The US ranks 46th in how easy it is to start a company

By James Pethokoukis of AEI.

"The White House this week gave some welcome focus to the unhelpful rise of job licenses."

In “The land of free markets, tied down by red tape,” the FT’s Gillian Tett notes that issue but also highlights the difficulty in starting a business here:

Every nation needs a unifying idea. Americans love to see themselves as champions of free markets and entrepreneurial zeal — and have long been more welcoming to entrepreneurs than has most of the western world. But the 2008 financial crisis tarnished America’s self-image (with, for example, the eyesore of state support for mortgages). The entrepreneurial halo is starting to slip, too, since increasing quantities of red tape are making life harder for start-ups, relative both to the past and to the rest of the world. …  The process of securing these licences is often so costly and cumbersome that one recent study estimated costs for consumers at $200bn a year. More importantly, licences deter many would-be workers — and entrepreneurs.

A separate World Bank report is even more sobering. Last year it ranked countries according to their levels of support for the corporate world. This placed America in seventh place in terms of overall ease of doing business. But the US was ranked 46th — yes, 46th — in terms of how easy it is to start a company. This is worse than Estonia, Malaysia, Georgia and even France.

One important reason for this dismal position is that in America entrepreneurs need, on average, to navigate six different legal and regulatory hurdles to start a company. In New Zealand and Canada, which top the league, there is just one procedure. The complexity faced by Americans means that it takes them on average about six days to create a start-up; in many other countries the process is much faster and cheaper.

Of course, this World Bank league does not tell the whole tale. The American national average conceals significant geographical variations because it is municipalities that set many of the business rules. Thus research by Thumbtack, a West Coast website that connects consumers with local businesses, and the pro-entrepreneurship Kauffman Foundation shows that it is much easier to start a company in Texas than, say, California. Moreover, red tape is only one factor that determines start-up activity; what also matters is whether there is access to capital and a culture of respect for entrepreneurs.

I address the issue of startups and US economic dynamism in my new “Room to Grow” monograph, “Startups and Entrepreneurship.”"

 

Douglas Holtz-Eakin & Ben Gitis On Minimum Wage Laws

Click here to go to the link.

"Executive Summary
 
We examine the employment effects and antipoverty implications of raising the federal minimum wage to $12 per hour and to $15 per hour, respectively, by 2020. We focus on how raising the federal minimum wage would affect the very low-wage workers whom the policy is intended to help. Overall, we find significant trade-offs in raising the federal minimum wage.

While a minimum-wage hike would benefit millions of workers with higher earnings, it would also hurt millions of others who would lose earnings because they cannot attain or retain a job. Our estimates show that raising the federal minimum wage to $12 per hour by 2020 would affect 38.3 million low-wage workers. Using our central estimate, we find that raising the minimum wage would cost 3.8 million low-wage jobs. In total, income among low-wage workers would rise by, at most, $14.2 billion, of which only 5.8 percent would go to low-wage workers who are actually in poverty.

Similarly, we find that increasing the federal minimum wage to $15 per hour by 2020 would affect 55.1 million workers and cost 6.6 million jobs. Aggregate income among low-wage workers would rise by $105.4 billion, after accounting for income declines from job losses. However, only 6.7 percent of the increase in income would go to workers who are actually in poverty.

Because the exact effect of the minimum wage on employment remains unsettled, we check the robustness of our results by employing a range of estimates from the literature that imply modest, moderate, and severe employment consequences. In each case, we analyze how the change in earnings resulting from a minimum-wage increase would be distributed across income levels."

The Negative Consequences of Raising D.C.'s Minimum Wage

Good intentions and unintended effects

By Veronique de Rugy in Reason. Excerpt:

"research by economists David Neumark of the University of California, Irvine, William Wascher of the Federal Reserve Board, and Mark Schweitzer of the Federal Reserve Bank of Cleveland shows that minimum wages increase poverty—and hence poverty reduction shouldn't be expected as a benefit of raising the minimum wage. That's because, contrary to common belief, the relationship between low wages and poverty is extremely weak.

As Neumark—who has done extensive research on the issue—explains, "the principal sources of an individual's higher earnings are more schooling and the accumulation of experience and skills in the labor market," both of which are discouraged by increases in the minimum wage. Though an increase raises the wages of some people, it also reduces employment of young and low-skilled people. The Congressional Budget Office calculated that an increase in the federal minimum wage from its current level, $7.25 an hour, to $10.10 per hour would cost about 500,000 jobs.

The negative consequences are also worse when unemployment is high; hence, not all D.C. neighborhoods would be similarly affected. Economist Salim Furth of the Heritage Foundation explained to me: "It's easy for the lobbyists and economists of D.C. to forget that a quarter of the city is very poor and poorly served by its government. A $15 (minimum wage) would raise prices in Georgetown, but in Congress Heights, it would shutter shops altogether." Georgetown is in Ward 2, where the unemployment rate is below 5 percent. Congress Heights is part of Ward 8, where unemployment is 13.4 percent.

Furth said: "The people most likely to lose their jobs are those in professions where there is no successful business model that includes high wages. In D.C., 18,000 people work in professions where most workers earn less than $10 an hour. That includes parking lot attendants, shampooers and a lot of food service workers."

Consumers would be affected, too, as businesses push the extra cost onto them. Considering how sensitive they are to price changes, it might further hurt employment.

Fast-food workers might stand to lose the most from the hike. Using peer-reviewed research, James Sherk, Furth's labor economist colleague, estimates that a $15 minimum wage would cause a 36 percent drop in hours worked in fast-food chains. His estimate is based on a national average and is not restricted to a high-cost city such as D.C. He told me, "I would expect a smaller effect in D.C., as $15 an hour will be less of a proportionate increase than it will be in, say, Louisville, Kentucky."
To make matters worse, Sherk explained, "a $15-an-hour minimum wage in D.C. would force many less skilled D.C. residents to look for work outside the city or not work at all." He added, "Businesses will not pay workers more than the value they produce."

Company whose CEO announced that all of the firm’s employees would be paid a minimum of $70,000 a year is having trouble

See Atlas Shrugs by Randall Holcombe of the Independent Institute.

"Three months ago, the CEO of Gravity Payments, a Seattle credit card processing firm, announced that all of the firm’s employees would be paid a minimum of $70,000 a year, according to this story. Now, the firm has fallen on hard times, and some of the firm’s “higher valued” employees have quit. One employee who quit said, “He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump.” Another who quit said, “Now the people who were just clocking in and out were making the same as me. It shackles high performers to less motivated team members.”

The real-world Gravity Payments sounds a lot like the fictional Twentieth Century Motor Company from Ayn Rand’s novel, Atlas Shrugged, and while the quotations from the real-world employees who left Gravity Payments do not sound quite as passionate as the fictional John Galt, the message is the same.

Rand’s novel was first published in 1957 and has been continuously in print since. I am not the first to observe that many real-world events since the publication of Rand’s novel closely resemble events in the fictional world she described. Here is another example."

See also Seattle CEO who set firm's minimum wage to $70G says he has hit hard times from Fox News. Excerpt:

"Only three months ago Price was generating headlines—and accusations of being a socialist -- when he announced the new salary minimum for all 120 employees at his Gravity Payments credit card processing firm. Price said he was doing it, and slashing his $1 million pay package to pay for it, to address the wealth gap.

“I’m working as hard as I ever worked to make it work,” he told the Times in a video that shows him sitting on a plastic bucket in the garage of his house. “I’m renting out my house right now to try and make ends meet myself.”

The Times article said Price’s decision ended up costing him a few customers and two of his “most valued” employees, who quit after newer employees ended up with bigger salary hikes than older ones.

“He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump,” Gravity financial manager Maisey McMaster, 26, told the paper.

She said when she talked to Price about it, he treated her as if she was being selfish and only thinking about herself.

“That really hurt me,” she said. “I was talking about not only me, but about everyone in my position.”
Approaching burnout, she quit.

Grant Moran, 29, also quit, saying the new pay-scale was disconcerting

“Now the people who were just clocking in and out were making the same as me,” he told the paper. “It shackles high performers to less motivated team members.”

Price said McMaster and Moran, or even critic Rush Limbaugh, the talk show host, were not wrong.
“There’s no perfect way to do this and no way to handle complex workplace issues that doesn’t have any downsides or trade-offs,” he said.

The Times said customers who left were dismayed at what Price did, viewing it as a political statement. Others left fearful Gravity would soon hike fees to pay for salary increases."

Are US Middle-Class Incomes Really Stagnating?

No, says Martin Feldstein.

But first, 10% of economists surveyed strongly agreed with the following statement and 50% agreed:

The 9% cumulative increase in real US median household income since 1980 substantially understates how much better off people in the median American household are now economically, compared with 35 years ago.

 See IGM Forum survey 

Excerpts from Martin Feldstein:

"it is frequently said that the average household income has risen only slightly, or not at all, for the past few decades. Some US Census figures seem to support that conclusion. But more accurate government statistics imply that the real incomes of those at the middle of the income distribution have increased about 50% since 1980. And a more appropriate adjustment for changes in the cost of living implies a substantially greater gain. 

The US Census Bureau estimates the money income that households receive from all sources and identifies the income level that divides the top and bottom halves of the distribution. This is the median household income. To compare median household incomes over time, the authorities divide these annual dollar values by the consumer price index to create annual real median household incomes. The resulting numbers imply that the cumulative increase from 1984 through 2013 was less than 10%, equivalent to less than 0.3% per year. 

Any adult who was alive in the US during these three decades realizes that this number grossly understates the gains of the typical household. One indication that something is wrong with this figure is that the government also estimates that real hourly compensation of employees in the non-farm business sector rose 39% from 1985 to 2015. 

The official Census estimate suffers from three important problems. For starters, it fails to recognize the changing composition of the population; the household of today is quite different from the household of 30 years ago. Moreover, the Census Bureau’s estimate of income is too narrow, given that middle-income families have received increasing government transfers while benefiting from lower income-tax rates. Finally, the price index used by the Census Bureau fails to capture the important contributions of new products and product improvements to Americans’ standard of living. 

Consider first the changing nature of households. From 1980 to 2010, the share of “households” that consisted of just a single man or woman rose from 26% to 33%, while the share that contained married couples declined from 60% to 50%. 

When the nonpartisan Congressional Budget Office (CBO) conducted a detailed study of changes in household incomes from 1979 to 2011, it expanded the definition of income to include near-cash benefits like food stamps and in-kind benefits like health care. It also subtracted federal taxes, which fell from 19% of pretax income for middle-income households in 1980 to just 11.5% in 2010. To convert annual incomes to real incomes, the CBO used the price deflator for consumer expenditures, which many believe is better for this purpose than the consumer price index. The CBO also presented a separate analysis that adjusted for household size. 

With the traditional definition of money income, the CBO found that real median household income rose by just 15% from 1980 to 2010, similar to the Census Bureau’s estimate. But when they expanded the definition of income to include benefits and subtracted taxes, they found that the median household’s real income rose by 45%. Adjusting for household size boosted this gain to 53%. And, again, even this more substantial rise probably represents a substantial underestimate of the increase in the real standard of living. The authorities arrive at their estimates by converting dollar incomes into a measure of real income by using a price index that reflects the changes in the prices of existing goods and services. But that price index does not reflect new products or improvements to existing goods and services. 

Thus, if everyone’s money incomes rose by 2% from one year to the next, while the prices of all goods and services also rose by 2%, the official calculation would show no change in real incomes, even if new products and important quality improvements contributed to our wellbeing. Indeed, the US government does not count the value created by Internet services like Google and Facebook as income at all, because these services are not purchased. 

No one knows how much such product innovations and improvements have added to our wellbeing. But if the gains have been worth just 1% a year, over the past 30 years that would cumulate to a gain of 35%. And combining that with the CBO estimate of a gain of about 50% would imply that the real income of the median household is up nearly 2.5% a year over the past 30 years."

Important New White House Report Documents Costs of Occupational Licensing

By Adam Thierer of The Technology Liberation Front. Excerpt:

"Yesterday, the White House Council of Economic Advisers released an important new report entitled, “Occupational Licensing: A Framework for Policymakers.” (PDF, 76 pgs.) The report highlighted the costs that outdated or unneeded licensing regulations can have on diverse portions of the citizenry. Specifically, the report concluded that:

the current licensing regime in the United States also creates substantial costs, and often the requirements for obtaining a license are not in sync with the skills needed for the job. There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities,  and make it more difficult for workers to take their skills across State lines. Too often, policymakers do not carefully weigh these costs and benefits when making decisions about whether or how to regulate a profession through licensing.

The report supported these conclusions with a wealth of evidence. In that regard, I was pleased to see that research from Mercatus Center-affiliated scholars was cited in the White House report (specifically on pg. 34). Mercatus Center scholars have repeatedly documented the costs of occupational licensing and offered suggestions for how to reform or eliminate unnecessary licensing practices. Most recently, my colleagues and I have explored the costs of licensing restrictions for new sharing economy platforms and innovators. The White House report cited, for example, the recently-released Mercatus paper on “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the ‘Lemons Problem,’” which I co-authored with Christopher Koopman, Anne Hobson, and Chris Kuiper. And it also cited a new essay by Tyler Cowen and Alex Tabarrok on “The End of Asymmetric Information.”

Moreover, along with Christopher Koopman and Matt Mitchell, I recently submitted comments to the Federal Trade Commission for a sharing economy workshop. In those comments, as well as a recent paper on the same subject, we documented how occupational licensing rules were often “captured” by affected interests and are then used to discourage new forms of competition and innovation. This harms both consumers and workers by depriving them of new and better options. Many sharing economy operations are having great success in breaking down these barriers and proving that consumers and workers do better in an environment free of unnecessary and costly licensing restrictions. This suggests that consumer welfare would be improved even more by reforming other licensing regimes."

Black Teens Are Fired When the Minimum Wage Rises

The sector where many work is part of the problem.

By Frank McCoy of BET.  

"It is no surprise that Black teens, 16- to 19-years old, are disproportionately unemployed. At the Great Recession’s bottom, African-American teens had an unemployment rate of nearly 50 percent while the rate for all teens was 27.1 percent. In the weak post-Recession, many teens compete for jobs against down-sized adults with college degrees.

And economists William Even from Miami University and David Macpherson from Trinity University report that when a state, or the federal government, increases the minimum wage, Black teens are more likely to be laid off. The duo analyzed 600,000 data points, which the Employment Policies Institute says included “a robust sample of minority young adults unprecedented in previous studies on the minimum wage.”

The report focused on 16-to 24-year-old males without a high school diploma and found that for each 10 percent increase in the federal or state minimum wage employment for young Black males decreased 6.5 percent. By contrast, after the same wage boost, employment for white and Hispanic males fell respectively just 2.5 percent and 1.2 percent.

The real hit for Black teens occurred, however, in the 21 states that had the federal minimum wage increase in 2007, 2008 and 2009.

The findings reveal that while 13,200 Black young adults lost their jobs as a direct result of the recession nearly 40 percent more, a total of 18,500, were fired because of the rise in the federal minimum wage, raising the researchers’ question: “Why do black males suffer more harm from wage mandates than their white or Hispanic counterparts?”

A key reason is that many young Blacks hold tenuous, low-skilled positions in the nation’s eating and drinking businesses, such as  fast food restaurants. The researchers report “that nearly one out of three Black young adults without a high school diploma works in the industry.”

It is a sector that welcomes their entry, and lauds young Black workers in its ads. But African-American teens working in that highly-competitive industry with its narrow profit margins should know that their job is on shaky ground when the minimum wage rises."