Fannie Mae and Freddie Mac, the two government-sponsored-enterprises that supply affordable mortgages across the country, are cutting back on loans to certain risky borrowers. This appears to come at the direction of their regulating agency, the Federal Housing Finance Agency (FHFA). This reduction in risky loans may signal that the FHFA is anticipating an economic downturn.

Curtailing loans to individuals with low down payments, or those deeply in debt, should lower the risk of mortgage defaults, which were a major driver of the 2008 financial crisis. Thus the FHFA’s decision is a step in the right direction, but it misses the fundamental issue: government should not promote homeownership.

The U.S.’s long standing goal of greater homeownership is disguised redistribution that creates more risk in financial markets by offering loans to individuals who cannot afford them. The way to improve affordability is not through redistribution but instead via elimination of land use regulations.

Directing Fannie and Freddie to change their lending behavior is a reasonable first step. Ultimately, however, the goal must be to remove government from the housing and mortgage lending businesses.

Earlier this week, Centers for Medicare & Medicaid Services (CMS) raised its estimate of Medicaid’s improper payments from $36 billion (9.8 percent of federal Medicaid expenditures) to $57 billion (14.9 percent of federal Medicaid expenditures). Actually, the situation is far worse than these estimates suggest. As we discussed in a Wall Street Journal op-ed after the numbers were released, Medicaid’s improper payments now almost certainly exceed $75 billion – or more than 20 percent of federal Medicaid expenditures.

This year’s report shows not only a significant increase in CMS’s estimate of improper payments. Its methodology also shows the agency has been hiding even larger improper payments for years. CMS estimates improper payments in the Medicaid program by auditing each state and DC once every three years and then using the most recent estimate available for each to construct a three-year rolling average. The 2018 report therefore covered fiscal years 2015–2017, while the 2019 report covered fiscal years 2016–2018.

There’s one important caveat, however. The Obama administration did not perform Medicaid eligibility audits for fiscal years 2014–2017. Instead, it simply plugged the eligibility rate from the pre-Obamacare era into its improper payment calculations. This change would tend to hide any increases in improper enrollments that may have accompanied the implementation of ObamaCare’s Medicaid expansion. Indeed, other evidence suggests severe eligibility errors and problems accompanied the Medicaid expansion. As a result, the 2015, 2016, 2017, 2018, and 2019 reports likely underestimate the true extent of Medicaid improper payments because they use pre-ObamaCare data to describe what was happening under ObamaCare.

So it’s a very big deal that CMS’s 2019 report showed a 5.1 percentage point increase in the three-year moving average—from 9.8 percent to 14.9 percent—compared to the 2018 report. Note that while both reports’ averages use imputed improper payment rates for fiscal years 2016 and 2017 based on pre-2014 (i.e., pre-ObamaCare) data, the newest three-year average replaces the pre-ObamaCare rate used for 2015 with the actual, post-ObamaCare estimate for fiscal year 2018.

Mathematically speaking, in order for the overall three-year average to rise by 5.1 percentage points, the improper payment rate estimate for FY 2018 must be 15.3 percentage points higher (5.1 x 3 years) than the FY 2015 estimate. Given that the true improper payment rate in 2015 was almost certainly at least 8 percent, then the true improper payment rate in Medicaid (or more precisely, the real three-year rolling average from FYs 2016–2018) would then exceed 23 percent (15.3 percent + 8 percent). In other words, as long as the improper payment rate in FY 2016 exceeded 5 percent — and Medicaid’s improper payment rate has never been below 5 percent — the true improper payment rate exceeds 20 percent.

Even this much higher three-year rolling average is likely too low. CMS surveys the 50 states and DC in cycles – with 17 jurisdictions each year. The 2019 report updates the payment rate with “Cycle 1” states – which includes Arkansas, Connecticut, Delaware, Idaho, Illinois, Kansas, Michigan, Minnesota, Missouri, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, Virginia, Wisconsin, and Wyoming. Recent OIG government audits of newly eligible Medicaid expansion enrollees known as “new adults” in California, New York, Colorado, and Kentucky, as well as non-newly eligible enrollees in California, New York, and Kentucky find serious program integrity issues and high improper payments during the 2014–2015 initial implementation of Obamacare. None of these states with well documented issues with their expansions were included in Cycle 1. Neither are Louisiana or Oregon, where state audits showed significant problems with how those states were conducting eligibility reviews.

In a forthcoming Mercatus paper, we find that the 12 expansion states with the largest rates of improper eligibility were New Mexico, California, Kentucky, Rhode Island, West Virginia, Oregon, Washington, Arkansas, Colorado, Louisiana, Montana, and New York. Yet, the CMS report only includes two of them (New Mexico and Arkansas). The result is that the 2019 estimate uses data that are not only not up to date, but also unrepresentative. An estimate employing up-to-date and representative data would show an even higher improper payment rate. Moreover, the sheer size and extent of improper enrollment problems in California will raise the cycle-specific rate for the 2020 report.

Looking across the entire country and fully accounting for eligibility problems, it is possible, if not likely, that the improper payment rate is as high as 25 percent of federal Medicaid expenditures, or nearly $100 billion a year. That’s more than the entire $70 billion CMS actuaries estimate the federal government spend on ObamaCare’s Medicaid expansion in 2018.

Improper payments in Medicaid are a real problem for policymakers, and it is imperative that CMS finally take this problem seriously. Next week, the Mercatus Center will publish a new paper we authored that explains the problem in greater detail, including which states have the highest rates of improper payments, and makes a series of recommendations for reform.

The Albrecht family of Germany is one of the richest in the world. They earned their wealth from innovations in price-slashing for European grocery shoppers. Their Aldi grocery chain is now spreading across the United States and bringing savings to millions of lower- and middle-income families. I profiled Aldi in this recent post.

Rather than bashing the rich, Bernie Sanders, Elizabeth Warren, and other liberals should be praising wealthy entrepreneurs and corporations, such as Aldi, that are reducing poverty through aggressive market competition.

Aldi was the subject of a fascinating profile in the UK Guardian. Snobby British observers did not think Aldi would succeed because they assumed consumers didn’t mind high prices. Aldi proved them wrong. UK grocery chains were used to fat profits. Aldi eliminated them. Sanders and Warren take note: open markets and intense competition transfers wealth from corporations to moderate-income consumers.

Here are some excerpts from the Guardian piece by Xan Rice:

On a Thursday morning in April 1990, in the suburb of Stechford in Birmingham, a strange grocery chain started trading in the UK. It only stocked 600 basic items – fewer than you might find in your local corner shop today – all at very low prices. For many products, including butter, tea and ketchup, only a single, usually unfamiliar brand was offered. To shoppers accustomed to the abundance of Tesco and Sainsbury’s, which dominated the British grocery sector with thousands of products and brands, delicatessens, vast fridges and aisles piled high with fresh fruit and vegetables, the range would have seemed dismal.

The managers of this new shop, which was called Aldi, had not bothered to place a single advert announcing its arrival – not even an “Opening soon” sign outside the store. Strip lights illuminated the 185 sq metre store, and from the ceiling hung banners listing prices for the goods stacked on wooden pallets or displayed in torn-open cardboard boxes on metal shelves.

… most people were confident they would fail in Britain, where there was a discernible snobbery about discount stores. When a reporter from the Times visited an Aldi store in Birmingham the following year, he thought it represented the “anonymous, slightly alarming face of 1990s grocery shopping”, without any pretence of sophistication. “One looks in vain for avocados or kiwi fruit.” The British supermarket giants, whose 7% profit margins were the world’s highest, were even more dismissive.

… But today, the boasts of Tesco and Sainsbury’s read like a classic example of business hubris. While the major supermarkets dozed, convinced that many people would not be seen dead in a discount store, the German chains quietly turned the sector on its head. Nearly two-thirds of households now visit an Aldi or Lidl branch at least once every 12 weeks, according to the research firm Kantar Worldpanel.

… By sucking in shoppers and, as former Aldi UK CEO Paul Foley puts it, “sucking the profitability out of the industry” – profit margins of 2–3% are now the norm – the two German-owned companies have forced the “big four” supermarkets to take drastic measures.

… The stores’ overall feel is still more gritty than pretty. In the latest Which? magazine survey of its members’ favourite supermarkets, published in February, shoppers ranked Aldi third overall, behind only Waitrose and Marks & Spencer, despite giving it only one star out of five for store appearance. Merchandise is still displayed on pallets, in plastic crates or cardboard boxes – or arranged haphazardly, as in the case of the one-off, bargain-priced goods found in the “middle aisle”, which hosts a rapidly rotating assortment of ultra-discounted oddities.

… Packaged products in all supermarkets come with a barcode, which the checkout assistant will locate and scan. But look closely at a packet of Aldi toilet rolls and you will see not one but four barcodes: two long ones down the sides, and one on each large flat surface. A container of butter has three barcodes; a bag of carrots has two. For kidney beans, a pinstripe barcode is wrapped around half of the can. This means that whichever way the assistant holds the product the scanner will register it.

… what Aldi managers describe, straight-faced, as “the thrill at the till”: your trolley full of goods has cost less than you thought it would. The rushed, no-frills experience isn’t something you merely endure for the sake of saving money; the awareness of your savings makes that experience a pleasure in itself.

… Aldi managers were expected to make continuous improvements to the company’s processes, a business philosophy also used by Japanese manufacturers, where it was called kaizen. In their book “Bare Essentials”, Dieter and Nils Brandes argued that Aldi’s embrace of kaizen, its lean management structure and just-in-time approach to inventory – taking delivery of stock only when needed, to cut holding costs – made it the “most Japanese” company in Germany.

… “The rest of the industry hated us,” said Paul Foley, who was the company’s third employee in the UK, and chief executive from 1999–2009. “I heard us called parasites, leeches, and ‘a plague of locusts landing on our shores’” – because of the company’s record of dragging down prices and profit margins in new markets. “It means nobody will help you: nobody wants to rent you space, organise transport for you, or sell you product.”

… Today, new Aldi store assistants receive industry-leading pay of £9.10 an hour, and £10.55 an hour in London – the London living wage – while a graduate accepted on to the area manager programme starts on £44,000 and gets an Audi A4 company car. Paying well obviously helps attract and retain staff, who might otherwise go to chains where the pace of work is slower. But it also serves to drive up wages across the industry, which, because of Aldi’s lower overall employee costs, hurts its competitors more.

Senator Bernie Sanders has called levels of U.S. wealth inequality “outrageous,” “grotesque” and “immoral.” Democratic presidential candidate Elizabeth Warren is pushing for a wealth tax to curb what she describes as “runaway wealth concentration.” Yet despite their rhetoric, it’s not clear, deep down, whether either really cares about wealth inequality per se or believes that reducing it should be an overriding public policy goal.

To see why, consider this. Every year, Credit Suisse calculates a wealth “Gini coefficient” for major countries, indicating their level of wealth inequality in a single number from 0 to 100. Higher numbers indicate higher inequality. In 2018, the U.S. really did have a comparatively high figure at 85, as Warren and Sanders lament. But how this number compares to other countries is instructive.

Many poorer economies, such as Ethiopia (61), Myanmar (58), and Pakistan (65), have lower wealth inequality than America. Meanwhile, a diverse range of countries have similarly high wealth inequality, including Russia (88) and Kazakhstan (95), through to Sweden (87) and Denmark (84). Unsurprisingly, neither Warren nor Sanders argue for the U.S. to adopt Ethiopia or Pakistan’s economic model in pursuit of more equality. But Bernie Sanders has said in the past that Denmark and Sweden are exemplars par excellence of his vision of “democratic socialism,” seemingly not caring that their wealth distributions are “outrageous,” “grotesque,” or “immoral,” according to his own self-defined standards.

The truth, acknowledged by the candidates’ own talking points and omissions, is that wealth inequality statistics in isolation tell us nothing particularly interesting about an economy’s health. Without analyzing in detail the underlying causes of a wealth distribution, statistics like the Gini coefficient, or the top 10 or 1 percent wealth shares, give us no indication of whether “good” or “bad” trends have driven the distribution of net assets across society. Sanders and Warren might use such summary wealth statistics as if they are proxies for “fairness” or how “rigged” the economy is. But few sane people would argue Sweden is less fair than Myanmar, or that the U.S. economy is more rigged than Argentina (79) or Qatar (62). These figures, as with top wealth shares, are a poor guide to policy.

All this shows that when it comes down to it, the candidates don’t prioritize wealth egalitarianism as a social goal when it conflicts with their other aims. This is somewhat of a relief. Japan immediately after World War II was a very equal place, as was China before its relative economic liberalization from around 1980. But the cost of achieving that wealth egalitarianism in both cases was intolerably high: mass destruction through war and grinding communist poverty. As former treasury secretary and Democrat Larry Summers recently said with beautiful understatement, “I do not think a focus on wealth inequality as a basis for being concerned about a more just society is terribly well-designed.”

In our new paper today, “Exploring Wealth Inequality,” Chris Edwards and I examine some potential causes of wealth inequality in the U.S. In a global free market, the distribution of wealth can widen as entrepreneurs make groundbreaking innovations to become hugely rich through selling their products or services to better-off consumers all around the world (a positive sum cause). On the other hand, cronyism, rent-seeking, and certain bad government regulations can be a destructive cause of wealth inequality – enriching some at the expense of others and reducing overall wealth. There’s lots of evidence too that social insurance programs come with a big trade-off: though they may reduce after tax-and-spend income inequality, they widen wealth inequality by deterring the means and incentive to save among the middle-classes and the ability for them to inherit their wealth.

Sanders and Warren talk as if it’s pure cronyism or greed that has led to high measures of U.S. wealth inequality. In crude terms, they imply that the U.S. economy is more like Russia than Denmark. And, of course, there is some rent-seeking, which policy change could help stamp out. But evidence that this is the overwhelming cause is weak; dynamic entrepreneurial activity and redistributive programs are clearly significant drivers of wider wealth inequality too. Yet neither candidate argues for shrinking the welfare state to reduce measured private wealth gaps. In fact, both want to massively expand it. That revealed preference heavily suggests wealth inequality isn’t a primary concern for either, but rather a secondary one.

To paraphrase Orwell: in highlighting wealth inequality statistics, Sanders and Warren talk as if all wealth inequality is created equal. But when it comes to their policy choices, some wealth inequality causes are clearly more equal than others.

A growing number of political leaders consider wealth inequality to be a major economic and social problem. They complain that wealth is being shifted to the top at everyone else’s expense.

Is wealth inequality the crisis that some people believe it is?

A new Cato study examines six aspects of wealth inequality and discusses the evidence for the various claims being made. Here are some findings:

1. Wealth inequality has risen in recent years but by less than is often suggested. Faulty data from economists Piketty, Saez, and Zucman are behind many exaggerated inequality claims. Furthermore, wealth estimates overstate inequality because they do not include the effects of social programs.

2. Wealth inequality tells us nothing about poverty or prosperity. Inequality may reflect innovation in a growing economy that is raising overall living standards, or it may reflect cronyism that causes economic damage.

3. Most of today’s wealthy are business people who built their fortunes by adding to economic growth, and some have created innovations that benefit all of us. The share of the wealthy who inherited their fortunes has declined sharply in recent decades.

4. Cronyism is one cause of wealth inequality which may have increased as governments have expanded subsidies and regulations. Some countries with high levels of wealth inequality also have high levels of cronyism or corruption.

5. The growing size of the U.S. welfare state has crowded out or displaced middle-class wealth-building, and thus likely increased wealth inequality. Some countries with large welfare states, such as Sweden, have high levels of wealth inequality. Numerous presidential candidates want to expand social programs, but that would likely increase wealth inequality.

6. Wealth inequality has not undermined U.S. democracy despite frequent claims to the contrary. Research shows that wealthy people do not have homogeneous views on policy and do not have an outsized ability to get their goals enacted in Washington.

Wealth inequality by itself is not a useful metric, but the underlying causes should be considered. U.S. wealth inequality has risen modestly, but mainly because of innovation and growth that is raising all boats. Policymakers should aim to reduce inequality by ending cronyist programs and removing barriers to wealth-building by moderate-income households.

The new study by Chris Edwards and Ryan Bourne is here.

Other Cato commentaries on wealth inequality are here, here, here, here, here, and here.

A recent New York Times article described the wretched management of New York City’s public housing. The main problem highlighted is a common one in government ownership: bureaucracies do not maintain their assets.

Governments build shiny new highways, rail systems, schools, parks, sidewalks, and other infrastructure, and then let the assets rapidly deteriorate. Politicians like to brag about the new projects they are spending money on, but they pay little attention to old facilities that are falling apart, except when the media shines a spotlight.

The federal government provides $7 billion in annual funding to public housing agencies. Such aid induces irresponsible local management. It should be zeroed out and states encouraged to privatize their public housing stock. See these studies on federal aid and public housing.

Here are highlights from the NYT story by Luis Ferré-Sadurní:

The seven steel boilers should have been replaced years ago. Instead, they continue to sputter inside a cavernous brick building, producing steam that travels through a maze of old pipes providing heat and hot water to the Breukelen Houses in Canarsie, Brooklyn, a public housing complex where 3,500 people live.

… As winter approaches, [New York City] is racing to ready boilers in the nation’s largest public housing system, where widespread heat outages have repeatedly left many of its 400,000 low-income residents shivering in their homes. Many of the boilers are old; some were built in the 1950s. With temperatures dropping, the fragile, antiquated heating network imperils a large portion of public housing residents: children, older residents and people with health conditions.

Providing consistent heat is only one challenge in a long list of woes for the agency, which oversees 176,000 subsidized apartments. New York City Housing Authority is under the supervision of a federal monitor after federal prosecutors accused it of years of mismanagement. In addition to heating inadequacies, the agency has a history of failing to rid its apartments of mold and lead paint.

More than half of the housing authority’s 1,713 boilers — some made by companies that no longer exist — are more than 20 years old, the typical life span of a boiler. Following years of underfunding and poor maintenance, nearly half are in critical condition and need major repairs or replacement. Pipes that circulate steam to apartments are crumbling, aging buildings are poorly insulated and radiators need to be overhauled.

… But as it started to get cold again, those improvements meant little to residents of the Breukelen Houses. It was among the developments with the most outages last winter. Residents there had no heat or hot water 25 times from Oct. 1, 2018, to May 1, 2019 — the city’s heat season.

The government says that America’s poverty rate is 11.8 percent. It also says that the poverty rate has hovered around 11 to 15 percent since 1970 suggesting little or no progress against poverty in decades.

But the Census Bureau’s official poverty rate is biased upwards and kind of meaningless. In terms of material well-being, families near the bottom are much better off today than in past decades because of general economic growth and larger government hand-outs.

In a Cato study, John Early recalculated the U.S. poverty rate using more complete data and found that it fell from 19.5 percent in 1963 to just 2.2 percent in 2017. (The study’s charts are updated here.) Early is a former Assistant Commissioner of the Bureau of Labor Statistics.

Bruce Meyer and James Sullivan perform a similar exercise in this new study. They find that the poverty rate fell from 13.0 percent in 1980 to 2.8 percent in 2018. Meyer-Sullivan calculate their figure based on consumption rather than income, but the general idea is the same. Meyer is at the University of Chicago and Sullivan is at the University of Notre Dame.

The Early and Meyer-Sullivan estimates are charted below. Both estimates reflect a large reduction in material deprivation for less fortunate Americans. Unfortunately, this great news about the American economy is usually ignored in media reports and political discussions.

Both Early and Meyer-Sullivan use a more accurate inflation measure than the one used for adjusting the official poverty rate each year. And they both correct for the fact that the Census—in its main poverty series—excludes numerous government benefits including Medicaid, food stamps, and earned income tax credits. Both studies make a number of further adjustments.

The charts below show the Early and Meyer-Sullivan poverty rates compared to the official Census series. Note that all poverty rate calculations stem from essentially arbitrary poverty thresholds measured in relation to a chosen base year. John Early anchors his series to the official rate in 1963. Meyer-Sullivan anchor their series to the official rate in 1980.

The important thing is not the calculated poverty rate in any particular year but the trend over time. The official series shows no sustained improvement in poverty in recent decades, while the better estimates from Early and Meyer-Sullivan suggest large gains for households near the bottom.

In sum, using somewhat different methods, Early and Meyer-Sullivan both show that the official poverty data is far too pessimistic.

I interpolated the value for 1982 in Meyer-Sullivan.