Maximumly Misleading on Minimum Wages

From Cafe Hayek.

"Here’s a letter to the American Prospect:

In “Why Economists Cling to Discredited Ideas” (Winter 2015) Jeff Madrick caricatures modern economics as well as the policies that economists supposedly foisted upon an unsuspecting public.  Among the many flaws that infect this essay is Madrick’s defense of minimum-wage legislation.

Madrick mistakenly suggests that recent empirical research shows convincingly that minimum wages do not diminish to any meaningful degree the job opportunities open to low-skilled workers.  Some research reaches this conclusion, but a great deal of other research reaches a conclusion quite the opposite.*

So is this matter a toss-up?  It might be were it not for the fact that the idea behind economists’ opposition to minimum-wage legislation is both foundational and not remotely discredited.  This idea is not (contrary to Madrick’s telling) that the invisible hand operates flawlessly but, instead, that as people incur higher costs of engaging in some activity people engage in less of that activity.  Indeed, the very same proposition that assures many economists that a government policy of raising firms’ costs of employing low-skilled workers causes firms to employ fewer such workers also, and quite rightly, assures even “Progressives” that, for example, a higher tax on carbon emissions causes firms to emit less carbon and that a steeper tariff on imports causes consumers to buy fewer imports.

Until and unless a compelling reason is found to conclude that low-skilled labor, apparently alone among all goods and services, is not subject to this economic reality (and neither the alleged monopsony power of employers nor the presumed ability of higher minimum-wages to spark sufficiently greater consumer demand comes within light-years of “compelling”), wise economists will and should continue to warn that minimum wages inflict disproportionate harm on the very workers who they are ostensibly meant to help.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* See, for example, David Neumark and William L. Wascher, Minimum Wages, reprint ed. (Cambridge, MA: MIT Press, 2010)."

Piketty Corrects the Inequality Crowd

The economist’s book caused a sensation last year, but now he says the redistributionists drew the wrong conclusions.

From the WSJ. By Robert Rosenkranz. Mr. Rosenkranz is a financier and economist who promotes civil discourse as founder of the Intelligence Squared U.S. debates.

Excerpts:

"Though his formula helps explain extreme and persistent wealth inequality before World War I, Mr. Piketty maintains, it doesn’t say much about the past 100 years. “I do not view r>g as the only or even the primary tool for considering changes in income and wealth in the 20th century,” he writes, “or for forecasting the path of inequality in the 21st century.” 

Instead, Mr. Piketty argues in his new paper that political shocks, institutional changes and economic development played a major role in inequality in the past and will likely do so in the future.

When he narrows his focus to what he calls “labor income inequality”—the difference in compensation between front-line workers and CEOs—Mr. Piketty consigns his famous formula to irrelevance. “In addition, I certainly do not believe that r>g is a useful tool for the discussion of rising inequality of labor income: other mechanisms and policies are much more relevant here, e.g. supply and demand of skills and education.” He correctly distinguishes between income and wealth, and he takes a long historic perspective: “Wealth inequality is currently much less extreme than a century ago.”"

"The r>g formulation always struck me as unconvincing. First, Mr. Piketty’s definition of r as including “profits, dividends, interest, rents, and other income from capital” conflates returns on real business activity (profits) with returns on financial assets (dividends and interest).

Second, it ignores the basic rule of economics that when supply of capital increases faster than demand, the yield on capital falls. For instance, since the great recession, the money supply has grown far more rapidly than the real economy, driving down interest rates. Returns on government bonds, the least risky asset, are now close to zero before inflation and negative 1% to 2% after inflation. In today’s low-return environment, with the headwinds of income and estate taxes, it becomes a Herculean task to build and transmit intergenerational wealth."

"The Initiative on Global Markets at the University of Chicago asked economists in October whether they agreed or disagreed with the following statement: “The most powerful force pushing towards greater wealth inequality in the U.S. since the 1970s is the gap between the after-tax return on capital and the economic growth rate.” Of 36 economists who responded, only one agreed."

Has Obamacare fixed US health care inflation?

By Christopher J. Conover of AEI.

"Here we go again. What is it about Obamacare that inspires its fiercest supporters the cherry-pick evidence as proof it is “working”?  The latest entrant in this never-ending contest is Matt Phillips, who trumpets the news “Obamacare fixed U.S. healthcare inflation.”  If true, this would be no mean feat since as we’ll see, medical inflation has outpaced general inflation rather regularly over the past half century, sometimes by as much as 6 percentage points in a single year.  But as we’ll also see, giving Obamacare credit for the recent slowdown in health prices is quite a stretch for two reasons: first, it fails to account for the fact that this downward trend was clearly visible years before President Obama was even elected president; and second, it fails to account for what was happening to the general economy and general inflation during the same time period.

The Purported “Proof” Obamacare Has Fixed U.S. Healthcare Inflation

Let’s start with Mr. Phillips’ evidence, shown in this chart:

Being a born skeptic, I’ve gone to the same data source and get a slightly different picture.[1]

The difference is that Mr. Phillips focused on the price index for health services (hospitals, doctors, nursing homes etc.) whereas I used the index for all of health, which includes pharmaceuticals and medical equipment.  His measure essentially misses 20% of national health spending.  If we’re trying to figure out what’s happening to healthcare inflation, I cannot see any good justication for leaving out one fifth of the health sector. So in what follows, I will rely on my numbers rather than his.

The Post Hoc Ergo Propter Hoc Fallacy

Anyone who has taken Logic 101 knows of the post hoc ergo propter hoc fallacy. The mere fact that health inflation is how at one of its lowest points on record and that this has occurred 4+ after Obamacare was enacted is certainly no proof that Obamacare “caused” this. Put another way, correlation is not the same as causation.  And in fact the very data Mr. Phillips uses to make his case tend to undercut it. If Obamacare is the cause of this remarkable slowdown in health inflation, then how does Mr. Phillips explain that this slowdown clearly began in 2003-2004, before President Obama had even been elected to the Senate?  The fallacy becomes clearer when we examine the pattern of general inflation.

That chart tells nearly the identical story! In fact, it tells an even more compelling story 

That is, apart from the huge dip during the most recent economic slowdown, measured inflation is at its lowest level ever since 1960, outpacing even the level achieved during the 1961-62 recession. Is Mr. Phillips going to give Obamacare credit for that too?  If so, it’s quite an amazing law.

But even if we’re only going to more modestly give Obamacare credit for the slowdown in health inflation, does that mean Obamacare gets the blame for the recent uptick in this metric?  Admittedly, we do not yet know whether this is a temporary spike or the start of a more enduring upward trend. What we can be certain is that it is far from clear that U.S. healthcare inflation has been “fixed.”

What Has Happened to “Excess” Medical Inflation?

Mr. Phillips ignores the reality that medical inflation is driven to a large extent by trends in general inflation. When general inflation is high, so is medical inflation. No surprise there. So what really matters is the extent to which medical inflation is outstripping general inflation. My final chart shows what happens when we subtract general inflation from medical inflation.

 

This provides a more realistic (and I would argue, far less rosy) picture of Obamacare’s impact on medical inflation. Admittedly, there is a lot of year-to-year variation, but in this chart, we can see even more clearly that a general downward trend in gradually  diminishing “excess” medical inflation began well before President Obama’s arrival in the Oval Office. And since Obamacare was enacted, at best this metric has been flat. And at worst, one can detect a slight upward trend rather than a continuation of the downward trend that had been in place for at least a half decade for President Obama  took office.  It’s a rather sizable stretch to point to this chart and argue it is proof that Obamacare has whipped healthcare inflation. One might generously say it has not made things worse on the medical inflation front. But even that comes with a caveat in light of  the sharp upward spike in January 2015. This may well turn out to be only a temporary spike, but the point again is to emphasize that any conclusion that Obamacare has tamed the medical inflation monster really cannot be supported by the evidence at hand.

Update #1

In today’s Upshot column at NY Times, Austin Frakt has an excellent deep dive into the various strands of evidence that relate to long-term trends in health costs. Note that he is focused on health spending not just medical prices. Nevertheless, his piece is well worth reading for anyone wishing to get a greater understanding of whether to expect that we have “bent” the health care cost curve in a downward direction.

Footnotes

[1] I’ve used the price index for health reported in Table 2.3.4U. Price Indexes for Personal Consumption Expenditures by Major Type of Product and by Major Function (found under Section Two. Personal Consumption Expenditures at the link provided). Mr. Phillips evidently used the price index for health services found in the same table. However, that index only includes outpatient services, hospitals and nursing homes and does not include pharmaceuticals, medical devices or other medical products. Collectively, the excluded categories account for 20% of health spending as measured by BEA. The broader health index I used includes these missing components."

The Right-to-Work Advantage

From the WSJ, by Luke Hilgemann And David Fladeboe. Messrs. Hilgemann and Fladeboe are, respectively, the CEO and Wisconsin state director of Americans for Prosperity.

Excerpts:

"from 2003-13 states with such laws increased their employment rolls by 9.5%—nearly three percentage points more than the national average and more than double the growth in non-right-to-work states."

"Personal incomes in those states grew 12% more than in states without right-to-work protections during that same 10-year period"

"Labor unions try to rebut these statistics by pointing to their higher top-line wages and salaries. But these simple analyses fail to mention that those earnings are disproportionately in union strongholds in the Northeast, Chicago and on the West Coast, where the cost of living is more expensive than in the right-to-work South and Midwest. It makes sense that those areas would have higher nominal pay.

Once cost of living is considered, right-to-work states have 4.1% higher per capita personal incomes than non-right-to-work states, according to a 2013 analysis by the Michigan-based Mackinac Center for Public Policy."

"the economies of right-to-work states grew about 10% more than non-right-to-work states between 2003 and 2013."

[there are]"statistically significant economic growth advantages of right-to-work states in every 10-year period dating back to the 1960s."

[there is]"net migration of citizens to those states with such laws."

"from 2003-13 the population of right-to-work states grew by 3%—nearly quadruple the national average of 0.8%. Non-right-to-work states saw their populations decline by 1.1% over the same period."

"While 38% of union household members voted for a Republican candidate in the U.S. House of Representatives in 2014, an analysis by the Center for Responsive Politics revealed that more than 90% of union political spending backed Democratic candidates."

Liberals Mugged by Obamanet

Buyer’s remorse is already setting in for Google and other ‘net neutrality’ proponents

 By L. Gordon Crovitz of the WSJ. Excerpts:

"The Progressive Policy Institute said: “There is nothing progressive about the FCC backsliding to common carrier rules dating back to the 1930s.” The Internet Society, a net-neutrality advocate, said: “We are concerned with the FCC’s decision to base new rules for the modern Internet on decades-old telephone regulations designed for a very different technological era.” Former Clinton official Larry Irving wrote in the Hill: “Most of today’s proponents of a utility model for the Internet either have forgotten or never knew the genesis of the ‘regulatory restraint’ model that helped spur and continues to support Internet expansion.”"

"The Electronic Frontier Foundation, which supports applying the 1934 law to the Internet, nonetheless objects to a new regulation giving the FCC open-ended power to regulate the Internet. “A ‘general conduct rule,’ applied on a case-by-case basis,” the EFF wrote, “may lead to years of expensive litigation to determine the meaning of ‘harm’ (for those who can afford to engage in it).”

The general-conduct rule reportedly has seven standards, one of which is the “effect on free expression.” Net neutrality was supposed to ban online discrimination based on content. Instead, it is empowering the FCC—the agency that for decades enforced the “Fairness Doctrine” and that last year proposed studying “bias” in newsrooms—to chill speech."

"What if at the beginning of the Web, Washington had opted for Obamanet instead of the open Internet? Yellow Pages publishers could have invoked “harm” and “unjust and unreasonable” competition from online telephone directories."

"Among the first targets of the FCC’s “unjust and unreasonable” test are mobile-phone contracts that offer unlimited video or music. Netflix , the biggest lobbyist for utility regulation, could be regulated for how it uses encryption to deliver its content."

Retirement plan taxation is unfair to the middle class

From the WSJ.

"The “Notable & Quotable” of Feb. 23, which is from the Tax Foundation’s report “Sources of Personal Income,” correctly points out that middle-class Americans earn substantial capital gain returns from pensions and other retirement accounts. The article doesn’t mention how unfair this is to the middle class. The entire distribution from a retirement plan, including the portion that represents long-term capital gains, is taxed at regular rates which can be as high as 39.6%. This is almost double the 23.8% maximum tax rate on long-term capital gains earned outside of a retirement plan. Investors pay less tax than retired workers on the same long-term capital gains. Additionally, contributions of wages to an IRA or deferred compensation plan, such as a 401(k), are deductible from income taxes, but workers still have to pay Social Security and Medicare taxes on the amount contributed. Investment income is never subject to Social Security tax, and only a reduced rate of Medicare tax applies to very high income investors. These are examples of how the tax code favors the wealthy and investment class at the expense of middle-class workers.  

Em. Prof. Andre Montero

Kingsborough

Community College

Brooklyn, N.Y."

Here was a response plus one comment:

"In his March 3 letter, Andre Montero states that “the tax code favors the wealthy and investment class at the expense of middle-class workers.” He cites as an example that the “entire distribution from a retirement plan . . . is taxed at regular rates that can be as high as 39.6%.” To be in the 39.6% tax bracket, joint filers must generate at least $464,850 in 2015 income. At a typical 5% IRA withdrawal rate, someone would have to have an account worth $9,297,000 to generate that much income, hardly a “middle class” sum. A more likely example, in my experience, would be someone who has, say, $500,000 in an IRA. Using the same withdrawal rate of 5%, that would generate $25,000 a year, which would typically keep the individual in the 15% bracket.

The top 1% of individuals earn 16% of the nation’s income and yet pay 37% of the taxes. The bottom 50% of taxpayers earn 12% of the nation’s income yet pay 3% of the taxes, less than 1/12 as much. Yet academics keep calling for more.

No wonder Arthur Godfrey said, “I’m proud to be an American and pay taxes, but I could be just as proud for half the money.”

Scott Kaufmann
Kansas City, Kan.

Alan Reynolds  

 

Mr. Kaufmann says, "Someone who has, say, $500,000 in an IRA. Using the same withdrawal rate of 5%, that would generate $25,000 a year, which would typically keep the individual in the 15% bracket."  But that is true only if that family had no income from Social Security, pensions, work, etc.  It is quite doubtful that most households with $500,000 in various deferred savings plans (e.g., I have IRA, 401k, 403b and Keogh savings) has no taxable investments, no defined benefits pension, and is also ineligible for Social Security.

With other income considered, withdrawal from $500,000 in retirement accounts would commonly be subject to marginal tax rates of 28% or more, plus state taxes in most cases. Besides, prudent two-earner couples should be willing and able to accumulate considerably more than $500,000 by age 70.5."

For Gender Equality, You Can’t Beat Capitalism

The March 8 commemoration has Communist roots, but capitalism by far has done more for gender equality.

From the WSJ. By Antony Davies And James R. Harrigan. Mr. Davies is associate professor of economics at Duquesne University. Mr. Harrigan is director of academic programs at Strata, a free-market think tank in Logan, Utah.

Excerpts:

"In countries that are (according to Fraser) more economically free, such as Switzerland and Finland, women have achieved (according to the U.N.) greater outcome equality. In the half of countries that are less economically free, such as India and Algeria, the U.N. measure shows that women experience significantly more inequality (almost 75% more according to the inequality index).

What is the implication? As compared with men, women in economically freer countries hold more elected seats in government, have longer life expectancies, achieve higher education levels, and earn higher incomes than do women in less economically free countries. In short, in freer economies, women’s lives are longer, more prosperous and more self-directed."

"If we restrict our vision to the poorest countries, the same pattern emerges. Comparing the Fraser and U.N. data sets, we find that, of the poorest 25% of countries (as measured by per-capita GDP), the half that are more economically free achieve more gender equality than do the half that are less economically free. According to the U.N.’s own numbers, women suffer less inequality in poor, economically free countries than they do in poor, economically unfree countries. Women in poor but economically free countries hold more elected seats in government (relative to men), are better educated (relative to men), and live longer (relative to men) than do women in poor but economically unfree countries."

"the more we allow governments to control markets, the more poverty and inequality we experience."