More Welfare for Workers

 

Bernie Sanders billionaire welfare taxation defies all economic logic
Bernie Sanders has officially introduced legislation in Congress aimed at forcing large companies to reimburse the government for providing public benefits to their employees. Targeting Amazon in particular, the Vermont senator recently tweeted, “All over this country, many Amazon employees, who work for the wealthiest person on Earth, are paid wages so low they can’t make ends meet. The American taxpayer should not be subsidizing Jeff Bezos so he can underpay his employees.”

Not only is this proposal unworkable and likely to harm the small number of people it targets, but it also mischaracterizes companies like Amazon and Walmart as reaping the benefits of lower wages, while the government picks up the tab. This argument fails on basic economic principles and ignores investments that many of these companies make in their entry level workers. Rather than “taxing” major companies for giving jobs to low skilled workers, Congress should find ways to make it easier for them to educate and train their entry level workers.

One of the major problems with the proposed legislation is that it assumes that wages are set by the whims of company executives. But in a competitive labor market, wages are set by the supply and demand for labor, not some arbitrary decision making by executives. As economist Arindrajit Dube argued, research shows that benefit programs like food stamps and housing assistance actually reduce labor supply because they make work less attractive, which drives wages up instead of not down. He writes, “The key point is that it is difficult to imagine how food stamps would lower wages. If they don’t lower wages, they can’t be thought of as subsidies to low wage employers.” For the argument that safety net programs “subsidize” employers to ring true, wages would be higher in their absence, something I doubt proponents believe.

[snip]

 

Workers on Welfare

From Bloomberg Opinion:

Senator Bernie Sanders is all set to propose legislation that proposes to put a tax on large businesses with employees who receive benefits from safety-net programs. The idea is simple: If a business isn’t paying enough to keep its employees from qualifying for, say, food stamps and public housing, then the business should be taxed an amount equal to those benefits. If a McDonald’s employee receives $400 in food stamps, then McDonald’s would owe the government $400 in additional taxes.

Fox News host Tucker Carlson thinks this is smart policy. In a tweet last week, Carlson pointed out that Jeff Bezos, founder and CEO of Amazon, is “the richest man in the world. Many of his employees are so poor, you’re paying their welfare benefits.”

[snip]

Whether motivated by concerns about inequality, as the Vermont senator is, or by the increasingly common view on the political right that when it comes to certain corporations, big is bad, both Sanders and Carlson betray a fundamental misunderstanding of economics and of the proper ordering of society.

Forces in a market economy will push the wage earned by workers toward the amount of revenue they generate for their employer. It is simply unrealistic to expect a company to pay, say, $15 per hour to a worker who is only generating $9 per hour of revenue for the business. Under such an arrangement, the company is losing $6 every hour the worker is on the job. That situation is untenable.

My argument may sound off given the amount of attention currently paid in some circles to issues like “market concentration,” “monopsony power” and the like. To be clear, I do not deny that these factors play a role in determining wages. But particularly in the low-wage labor market, a worker’s productivity plays a very important role in determining his wage. And large gaps between wages and productivity are ultimately unsustainable for many workers.

So in some sense, Sanders and Carlson have it exactly backward: Walmart, Amazon and McDonald’s are not being subsidized by taxpayers because some of their employees receive assistance from safety-net programs. Instead, employers of lower-wage workers are surely reducing safety-net rolls. In the absence of these jobs, more people, not fewer, would likely be receiving government assistance.

The logic underlying the claim by Sanders and Carlson also leads to a place that the senator at least probably doesn’t want to go. Sanders argues that if Amazon has employees on Medicaid, then taxpayers are subsidizing Amazon. At the same time, the senator supports single-payer national health care (“Medicare for All”). Should we view any national health-care program as a multitrillion-dollar taxpayer subsidy to business?

Of course not. And we shouldn’t view food stamps as a subsidy to business, either. Doing so reflects a fundamental misunderstanding of how U.S. society has chosen, through politics, to assign different roles to different actors.

And while we’re at it, this from National Review:

Both Senator Bernie Sanders and Fox News host Tucker Carlson have recently slammed Amazon, Walmart, Uber, and other large companies for paying workers and contractors too little. In a withering monologue last week, Carlson claimed that the companies are all effectively subsidized by the taxpayer because many of their employees’ incomes are supplemented by various federal welfare benefits, such as food stamps. Sanders agrees. Yesterday, he introduced legislation (the so-called Stop BEZOS Act) to tax large corporations one dollar for every dollar their workers receive in government food stamps or health-care benefits.

If nothing else, it is amusing that neither Sanders nor Carlson fully acknowledges the logical implications of their position. If Sanders is right that programs such as food stamps modestly subsidize employers who pay low wages, then his hugely expensive Medicare-for-all and free-college-tuition proposals would constitute a massive subsidy to low-wage employers. If Carlson truly believes that large firms have the power to suppress wages below competitive rates, then he should support raising the minimum wage to combat that power — something that he has, in the past, sensibly advocated against.

Snark aside, the pair are simply wrong on the economics of the matter, and shortsighted to boot. An employer’s responsibility is to pay employees for the work they do, not to ensure that they have some societally agreed-upon level of livable household income. Indeed, it is a peculiar worldview that suggests that, when setting wages, a company employing low-skilled workers should ignore the value of the tasks the employee actually undertakes for them.

In competitive labor markets, we usually assume that firms pay workers according to their productivity, the marginal revenue product of their labor. Market wages are determined by where this demand interacts with the supply of workers. Firms can’t underpay workers without losing the best to rivals. Nor can they routinely pay employees for more than they add to company revenue without losing capital to rivals at home and abroad and risking going out of business. There is no evidence that Amazon, Walmart, or Uber have high-enough degrees of labor-market power that they are the single hirer of workers in any one geographical area. For Carlson to imply that their pay rates are evidence purely of corporate greed is the worst form of populism.

There is a basic conundrum hanging over this debate: In a world with no minimum-wage laws, no out-of-work benefits, and no in-work benefits, some workers with low productivity levels would obtain work but find it difficult to live comfortable lives on market income. The real questions then are: Who should help, and if it is the government, will that end up subsidizing firms?

One form of help comes in the form of means-tested programs that apply regardless of work status, such as basic food stamps. These explicitly do not subsidize employers as Sanders and Carlson allege. Actually, we’d imagine that transfers of this kind would have the opposite effect, because they replace income obtained from work: The more you earn, the less in transfers you receive. These programs therefore reduce the supply of workers, by raising the wage people would have to be offered to return to work, which in turn raises market wages if the supply of workers is upward-sloping. Far from a “subsidy,” then, means-tested federal welfare benefits are more like a “tax on employers.”

Indeed, the only forms of welfare that can theoretically subsidize employers through lower wages are transfers that supplement income from work and so increase labor supply, such as the earned-income tax credit (EITC). As a wage subsidy, the EITC encourages more potential workers to seek low-paying employment, because the earnings from that employment plus the subsidy are higher than the means-tested benefits they forfeit by going back to work. The EITC thus increases the labor supply by design, which is great for EITC recipients but can hurt ineligible groups, such as those without children, who see their wage rates fall as a result.

The benefits of such supplemental subsidies are indeed captured by a combination of the employer and all employees. Academic experts Auston Nichols and Jesse Rothstein, using reasonable assumptions, estimate that for every $1 put into the EITC program, employees receive $0.64 of the outlay and employers capture $0.36 owing to reduced market wages. One therefore could, if he were so inclined, call the EITC an “employer subsidy,” though strangely neither Sanders nor Carlson has bothered to mention it at all.

Given that Sanders’s and Carlson’s critique focuses instead on means-tested welfare programs, it makes no sense. Cajoling companies to pay more by imposing high minimum-wage rates or taxing those whose employees receive government assistance would simply make it more difficult for lower-productivity workers to find jobs, putting taxpayers on the hook for more safety-net spending. Only supplementary welfare programs such as the EITC have the effect that Sanders and Carlson describe, and cutting these programs would certainly hurt the workers who rely on them as much as, if not more than, employers.

Does Welfare Subsidize Employers?

Source: The Pitifully Low Wages of Economic Illiteracy – Cafe Hayek

Leo Gertner (Letters, August 27) repeats a favorite trope of the left – namely, that welfare payments received by low-wage workers are really subsidies to employers who allegedly reduce workers’ pay by the amount of government welfare benefits received by these workers. There are several flaws with this trope.

First, it’s backwards. By reducing the economic burden of being unemployed, welfare payments not tied to work requirements reduce the supply of low-skilled labor and, thus, raise – rather than lower – the wages that employers pay to such workers.

Second, it’s at odds with readily observable labor-market realities. If workers reduce their wage demands because they have outside income, then whenever two highly paid professionals marry each other, one of them over time would come to be paid no more than the minimum wage. (Mr. Gertner and other Progressives would then argue that employers of these low-paid physicians, lawyers, and other professionals are “subsidized” by the employers of these employees’ high-paid spouses.) But of course we observe no such thing.

Third, if this trope were indeed correct, then the most direct way to protect taxpayers from having to subsidize employers would be to abolish the government welfare programs. When their welfare benefits disappear, low-wage workers will demand, and receive from their employers, higher pay to replace the lost benefits. But because Mr. Gertner and others who repeat this trope surely oppose abolition of the welfare programs that they assert are subsidies to employers, it’s unlikely that even they really believe this trope.

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

Missed by that much

Seen online:

“There are some things in the world we can’t change – gravity, entropy, the speed of light, and our biological nature that requires clean air, clean water, clean soil, clean energy and biodiversity for our health and well-being. Protecting the biosphere should be our highest priority or else we sicken and die. Other things, like capitalism, free enterprise, the economy, currency, the market, are not forces of nature, we invented them. They are not immutable and we can change them. It makes no sense to elevate economics above the biosphere.”

~David Suzuki

And indeed, one of the things we can’t change is that everything has a cost – in resources, in time, in energy, in human will. If you want anything in this world, you have to give up something to get it. That means you’ll always be confronted by choices in life.

That’s economics, and it’s not going away merely because you declare it somehow optional.

Should doctors profit from medicine?

I recall a conversation on the Rush Limbaugh show many years ago. A medical school student called in to explain why he was in favor of socialized medicine. He wanted to make sure that everyone who needed medical care could get it.

Rush had an answer for that. He suggested that once he completed his training, he should give his services away for free.

“What?”

The tone of the kid’s voice spoke volumes.

It seems people become doctors expect some form of reward for all the work involved.

Stephen Green offers this:

Regarding my earlier post about socialized medicine, Longtime Sharp VodkaPundit Reader™ RBJ commented:

People are self-nterested, not virtuous. I want really smart people to go into medicine because they want to make money to provide for a good life for themselves and their families.

Take away that financial incentive, and the best and brightest will find other things to do. Meaning the quality of doctors and nurses, et al., will go down.

And before that, BobB59 said, “Will they acknowledge the inevitable doctor shortage with that plan? I’m not holding my breath.”

Indeed.

This all goes back to my oft-stated belief that modern progressivism is a form of high-tech feudalism.

Under the old feudalism, there were serfs who worked the land, lords who lorded over them, ladies who tended to the lords, etc. Everyone knew their place and remained in their place, forever.

Progressivism “works,” such as it does, under the conceit that there are doctor-units who perform medicine, business-units who provide goods and services, teacher-units who teach, student-units who learn, etc. And — this is the vital bit — all those units perform their assigned tasks, and will continue to do so, regardless of incentives.

When all those person-units don’t conform to progressive wishes, that’s when progressives turn nasty. Which is in most instances pretty much right away.

But don’t worry, comrade. You will be made to conform. In the end, you will love Big Brother.

 

Capitalism and Racism

From the Volokh Conspiracy:

A program at UC-Davis looks at the relationship between capitalism and racism.

The website Campus Reform points to a multi-year academic program, Racial Capitalism, hosted at the UC-Davis Humanities Institute that explores the links between racism and capitalism (tip to Glenn Reynolds). Among the questions that were asked at the event launching the program are:

    • “Which came first, capitalism or racism?”

“Can there be capitalism without racism?”

“Is capitalism always racial?”

IMO, the answers to these questions are fairly obvious:

1. Racism came first. Every inhabited continent had slaves, and ethnic out-groups were among the most likely to be enslaved. It is the abolition of slavery that is particularly Western, as Orlando Patterson explains his books Freedom and Slavery and Social Death.

2 (and 3.) If there can be any economic system without racism (I suppose it depends on how high one’s standards are), then capitalism is not always racist and there can be capitalism without racism. Capitalism is easier to square with a reduction in racism than most ideologies because (a) it is individualistic, (b) it is not built on envy for despised groups, and (c) in the United States at least, pro-capitalists tend to be less racist personally than anti-capitalists.
Indeed, in the general public it is the opposition to capitalism and the desire for redistribution that are positively associated with racism and intolerance.

I explore this relationship in “Redistribution and Racism, Tolerance and Capitalism,” which analyzes data from 20 nationally representative surveys of the general public.

[snip]

The more interesting question (than whether you can have capitalism without racism) is whether you can have socialism without racism. The answer is yes, but the reason is an enlightening one.

In the long run, a robust socialism (that dominates most of the economy) tends to lead to the scapegoating of demonized out-groups, because there must be someone to blame for economic failure. Thus, the Soviet Union began with hating the Kulaks and the ownership class more generally, but once these were destroyed, they needed someone else to blame. Though it took many decades, the Soviet Union went beyond targeting “counter-revolutionaries” to add Jews to the list. So the demonized out-groups under socialism don’t have to be defined by race or ethnicity; they could instead be defined by economic class, religion, or nationality. Accordingly, socialism doesn’t have to be racist, but when it dominates the economy almost inevitably there must be some group to despise.

It would be good if the academy in general–and the UC-Davis Racial Capitalism program in particular–were ideologically diverse enough to reflect some of the substantial evidence from the last few decades on the relationship of capitalism and racism in the views of the general public, evidence that tends to point to a negative association between racism and support for capitalism.

The Empirical Reality of the Minimum Wage (Donald J. Boudreaux)

From the American Institute for Economic Research:

The Current Consensus

So what, really, is the state of modern empirical research into minimum wages? Let’s start with an unambiguous statement: Paul Krugman is factually mistaken. Plenty of recent evidence indicates that raising the minimum wage costs jobs. As long-time minimum-wage researcher David Neumark concluded in a December 2015 article for the Federal Reserve Bank of San Francisco:

Coupled with critiques of the [econometric] methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers — with possibly larger adverse effects than earlier research suggested.

 

My own extensive reading of minimum-wage research confirms Neumark’s conclusion.

That said, it is also the case that quite a few, although not a majority, of the empirical studies of minimum-wage hikes find no evidence that these hikes destroy jobs. What explains these conflicting research results?

One reason for these inconsistent conclusions is simply the differences in skill and meticulousness that separate some researchers from others. Economic studies vary greatly in quality and reliability. Not every piece of published work by Ph.D. economists is trustworthy. Far from it.

But even after excluding all shoddily done studies of minimum wages, we’re still left with conflict in the conclusions. Fortunately, economic theory itself supplies clues as to why.

Clue #1: While the destruction of jobs for some low-wage workers is the banner prediction elementary economics makes about minimum wages, it’s not the only prediction. Employers and workers can adjust to minimum-wage hikes in other ways. For example, the value of fringe benefits can be reduced, as when restaurants no longer let their employees eat free of charge and when retailers stop offering their merchandise to employees at discount prices.

Similarly, employers can work their low-wage employees harder or become less tolerant of these employees’ showing up for work late, leaving work early, or texting and making personal phone calls while on company time.

To the extent that employers and employees adjust to hikes in minimum wages in these ways, the incentive for employers to reduce the number of low-wage workers they employ is muted. Hence the number of workers cast into unemployment by minimum-wage hikes is diminished.

Clue #2: Employers can adjust to higher minimum wages not only by reducing the number of low-skilled workers they employ, but by reducing the number of hours they employ each of these workers. Indeed, because minimum-wage legislation is written in terms of hourly wages, the most precise description of the banner prediction that elementary economics makes about minimum wages is that these legislative mandates reduce the number of hours of low-skilled labor that employers wish to hire (rather than the number of such workers themselves).

Therefore, empirical studies that count the number of workers employed, rather than the number of hours workers work, count the wrong variable. While it’s true that the most obvious way, and often the easiest way, for employers to reduce the number of hours of labor they employ is to employ fewer workers, empirical studies that find that minimum wages cause no reduction in the number of people employed do nothing to cast doubt on the elementary case against minimum wages because an alternative way is to employ the same number of workers but at fewer hours.

Even if no workers lose jobs because of minimum wages, minimum wages harm these workers if some of them are thereby unable to work as many hours as they would work absent minimum wages.

Clue #3: Employers in countries in which minimum wages have existed for many years have adjusted their business plans not only to the existence of minimum wages, but also to the likelihood that minimum wages will rise. In the United States, the current national minimum wage was first imposed in 1938 by the Fair Labor Standards Act. Starting off at $0.25 per hour, it has since been raised 22 times, an average of once every 44 months. This minimum wage is now $7.25 per hour.

Because this minimum wage has been around, without pause, for 80 years, because it is routinely increased, and because there is no realistic prospect of its being repealed, employers make their business plans accordingly. No firm today in the United States uses a production process as heavily reliant on low-skilled workers as some of these processes would be absent a minimum wage. Knowing of the existence both of the minimum wage and of the likelihood that it will be raised in the not-too-distant future, employers use more labor-saving machinery and fewer low-skilled workers than they would use otherwise.

So it’s no surprise that some researchers fail to detect any resulting decrease in employment whenever the minimum wage is increased. The negative employment effects of the minimum wage were already built into the structure of the American economy. Indeed, when this undeniably correct prediction of economics is understood, it is not too much to say that the most surprising fact about the many modern empirical studies of minimum wages is that any of them find that hikes in minimum wages continue to have statistically significant negative employment effects.

Despite some commentary to the contrary, empirical studies of the employment effects of minimum wages do not come close to proving that minimum wages don’t harm many of the people most minimum-wage supporters wish to help: low-skilled workers.

The Plane: Economics in two parts

From The Writer in Black

The Plane: or Why Interest is Justified

This is my own telling of one of Frederic Bastiat’s essays. I like it because it makes clear, why those to provide capital–the means of production–are entirely justified in receiving ongoing recompense for providing that well beyond. Suppose there was a rough carpenter, let’s call him John. He makes a certain amount of money in […]

And here’s part 2:

The Plane (part 2)

Last time we left carpenter turned capitalist John retired, with his capital passed on to his son John Jr.

This time we take a look at John Sr’s old workshop. It’s still sitting there. John Jr. could go into that workshop and start doing carpentry. That’s one measure of the value of that workshop sitting there. Another is that he could simply sell it and let someone else worry about doing the carpentry. But there’s a third possibility. Someone, let’s call him Andre, approaches him. Andre wants to do carpentry but Andre doesn’t have any tools or workshop. Andre could, in principle build his own workshop and acquire his own tools but there’s this one John Jr. has. So he suggests John Jr. let him work in it.

[snip]

So the same principles that applied to John Sr. and his plane apply to John Jr. and his factory. And it’s entirely proper that the people providing capital, the means of production, be compensated based on whatever benefit they could obtain through alternate uses of that capital. And the people managing capital be compensated based not on the “labor” they provide but on the value they bring to the enterprise.

The Questions Stephen Colbert Should Have Asked Democratic Socialist “Rock Star” Alexandria Ocasio-Cortez – Foundation for Economic Education

Source: The Questions Stephen Colbert Should Have Asked Democratic Socialist “Rock Star” Alexandria Ocasio-Cortez

Here are other questions Colbert did not ask, and those who support socialism aren’t asking either:

Do you believe only socialists are “moral”?

Do you think other people are opposed to proper housing, jobs, and healthcare and block simple solutions because they are not as caring as you?

In his book The Law the 19th Century French economist Frédéric Bastiat exposed the false premise behind those who think government is the only way to achieve social and economic ends:

Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all.

We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain.

Generative Questions

A generative question is something that points us to the unknown and stimulates further inquiry. Here are a few generative questions that Colbert could have asked:
What are the conditions under which human beings flourish?
Why does power corrupt?
Why until recently in human history did each generation live in poverty, much the same as the generation before?

….

Ocasio-Cortez, Stephen Colbert, and millions of Americans leaning toward socialism have no knowledge of the economic problem. Invincibly ignorant, they assume the problem away by embracing the idea of redistributing other people’s money.

If you don’t know what the economic problem is, there is no possibility of discovering solutions to the problems you see. With a willingness to explore questions, more knowledge will be discovered. Freedom, not simplistic answers based on coercion, promotes voluntary human cooperation and creates economic progress, raising the well-being of all.

Did the Government End Child Labor?

It’s hard to prove by the numbers.

In 1938 the US government passed the Fair Labor Standards Act mandating a forty hour work week, establishing a minimum wage, and prohibiting child labor. Because of legislation like this, government is often credited for making the American work environment safer and more fair. Yet, as Antony Davies and James Harrigan demonstrate with historical data, market forces were already making things easier on the American worker long before the FLSA.

Learn More: https://fee.org/articles/child_labor_…

https://youtu.be/0zq-2cKENOc

http://www.politifact.com/truth-o-met…

https://fee.org/articles/child_labor_…

Data: http://www2.census.gov/prod2/statcomp… See page 170 for average weekly work hours. See page 134 for child labor rates.

By the way, try the autogenerated transcript function. It works surprisingly well.