Tag: economics

Human Mobility is Key to Fighting Poverty

Posted on Posted in economics, Opinion, Public PolicyTagged , , , , , , , , , , , 1 Comment

Some sixty years into the “war on poverty,” government welfare programs remain the subject of much scrutiny. As the Trump administration unveils a new tax plan, fresh off numerous attempts to repeal and replace the Affordable Care Act, perennial questions about whether the government is doing enough to reduce poverty have resurfaced.

This debate often focuses almost exclusively on poor Americans, and solutions mostly center around the redistribution of resources via government transfers. On many levels, this makes sense; on the first count, non-Americans don’t vote, and politicians tend not to pay much attention to groups that cannot help them win elections. Secondly, the government’s ability to act on poverty is somewhat limited — it can try to create policies that facilitate wealth, but it cannot actually produce wealth on its own. Spreading around some of the surplus is therefore an attractive option.

But from a utilitarian and humanitarian perspective, this debate represents a missed opportunity. Limiting the conversation to wealth transfers within an already wealthy nation encourages inefficient solutions at the expense of ideas that might do a lot more good for a lot more people: namely, freeing those people, who are not at maximum productivity, to pursue opportunity.

Between the EITC, TANF, SNAP, SSI, Medicaid, and other programs, the United States spent over $700 billion at the federal level in the name of alleviating poverty in 2015. A 2014 census report estimates that Social Security payments alone reduced the number of poor Americans by nearly 27 million the previous year. Whatever your stance on the long-run effects of welfare programs, it’s safe to say that in the short term, government transfers provide substantial material benefits to recipients.

Yet if the virtue of welfare programs is their ability to improve living standards for the needy, their value pales in comparison to the potential held by labor relocation.

Political boundaries are funny things. By crossing them, workers moving from poor to rich nations can increase their productivity dramatically. That’s not necessarily because they can make more products or offer better services — although that is sometimes the case as well — but rather because what they produce is more economically valuable. This is what economists refer to as the “place premium,” and it’s partly created by differences in opportunity costs between consumers in each location.

Median wages of foreign-born US workers from 42 developing countries are shown to be 4.1 times higher than those of their observably identical counterparts in their country of origin. Some enthusiasts even speculate that the elimination of immigration restrictions alone could double global GDP. The place premium effect can be powerful enough to make low-skilled positions in rich countries economically preferable to high-skill immigrants from poor nations.

We have a lot of inequality in the United States, and that often masks the fact that we have very little absolute poverty. Even someone who is poor by American standards (an annual pre-transfer income of about $12,000 or less for a single-person household) can have an income that exceeds that of the global median household. Even with relatively generous government transfers, we probably would not increase their incomes by more than triple.

On the other hand, because they start with lower incomes, this same effect allows low-earning immigrants to proportionally increase their standard of living in a way that can’t be matched by redistribution within a relatively wealthy population. For example, the average hourly wage in the US manufacturing sector is slightly over $20; in Mexico, it’s around $2.30. Assuming a manufacturer from Mexico could find a similar position in the United States, their income would increase by around 900%. To provide the same proportional benefit to a severely poor American — defined as a person or household with an income under half the poverty threshold — could cost up to $54,000.

What’s true across national borders is true within them. Americans living in economically desolate locations could improve their prospects by relocating to more prosperous and opportune areas. Indeed, this is exactly what’s been happening for decades. The percentage of Americans living in cities has increased steadily, going from 45% in 1910 to nearly 81% by 2010. Nor is relocation exclusively a long-term solution. During oil rushes in Alaska and North Dakota, populations within the two states exploded as people flocked to economic activity.

Recently, however, rates of migration have been dwindling. Admittedly, there are fewer barriers to intra-national migration than immigration. But there are still things we might do to make it easier for people to move where the money is.

One obvious solution would be to encourage local governments to cut back on zoning regulations that make building new housing stock less affordable. Zoning laws contribute heavily to the rising costs of living in the most expensive cities, leading to the displacement of poorer residents and the sequestration of opportunity. As with immigration, this poses a bit of a political problem — it requires politicians to prioritize the interests of the people who would live in a city over those of the people who currently live there — the ones who vote in local elections.

Relatedly, we might consider revising our approach to the mortgage interest deduction and other incentives for homeownership. While the conventional wisdom is that homeownership is almost always desirable because it allows the buyer to build equity on an appreciable asset, some studies have found a strong positive correlation between levels of homeownership and unemployment. The upshot is that tying up most of one’s money in a home reduces the ability and desire to move for employment, leading to unemployment and downward pressure on wages. Whether or not to buy a home is the buyer’s decision, but these data cast doubt on the idea that the government should subsidize such behavior.

If the goal of policy is to promote human well being, then increasing mobility should be a priority for policy makers. As a species, as nations, as communities, and as individuals, we should strive for a more productive world. Allowing people the opportunity to relocate in the name of increasing their output is a near-free lunch in this regard.

But while the economic dream of frictionless markets is a beautiful one, we live in a world complicated by politics. It’s unrealistic to expect politicians to set aside the concerns of their constituents for the greater good. I will therefore stop short of asking for open borders, the abolition of zoning laws, or the removal of the mortgage interest deduction. Instead, I offer the humbler suggestion that we exercise restraint in such measures, striving to remove and lessen barriers to mobility whenever possible. The result will be a freer, more equal, and wealthier world.

This article originally appeared on Merion West

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Universal Basic Income is Probably Not the Future of Welfare

Posted on Posted in economics, Opinion, Public PolicyTagged , , , , , , , , , 3 Comments

If for no other reason, universal basic income — that is, the idea to replace the current means-tested welfare system with regular, unconditional cash payments to every citizen — is remarkable for the eclectic support it receives. The coalition for universal basic income (UBI) includes libertarians, progressives, a growing chorus of Luddites, and others still who believe a scarcity-free world is just around the corner. Based on its popularity and the growing concerns of coming economic upheaval and inequality, it’s tempting to believe the centuries-old idea is a policy whose time has finally come.

Personally, I’m not sold. There are several obstacles to establishing a meaningful universal basic income that would, in my mind, be nearly impossible to overcome as things stand now.

For one, the numbers are pretty tough to reconcile.

According to 2017 federal guidelines, the poverty level for a single-person household is about $12,000 per year. Let’s assume we’re intent on paying each American $1,000 per month in order to bring them to that level of income.

Distributing that much money to all 320 million Americans would cost $3.84 trillion, approximately the entire 2015 federal budget and far greater than the $3.18 trillion of tax revenue the federal government collected in the same year. Even if we immediately eliminated all other entitlement payments, as libertarians tend to imagine, such a program would still require the federal government to increase its income by $1.3 trillion to resist increasing the debt any further.

Speaking of eliminating those entitlement programs, hopes of doing so are probably far-fetched without a massive increase in taxation. A $1,000 monthly payment to every American — which again, would consume the entire federal budget — would require a lot of people currently benefiting from government transfers to take a painful cut. For example, the average monthly social security check is a little over $1,300. Are we really going to create a program that cuts benefits for the poor and spends a lot of money on the middle class and affluent?

In spite of the overwhelming total cost of such a program, its per capita impact would be pretty small, since all the cash would be disbursed over a much greater population than current entitlements. For this reason, its merit as an anti-poverty program would be questionable at best.

Yes, you can fiddle with the disbursement amounts and exclude segments of the population — dropping minors from the dole would reduce the cost to around $2.96 trillion — to make the numbers work a little better, but the more you do that the less universal and basic it becomes, and the more it starts to look like a modest supplement to our existing welfare programs.

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Universal basic income’s problems go beyond the budget. If a UBI was somehow passed (which would likely require our notoriously tax-averse nation to OK trillions of additional dollars of government spending), it would set us up for a slew of contentious policy battles in the future.

Entitlement reform, already a major preoccupation for many, would become a more pressing concern in the event that a UBI of any significant size were implemented. Mandatory spending would increase as more people draw benefits for more years and continue to live longer. Like the entitlements it may or may not replace, universal basic income would probably be extremely difficult to reform in the future.

Then there’s the matter of immigration. If you think reaching consensus on immigration policy is difficult in the age of President Trump, imagine how it would look once we began offering each American a guaranteed income large enough to offer them an alternative to paid work. Bloomberg columnist Megan McArdle estimates that establishing a such a program would require the United States to “shut down immigration, or at least immigration from lower-skilled countries,” thereby leading to an increase in global poverty.

There’s also the social aspect to consider. I don’t want to get into it too much because everybody’s view of what makes people tick is different. But it seems to me that collecting money from the government doesn’t make people especially happy or fulfilled.

The point is, part of what makes universal basic income appear realistic is the political coalition backing it. But libertarians, progressives, and the rest of the groups superficially united behind this idea have very different opinions about how it would operate and very different motivations for its implementation. When you press the issue and really think through the consequences, the united front for universal basic income begins to crack.

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Don’t get me wrong; there’s plenty about universal basic income that appeals to this author’s libertarian sensibilities. I think there’s a strong argument for reforming the welfare system in a way that renders it more similar to a basic income scheme, namely replacing in-kind payments and some subsidies with direct cash transfers. Doing so would, as advocates of UBI claim, promote the utility of the money transferred and reduce government paternalism, both goals which I find laudable.

I should also note that not all UBI programs are created equal. Universal basic income has become something of a catch-all term used to describe policies that are quite different from each other. The negative income tax plan Sam Bowman describes on the Adam Smith Institute’s website is much more realistic and well-thought-out than a system that gives a flat amount to each citizen. That it is neither unconditional nor given equally are its two greatest strengths.

However, the issues of cost and dispersion, both consequences of UBI’s defining characteristics, seem to me insurmountable. Unless the United States becomes dramatically wealthier, I don’t see us being able to afford to pay any significant amount of money to all or most people. We would need to replace a huge amount of human labor with automation before this plan can start to look even a little realistic. Even if that does happen, and I’m not sure that it will anytime soon, I think there are better things we could do with the money.

This article originally appeared on Merion West.

The CBO Feels the Love

Posted on Posted in Politics, Public PolicyTagged , , , , , , , , , , , , , , , , 3 Comments

The Congressional Budget Office isn’t known for its awesome marketing or pithy statements. It’s never been recognized by Buzz Feed for its social media use. Nevertheless, the Congressional Budget Office (CBO) is enjoying an unusual amount of love on Twitter.

Here’s how you really know they’ve made it: The title of yesterday’s National Review Morning Jolt was, “The Congressional Box Office is Very ‘In’ Right Now.”

Two nights ago, it tweeted a four-word message with a link to its analysis of the American Health Care Act (AHCA) that has received far more attention than is normal for the CBO twitter account. As of writing this post, the tweet in question has racked up 62 responses, 846 retweets, and 542 likes.

That might not sound like a lot; the truth is, it isn’t. Donal Trump’s tweets, for example, often receive tens of thousands of ‘likes.’ But relative to the usual engagement on the CBO’s tweets, it’s absolutely ridiculous.

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Since January first of 2016, the CBO has tweeted 120 times. The median numbers of responses, retweets, and ‘likes’ to those tweets were respectively 0, 3, and 2. In fact, this latest tweet is responsible for nearly half of all the reactions garnered by the CBO’s account over that time period.

So what does this tell us?

The most obvious insight is that people are paying more attention to the CBO since the administration change. That’s not surprising; the CBO evaluates economic and budget proposals, and there are quite a few shakeups going on in that department right about now. The agency has been firing on all cylinders to keep up with demands from Congress, doubling the frequency of its tweets since Trump took office (.48 tweets/day compared with .24 tweets/day during the previous year).

In the final year of Barack Obama’s presidency, the CBO only averaged 9.5 ‘retweets’ per tweet–and that’s including a January 17th tweet that was responsible for 405 retweets alone (if you exclude that post, the account averaged 5 retweets per post). Since the beginning of the Trump administration, that average has jumped to 39.6 (7.6 if you don’t include the latest viral tweet).

Another insight: Negative feelings about the AHCA are driving the CBO’s recent popularity surge. The only two tweets with significant activity in the past year (look at the spikes in the graphs above) were about the AHCA and the effects of repealing the Affordable Care Act (ACA). A cursory glance through the responses to both tweets reveals that most of the commenters are detractors of the current administration who oppose changes to the ACA.

It would be a mistake to use this as a proxy for national consensus on the AHCA, however. Twitter often skews liberal.

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For the record, the CBO writes a killer blog (I use the term loosely, for obvious reasons). It’s a great source of unfiltered information about economic ideas from Washington. You can sign up to receive email updates from it here. And, if the CBO is reading this, don’t forget about us when you get famous.

Does Portland’s CEO Tax Indicate Progressive Shift to Local Focus?

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Starting next year, publicly traded companies operating in Portland, OR will be subject to a new tax surcharge if their CEOs are compensated at a rate exceeding 100 times that of their median employee. Per a Dodd-Frank regulation approved in 2015, public companies must disclose details of CEO and worker compensation beginning in 2017.

Such companies will have to pay an additional 10% to the existing business income tax owed to the city, calculated as 2.2% of their net income less operating losses. Companies whose CEOs earn over 250 times more than their median employee will have to pay a 25% surcharge.

Officials from the city estimate the new tax will apply to about 550 companies and provide between $2.5 million and $3.5 million in new revenue to the city’s general fund, which funds basic public services.

The new measure is the first of its kind; proponents are describing it as an innovative step in countering growing income inequality–one that they hope other cities will adopt. Skeptics of the new tax, most notably the Portland Business Alliance, say  it won’t reduce income inequality and that the city government should instead try to work with local businesses to boost job growth.

Both parties have good points. In isolation, the surcharge isn’t likely to do much in the way of reducing inequality. For starters, under the new SEC law corporations are given wide latitude to calculate median worker earnings (it’s more difficult than it sounds when you have workers in multiple countries with varying types of employment). More practically, large corporations with highly compensated executives do relatively little of their business in Portland. The city, to its credit, seems to understand this and isn’t eager to overplay its hand, hence the relatively small amount of revenue being raised by the tax.

But if enough cities adopted laws penalizing high CEO-worker compensation ratios, it could conceivably make a big enough dent in corporate profits to spur a change (though this might look substantially different from what lawmakers envision).

That seems to be exactly what Portland’s government hopes to catalyze. “It falls to cities to do creative, progressive policymaking,” Mayor Charlie Hales said, “and this is exactly what this is.” The real story here might not be a change to Portland’s tax code, but instead a change to the arenas in which progressive politicians choose to fight for their policies.

Faced with a Republican-dominated federal (and in some cases, state) government, large cities, which overwhelmingly tend to elect Democratic leadership, could increasingly take it upon themselves to implement the changes that elude them on the national level.

In cases where progressives advocate for the expansion of existing laws, they could find it easier to achieve such policy at the local level. This is for two reasons: First, the politics and economics are more likely to align; second, doing so is largely consistent with our system of federalism that allows for local expansion of federal law.

Consider that many large cities have seen fit to implement minimum wages that exceed the levels set by the states in which they reside, which often themselves exceed the $7.25/hour wage set by the federal government.

Focusing on advancing progressive policy at the city level should, in theory, mollify conservative opposition that has long stressed the importance of local governance. However this doesn’t necessarily appear to be the case: two days after Birmingham raised its minimum wage to $10.10/hour, the state of Alabama passed a law retroactively denying cities and towns within the state the ability to set their own minimum wages. The law is being contested in court.

Americans Aren’t the Ones Who Should Be Mad about Chinese “Dumping”

Posted on Posted in economics, Opinion, PoliticsTagged , , , , , , , , , , 2 Comments

One of the few issues upon which Clinton and Trump seemed capable of agreement in the second debate was that cheap steel from China was hurting America. Given how alarming Sunday’s exhibition was, it might have been a nice respite. That is, if they had not both been so wrong.

China produces about as much steel as the rest of the world combined. This is due partly to cheap labor and strong domestic demand, but mostly to heavy government subsidies. Now that China’s economic growth has slowed, markets are awash with cheap Chinese steel.  This has led China’s trading partners to accuse China of “dumping” steel.

Dumping, for those not familiar with the term, refers to the act of selling a good in a foreign market for less than the cost of production. It’s against WTO rules and is penalized by tariffs implemented by importing nations. The United States recently levied a 522% tariff on Chinese cold-rolled steel, which is used for construction and to make shipping containers and cars.

The general consensus, dutifully embraced by both candidates, is that dumping is bad for the importing country and an act of aggression by the exporter. But if you think about it, this is pretty absurd.

First of all, countries don’t trade with each other. The United States doesn’t buy wine from Portugal; American companies buy wine from Portuguese companies. We’re not “getting killed” on bad trade deals as Donald Trump fears; there isn’t even a “we” in the sense that he suggests. There are only people, and people don’t habitually engage in voluntary exchanges at a loss. It should be obvious that importers (American companies, in this instance) are the ones benefiting from cheap steel from China. That’s why they prefer to buy it over more expensive steel made domestically.

It’s true that China’s not a market economy in the same way that America is; their government owns and subsidizes far more than ours. That might sound like an advantage for the Chinese, but it’s really not.

Chinese producers are able to sell steel for less because of large subsidies from their government. The people who benefit from this are the people buying and selling steel–importers and Chinese steel companies, respectively. The people who lose are non-competitive firms and those paying for the subsidies…which would be the Chinese taxpayers.

Subsidized exports are really a transfer of wealth from within a country to without. Importing parties are able to be more profitable and productive, which is precisely why Donald Trump builds with Chinese steel and why we’re all better for it. Yes, it hurts American steel companies, but whatever resources are devoted to domestic steel production can be diverted to other areas with better returns.

Conversely, import tariffs are paid by the importer, and ultimately the consumer. In other words, in order to protect us (read: domestic steel companies) from what amounts to discounted steel, our government taxes the hell out of it so that we end up paying more. Saying that this helps our economy is like claiming that rolling up your sleeves makes your arms warmer. Remember that any jobs or income generated by such tariffs comes directly at the expense of American consumers who are being forced to forgo savings or purchases they would have made with the money they saved on steel.

If millions of tons of steel fell from the sky would we draft legislation to tax the heavens? No, we’d take the free steel and build things with it. If China wants to take money out of its citizens’ pockets and use it to make steel for the rest of the world, Chinese citizens should be outraged. But why should the rest of us complain? When someone gives you a gift, the correct response is: “thank you.”

Census Data Are Weird

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For those of you with better things to do than scroll through Paul Krugman’s twitter feed, I have news: last Tuesday the Census Bureau released its annual report on Income and Poverty, and people are stoked.

Here’s the upshot: Median household income increased 5.4% from last year after nine years of general decline. It’s now only 1.6% lower than it was in 2007, the year before the recession, and 2.4% lower than its historic peak in 1999.

While Asian households didn’t see a significant increase, black, white, and Hispanic households did. Median household incomes increased in all regions of the country and, for the first time since the recession, real income gains are distributed beyond the top earners.

Sounds like great news! It might well be, but before you celebrate there are some things to note about these statistics. The following isn’t a refutation of the conclusion that the economy is improving. Rather, it’s an indictment of the statistics that lead us to such conclusions. Here are three things to consider:

  • Household income data aren’t all they’re cracked up to be

All statistics have limits, but median household income is particularly misleading in the wrong hands. For years now, economists and politicians have cited median household income data to paint grim pictures of the American economic landscape. While the story is nicer this year, the logic behind the choice to measure households, rather than individuals, is still suspect.

A positive or negative change in median household income doesn’t imply a similar change in individuals. That’s because the characteristics of households vary across time and population.

Average household size has decreased from 3.6 to 2.5 people since 1940. Demographic shifts can also affect household incomes, because average household sizes differ between races.

Another limitation of household income data is that individuals aren’t equally distributed among households of different income levels. There are far more individuals–let alone workers–in the top quintile of income-earning households than the bottom. People who have vested interests in portraying an economically lopsided America tend to cite household data for this reason, without noting this.

Households expand and contract as more people are able to afford their own places. This can strangely cause median household income to rise while people are making less money. For example, if I were demoted and had to move in with my mom because I was now making half as much money, the median household income would increase as our two households merged, despite less aggregate income for the individuals involved.

The same works in reverse. When I started making enough money, I moved out of my mom’s house. Even though our combined income was greater, median household income fell.

Speaking of which…

  • Millennials are living at home longer and in greater numbers than previous generations

Fully 32% of 18-34 year-old Americans live with their parents, making it the most common living arrangement for that group. There are a couple of reasons for this: higher unemployment among young adults; an accompanying delay in or aversion to marriage; and a changing ethnic makeup of America, among others.

While Millennials are more likely to live with mom and dad, we’ve also become the largest generation in the workforce. A larger part of the workforce consolidating in fewer households could explain part of the rise in household income.

This probably isn’t too big of a factor, but since we’re measuring households it’s worth mentioning that about a third of people ages 18-34 are living with mom and dad.

  • “Low-income households” and poor people aren’t necessarily the same

This is a big one. Part of the elation about the Census data comes from the fact that lower-earning households have seen more of a bump in income than they have in recent years.

The problem is income isn’t the same as wealth. It’s closer to a derivative of wealth, like a stillframe is to a film. It’s a simplistic method of gauging standard of living, hobbled by the fact that it doesn’t consider government transfers of money, assets, or liabilities. Economists would probably argue that consumption data are more informative indicators of standard of living.

A wealthy elderly couple and a part-time minimum-wage earner might both be in the lowest income quintile in a given year. That doesn’t mean their standards of living are similar.

Rising incomes of the lowest earners might indicate lots of things: for example, that people are being forced back into the labor market after retiring. As I’ve noted here before, most poor households have no income earners, according to data from the Federal Reserve Board of San Francisco. Unless the rate of employment among the poor grew at the same time, there could be reason to believe that the increase in low-earning households is due to something other than increased income of “the poor.”

Another common assumption is that the households’ positions within income brackets are stagnant, as if we lived in a world without job churn. The households in the bottom 10% of income earners this year aren’t necessarily the same ones that were there in 2008.

We’re used to seeing data based on groups of income earners, not individuals. That’s how the Census reports. However, studying individuals tells a more relevant story.

The United States Treasury tracked individuals’ tax returns from 1990 to 2005. They found that over half of people in the bottom quintile as of 1990 had moved to a higher quintile by 2005.

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The Census statistics measure exactly what they measure: nothing more. That doesn’t mean that information is useless, it just means we shouldn’t lose our heads over it. Extrapolating a verdict about America’s economic health from median household income data exposes us to opportunities to make mistakes based on a deceptively simplistic figure.

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Don’t mistake my skepticism of stats for pessimism about the American economy. Where long-term trends in the American economy are concerned, optimism is never a bad idea.

Doctor Paidless? Eh, Maybe.

Posted on Posted in economicsTagged , , , , , 1 Comment

A new study of 24 medical schools across 12 states by Dr. Anupam B. Jena, Andrew R. Olenski, and Daniel M. Blumenthal—all of Harvard Medical School—shows that male and female doctors are often paid disparate salaries, even when accounting for several factors. The average absolute difference was around $51,000 while the adjusted average difference was about $20,000.

The New York Times quickly ran an article that all but declares the wage gap between the sexes to be a result of discrimination. It seems like an easy call to make, but the omission of certain factors gives reason to be cautious about jumping to such a conclusion.

Before I begin, I should acknowledge that the authors are far more credentialed than I am (no large feat) and probably put a lot of hard work into this study. Not that they’ll ever read this critique, but I can imagine it would be pretty annoying to read some nobody undermining your diligent study. My aim here isn’t to discredit their study, but to mention some factors that, if included, could have helped produce a more definitive picture.

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To put it lightly, the popular discourse on the gender pay gap is littered with misinformation. Practically everyone has heard the standby that women are paid on average seventy seven cents for every dollar that men are. Such a blunt “statistic” makes a good rallying cry, but is just about useless in every other respect. And yet, it sticks.

Part of the problem is the age-old fallacy of inferring causation where mere correlation is at hand. This is an understandable reflex in this case—across cultures, women share a history of oppression and obstructed paths to the labor force. But this same kind of logical leap would never be tolerated if someone alleged that employers discriminated in favor of Asian men, who earn 117% of their white counterparts in 2015.

Another problem is that comparing men and women in the workplace is far more difficult than you might believe, making study results suspect in many instances.

Salaries are influenced by a number of factors. The authors know this. According to the abstract, they measured:

…information on sex, age, years of experience, faculty rank, specialty, scientific authorship, National Institutes of Health funding, clinical trial participation, and Medicare reimbursements (proxy for clinical revenue).

It seems like a pretty complete list, but there are a couple other factors that—if previous studies are any indication—would have a significant effect on the findings. The most important ones that I can think of are marital status, whether or not a doctor has children, shift availability, how many hours, not years, they have worked, and the length of any interruptions to their tenure. The inability or failure to measure and report these factors gives reason to be somewhat skeptical of the findings.

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Marriage and Children

Marriage and child counts are extremely important to any discussion of salary differences between men and women. Interestingly, they usually correlate to opposite effects on the incomes of men and women, presumably due to the unequal division of domestic labor and child rearing. Married men are known to have higher salaries than comparable unmarried men for this reason–their partners are essentially investing in their earning potential. Consequently, the reverse tends to be true for women, who often divert more of their attention to household labor, thus giving up some of the effort they might otherwise spend on money-earning activities.

Having children tends to enhance this trend. From a division of labor standpoint, most couples are probably deciding that it’s more efficient to have one member carry the bulk of the remunerative workload and the other to handle a larger share of the unpaid labor. Of course, it’s not necessary that these roles be taken by men and women respectively, but that seems to be the way it plays out most of the time.

The Economist unwittingly stumbled onto this hypothesis in February, when their blog noted that lesbians often earned more money than straight women while gay men often earn less than straight men. Unfortunately, they didn’t note that lesbians are about twice as likely as gay men to get married and thus replicate the heterosexual division of labor between spouses, to some extent (lesbians are also more likely than straight women to be childless and split domestic work more equitably–all of which would contribute to higher income per capita relative to straight women).

Any discussion purporting to measure income differences as a factor solely of sex has to take these effects into account. A married man with 20 years of experience isn’t comparable to an unmarried man with 20 years experience, let alone a married mother of three with equal tenure. Because marriage and childbearing tend to have opposite effects on the incomes of men and women, the only accurate comparison to make is between childless men and women who have never been married. Some inference can be gleaned from the fact that women in their twenties earn more than similarly-aged men on average. This trend reverses around age thirty.

Interruptions to Tenure

Because knowledge and technology are constantly advancing, interruptions to tenure can be especially penalizing in a highly technical field such as medicine. The value of a computer science professional, for example, is estimated to have a halflife of only three years. A doctor with five years of experience who is coming back into the labor force after a four year gap isn’t likely to be as valuable as a comparable doctor who has spent the last five years working. We wouldn’t expect to observe the same phenomenon to the same degree in low-skilled occupations.

Therefore, simply measuring age, years of experience, and faculty rank, as this study does, doesn’t give us a complete picture of the prospects of the doctor in question. Because female employees are more likely to take time off, we can expect that on average–and especially in fields with high rates of obsolescence like medicine–they will suffer harsher penalties for absence from the workplace than male practitioners, likely depressing their average wages.

Hours and Shift Availability

Measuring years gives some idea of an employee’s commitment to a field, but a more complete picture would require the amount of hours worked and the shift availability of the physicians in question. Past research has shown that for numerous reasons, female workers tend to be more willing to trade pay for flexibility than males. If that’s true for the doctors in this study as well, it would explain some of the average pay differences that simply counting years would omit.

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There are many more variables that contribute to one’s salary than I can begin to list here. The problem with studies like this is the propensity of readers to project their own prejudices onto the results.

Assuming that men and women care equally about income, for example, would lead one to believe that women are routinely getting the short end of the stick. But, to quote anyone with quick access to a hacky sack: money isn’t everything. There is a huge disparity in workplace deaths between genders (men are about 13 times more likely to die at work), which suggests that the people willing to trade job safety for income are more likely to be men than women. Neither a coal miner nor a part-time secretary could rightly tell the other they’re making the wrong choice. Individuals value things differently–that they are able to pursue employment that fits their criteria is a wonderful thing.

One could argue that the pay differentials between men and women in a given field are both a result of outside factors, individual preferences, and sexism, because those preferences are influenced by a society that has different expectations for men and women. What doesn’t really make sense, but is asserted quite often, is widespread employer discrimination against female employees.

There are basic economic reasons to doubt this. The amount of coordination involved among competing entities would be unthinkable. Moreover, since there is no fixed price of a physician that we would deem “correct”, underpaying women could be restated as overpaying men. Why, we might ask ourselves, would hospitals routinely and arbitrarily overpay their male employees? If female doctors were capable of performing the same exact work but could be retained for $20,000 less per year, why would any hospital hire a male doctor who insisted on being paid a premium? That would be some truly expensive bigotry.

While it would be difficult to prove that observed income differentials are the result of discrimination, it is indeed impossible to prove that discrimination doesn’t affect individuals’ income. It could be the case, and I can’t dispute the possibility. However, as the economist Thomas Sowell has taken great pains to point out, that difference in income would represent the maximum amount attributable to discrimination plus other factors that haven’t been accounted for. My guess is that the results of this study are realistically limited by the availability of certain data and individual preferences.

Brexit Doesn’t Have to Spell Disaster

Posted on Posted in OpinionTagged , , , , , 1 Comment

The votes are counted and Britain has officially decided to leave the EU. Experts and elites on both sides of the Atlantic are roiling over the decision and predicting a sort of Valyrian Doom unfolding. Before we lose our heads, we should at least entertain the possibility that things won’t completely deteriorate. Let’s talk about how things could go right.

Leaving the EU doesn’t have to mean a rejection of internationalism. In the best case scenario, British policymakers will take the opportunity to free themselves from cumbersome EU regulations while working to strengthen their international presence and keep their markets open. Britain will remain a member of NATO and can maintain strong international ties irrespective of its EU membership status.

From an economic perspective, the best parts of the EU are increased mobility of capital and labor and open trade. In theory, both Britain and the remaining 27 members of the EU would realize that these arrangements are mutually beneficial and that erecting economic barriers would hurt both parties. London is the world’s top financial center—one of only two European cities on the top ten list. The EU would be doing its members a great disservice by cutting them off from such a resource.

An arrangement like NAFTA, where countries forego many economic barriers but remain politically independent, might make sense. Something that allows for personal mobility throughout the continent and Britain would be ideal, but is probably wishful thinking at this point. One of the main motivations for Britain to leave the EU was to regain control over its border (motivated in part by perceptions of welfare spending on immigrants and refugees, which has me feeling a bit prescient). It’s unlikely that EU countries won’t be tempted to reciprocate.

At the end of the day, the repercussions of Brexit will hinge on politics, not economics. The economic benefits of open trade are widely acknowledged, but if EU membership is to continue to mean something beyond onerous dues and ceding sovereignty, it might be hard for members to resist punishing Britain, and themselves, for its departure.

We’ll see what happens. Britain has two years to make its departure. Until then, don’t take too many cues from financial markets–they’re nervous at the moment, but that could easily change over time.

Why Minimum Wage Fails and What Will Succeed

Posted on Posted in economics, OpinionTagged , , , , 12 Comments

The debate over minimum wage is one of the most confused arguments in American public policy. Although on its face minimum wage appears to be a promising and simple idea, it is, in fact, a very bad policy that has surely hurt the very people it aimed to help. Proponents of minimum wage (many of them well intentioned) often advocate for increases as a means to improve the personal welfare of workers earning the minimum. This is often accompanied by the argument that no one working full time should live in poverty.

The debate they’re having is: can we provide a minimum income/standard of living in America for workers? The debate relative to minimum wage law is, as Charles Blahous of 21st Century Economics points out: Whether government should establish a price barrier to employment, and if so how high it should be.

The answer to the first question is: yes, but it should be handled differently. The answer to the latter is simple: no.

The welfare of the poor and the prevailing minimum wage are not inextricably linked. Despite minimum wage’s self-evident virtue among certain ideological factions, there’s actually little reason to think this sledgehammer-style policy would help many people, let alone society as a whole. Before we talk about what would work better, I want to highlight some of the more egregious failings of the minimum wage.

  1. Minimum wage forces people out of work

Because most of us grew up with the idea, it takes effort to even begin considering the minimum wage for what it really is: a price floor. Like other price floors, it has consequences beyond those desired.

One negative effect of a minimum wage is a loss of employment. This isn’t limited to people losing their jobs or having their hours cut, but also includes the destruction of future jobs that are casualties of foregone economic growth.

Artificially changing the price of something doesn’t change how much it’s worth to people; economics is tasked with grimly reminding us that prices emerge as a function of supply and demand. As long as employment remains a voluntary transaction between employer and employee, it’s hard to believe a price floor won’t compromise the ability of some workers to sell their labor.

Tragically, this usually affects workers with the lowest skills—traditionally the young, poor, undereducated etc. By eliminating their ability to charge less for their services, minimum wage laws eliminate their competitive advantage. This forces them onto the public dole and renders them a net drain on society.

2. Loss of societal surplus, deadweight loss

This concept is a bit nebulous, but bear with me.

One of the reasons people like me (handsome, rugged) are fans of free markets (a commonly maligned and misunderstood term) is their ability to maximize surplus—the excess benefits enjoyed by producers and consumers in a transaction. (That is, when we’re talking about privately consumed goods.)

Surplus is the idea that even though someone would be willing to pay more or be paid less to consume or supply a good (in this case, labor), the free-market equilibrium price ensures that both parties enjoy a better price. In the graph below, it’s represented by the triangle formed by the crossing of the supply and demand curves.

price_floor
Left: In equilibrium, surplus is maximized for consumers and producers. Right: A price floor has increased producer surplus at the expense of the rest of society. (Graph from econ101help.com)

Forcing a price above or below the equilibrium diminishes the amount of surplus enjoyed by society as a whole; economists refer this to as “deadweight loss” (the green triangle in the graph on the right). It’s true that implementing a price floor above the equilibrium point can (but won’t necessarily) increase the surplus of suppliers (laborers), but this is a bad idea for two reasons:

  1.     It reduces economic growth and efficiency. The added supplier surplus comes at a direct expense to the rest of the economy. This puts undue pressure on consumers of labor, and thus demand for labor.
  2.     Consumers of labor aren’t exclusively employers; they’re also everyday customers—many of whom are the very laborers we meant to aid with the minimum wage.

In other words, though there is tendency to focus on people as either consumers or suppliers of labor, most are both. While they may benefit from minimum wage increases as an employee, they may lose in many other instances when they find themselves on the other side of the proverbial counter. Which dovetails nicely with my next point…

3. Poor people consume lots of low-wage labor

We all buy food. We all buy clothes. But we don’t all shop at the same places. Poor people are more likely to shop at places with lower prices and–you guessed it–lower costs of labor.

Consider that the average Whole Foods employee earns about $18 per hour while the average WalMart employee makes about $13. The shoppers of the corresponding stores have similar disparities in disposable income that are reflected in the prices they pay.

If the minimum wage were raised to $15 per hour, it might have a negligible effect on prices at Whole Foods. The same is not certain for Walmart. Even if prices were to increase by the same amount in both stores, the impact would be greater on the lower-income shoppers, since it would make up a larger percentage of their income.

The problem is that the money that pays for the higher price of labor doesn’t come from nowhere; too often, it comes from exactly those we’re trying to help.

4. Minimum Wage Has Sloppy Aim

A central challenge to minimum wage’s credibility as a form of poverty relief is that it only affects people with wages. It’s easy to make the assumption that poor people are the ones working low-wage jobs, but the two groups aren’t as synonymous as one might think.

First of all, in order to be considered poor, you must be from a poor household, 57% of which have no income earners (Federal Reserve of San Francisco, pg 2). The idea that we would help them by making things cost more is ludicrous.

In reality, about 22% of minimum wage earners live below the poverty line. Their median age is 25; 3/5 of them are enrolled in school; 47% of them are in the south (where costs of labor and living are lower); and 64% of them work part-time.

Fully ¾ of minimum wage-earning adults live above the poverty line.

It’s clear that we’re largely talking about two different groups of people when we discuss minimum wage earners and the poor. Given that the majority of minimum wage workers aren’t poor and that the majority of the poor are unemployed, we should consider another strategy for fighting poverty: one that doesn’t reduce employment opportunities for the unskilled.

Okay, okay…so if minimum wage isn’t a good solution, what is?

Phenomenal question! The many problems with minimum wage policies share a common root: minimum wage effects transactions before they occur. This passes the cost on to employers or customers and impacts demand. The evident solution then, is a policy that goes into effect post-market. My answer to this is a wage subsidy.

We lose more than we gain by interfering with labor markets. Instead, we should eliminate the minimum wage and—very carefully—create targeted wage subsidies for people that aren’t making enough money from their jobs to survive.

This has to be done precisely to avoid creating disincentives to work. Welfare programs can perversely discourage people from earning more money by stripping away benefits faster than wages rise (and this really is more like a welfare program than minimum wage). To give a simple example: if everyone earning under $10,000 were given an extra $5,000, it would discourage people from earning between $10,000 and $14,999, thus encouraging economic stagnation.

We want to encourage people to be as productive as possible. When we design a welfare system, we have to make sure the total benefit enjoyed by the recipient is greater for every dollar earned than the one before it. In order to accomplish this, we need to design our wage subsidy as a function of market wages (the price that employers pay) that increases at a decreasing rate until it hits a wage that we as a society find acceptable.

Wage Subsidy
The subsidy is equal to the height difference between the two curves at any given value of x.

I chose to have the subsidized curve cross with the market wage (y=x) at $13/hour, beyond which point it will cease to be applied. Of course, we could write any equation and phase it out at any point. This subsidy curve is a concept, not a strict recommendation.

There are some profound advantages to this “after-market” approach:

  1.    The cost is borne by society instead of individual employers

I’ve spoken before about how the cost of consumption should be borne by the consumer, so you can be forgiven for feeling confused about why I feel a subsidy funded by taxes is appropriate here. However, the true price of a dishwasher (for example) is not $15 per hour. We know this because there are currently an abundance of dishwashers willing to work for far less than that. If we as a society want them to take home more money for their work, we should pay the difference.

Because of the way this subsidy curve is designed, employees will still have incentive to search for the highest paying jobs available to them. By tying subsidy receivership to work, we encourage workers to maximize their productivity. As long as these conditions are met, our subsidy won’t unnecessarily burden society with the cost of inefficient labor allocation.

  1.     No one is locked out of the labor market

Young people’s employment opportunities are eroded by high minimum wages. Keeping them out of the labor market has negative repercussions for their futures. From the Center for American Progress:

Not only is unemployment bad for young people now, but the negative effects of being unemployed have also been shown to follow a person throughout his or her career. A young person who has been unemployed for six months can expect to earn about $22,000 less over the next 10 years than they could have expected to earn had they not experienced a lengthy period of unemployment. In April 2010 the number of people ages 20–24 who were unemployed for more than six months had reached an all-time high of 967,000 people. We estimate that these young Americans will lose a total of $21.4 billion in earnings over the next 10 years.

Everyone, even the White House, recognizes that the larger implications of a “first job” for our young labor force extend far beyond the pay they receive. Absurdly, they have crafted a program that calls for $5.5 billion in grant funds to help young people get the jobs they have been priced out of by their own government.

  1.     Markets will function better

Advocates of raising the minimum wage are effectively claiming that making a market inefficient will improve outcomes. Here this fallacy is presented as: if the cost of labor is higher, workers will have more money to spend and demand will increase.

This is tempting logic, but it doesn’t hold up to scrutiny. To see how, we can substitute workers for something more specific, like carpenters. Yes, if we passed a law saying that carpenters had to be paid more it would be great for some carpenters. But any additional money spent on carpenters can’t be spent on something else. Society loses any additional benefits it might have gained from having more surplus.

If the reverse were true, it would make sense to ban power tools and all sorts of technology, thereby increasing demand for and price of human labor.

An efficient market creates more surplus, and is less burdened by the cost of those who must rely on public welfare. Additionally, the cost of supporting those people will be defrayed by their renewed ability to provide (in some part, at least) for themselves.

  1. It’s way more targeted than a minimum wage, and could absorb other welfare programs

We could write different equations for different people who might require larger or smaller subsidies to meet their basic needs. For example, a single mom of four kids in Long Beach could receive a steeper subsidy than a childless teen living in rural Alabama, who might not need one at all.

This could theoretically absorb other welfare programs. Instead of receiving a SNAP card, a section 8 voucher, and WIC benefits, the cash needed to cover one’s expenses can be calculated in the subsidy. This has the benefit of cutting down on expensive bureaucratic systems and increases the utility of the money given through welfare while incentivizing work.

*

The United States is a rich country. If we spend our money wisely, there’s no reason we can’t afford some minimum standard of living for workers. Helping our poor citizens is one of the best uses for taxes and far better than a lot of the things we spend public money on.

But rather than mess with markets, we should simply give more money to the people we want to help by redistributing income after markets are allowed to produce as much wealth as they’re able. Additionally, if we’re going to combat poverty with public money, we should do it in a way that stands a chance of eventually readying people to support themselves and without sacrificing economic efficiency. Minimum wage fails both of these tasks.

Of Course Minimum Wage Reduces Employment

Posted on Posted in economics, OpinionTagged , , , , , , , , , 7 Comments

In his opus, Economics in One Lesson, Henry Hazlitt devotes an entire chapter to minimum wage laws. He’s quick to identify a semantic problem that lies at the heart of the debate on minimum wage.

“…for a wage is, in fact, a price. It is unfortunate for the clarity of economic thinking that the price of labor’s services should have received an entirely different name from other prices. This has prevented most people from realizing that the same principles govern both.

Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored”

Today Hazlitt’s gripe still rings true.

Presidential candidates Clinton and Sanders are calling for huge increases in the federal minimum wage (Clinton recently echoed Sanders’ call for a $15 federal wage floor). California and New York scheduled incremental increases in the state minimum wages to $15/hour by 2022 and 2021 (with New York’s timing of increase stratified by county). All this is sold to the public as a means to help poor workers, with rarely a mention of the costs of such policy, or who would bear those costs.

Despite a wealth of study on the subject and large consensus about the effects of price floors, economists aren’t speaking out against such an aggressive price-fixing scheme as loudly as one might think.

Twenty-four percent of economists surveyed by the University of Chicago disagreed that advancing the federal minimum wage to $15/hour by 2020 would reduce employment. That is, a quarter of economists disagreed that forcing employers to pay twice as much for labor would reduce their ability or desire to employ people. Fully 38% of economists surveyed responded that they were “uncertain.”

It’s hard to imagine economists making such a statement about anything else. For example: that doubling the price of  laptops would have no effect on the amount of laptops purchased. Since labor is purchased just like anything else, we can expect that making it more expensive will cause people to consume less of it.

Consider that when governments want to cut down on behaviors they deem harmful, one of their go-to tools is taxation aimed at increasing the price paid by consumers. Sanders understands that making people pay more for producing carbon means we will produce less carbon. Other politicians have proposed or implemented taxes on soda, tobacco, alcohol, and more activities in order to suppress demand for them. Yet apparently even economists fail to see the parallels between this and minimum wage.

As Hazlitt states, labor is best thought of as another good. Raising its price by mandate will yield the same effects as any other minimum price: some will be purchased for a rate higher than the free-market equilibrium, but a portion of the previously available supply will not. In other words, while some workers will get a raise, others will work less, be fired, or not hired to begin with and employers will enjoy less productivity from their workers.

No one—least of all economists—should be surprised to hear that setting the price of labor higher than people are willing to pay and accept will lead to less efficiency and productivity, nor that this would lead to slower job growth and less employment. We can even observe this happening during past increases of the minimum wage.

Minimum wage is rationalized as an intervention to alleviate poverty and give a leg up to the most vulnerable workers. However raising the minimum price of labor not only prevents consumers (employers) from buying labor beneath such a floor, but also prevents producers (employees) from selling labor below that cost. Since some people don’t have skills that are worth at least $15/hour to employers, they are going to have a much harder time finding employment under such a policy.

When we consider the people that most likely fit this description, the cynicism of minimum wage laws becomes clear. Those most unable to command premiums for labor–the young, poor, under-educated, and inexperienced—are the very people we purport to be helping! It’s no coincidence that minimum wage laws all over the world have roots in racism and ethnic nationalism. In many cases, their goal was to create unemployment among marginalized groups by eliminating their comparative advantage to native workers.

As for employers, it actually gives an advantage to bigger businesses and puts undue pressure on marginal producers (think mom and pop stores, rural and inner-city employers, etc.) who have smaller profit margins and must operate more efficiently. Quite bizarre for an election cycle marked by consternation of income inequality and skepticism of big business.

The ability to sell your labor competitively is important when you don’t have a lot to offer. We seem to understand the value of this for the affluent. No one thinks twice when a college kid takes an unpaid internship or starts volunteering to gain experience. If it’s fine to work for $0/hour, why not $1, $5, or $7?

The scale of federal minimum wage is what truly makes it a bad idea. It’s one thing to try to fix the price of a specific item in a given location (though it’s still a bad idea). But to impose a national price floor on all incarnations of labor should be unthinkable. To suggest that this won’t lead to any reduction in employment (especially in poorer places) is ridiculous.

Some proponents of minimum wage hikes seem to understand this, yet proceed regardless. Upon signing California’s minimum wage increase into effect, Governor Jerry Brown stated:

Economically, minimum wages may not make sense. But morally, socially, and politically they make every sense because it binds the community together to make sure parents can take care of their kids.

To be honest, I don’t understand the morality of pricing people out of work or making consumers spend more than they have to. Given that “57% of poor families with heads of households 18-64 have no workers”, I don’t think making them harder to employ is going to be beneficial to anyone.

It’s good to care about the poor and try to implement policies that help them, and to be clear, I’m not advocating that nothing be done. But economic policies should make economic sense, rather than being rooted in feel-good or politically expedient gestures. Minimum wages help some (often the wrong people) at the expense of others, who, now unemployable, are unable to gain experience that might lead them to prosperity or at least self-sufficiency. At the same time, the rest of society is robbed of the potential productivity of those victims of the wage floor.

After-market transactions (which I’ll get into next essay) are a much better method of helping the poor, precisely because they don’t distort labor markets or reduce demand for labor. Hopefully, our economists will soon get back to the dismal science and stop playing politics.