Sunday, June 22, 2014

Every Economist in America Is Wrong: The Minimum Wage Is Better Than the EITC

Maybe I'm missing something obvious, but...

Let's say we want to help low-wage workers. Which of these plans sounds better to you?

Plan A
Tax:  Rich
Benefit:  Poor and middle class

Plan B
Tax:  Rich and middle class
Benefit:  Poor and rich

It's a matter of taste, but I think most people would prefer Plan A. Plan A is the minimum wage. Plan B is the Earned Income Tax Credit.

You may recall my discussion of this in a recent post. The basic economic analysis is that the minimum wage is equivalent to a tax on low-wage jobs and a transfer of the revenue from that tax to workers in those jobs. Economists, even liberal economists, see a few problems with that.
  • A lot of the transfer doesn't go to poor people. A good chunk of it goes to people from non-poor households. 
  • Putting a tax on low-wage jobs would be expected to reduce the number of low-wage jobs. This seems obvious, but is now hotly contested, with a substantial amount of empirical research finding zero effect; the consensus now is that the effect is zero or small.
  • Businesses will pass along some of their cost increases to customers, who may be poor themselves.
Much better, economists say, to use the Earned Income Tax Credit. This is a wage subsidy which is targeted at the poor. It presumably is funded from general tax revenues, so it doesn't discourage low-wage jobs. And it doesn't get passed along, because it's not a cost to employers. In fact, a portion of it ends up benefiting employers, because the wage subsidy reduces the wage employers have to pay. (For example, if I'm paying my employees $7/hour, and employees get a $1/hour subsidy, I may find  that I can pay them only $6.50 per hour, so they end up with a wage of $7.50.) If that's true, I may actually increase my hiring. You can find a liberal economist's view of the minimum wage here and a conservative economist's here.

What every economist thinks is what I thought, until, as I was writing that recent post, I read the Congressional Budget Office's report on the minimum wage. The media summarized the conclusions of the report as: raising the minimum wage will raise the incomes of the poor, but a small number will lose their jobs. But that summary, while true, misses the main point. Here, for example, is the Washington Post's Wonkblog:

The CBO's report reminds us that the main effect of raising the minimum wage is to redistribute income from consumers and owners/higher-wage earners to lower-wage earners. As this chart shows, most people earning under six times the poverty line would benefit from the increase.

When I read the CBO report and saw Figure 3, my eyes almost popped out of my head. "Everyone needs to see this chart!" I thought. And yet the people at Wonkblog not only saw it but posted it, and missed the point completely. Try this instead:

The CBO's report reminds us that the main effect of raising the minimum wage is to redistribute income from the top 10% to the bottom 90%. As this chart shows, the average family earning up to six times the poverty line (around $150,000 per year for a family of four) would benefit from the increase, even net of price increases and job losses.

Perhaps they didn't realize that 90% of all American families earn less than $150,000 per year, or didn't make the connection.

Apparently, in a lot of middle-class families there is someone earning the minimum wage. Some small fraction of those people will lose jobs if the minimum wage increases, and all will pay slightly higher prices. But the net effect is to make them, on average, better off.

What if your family earns, say,  $200,000 per year? That's more  upper-middle class than rich. Are you a net loser? Actually, we don't know, because everybody in the top ten percent is lumped together in the chart. Many things we once thought were true about the top 10 percent, like their getting a much larger share of national income than they used to, turn out to be mostly attributable to the top 1% (see Figure 2 here).

My guess is that people earning $200,000 per year end up being slight net losers. But clearly the big losers are people who earn a big chunk of their income from business profits, and (I can't find an estimate, but) those people are overwhelmingly the rich.

So as a first approximation, I'm going with Plan A above as a description of the effect of an increase in the minimum wage: hurts the rich, helps the poor and middle class.

In contrast, the EITC, being "better targeted," does not directly benefit the middle class. And because it presumably comes out of income-tax revenue, a good chunk of the middle class, as well as the rich, end up paying for it. Moreover, as I discussed above, some of the benefits end up being captured by owners of businesses, i.e., the rich. Some of the minimum wage "leaks" out to the middle class; some of the EITC leaks out to the rich. Yet somehow economists consider the former more of a problem than the latter.

Finally, there's the employment effect. As noted above, there's a large body of empirical work finding, surprisingly, that modest increases in the minimum wage have no effect on employment. I looked at the CBO report to find the basis for their estimate that 500,000 jobs would be lost. That's not a huge number-- it's about 0.3% of the labor force-- and there's a lot of imprecision around it, but I still wondered how they had come up with it.

When I got down into the weeds, I found that they had done careful work. They ended up making separate calculations  for teenagers and adults, then adding them together. I was curious how much of their final estimate of 500,000 jobs lost was made up of teenagers. But they never said.  So, using CBO's "conclusion" that adult employment is about one-third as sensitive to changes in the minimum wage as teen employment, and the fact that almost a quarter of jobs at or below the minimum wage are held by teenagers, I tried to calculate it.

My result is that 48% of the job losses will be by teenagers. The adult job loss is not 500,000; it's about 260,000. An editorial comment: When people argue that increasing the minimum wage will be ineffective, they always talk about teenagers. When they say there will be job losses, those teenagers are never mentioned.

Here, then, are the main takeaways from my reading of :the CBO report:
  • The minimum wage transfers income from the top 10% of the population to the bottom 90%. Quite likely a large part of that transfer is coming from the top 1%, but we don't know.
  • The number of people losing jobs is modest, and almost half of them are teenagers.
I can't quite get over the feeling I'm missing something, so if you happen to know any economists, run this by them.

Thursday, June 19, 2014

Saturday, June 14, 2014

Pakistan After the Karachi Airport Attack


Do you make anything of the latest kerfuffle in Pakistan? Will the Army finally decide that India is not its biggest problem? Will Pakistanis finally decide the US is not their biggest problem?


Alas, I am dubious on both counts. The military would have to work much harder to justify its completely voracious appetite if it lets go of India, which is so much bigger; everyone else would have to recognize--and take responsibility for--terrorism, corruption, the leadership's tepid commitment to democracy, and taking care of their own business if they let go of the view that the U.S. and its "aid" is the source of all their problems.

What could well happen instead is that they continue to throw themselves into the dubious embrace of the Chinese and wake up a bit later to realize that it can get much worse than it is now.

What happened in Karachi makes me despair. I despair in order not to feel fury. When you live as well as the ruling elites do in Pakistan (both military and civilian) a bit of noblesse oblige is in order, I think.


I would especially extend my rant to say that perhaps the most insidious of the governmental bodies is the ISI (Inter-Services Intelligence), who put out contracts on human rights workers and journalists with almost complete impunity. They--and the rest of the military--seem to believe that they have the right to operate without the risk of being publicly criticized (or even identified). This, rather than electoral processes, is where democracy is perhaps the weakest in many countries, and I wish that political scientists and other scholars would pay more attention to it.

Wednesday, June 11, 2014

In Love With the Earned Income Tax Credit...But Not Enough to Tie the Knot

It's spring, and love, love, love is in the air! Yes, conservative intellectuals have fallen in love with the Earned Income Tax Credit, the federal program that subsidizes workers in low-wage jobs.

The source of this strange passion is, of course, recent Democratic proposals to increase the minimum wage, proposals with overwhelming popular support. Greg Mankiw, head of the Council of Economic Advisers under George W. Bush, makes the argument for the EITC over the minimum wage. It goes  like this:

Analytically, an increase in the minimum wage is identical to putting a tax on low-wage jobs, and then giving the revenue from the tax to low-wage workers. The good part is that we're raising the incomes of low-wage workers, who in many cases are below the poverty line. The bad part is that we're paying for it by taxing low-wage jobs.

Taxing low-wage jobs has a couple of problems. First, you would expect that taxing anything would reduce the amount of it. So there were would be fewer jobs available. Second, the net cost of the tax ends up being paid by employers. Why, says Mankiw, should they bear all the burden for a broader societal decision? The money should be paid by the government so that the cost is shared more broadly. (Actually, some of the cost to employers gets passed along to consumers as higher prices.  But again, why should consumers of those specific products pay all the cost?)

Then we should increase the EITC instead, right? So where should the money come from, and how much? What's Mankiw proposing?

As it turns out, Mankiw is a bit of a cad; rather than propose, he prefers to love the EITC and leave it. He concludes: "If, as a nation, we decide we want to do more to supplement the incomes of low-wage workers, that’s fine. But let’s do it openly, without artifice, and with broad participation." I never said I was in love with you...I just said that if I were in love, it would be with you and not your sister.

Then what are the possibilities? We could raise taxes. Or we could add it to the deficit, thus deferring to the future a decision about how to pay for it. Or we could cut military spending. Or we could cut domestic spending. Which of those options do you think Republicans would accept? In practice, Mankiw's idea comes down to this: let's supplement the income of low-wage workers, and let's pay for it by cutting food stamps. I wouldn't expect much impact on the poverty rate, would you?

If anyone tells you we should increase the EITC instead of raising the minimum wage, just ask how they suggest we pay for it.

Tuesday, May 27, 2014

Assad's Doing It Again

Many people breathed a sigh of relief when the US worked out a deal with Russia and Syria over Assad's use of poison gas in the Syrian civil war. Instead of launching an airstrike against Syria in retaliation, we would simply remove the remaining chemical weapons.

I did not breathe a sigh of relief; I though it was a bad deal. Given the lack of enthusiasm for an airstrike in Congress and in public opinion, this may have been the best the Obama administration could get. But I think that's because the issue got framed wrong in the public debate.

Here, for example, are some things the airstrike was not supposed to achieve:

  • Destroying Assad's remaining chemical weapons;
  • Involving the US in the war on the side of the rebels.

Here are some things the airstrike was supposed to achieve:

  • Deterring Assad, and every leader of any army anywhere, from using chemical weapons in the future;
  • Reducing the killing of civilians in Syria.
Clearly, removing Assad's chemical weapons does not accomplish those goals. It's not a deterrent to tell someone, "If you ever write another check, I'll take away the checkbook." There's nothing to lose by writing a check, and you might get away with it. And there's nothing for any future leader to lose by using poison gas. But the threat of an airstrike against Assad's air force is a deterrent; if carried out, it would significantly weaken him in his war. Quite likely, that would make the price of using chemical weapons too high in the future, for Assad or anyone in a similar situation.

As for protecting civilians, removing Assad's chemical weapons has not discouraged him in the least from using his air force against civilians. Whether through depraved indifference or conscious policy, thousands of civilians have died in air attacks. Many of those people might have been saved by anything that weakened his air force.

Now come credible reports that Assad's air force has dropped bombs containing chlorine gas. Chlorine was the first lethal gas used in warfare. It has common industrial uses (municipal water treatment, for example), so it was not among the banned chemicals now being removed from Syria. But its use in warfare is clearly illegal and a war crime.

Assad obviously has not been deterred. In fact, not to take it too personally, he is thumbing his nose at us. This is not good for world stability and maintenance of civilized norms.

We need to respond with an air strike against Assad. Obama must do what for some reason he hates to do, which is go on TV and explain to people why we should do this.

Thursday, May 8, 2014

Ukraine: Calling It What It Is

In a very interesting scoop, a New York Times reporter talked to members of a pro-Russian militia in Ukraine. A soldier named Aleksey commented, “In western Ukraine, they showed their faces: Nazis, fascist. They destroyed monuments to Lenin, attacked our history. Living on one land with them is senseless for us.”

Fascists? Lenin? Is socialism still alive in Russia? In a word, no.

The basic  internal conflict in Russia, since at least the 19th century, has been between the Westernizers and the Slavophiles.  The Slavophiles believe that Russians, and the Slavs in general, have unique spiritual strengths that the West lacks. In the article, another soldier "speaks of what he sees as unbreakable cultural, economic and religious ties to Russia and his ideal of a greater Slavic world, which he says is threatened from outside." Somehow, though, these brother Slavs always end up being dominated by Russia. My impression is that Russians are much more enthusiastic about the whole idea than other Slavs are.

The Bolsheviks, like other socialists, were Westernizers: they were followers of German revolutionaries and hostile to traditional institutions like the Tsar or the Russian Orthodox Church. But when Stalin perceived a threat from Germany, he revived traditional Slavophilia. See, for example, the famous 1938 film Aleksandr Nevsky, in which the simple, virtuous Slavs defeat the baby-killing Teutonic knights.  World War II is referred to in Russian as the Great Patriotic War, that is, a war for the Fatherland, not for socialism.

What's a bit weird is how completely Slavophiles have now assimilated the Soviet past. Lenin the Westernizer is now, as Aleksey noted, a symbol of Russian history. May Day  (originally celebrated as International Workers' Day) is now a patriotic holiday, apparently with no mention of socialism. The Soviet Union becomes the latest iteration of the Russian Empire, one whose sphere of influence once extended all the way to Berlin.

In this story, one of the great triumphs of the Soviet empire was the defeat of fascist Germany. As indeed it was; the cost to Russians in terms of suffering was enormous. Note that in the story, the war was fought against the fascists, which is simply the Russian term for Nazis, and not against the Germans, some of whom became allies of the Soviet Union, and therefore good guys. Smilarly, there were fascist Ukrainians, who helped the Nazis, but the good Ukrainians, the allies of Russia, triumphed. Now it appears to Russians that the good Ukrainians are out; therefore the bad Ukrainians must be back.

Of course, it looks quite different to the Ukrainians. True, Ukrainians had a long history of violent antisemitism, and some of them were notably brutal concentration camp guards. But Aleksey may not be aware that somewhere between 2.4 and 7.5 million Ukrainians starved to death as a result of deliberate policy decisions by Stalin in the 1930s, and that some consider it one of history's great genocides. So it's not hard to understand why a lot of Ukrainians are not fans of Lenin,

Putin has clearly placed all his chips on the Slavophiles. We are better than these Westerners, he says, with their chaotic "democracy" and their decadent tolerance of homosexuality. In effect, Putin has assumed the mantle of Tsarism, with the Russian Orthodox Church as his strong supporter. (It was no accident that Pussy Riot staged their anti-Putin protest in a Russian Orthodox cathedral.)

And Putin's goal is pretty clearly the restoration of the Russian/Soviet empire. It is absurd to say, as some have, that this is all happening because Putin felt threatened by the enlargement of NATO. Putin knows perfectly well that Latvian or Bulgarian membership in NATO is not a threat to Russia. But it is a threat to Russian dominance of Latvia or Bulgaria. That's the whole point.

It's time to call this what it is, and what no one is calling it: Russian imperialism.

Thursday, February 6, 2014

The Other Inequality

Suddenly, economic inequality is hot. Before Occupy Wall Street, no one was talking  about it. Now Democrats have decided that it's an issue for the midterm elections. It featured prominently in the recent State of the Union address. Increasing the minimum wage now looks like an issue with legs.

Any politician who really wants to ride a populist wave over the next few years, though, needs to start talking about the Other Inequality. I mean political inequality, the fact that rich people and big businesses have more political power than everyone else.

Electorally, the Other Inequality has the potential to be a big, big issue. According to a 2011 CBS News poll, large and growing majorities feel alienated from the government: 80% believe Congressmen are primarily interested in serving special interests rather than the people they represent, 75% believe large corporations have too much influence, and 66% (including 67% of independents and 44% of Republicans) believe the rich benefit the most from government policies. Other polls have shown similar results.

But political inequality is not just an issue in itself-- it's also a sort of meta-issue. There is a long list of problems that people think cannot be solved because someone is too powerful: oil companies, pharmaceutical companies, Wall Street, AIPAC, and on and on. We won't make much progress on a lot of individual issues, including economic inequality, until we address the meta-issue by reducing the disproportionate influence of the rich on American politics.

To be sure, the rich have advantages in the political process that are not going to disappear: they can own media outlets, fund think tanks, and, for the foreseeable future, fund super-PACs to buy negative advertising.

But the main reason for the power of money in Washington is that members of Congress always desperately need campaign contributions. They spend, in fact, more time raising money than they do legislating. Probably, they therefore spend more time talking to the rich than to their own constituents, getting a distorted picture of what most people are thinking.

The solution, clearly, is public financing of campaigns. What? Oh, sorry, I must have dozed off for a minute there. There's nothing like the mention of campaign financing to do that. We need a policy that:
  1. Reduces the importance of the rich in financing political campaigns,
  2. Increases average citizens' feeling that their voice matters, 
  3. Doesn't put people to sleep.
There are two basic approaches. One is for the government to match small donations, perhaps with the proviso that the candidate turn down large donations. But I think this approach  fails the second test above. A match makes donating more attractive, but my guess is that we would still end up with only a small minority contributing. The goal, instead, should be to have most people contributing, so that they feel they are a part of the process rather than onlookers. And a match also fails the third test above: it's a little too far removed to get excited about.

What passes these tests is some system  in which the government pays the first, say, $50 of everyone's political contribution, so that everyone can contribute up to $50 without incurring any personal cost. Both Ackerman and Ayres and Lessig have proposed versions of such a plan where the government issues vouchers to citizens, and, at considerably less length, I proposed a version using refundable tax credits here.

Essentially, we are giving everyone $50 to spend as they please on influencing elections. It's a lot more personal and participatory than matching funds. You'd expect nearly everyone to contribute the full amount, but you'd still expect people to be somewhat selective about whom they're giving their money to.

When you do the arithmetic, the results are startling. If every adult in the U.S. contributes $50, it totals to about $12 billion per year in political contributions. Say $8 billion to be conservative. Over a two-year election cycle, that's $16 billion. Suddenly, the hundreds of millions spent by the Koch brothers and Sheldon Adelson look beside the point. (Total spending on Federal elections in 2012 was a mere $7 billion, itself a record high.)

It's a bit difficult to take in how big a change in American politics this would be. Politicians' fate not in the hands of big contributors? Every citizen a contributor? It's astonishing how much we've come to take it for granted that the moneyed few will dominate our politics.

Some 2016 presidential candidate, Republican or Democratic (but almost certainly Democratic), could ride this issue a long way. Does anyone know a future Democratic candidate who needs to shake a reputation for being too much of a Washington insider and too well connected to rich donors?

There is no more important issue.

Monday, December 30, 2013

The Mysterious Orient/Occident (a politics-free post)

On Christmas Day, I followed the traditions of my people by eating in a Chinese restaurant. This particular one was a very good, and seemingly authentic, new one called the Sichuan Gourmet House. In between my bites of jellyfish (no tentacles; good but rather bland) and bitter melon (bitter), I pondered the age-old question: Why is the standard American spelling "Szechuan"? Where does the "z" come from?

Short answer: I don't know. I couldn't find a satisfactory answer on the Internet.

Slightly longer answer: I only know of one language where sz is pronounced as we pronounce the letter s (and s is not pronounced as we do): Hungarian. If you want to show an s sound in Hungarian, you have to write it sz. So I speculate that the distinctive cuisine of Sichuan was introduced into the US by some native of famously foodie Hungary.

Much longer answer: Blame the Romans.

When the Roman Catholic countries of Europe (some later Protestant) sat down to invent written languages for themselves, they used the Roman alphabet. This was natural, because the literate class read Latin, which was the language of the Church. (Similarly, the Persians, being Muslims, adopted Arabic script. The Eastern Orthodox Russians, Ukrainians, and Serbs used Cyrillic; not so the Catholic Poles, Czechs and Croats.) But there's a problem with using language A's alphabet to write language B: there are generally some sounds in language B that language A (in this case Latin) lacks, and for which it therefore has no letters.

People tried various ways of representing the missing sounds, usually by modifying existing letters. English relied heavily on adding h.  Thus we have ship and chip, whose initial sh and ch sounds do not exist in Latin. For the same sounds Polish made use of the z, baffling future generations of English-speakers by writing sz and cz where we would use sh and ch.

Hungarian, for some reason, used an approach opposite to Polish. It used the letter s for the sound the Poles write sz. But then it used sz for the sound that most languages use s for. Thus we have the financier George Soros, whose name is pronounced Shorosh in his native Hungarian. And thus, perhaps, we have Szechuan.

A couple more points. First, German doesn't have a sound like the ch of chip. So it used ch for the sound at the end of Bach. When English-speakers needed to romanize the Cyrillic alphabet of  Russian, they faced the problem that Russian has both a Bach sound and a chip sound  So English romanizations use kh for the Bach sound. Hence, Chekhov.

Finally, many people are puzzled by the way Qs and Xs have suddenly started popping up in Chinese words. What's the deal with tai qi for t'ai chi? Pretty simple. Romanization of Chinese has always been technically complex. As a result, there are many competing systems floating around, which is confusing. The Chinese government has tried to solve this problem by decreeing the correct system. That system ended up enlisting some otherwise unnecessary letters to represent some of the familiar problem sounds. Thus, q is (roughly) the ch sound in chip, and x the sh sound in ship.

Next time maybe I'll answer the question, "Tomato: Vegetable or Fruit?" Probably not, though.

Saturday, December 21, 2013

No Way

While Democrats are gleefully watching the fratricide in the Republican Party, they've had a little skirmish of their own. Perhaps you've heard about the brouhaha caused by Third Way, a think tank for centrist Democrats. Its president and vice president for policy published an op-ed in the Wall Street Journal attacking "economic populism" (i.e., a focus on economic inequality) as a strategy for Democrats, and singling out for criticism Senator Elizabeth Warren and New York's mayor-elect Bill DeBlasio. This has provoked a strong reaction from the populists, with some of them pointing out that the board of Third Way is predominantly investment bankers and suggesting that the group represents the interests of the Wall Street rich.

Now, I've got nothing against moderates. The World's Smallest Political Quiz shows me just a smidgen, if at all, to the left of the boundary between liberal and moderate, and I would add that the party that purged all its moderates lost the last Presidential election. Also, it turns out that I (to my surprise) know one of the investment bankers on the board of Third Way, and although I haven't spoken to him in many years, I think he is a genuine Democrat rather than an agent of influence for Morgan Stanley.

But I have to say that I score this one for the liberals. This op-ed does read like the work of apologists for Wall Street, and not overly scrupulous ones.

They begin by dismissing the broader significance of the recent election of DiBlasio and Warren: Since they're from heavily Democratic New York City and Massachusetts, they're not very good indicators of the mood of rest of the country. True, but New York had a two-term Republican mayor (Rudy Giuliani), followed by a three-term centrist independent billionaire (Michael Bloomberg) who pretty much incarnates Third Wayism. DiBlasio represented a clear repudiation of Bloomberg, and he won not just in a landslide but in a big landslide (73%). As for Warren, she defeated an incumbent Republican, who ran on his regular-guy, moderate image against liberal "Professor" Warren. I don't know exactly what those elections mean, but it doesn't seem safe to say they mean nothing.

But even worse, the authors go on, are the actual policies of these woolly-headed liberals ("the Warren wing of the Democratic Party"). The authors first sneer at, but do not refute, "the 'we can have it all' fantasy" that we can pay for all sorts of good things if we tax the rich more, "close a few corporate tax loopholes, and break up some big banks." (No one that I'm aware of has suggested that breaking up big banks would raise money, but apparently Third Way is so much against it that they wanted to take an extra opportunity to sneer at it.)

But they quickly go on to their main targets, middle class entitlements. At the present rate, they warn, the Social Security Trust Fund will be used up in 18 years. Then they cross the line into deceit:

Undeterred by this undebatable solvency crisis, Sen. Warren wants to increase benefits to all seniors, including billionaires, and to pay for them by increasing taxes on working people and their employers.

The plan Warren is supporting would remove the cap on payroll taxation, thereby raising the marginal payroll tax rate from zero to 12.4% on earnings above $110,100. (For simplicity, let's assume that the employer share ends up being paid by the employee as lower wages.) The change would have no effect on anyone earning less than $110,100. Of course, anyone paying payroll taxes is by definition a working person, but somehow the phrase "working people" does not normally evoke images of people whose individual earnings are over $110,100, and only those people. That's why I call it "deceit" rather than "falsehood."

Because of the current cap, rich people actually pay a lower average rate on earnings than other people. If you have a salary of $1 million, you will pay payroll taxes of 12.4% x $110,100 = $13,652, for an average tax rate of 1.4%. Having that increase to the same 12.4% that most people pay will hurt, especially because your higher taxes won't increase your own social social security check, which will remain a tiny fraction of your income. But in the funhouse mirror of Third Way, working people are paying to benefit billionaires.

I could go on to discuss their comments about Medicare, or their peculiar interpretation of some election results from Colorado. But you get the point. I don't want to sound immoderate or anything, but this is hackery by Wall Street's performing monkeys.

Monday, December 16, 2013

Which Cause of Avoidable Deaths Is Bigger?

U.S. drunk-driving fatalities, 2010:     13,365

U.S. suicides using firearms, 2010:     19,392 

Yes, but if people who want to commit suicide don't have access to guns, won't they just use something else? No.