This is the great hidden truth about Obamacare. It was never a program for improved medical coverage. It was a program for redistributing wealth by force from the healthy to the sick. It did this by forcing nonmarket risk pools, countering the whole logic of insurance in the first place, which is supposed to calibrate premiums, risks, and payouts toward mutual profitability. Obamacare imagined that it would be easy to use coercion to undermine the whole point of insurance. It didn’t work.
And so the Trump executive order introduces a slight bit of liberality and choice. And the critics are screaming that this is a disaster in the making. You can’t allow choice! You can’t allow more freedom! You can’t allow producers and consumers to cobble together their own plans! After all, this defeats the point of Obamacare, which is all about forcing people to do things they otherwise would not do!
A meme, and a notion, floating around the Internet:
So do these changes really kick-start an economy? Here’s an analysis from the “Being Classically Liberal” Facebook page:
1. Minnesota had ALREADY been experiencing a decent economy prior to the tax increases. As USA today explains, “Minnesota had one of the nation’s lowest unemployment rates in 2012 …and one of its highest GDP growth rates, at 3.5%.” [a] The tax increases came the following year, in 2013. [b] Minnesota continued to maintain its rank of having one of the best unemployment rates, and any further decrease in its unemployment rate simply mirrored national trends. One cannot reasonably conclude, then, that the 2013 tax increases had “caused” the good economy which was already in place before said tax increases even existed.
2. Understand that this controversy is over TWO tax increases; One which increased income taxes on individuals earning above $150,000 a year or couples earning above $250,000. [b] [c] The other which increased the state’s excise tax on cigarette sales by 130%. [d] It’s rather disingenuous for progressives to point to the these two tax increases and declare ideological victory since jobs hadn’t vanished. For one, they’re conflating conerns. Concerns over businesses fleeing to neighboring states are not based on income taxes but more so on a state’s business environment. And in that regard, it’s relevant to point out two key facts:
a. Business taxes have actually been CUT since 2013. [e] This is something progressives don’t seem to be acknowledging.
b. Once analyzed in a 2014 study, the cigarette tax increase has, as predicted, been quite detrimental to sales. [d] We will list the pertinent details below.
THE CIGARETTE TAX:
“In 2013 the Minnesota Legislature passed a 130% increase in the cigarette excise tax and also increased the tax on other tobacco products from 70% of the wholesale price to 95% of the wholesale price.” In 2014, when a study was conducted to measure the effects of this new policy, the following conclusions were found: [d]
• 1,100 jobs were estimated to have been lost or eliminated by 2014 as a result.
• Tobacco sales declined 50% in Minnesota stores along the border.
• Dramatic sales increases of tobacco products occurred in all four bordering states, indicating consumers had merely shifted to out of state purchases.
• By 2014, $38 million of lost sales in non-tobacco products also occurred as an indirect result.
• Nearly a quarter of all cigarettes consumed in Minnesota are now estimated to be purchased in other states.
As you can see, Minnesota may in fact be doing well, but this is due to other variables and not due to an increase in income taxes or cigarette taxes. One must consider the many other relevant variables at play. For instance, Minnesota borders water which automatically benefits ANY region, as it makes it part of a commercial trade route. This alters the conditions that might otherwise push businesses to conduct commerce elsewhere. Consider this. Part of Minnesota’s border is water (beneficial to business), another part is Canada (not appealing to most companies seeking to stay in the US), and the rest of its border are 4 neighboring states, where 3 of which are landlocked. This gives Minnesota an upper hand relative to other states, which is entirely relevant when one’s concern is commerce. Furthermore, Minnesota is home to a major natural resource and produces 75% of the country’s iron ore. [f] The iron-ore industry can’t just pick up and leave. Lastly, there has emerged a rather extensive list of tax CUTS, credits, or simplifications, all potentially offsetting the detriments of the aforementioned two tax increases. [e] They are as follows:
• $230 million in reduced taxes, as well as a simplification of the tax code, for Middle Class Minnesotans.
• The elimination of the “marriage penalty” tax, saving more than 650,000 married couples an average of $115 per year.
• Over 16,000 additional middle class families will qualify for the Working Family Tax Credit.
• Tax Cuts for Parents. More than 25,000 families who qualify for child care tax credits will see an average increase in their tax credit of $74 per year.
• Tax Cuts for Students. More than 285,000 recent college graduates could save up to $190 per year by deducting their student loan interest. Another 40,000 current college students and parents will receive a tuition deduction of $140 per year, on average.
• Tax Cuts and simplification of the tax code for Small Employers as well as an elimination of a requirement to maintain separate records for federal taxes.
• Tax cuts for seniors, teachers, and homeowners.
• A reduction in business sales taxes by $232 million.
• All three business-to-business taxes were repealed.
• The sales tax on repair and maintenance of electronic, farm, and commercial equipment has been repealed.
• The warehousing sales tax was repealed.
• Sales tax on telecommunications equipment has been repealed.
• $3 million in tax CREDITS for “Innovation and Jobs” and specifically “fuel innovation” has been set aside.
• Another $3 million in Tax Credits for startup businesses and entrepreneurs.
• Simplification of the Estate Tax, raising the exemption from $1 million to $2 million.
• Elimination of the Gift Tax; a reduction of $43 million.
• Furthermore, in May of 2014, an additional $103 million in tax cuts for homeowners, renters and farmers was agreed to. [g]
To point to all of this and declare, “Tax increases created jobs!” is MORE than a bit questionable. When you already have a decent economy, and firms see tax cuts for businesses and consumers on the horizon, it shouldn’t be a surprise that they’d likely remain in the state. Minnesota is doing well for many reasons, but their 2013 income tax increase on the top 2% of earners and their 2013 cigarette tax increase are NOT why. Add to all of the Minnesota tax cuts the fact that their government has begun shrinking in size per recent jobs numbers showing the government shed 4,200 jobs in December of 2014 alone [h] and it’s a wonder why Progressives keep proudly waiving this example around.
The problem is, there are a multitude of variables in any economy. In order to claim that any given outcome is due only to one or two changes, you’d really need to have two Minnesotas, one where the changes happened, and one where they didn’t, but are otherwise identical.
This doesn’t exist anywhere in the world.
Thomas Sowell pops out of retirement long enough to address this, once again.
The hardest of these hard facts is that the revenues collected from federal income taxes during every year of the Reagan administration were higher than the revenues collected from federal income taxes during any year of any previous administration.
How can that be? Because tax RATES and tax REVENUES are two different things. Tax rates and tax revenues can move in either the same direction or in opposite directions, depending on how the economy responds.
But why should you take my word for it that federal income tax revenues were higher than before during the Reagan administration? Check it out.
Official statistics are available in many places. The easiest way to find those statistics is to go look at a copy of the annual “Economic Report of the President.” It doesn’t have to be the latest Report under President Trump. It can be a Report from any administration, from the Obama administration all the way back to the administration of the elder George Bush.
Each annual “Economic Report of the President” has the history of federal revenues and expenditures, going back for decades. And that is just one of the places where you can get this data. The truth is readily available, if you want it. But, if you are satisfied with political rhetoric, so be it.
The Untold Story
What is often lost in the short history-class-version of this case is the effort by the company to comply and remove the segregation law. This may appear counterintuitive to some, but the market reality made segregation expensive. Looking at the requirements of the law (see above) makes it clear why securing separate accommodations, either by car or partition, is costly, and when you are in the business of selling seats, increasing the likelihood of empty seats works against that interest.
In the 1950’s the economist Gary Becker at the University of Chicago began to write about the economics of discrimination. His writing was contemporaneous to the Brown case which was decided in 1954. Becker’s book, titled The Economics of Discrimination and released in 1957, began a discussion on discrimination in the market which has yielded counterintuitive results in many instances.
Using economic assumptions to describe discriminatory behavior, Becker observed two basic features of discrimination. First, that discrimination may depress the wages and employment opportunities of those discriminated against and conversely that the discriminator may pay higher wages to avoid hiring a minority.
If for example, a white worker gets paid $2 more an hour than an African American worker, the employer is paying a $2 an hour penalty to maintain his discriminatory preferences. Over time, this is a difficult practice to maintain in a competitive environment. The result is parity when comparing equal, similarly situated people. Most employers or businesses are not willing to pay that penalty in the long run.
Since Becker’s book, others have also observed the impact of discrimination in markets and the tendency to move away from discrimination unless the base is sufficiently broad and the taste for discrimination is rather strong. However, in this scenario discrimination is highly likely to arise via democratic mechanisms as well, as it did in the South unless there is a constitutional constraint to prevent discriminatory democratic results.
Additionally, when faced with strong preferences for discrimination those discriminated against are likely to move to geographic areas with more equal outcomes, much like the movement to the north of about six million African-Americans during The Great Migration, which was certainly exacerbated by Jim Crow.
The Free Market Is the Great Equalizer
What Plessy illustrates is that even in a place willing to legalize discrimination (meaning the democratic taste for it was sufficient to be legislated, even if it failed to reach a true majority due to potential disenfranchisement), the market was pushing toward more equal market outcomes and had to be artificially constrained. Essentially, the Plessy verdict granted a special interest group their preference and arrested the development of the market preventing it from moving away from discriminatory practices.
With the hindsight of Becker and others like him, we see how Plessy set the stage for years of subsidized discriminatory behavior. In practice, the schools and other segregated venues behaved as cartels with the ability to impose costs on an industry and essentially remove it as a matter of competition for certain services. If all market actors faced the same imposed costs, there is no incentive to compete to remove that cost.
The Plessy verdict prevented the market from removing discriminatory behavior and it also created a rent-seeking incentive. With the Plessy verdict, racists and segregationists learned they could implement their preference of a segregated society by diffusing the costs among the population at large. Until Brown, these rent-seekers were able to implement their market preferences and it is no surprise that after Plessy Jim Crow continued to grow throughout the South.
There is also a political reason why markets should be preferred over legislation to remove discrimination. Markets tend to work quietly in the background; there is no grand political movement, no sweeping legislation, and very little reactive backlash against those politics that ingrain, often unintentionally, discriminatory views.
In contrast, the doux commerce thesis suggests markets are institutions that bring about desired social change, peace and cordiality, and anti-discrimination becomes a byproduct of this thesis. Two of the most recent advocates of this view have been Deirdre McCloskey in her Bourgeoise trilogy, and Nathan Oman in his book, The Dignity of Commerce. Markets create more peaceful, less discriminatory communities simply because they penalize discrimination and introduce personal interactions within the market.
The lessons of Plessy, often overlooked, are two-fold. The market removes discrimination in a more peaceful manner if we allow it to do so but the desire to intervene on behalf of one group or another is very alluring (an argument to restrict, maybe chain, democratic governments may be merited to some degree based on this observation).
When we take the stance that intervention is necessary we increase the risk of a less peaceful outcome and increase the incentive for rent-seeking behavior, even when discrimination is not the underlying impetus. Understanding the history of this pivotal Supreme Court case teaches how markets provide more favorable outcomes and dispels the myth that free markets are tools of oppression.
Here’s a letter to the Wall Street Journal:
In “The $15 Minimum Wage Crowd Tries a Bait and Switch” (Sept. 26) David Neumark explains the challenges facing today’s minimum-wage researchers. Yet the difficulty of quantifying the consequences of minimum wages is even more daunting than Prof. Neumark’s excellent essay reveals.
First, because minimum wages in the U.S. have been in place for more than a century (Massachusetts enacted the first American one in 1912) and have consistently risen over time, employers long ago learned to adjust to their existence. Business decisions – especially the choice of how much labor to use relative to machines – are made with the expectation that minimum wages will rise. Thus, because firms adjust the sizes of their work forces in anticipation of minimum-wage hikes, measuring changes in employment after any given minimum wage hike fails to account for the jobs that were never created because employers expected the minimum wage to rise.
Second, while fewer jobs for low-skilled workers is a chief and especially unfortunate result of minimum wages, it isn’t the only negative result. Many other responses to minimum wages are possible instead of, or along with, reduced employment opportunities. My colleague Dan Klein offers some examples: the extent and difficulty of work duties grow; flexibility in employee scheduling lessens; fringe benefits and on-the-job training decrease; lockers, free food, and other amenities for workers are cut; workplace safety, comfort, and amiability decline. Because most of these other possible downsides of minimum wages are practically impossible to capture in empirical data, studies of minimum-wages’ effects almost certainly underestimate the harm inflicted on low-skilled workers by minimum wages.
Joint Economic Committee Republicans
February 15, 1995
For many years it has been a matter of conventional wisdom among economists that the minimum wage causes fewer jobs to exist than would be the case without it. This is simply a matter of price theory, taught in every economics textbook, requiring no elaborate analysis to justify. Were this not the case, there would be no logical reason why the minimum wage could not be set at $10, $100, or $1 million per hour.
Historically, defenders of the minimum wage have not disputed the disemployment effects of the minimum wage, but argued that on balance the working poor were better off. In other words, the higher incomes of those with jobs offset the lower incomes of those without jobs, as a result of the minimum wage [See, for example, Levitan and Belous, (1979)].
Now, the Clinton Administration is advancing the novel economic theory that modest increases in the minimum wage will have no impact whatsoever on employment. This proposition is based entirely on the work of three economists: David Card and Alan Krueger of Princeton, and Lawrence Katz of Harvard. Their studies of increases in the minimum wage in California, Texas and New Jersey apparently found no loss of jobs among fast food restaurants that were surveyed before and after the increase [See Card (1992b), Card and Krueger (1994), and Katz and Krueger (1992)].
While it is not yet clear why Card, Katz and Krueger got the results that they did, it is clear that their findings are directly contrary to virtually every empirical study ever done on the minimum wage. These studies were exhaustively surveyed by the Minimum Wage Study Commission, which concluded that a 10% increase in the minimum wage reduced teenage employment by 1% to 3%.
The following survey of the academic research on the minimum wage is designed to give nonspecialists a sense of just how isolated the Card, Krueger and Katz studies are. It will also indicate that the minimum wage has wide-ranging negative effects that go beyond unemployment. For example, higher minimum wages encourage employers to cut back on training, thus depriving low wage workers of an important means of long-term advancement, in return for a small increase in current income. For many workers this is a very bad trade-off, but one for which the law provides no alternative.
As a result of a federal law mandating all workers get paid a minimum of $15 an hour, a young teenage worker named Alex working full-time at a small neighborhood pizza restaurant would make $310 in additional income every week (ignoring taxes). Alex would spend that additional weekly income of $310 at local merchants on items like food, clothing, footwear, Uber rides, movies, computer games, and electronics items. The local merchants who receive that $310 from Alex’s additional spending now have additional income and profits every week, and they can spend some of that additional income and profits on goods and services. Alex’s additional weekly income therefore ripples through the local economy with an amazing multiplier effect that almost magically increases spending and income throughout the local economy. The pro-minimum wage crowd points to these many positive income effects from the $15 minimum wage and Alex’s additional income, and many might even suggest that a minimum wage above $15 an hour would create even greater and more positive benefits for workers like Alex and the local merchants who would be the beneficiaries of an even higher minimum wage like $20 or $25 an hour.
But let us take another and closer look at the situation. The minimum wage crowd is at least right in its first conclusion about Alex’s spending. The public policy of artificially raising wages through government fiat will mean more business and greater sales revenues for some local merchants. The local merchants will be no more unhappy to learn of the magical spending from a $15 an hour minimum wage law than an undertaker to learn of a death.
However, we haven’t yet considered the situation now facing Alex’s boss – Mrs. Alice Johnson who owns the small pizza restaurant where Alex works. As a result of Alex’s good fortune to receive $310 in extra income every week as a result of government fiat, his boss and sole-proprietor Alice Johnson now has $310 less every week because she has to pay Alex out of her own income or profits. The Johnson family now has to cut back on their household spending by $310 every week that they would have spent on food, clothing, Uber rides and electronics products at local merchants. Alex’s gain of $310 each week comes at the direct expense of the Johnson family, who are now worse off in the same amount that Alex is made better off. If we consider that Alex and the Johnson family are a part of the local community, the community’s income hasn’t changed – rather, there’s only been a transfer of income from the Johnson family to Alex; but no net gain in community income, wealth, or prosperity has been achieved.
In the United States, I have noticed increasing amounts of local municipalities instituting minimum wage laws. This is happening in many states across America, with many people supporting it in the hopes of bettering workers’ wages. Unfortunately, minimum wage is economically dysfunctional and unethical, yet so many people who lack economic or ethical knowledge are […]
I want to go back and discuss more a post I had a few weeks ago on the difference between a model and real life. As the question highlighted in the post shows, the model and reality can differ. In the price theory model discussed, there is no deadweight loss from a price ceiling when […]