Saturday, April 30, 2016

Being more like modern Sweden actually means deregulation, free trade, a national school voucher system, partially privatized pensions, no property tax, no inheritance tax, and much lower corporate taxes

See Bernie's Right—America Should Be More Like Sweden: But not in the way he thinks by Johan Norberg writing for Reason. Excerpts:
"when President Barack Obama visited Sweden in 2013, the three big Swedish trade unions sent him a letter requesting a meeting. Their agenda: a discussion of "how to promote free trade." The chairman of the largest Social Democratic trade union scolded the American president for his insufficient commitment to the free flow of goods."

"Being more like modern Sweden actually means deregulation, free trade, a national school voucher system, partially privatized pensions, no property tax, no inheritance tax, and much lower corporate taxes."

"Sweden and the other Scandinavian countries have experimented with very big government and semi-socialist ideas. There's just one problem: That experiment coincided almost perfectly with the region's only sustained period of economic decline over the last 100 years."

"the 1970s. Until that decade, Sweden and Denmark had grown much faster than other European countries and had become richer than most other countries on the planet, in large part by limiting government and embracing markets."

"During its laissez faire period, between 1850 and 1950, Swedish income per capita increased eightfold as the population doubled. Infant mortality fell from 15 to 2 percent, and life expectancy increased by a whopping 28 years. And all this happened before the welfare state was even a glint in the taxman's eye.

As late as 1950, total taxes as a percent of GDP in Denmark and Sweden were not just lower than in other European countries but lower than in the U.S.: 20 and 19 percent, respectively, vs. 24 percent in America.

It was at this point, when we Scandinavians had satisfied our thirst, that we thought that we could turn our backs to the well. We began to regulate. We increased taxes and beefed up the public sector. It's easy to see how foreigners observing the implementation of these unorthodox policies might confuse cause and effect. But those who think the semi-socialism made us rich would also probably look at a snapshot of Bill Gates and conclude that you become the world's wealthiest man by giving your money away."

"Sweden took democratic socialist policies further than its neighbors, and as a result its economy fell more steeply. Slowly but steadily the policies of Prime Ministers Tage Erlander and Olof Palme eroded productivity and the long-renowned Scandinavian work ethic. In 1970, Sweden was 25 percent richer than the OECD average. Twenty years later, the average had almost caught up with us. Once the fourth richest country on the planet, Sweden was now the fourteenth.

It was a disaster for entrepreneurship and employment. During this time, not a single job was created in the private sector (on net), despite a growing population. As of 2000, just one of the 50 biggest Swedish companies had been founded after 1970."

"As the Social Democratic finance minister Bosse Ringholm admitted in 2002: "If Sweden would have had the same growth rates as the OECD average since 1970, our common resources would have been so much bigger that it would be the equivalent of 20,000 SEK ($2,400) more per household per month."

During this brief Bolivarian turn, many Swedish intellectuals feared that their country would become an Orwellian nightmare. The Social Democrats toyed with an incredibly unpopular plan to socialize private businesses, and Parliament implemented a general rule saying that any economic transaction that had the intention of lowering one's taxes was illegal even if the transaction itself was legal. IKEA founder Ingvar Kamprad and many other entrepreneurs, plus all of our famous sports stars, fled the country.

Sweden's most famous author, Vilhelm Moberg, wrote that the government was out of control, and that we were turning into a third way between democracy and dictatorship "where everybody is discontented and disappointed." Our most famous film director, Ingmar Bergman, was snatched by the police at the Royal Theatre on charges of tax crimes (later dropped). He had a nervous breakdown and left the country."




"Kjell-Olof Feldt, the Social Democratic minister of finance from 1983 to 1990, admitted in a 1992 book that some of the government's program was "unsustainable," some of the policies "absurd," and the tax system "perverse." These policies also collapsed after a debt- and inflation-fuelled boom in the late 1980s.

Whatever these unsustainable and perverse policies did, they did not help the working people that Sanders claims to represent. Real wages in Sweden fell by around 5 percent between 1975 and 1995. Nominal wages increased, but runaway inflation devoured it."

"But in the early 1990s Sweden began to abandon its brief detour into Bernienomics. It deregulated, privatized, reduced taxes, and opened the public sector to private providers. The two decades that followed saw real wages increase by almost 70 percent."

"Between 1975 and 2005, Sweden improved its score on the Fraser Institute's Economic Freedom of the World Index by 2.3 points on a 10-point scale. Denmark's score went up by 1.7. This can be compared to Germany's 0.9 and the United States' 0.5"

"The legacy of Scandinavia's third way—its still-high public spending and high taxes, at least compared to the U.S.—has dwindled to fairly normal European levels. The governments provide the citizens with health care, child care, free colleges, and subsidized parental and medical leave. We Scandinavians have our quarrels with these systems and how they function, but at least they have not ruined our societies; indicators of living standards and health are impressive."

"Sweden and Denmark are more economically free than the United States when it comes to legal structure and property rights, sound money, free trade, business regulation, and credit market regulations. We don't have the multitude of occupational licensing laws that block competition in the United States."

"Sweden and Denmark take in lots of revenue via highly regressive value-added taxes at a normal rate of 25 percent of sales—the only tax where the rich and poor pay exactly the same amount in kronor. On the other hand, the corporate tax is just 22 and 23.5 percent respectively, compared to the U.S. rate of 35 percent.

In fact, rich people in Sweden enjoy several economic advantages not offered to their lower-class counterparts. Sweden always admitted very generous tax deductions for capital costs. Labor regulations are tailored to benefit big companies. To attract highly educated specialists from abroad, Sweden now has a beneficial "expert tax" for them, which shields 25 percent of their wages from taxation for a three-year period. "Sure, it is unfair, but we have no better solution," the Social Democratic minister of finance said in 2000, when he implemented special tax exemptions for individuals and families who owned a large share of a listed company.

Unlike Sanders, Scandinavian socialists have concluded that you can have a big government or you can make the rich pay for it all, but you can't do both."

"There is a cultural background that explains some of our success, going even further back than the laissez faire period in the late 19th and early 20th century, a culture of social trust, comparative lack of corruption, and a Lutheran work ethic. This may reflect a long history of internal stability, scant levels of feudalism, and a strong tradition of trading.

Two Scandinavian economists, Andreas Bergh and Christian Bjørnskov, have documented that a high degree of trust is an old legacy, and that descendants of those who emigrated from Scandinavia 100 years before the welfare state are also more trusting. Their conclusion is that trust in others and social cohesion creates the welfare state rather than the other way around, since it is more tempting to give power to politicians and money to strangers if you believe that they are decent people who would never cheat the system."

"The proportion of Swedes who say that it is never OK to accept benefits to which one is not entitled is still high, but has been reduced from 82 percent in the early 1980s to 55 percent now.

Some erosion of these attitudes could be seen in the early 2000s, when the number of Swedes on sick leave exploded. Even though we were objectively healthier than almost any other population, we were off sick more than anybody else. Often during large sporting events, coincidentally. During the Soccer World Cup in 2002, the number of men taking short-term sick leaves increased by 41 percent, whereas it did not change for women. God knows what would have happened had Sweden made it past the final eight.

In Sweden, we are experiencing these problems in the form of increased unemployment among immigrants. Now the employment gap between natives and foreign-born in Sweden is twice the European Union average, even though we express less racist and discriminatory attitudes than others. In response, Swedish politicians have recently decided to abandon liberal immigration policies and do whatever they can to scare people away.

It was easier to have a one-size-fits-all approach when we were all alike, from the same background, with the same faith and attitude and a similar education. We need a more flexible model now that we are becoming a little bit more like…well, the United States.

Gunnar and Alva Myrdal, the two leading Social Democratic thinkers of the 20th century, thought that the Scandinavian countries were uniquely suited for experimenting with high taxes and redistribution. They had homogenous populations with a strong work ethic, non-corrupt civil services, a high degree of trust in bureaucracies and politicians—and competitive free trade economies to foot the bill. If it did not work there, they suggested, it would be difficult to think it could work anywhere.
For now, the Swedish experiment in socialism continues along, in a much-altered form and buoyed by a healthy dose of economic liberalization. But attempting to transplant the Nordic 1970s model to the U.S. could have disastrous effects in a country with a less hospitable underlying culture. More government in the U.S. would not get you a big version of Sweden. It would get you a big version of the U.S. Postal Service."


Forget Denmark, Venezuela is the Real Culmination of Bernie’s Socialist Dreams

For the Vermont senator who favors press censorship and sees bread lines as evidence of success, the Bolivarian regime would seem to embody his ideals.

By J.D. Tuccille of Reason.
"Last September, Independent-Socialist-turned-Democratic presidential candidate Bernie Sanders got a bit pissy when supporters of Hillary Clinton tied him to Hugo Chavez, the late supreme leader of Venezuela. They "tried to link me to a dead communist dictator" his campaign complained of a super PAC mailing that pointed to Sanders working with Chavez in 2005 to bring oil subsidized by the Venezuelan government to Vermont as part of a mutual publicity ploy.

The harsh distancing may have been a step too far for lefty fans of the late Venezuelan strongman and his American comrade. A press release on the same incident preserved at BernieSanders.com refers instead to "the late Venezuelan leader Hugo Chavez."

Apparently all is forgiven. Last month Nicolas Maduro, Chavez's hand-picked successor, praised Sanders as "an emerging candidate with a renovating and revolutionary message."

And why not? In addition to oil deals, Sanders and the Bolivarian regime in Caracas have much in common. Venezuela has people waiting for hours to buy strictly rationed quantities of basic foodstuffs, and the Vermont senator loves him some bread lines.

"Sometimes American journalists talk about how bad a country is because people are lining up for food. That's a good thing," Sanders told interviewers in 1985. "In other countries people don't line up for food; the rich get the food and the poor starve to death."

Actually, it's a bit odd that Sanders would care what American journalists talk about, given the "democratic" socialist also tends to share the Venezuelan government's disdain for independent voices. Long before Chavez gained power in Caracas, Sanders expressed support for the suppression of dissent and censorship of the press implemented in his long-favored models of socialist Shangri-La: Cuba and Nicaragua. The Sandinista regime's restrictions on the independent newspaper La Prensa "makes sense to me" he commented at the time, even as he sparred with Vermont's Burlington Free Press over his Castro fanboy-ism.

For its part, Venezuela is rated "Not Free" by Freedom House, which points to concerns about the forced inclusion of pro-government messages in private media broadcasts, and a law that "bans content that could 'incite or promote hatred,' 'foment citizens' anxiety or alter public order,' 'disrespect authorities,' 'encourage assassinations,' or 'constitute war propaganda.'" Violators face heavy fines and closure, and the government works behind the scenes to force the sale of outlets to pro-government interests.

So, to hell with those journalists pointing to hours-long bread lines!

Or lines for anything else, for that matter. Like beer. Empresas Polar SA, Venezuela's largest brewer, is on the verge of closing its doors, since it can no longer gain access to necessary raw materials. Not that you could keep the stuff cold with electricity cut four hours every day in the oil-producing country.

One place that lines may be getting shorter is at the hospital—but not for good reasons. With a collapsing economy and worthless currency, the country can no longer afford to import the radioactive materials needed for many cancer treatments—which could possibly unify Venezuelans of all classes in the socialist solidarity of the grave. They'll have plenty of company, since medicine of all sorts is in short supply in the country.

Not that there are many people left to administer the medicine. The country guarantees a constitutional "right" to healthcare, but the system is crumbling. Over the past decade, an estimated 13,000 physicians fled the country in search of greener pastures. Cuba dispatched some of its own physicians to fill the gap, only to see them defect in turn. That's no shock, considering that the physician father of a Venezuelan friend of mine has been reduced to accepting payment in cooking oil and other groceries.

Seventeen years of Bolivarian socialism have arrived at the same point that state-directed economies always seem to arrive: severe shortages of goods, producers closing their doors (or peddling only to black market dealers) as mandated prices fail to cover costs, and growing state takeovers of industries as reality fails to keep pace with grandiose promises—or even to match the not-so-bad-in-retrospect conditions that prevailed before the socialists came to power.

Almost inevitably, the Venezuelan government has tried to close the gap with capital controls, "official" exchange rates that bear no resemblance to reality, and funny money that has become almost worthless. The International Monetary Fund expects inflation "to rise to 720 percent this year, from a world-high inflation of about 275 percent in 2015."

Probably the only thing holding the country together is the vestige of the free market, primarily in its illegal, black market form. Simply standing in the country's endless lines for an opportunity to make a purchase, for a fee, has become a business opportunity. Away from those lines, something to trade, or a handful of hard currency, can produce the coveted medicine, diapers, and food that the state's socialist policies have chased out of the normal market.

Maybe, just maybe, the black market can keep the country alive until the new opposition majority in Venezuela's Congress can wrest a measure of power from the president and his allies.

But is it fair to hold Sanders to his past approval of totalitarian socialist regimes and link him to the failures of the current crop of such governments? After all, the new favorite model for the "democratic socialist" is the Scandinavian welfare state, which requires a very elastic use of the word "socialist" or an awareness of current events that stops short at 1978. Scandinavians experimented with actual socialism decades ago, but realized that they liked to eat and keep the lights on. As Johan Norberg recently wrote for Reason, "Being more like modern Sweden actually means deregulation, free trade, a national school voucher system, partially privatized pensions, no property tax, no inheritance tax, and much lower corporate taxes." Yes, they have generous welfare states compared to the American version, but those rely on free economies to function—and they're shrinking under the pressure of economic reality.

If that's what Sanders really means today—assuming he fully understands the implications of what he's proposing—it sounds a lot better than what he's traditionally peddled.

But Sanders doesn't really seem to have given up his infatuation with authoritarian socialism. Even as Cuban officials prepared lists of dissidents to arrest in preparation for President Obama's visit, the Vermont senator hemmed and hawed at a Miami debate over whether the Castro regime's literacy program and healthcare system (those same doctors defecting through Venezuela) were offset by the lack of dissenting publications to read, long lines for sub-standard care, or the country's status as a tropical Alcatraz.

The Ladies in White group, consisting of the wives of political prisoners, were rounded up just before the president's plane landed—although they are regular involuntary guests of the state, as anybody keeping an eye on Cuba's political situation should know.

That may not have troubled Sanders very much, to be honest. Why would the arrest of a few embittered dissidents bother a politician who has a history of endorsing press censorship, and who sees long lines to purchase a few crumbs to eat as a sign of policy success?"

Friday, April 29, 2016

American aviation is suffering from a bureaucratic government-run ATC, while Canada’s privatized system is moving ahead with new technologies that reduce delays and congestion

See WSJ Reports on Canadian Air Traffic Control by Chris Edwards of Cato.
"In today’s Wall Street Journal, Scott McCartney reports on the superior air traffic control (ATC) system north of the border. American aviation is suffering from a bureaucratic government-run ATC, while Canada’s privatized system is moving ahead with new technologies that reduce delays and congestion. 
Showing leadership and boldness, House Transportation Committee chairman Bill Shuster managed to get reforms along Canadian lines passed out of his committee. Unfortunately, Senate Republicans have thus far been too timid to move ahead with restructuring. The flying public may have to wait until a reform-minded president can push an overhaul through Congress.
Here’s some of McCartney’s reporting:
Flying over the U.S.-Canadian border is like time travel for pilots. Going north to south, you leave a modern air-traffic control system run by a company and enter one run by the government struggling to catch up.
The model is Nav Canada, the world’s second-largest air-traffic control agency, after the U.S. Canada handles a huge volume of traffic between the U.S. and both Asia and Europe. Airlines praise its advanced technology that results in shorter and smoother flights with less fuel burn.
In Canada, pilots and controllers send text messages back and forth, reducing errors from misunderstood radio transmissions. Requests for altitude changes are automatically checked for conflicts before they even pop up on controllers’ screens. Computers look 20 minutes ahead for any planes potentially getting too close to each other. Flights are monitored by a system more accurate than radar, allowing them to be safely spaced closer together to add capacity and reduce delays.
And when flights enter U.S. airspace, pilots switch back to the old way of doing things.
The key, Nav Canada says, is its nongovernmental structure. Technology, critical to efficient airspace use these days, gets developed faster than if a government agency were trying to do it, officials say. Critics say slow technology development has been the FAA’s Achilles’ heel.
… Another innovation adopted around the world is electronic flight strips—critical information about each flight that gets changed on touch screens and passed from one controller to another electronically. Nav Canada has used them for more than 13 years. Many U.S. air controllers still use paper printouts placed in plastic carriers about the size of a 6-inch ruler that controllers scribble on.
For more on ATC, see here."

The End of Doom and Cost-Benefit Methodology

From Bryan Caplan of EconLog.
"Like all useful tools, cost-benefit analysis is flawed.  After surveying cost-benefit analyses of global warming and warming abatement, Ron Bailey's The End of Doom turns to methodological objections.  From his section on "How Much to Insure Against Low Probability Catastrophic Warming?":
How much should we pay to prevent the tiny probability of human civilization collapsing?  That is the question at the center of an esoteric debate over the application of cost-benefit analysis to man-mind climate change.  Harvard University economist Martin Weitzman raised the issue by putting forth a Dismal Theorem arguing that some consequences, however unlikely, would be so disastrous that cost-benefit analysis should not apply.

Weitzman contends that the uncertainties surrounding future man-made climate change are so great that there is some nonzero probability that total catastrophe will strike.  Weitzman focuses on equilibrium climate sensitivity... As has been discussed, the IPCC Physical Science report finds that climate sensitivity is likely to be in the range of 1.5° to 4.5° C and very unlikely to be greater than 6°C.  But very unlikely is not impossible.

Weitzman spins out scenarios in which there could be a 5 percent chance that global average temperature rises by 10
°C (17° F) by 2200 and a 1 percent chance that it rises by 20°C (34°F)... Surely people should just throw out cost-benefit analysis and pay the necessary trillions to avert this dire possibility, right?

Then again, perhaps Weitzman is premature in declaring the death of cost-benefit analysis.  William Nordhaus certainly thinks so, and he has written a persuasive critique of Weitzman's dismal conclusions...  Weitzman's Dismal Theorem implies that the world would be willing to spend $10 trillion to prevent a one-in-100-billion chance of being hit by an asteroid...

Nordhaus also notes that catastrophic climate change is not the only thing we might worry about.  Other low-probability civilization-destroying risks include "biotechnology, strangelets, runaway computer systems, nuclear proliferation, rogue weeds and bugs, nanotechnology, emerging tropical diseases, alien invaders, asteroids, enslavement by advanced robots, and so on." 
Deja vu.  Bailey's Nordhaus digest continues:
Weitzman's analysis also assumes that humanity will not have the time to learn about any impending catastrophic impacts from global warming.  But midcourse corrections are possible with climate change...

At the end of his critique of Weitzman's Dismal Theorem, Nordhaus investigates what combination of factors would actually produce a real climate catastrophe.  He defines a catastrophic outcome as one in which world per capita consumption declines by at least 50 percent below current levels...

Nordhaus ran a number of scenarios through the Dynamic Integrated Climate-Economy (DICE) model... DICE would produce a catastrophic result only if temperature sensitivity was at 10° C, economic damage occurred rapidly at a tipping point of 3°C, and nobody took any action to prevent the catastrophic chain of events.  Interestingly, even when setting all of the physical and damage parameters to extreme values, humanity still had eighty years to cut emissions by 100 percent in order to avoid disaster.
Bailey closes with a spot-on challenge:
Why has no one ever applied a Dismal Theorem analysis to evaluate the nonzero probability that bad government policy will cause a civilization-wrecking catastrophe?
I fear climate activists will dismiss Bailey's challenge as a debating trick.  But I see no way around it."

Thursday, April 28, 2016

Wind Energy Industry Suffers Fuel Shortage in 2015

By William Yeatman of CEI.

"Wind energy can’t compete. Instead, it exists only by the grace of favorable politics. On the supply side, the industry enjoys the federal production tax credit, which awards tax equity to owners of wind power for each megawatt hour of generated electricity. On the demand side, the industry enjoys Soviet-style production quotas in 30 states that force ratepayers to use increasing amounts of wind power.

Yet even with all this political “wind” at its back, sometimes the industry nonetheless falls short—because nature won’t cooperate. According to James Osborne at Fuel Fix,

Last year might have been a banner year for wind turbine construction, but not for the wind itself.

According to new data from the U.S. Energy Information Administration, the amount of electricity generated from wind turbines grew by less than 10 million megawatt hours last year, the smallest increase since 2007.

In a report Thursday government analysts attributed the slow down to decreased wind speeds across the western half of the United States during the first six months of 2015.

“The same weather patterns resulted in stronger winds in the central part of the country, where wind generation growth in 2015 was most pronounced,” the report read.

The fall off came even as wind energy capacity grew by its highest level in three years, as more than 8,000 megawatts worth of new turbines were installed on the grid, according to EIA.

To recap: Due to the wind not blowing, there was a paradox for the wind energy industry in 2015 whereby capacity installment was historically high, while generation was historically low. By my back-of-the-envelope calculation, the new wind power capacity operated 13 percent of the time in 2015, which is hardly the hallmark of reliability.

The lesson is that wind, though free, can suffer supply shortages, just like gas and coal. Add this to the industry’s other drawbacks, including:
  • High capital costs;
  • high operations and maintenance costs for the turbine and the grid; 
  • it’s intermittent and therefore requires backup generation; and
  • it’s non-dispatchable.
In late 2015, I wrote on this blog:

The American Wind Energy Association, which serves as wind power’s top lobbying shop, released a report warning that the industry would face a “sharp decline” in 2016, if the Congress does not extend the wind production tax credit by the end of 2015.

Given the precarious state of wind power in late 2015, when AWEA claimed that the industry would implode without a single subsidy, I was surprised by a recent boast by AWEA chief Tom Kiernan regarding his industry’s competitive health. In mid-April, Kiernan told The Washington Post:

We’re at a point of maturity in the wind industry that people are seeing the value in what we’re bringing to them. These corporations are buying because it’s affordable and it’s clean … This is a good business proposition for them.

Kiernan’s comments bring to mind a couple questions. Why, if wind power is a “good business proposition,” does it need a subsidy? How can wind power be a “good business proposition” if the industry would fall apart absent a single subsidy?"

Don Boudreaux's Latest On Free Trade

See Some links. Excerpts:
"John Tamny gets to the heart of Donald Trump’s (and Bernie Sanders’s – and their fans’) unmitigated ignorance about international trade.  A slice:
Thanks to free trade within these fifty states, the companies that fail to best serve the needs of their customers don’t last very long. That trade is wholly free within the U.S. is precisely what attracts a great deal of job-creating domestic and foreign investment, simply because lousy business concepts are allowed to fail so that good businesses can quickly replace them. In short, it’s the constant destruction of jobs in the U.S. that enables the fast creation of much better ones.
Applied to the foreign competition that Trump decries, the happy fact that the U.S. is largely open to foreign production is similarly what makes the U.S. such an attractive destination for investment. Figure foreign competition, just like domestic, forces the very economic evolution that appeals so much to investors. Absent foreign trade, the U.S. economy would be quite a bit more depressed as a result of many more proverbial Blockbusters existing at the expense of more capable replacements like Netflix.
So often we hear about Americans “battered” by “foreign trade,” but the certain truth about imports – whether from across the street or from around the world – is that they’re the surest sign of a growing economy. As logic dictates, the fact that so many businesses – domestic and foreign – compete to serve U.S. consumers is the best indicator that open trade has been brilliant for the American people. If it weren’t, we Americans wouldn’t have the world’s talented so aggressively working to serve our needs.
Speaking of trade, in my latest column in the Pittsburgh Tribune-Review I attempt to tackle yet another misunderstanding about trade.  A slice:
“Fair trade” is code for “unfree trade.”
Of course, no one endorses trade that is genuinely unfair. The crucial questions, however, are just what is unfair trade and what is the best way to deal with it. Protectionists in America want you to think that any imports whose producers receive any assistance at all from foreign governments are unfair. They want you also to uncritically accept their assumption that the best way to deal with unfair trade is for Uncle Sam to raise tariffs — that is, taxes — on American consumers.
Never mind the hypocrisy at work when Uncle Sam — itself a major subsidizer of many U.S. exporters, such as Boeing and Dow Chemical — uses charges of “unfair trade” as an excuse to punitively tax Americans who purchase imports.
I can pick two or three nits with Alan Blinder’s recent essay in the Wall Street Journal about trade, but overall it’s very good.  A slice:
Trade is more about efficiency—and hence wages—than about the number of jobs. You probably don’t sew your own clothes or grow your own food. Instead, you buy these things from others, using the wages you earn doing something you do better. Imagine how much lower your standard of living would be if you had to sew your own clothes, grow your own food . . . and a thousand other things.
The case for international trade is no different. It’s not mainly about creating or destroying jobs. It’s about using labor more efficiently, which is one key to higher wages."

Why California’s ‘one-size-fits-none’ $15 an hour statewide minimum wage is doomed to fail

From Mark Perry.
"I wrote earlier this month on CD about one of the potentially fatal flaws of California’s recently enacted $15 an hour statewide minimum wage: a one-size-fits-all uniform $15 minimum wage for the entire state of California is really a “one-size-fits-none” minimum wage, given the huge variations in the cost of living around the country’s most populous state. While a high-wage, high cost-of-living city like San Francisco might be able to absorb a $15 minimum wage without experiencing significant negative employment effects, that same $15 wage could inflict serious economic damages and result in job losses for many of the state’s 500 cities that are in low-wage, low cost-of-living areas.

calivingwage


To help understand how the “one-size-fits-all” approach of a $15 an hour state minimum wage will have a disproportionately adverse impact on low-cost communities in California, the table above displays the “living hourly wages” for California’s 26 metropolitan statistical areas (MSAs), based on data from MIT’s Living Wage Calculator for the year 2014 (most recent year available). According to the MIT website, the cost-of-living adjusted living wages displayed above are the “hourly rates that individuals must earn [in a given MSA] to support their family [and cover basic family expenses], if they are the sole provider and are working full-time (2,080 hours per year).” Living wages for adult workers with 1 to 3 children are also displayed in the table above.

The living wage data shown above reveal huge differences in the cost-of-living between low-cost California MSAs like Yuba City, El Centro, Chico, and Merced (living wages are below $10 an hour) and high-cost cities like San Francisco and San Jose, where the cost-of-living adjusted living wage is 38% higher. If $15 an hour is an appropriate minimum wage for San Francisco, it should be less than $11 an hour in MSAs like Yuba City and El Centro, where the cost-of-living is significantly lower. It’s also important to note that all four of those low-cost MSAs had jobless rates above the state average in February, and three of them (all except Chico) had double-digit unemployment rates in February, with El Centro having the distinction of once again being the MSA with the highest jobless rate in the entire country at 18.6%. Therefore, many MSAs in California (like Yuba City, El Centro, Chico and Merced) not only have costs-of-living way below the state average, but they also have jobless rates that are way above the state average, and it’s those MSAs that will be adversely impacted by the imposition of a uniform state minimum wage of $15 an hour.

Bottom Line: As I concluded before, even supporters of a $15 an hour minimum wage in California would have to concede that a one-size-fits-all, uniform $15 an hour state minimum wage, without any adjustments for the significant differences in the cost-of-living across the Golden State, will disproportionately affect unskilled and limited-experience workers in low-cost MSAs like Yuba City and El Centro, and also in hundreds of other low-cost, low-wage cities (that are not part of an MSA) throughout the state. In other words, a one-size-fits-all minimum wage for all 500 cities in California is really a “one-size-fits-none” minimum wage, and will inflict very serious and long-lasting economic damage in most parts of the state outside of the large metro areas on the coast (LA, San Francisco, and San Diego).

The clumsy, top-down, ham-handed approach of government imposed wage controls like a $15 an hour statewide minimum wage in California, without allowing for any adjustments to accommodate the significant differences in cost-of-living and labor market conditions, is one of the main reasons the Golden State’s risky experiment with a $15 wage will likely backfire and be “not-so-golden” in practice. In contrast, one of the significant advantages of market-determined wages is that they can naturally and automatically adjust to the market conditions of local areas. For example, we might expect that the starting wages for national chains like McDonald’s (1,165 stores in California) and Starbucks (2,000 locations) would vary around the state of California based on local labor market conditions and the local cost-of-living, and would be higher in San Francisco than in cities like El Centro. But a government mandated price control like the $15 an hour uniform minimum wage in California that outlaws adjustments to fit the customized needs of the 500 individual city-level labor markets in the state is a public policy destined to fail – especially in the state’s low-wage, low cost-of-living cities with high jobless rates that are the most vulnerable to the “one-size-fits-none” awkwardness and clumsiness that is the $15 statewide minimum wage in California."