Prosper_EMTR_Report_Web.pdf
Hi Tim,
Although I agree that tax change, and productivity enhancements, I don't think this invalidates why we would want to concentrate "within the triangle" when discussing the trade-offs in the post.
If we could tax more efficiently then we should do so no matter what - the fiscal envelop available in the triangle above is contingent on us being willing to raise a certain amount of funds to spend on these items. Given those funds, we face a trade-off between the amount paid to those out of work and the "return" to work for that given envelope.
In your piece you use a larger fiscal envelop to push EMTRs further up the income distribution - so a lot of people end up with a greater payment, but workforce disincentives now bite for individuals closer to full-time work (rather than the purposeful choice to have sharp abatement now). This choice - relative to the choice to increase benefit rates, decrease income tax rates, or to some other form of fiscal expenditure - involves a trade-off, even if the tax itself has limited distortions. The Iron Triangle is then a powerful device for thinking about these trade-offs given the decision to spend more on welfare!
This isn't about intellectual fun, it is about clearly articulating trade-offs given political and social constraints on what society is willing to spend on welfare payments. The Australian system focuses on a very specific set of such trade-offs to achieve targeting efficiency (the highest payment for individuals with low means given the fiscal envelop available) and has chosen to deal with the workforce implications of this through enforcement of a mutual obligations system. Dealing with the reality of the system this creates really is first order for understanding how we can improve opportunities for Australians who are down on their luck.
Great comment Matt, and sorry for the slow reply. My comment probably read as a little trite. This kind of analysis clearly has value, and I wasn't disputing that.
I think the point I'm getting at is one of emphasis and priorities.
To the economist trained in constrained optimisation, and holding a worldview that centres on trade-offs between competing ends, it seems natural to analyse choices within the income tax and transfer system as if the fiscal envelope were fixed. We economists are trained in using a hammer, so we treat this policy area as a nail.
But in political reality there is no fixed budget for transfers, nor for the income tax and transfer system as a whole, nor even for the entirety of the government budget. There's no hard budget constraint in reality. That's not how political decisions and budgeting work.
The paradigm of thinking in which "governments must optimise within constraints so economists must advise them on trade-offs" is created by economists more than it is imposed by decision-makers.
In that light, the emphasis by economists on painful trade-offs is misleading. Technical analysis of trade-offs within the iron triangle is an example (even that name communicates an unwarranted futility). It puts the spotlight on the miserable choice set we face, without being fully transparent about and giving sufficient emphasise to the ways that set can be dramatically expanded. So the analysis you describe can be entirely correct and true, yet be given undue importance, most obviously by people skilled in that analysis who desire to elevate it in priority.
Amartya Sen has a nice paper entitled "description as choice", which the title well summarises. What we economists choose to focus on is a choice of what we consider important, and what we submit to others (politicians, the public debate) as being how they should see the world.
I'm lucky to be in a position of being paid to express just how non-dismal are the choice sets we face in Australia - whether that be to achieve widespread housing choice by copying Singapore, or grow rich off our resources by copying Norway. There's a high latent demand by policymakers to understand the opportunities to improve things by untying our hands, not just the difficulties we face with our hands tied in the traditional ways!
Hola Tim, it is always great to debate these things - I didn't see anything as trite. I just like to write in an exciteable way.
Perhaps it is just my dogmatic training or stubborness, but even within what you are discussing I still believe that the trade-offs are important - it is all about measuring and describing what is important.
My fear with welfare policy is that the opportunities for those who are vulnerable are ignored in a chase for abundance - what I see as the left-wing version of a "rising tide lifts all boats".
I can give an example. In New Zealand there was a push to reform labour markets and income support by introducing unemployment insurance. However, in the desire to get individuals pooling risk and push for greater job mobility policy makers lost sight of the realities of what would happen to individuals in disadvantaged situations - a part-time sole parent would end up solely worse off under the new policy, and without middle class buy in the level of the core benefit would decline as it has overseas.
If the political will to support those who are disadvantaged is limited (and hence involves a limited fiscal envelop) I would prefer we do so in a way that lifts up those most in need - which requires centering those individuals in the conversation. Otherwise the welfare state creeps towards subsidises for flashy industries and middle class families. Such a view requires a clear policy framework that explores trade-offs - which is our good friend the Iron Triangle ;)
Good comment, Matt. I agree that the "Koru class dole" would have reduced the political incentive for adequate welfare at the bottom.
My working view is that parallel systems will degrade the system used by those with less power (public schools in Australia) but broadening the scope of a single system will tend to preserve it for those people (NZ age pension).
Economists can analyse the trade-offs in system design but politicians and welfare advocates need to analyse these political dynamics too.
Agree those that want to suggest a policy need to both make a choice, and recognise the political economy available.
What is it that Keynes said though, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”.
My reading has always been that, how we communicate and measure the trade-offs will matter for where the political economy of these things can go - not just in terms of our descriptions being picked up by others, but also in our willingness to recognise the margins that may matter to others and genuinely measure how much they matter.
I think there is a fun and important debate about whether the Iron Triangle is doing that. My feeling is it does - as you could conceptualise a set of trade-offs in it that would support higher or lower benefit support for someone with certain values, and then based on a willingness to take peoples views seriously you can measure those margins and inform their choices and policy demands.
My reading of your statements is that we should do the same thing for tax. As a former tax economist I couldn't agree more ;)
I think we fundamentally agree on this:
"My reading has always been that, how we communicate and measure the trade-offs will matter for where the political economy of these things can go - not just in terms of our descriptions being picked up by others, but also in our willingness to recognise the margins that may matter to others and genuinely measure how much they matter."
And my angle on it is that we economists have spent too much time emphasising the existence of painful trade-offs, and not enough time showing the opportunities to relieve those trade-offs. I judge "not enough" and "too much" by what I understand of people's fundamental objectives (i.e. "what matters to others") mapped against what I understand to be the true opportunity set, i.e. the outcomes we could achieve with policies that are available.
Coincidentally on Twitter the other day I came across a Thomas Sargent list of "valuable lessons that economics teaches" which illustrates my very point:
https://x.com/BrianCAlbrecht/status/1854585575879147725
Numbers 1, 2 and 5 emphasise the "dismal" nature of trade-offs.
Trade-offs are unavoidable when we're at the frontier of outcomes. Sargent's list assumes we're already there, and so we can't have our cake and eat it too (for example, number 5: "There are trade-offs between equality and efficiency").
But in the real world we're very often well within the frontier.
For example, in macroeconomics, we say "you can fit a lot of Harberger triangles [DWL of policy distortion] into an Okun's gap [output loss from an economy running under potential". Keynes would have emphasised this point too.
In tax (and welfare) policy, the idea of trade-offs between equality and efficiency only applies if you constrain the tax mix - for instance, by constructing an iron triangle by funding welfare only through income tax or a fixed budget.
The beauty of land tax is that we can achieve more efficiency and more (vertical) equality at once. This was the point of my EMTR report for Prosper.
Henry George was perceived as a dangerous radical because he pointed out how many apparently-unbreakable dismal trade-offs we claim to be constrained by are in fact arbitrary restrictions we have imposed on ourselves by deeming the income from land off-limits for public finance. The utopian potential of that idea needed quashing.
If you're interested, Mason Gaffney writes about this extensively and well in "Neo-classical economics as a strategem against Henry George", Chapter 2. He catalogues the different trade-offs relieved by Georgist land value capture (i.e. using the economic rent of land for public finance). There are close to a dozen such policy trade-offs relieved; vertical equity and efficiency is just one.
https://www.masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf
In short, I agree with you fully with the existence of potential trade-offs, but I think we economists have got it all wrong in emphasising trade-offs so often (it's a very depressing identity for a scientific discipline and its practitioners to have).
Economics needs a close look at how many trade-offs we emphasised are simply contrived ones, imposed by certain social pieties we economists have internalised and hidden from ourselves, most importantly the sacrosanct nature of privatised land rents.
Cheers!