Category Archives: Price and Wage Controls

Raise, Don’t Level: New CEI Papers on Inequality and Poverty Relief

Economic inequality is one of today’s defining issues. How to address it? Iain Murray and I offer an unconventional approach in a new two-part CEI study, released today. The first part frames the issue. The title sums it up well enough: People, Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions. The second part,The Rising Tide: Answering the Right Questions in the Inequality Debate, outlines a concrete policy agenda to make the poor better off.

Anti-poverty activists routinely fret about the ratio between a CEO’s salary and her lowest-paid employee’s, or how the top one percent’s ratio of national income compares to the bottom one percent’s. Instead of mathematical ratios, we encourage activists to focus on human beings. Again, we plead: focus on people, not ratios.

Ratio-obsessed activists from Thomas Piketty to Naomi Klein ignore some obvious questions due to their monomania:

  • How are the poor actually doing?
  • Is their economic situation improving over time?
  • What policies can make the global poor better off over time?

We seek to fill these disappointing gaps. According to nearly all available data, poor people are better off than ever before in human history—keep at it, then! There is still lots to do, but ignoring the accomplishments people have already made, and what can make more accomplishments possible, only hurts the poor.

Over the course of the 20th century, infant mortality went down by more than 90 percent—just think of how many parents’ broken hearts have stayed whole thanks to modern technology and sanitary practices.

Life expectancy improved by 30 years during the 20th century. And that’s not the only type of length modernity has improved: from 1900 to 1950, the average American became three inches taller, thanks to better nutrition, food security, and health care. The process has only continued since then.

Even if it was only the top one percent that enjoyed zero infant mortality, lived a hundred years, and were all seven feet tall, their best efforts could not bias society-wide statistics nearly that much, despite their most conspiratorial plutocratic efforts. This is what mass prosperity looks like.

According to the Swedish economist Max Roser, since 1960 the number of people living in absolute poverty has declined from nearly two billion to about 700 million—a two-thirds decline. And this happened as total world population more than doubled! This is good news. Today’s most important task is to keep this great enrichment going, and to eliminate absolute poverty altogether.

The poor will never have as much as the rich—every curve has a bottom and a top ten percent, and always will. No changing that. But only the hardest heads deny that most poor people today live better lives than their parents or grandparents did—and that future generations can expect this wonderful trajectory to continue, if they’re allowed to.

This is both a reason to celebrate, and a reason to double down. Now that we haveasked the right questions about inequality, the second part of our study, The Rising Tide, seeks to answer them: what policies can continue to make the world’s poor better off?

There are a lot of answers. We don’t pretend to have all of them, but we offer a few. One is an honest price system: runaway-inflation countries such as Zimbabwe and Venezuela are universally poor. Keeping inflation in check and making sure prices convey honest information will help consumers and entrepreneurs make wise decisions that create value for people.

Affordable energy is another answer, allowing everything from clean home heating (natural gas is somewhat cleaner than dung and logs, especially indoors) to more and better transportation choices, which expands employment options.

Any aspiring entrepreneur needs access to capital—Dodd-Frank-style financial regulations openly insult every person trying to escape poverty. So do many governments’ resistance to granting formal property rights to their people.

Another answer—there really are a lot of them, and no single panacea—is occupational licensing reform. There is no legitimate reason for an interior decorator or a hair-braider to undergo hundreds of hours of training in something they already know how to do, in order to do for pay something they can do for free. Nearly a third of American workers require government permission to begin their day’s work. That is ethically wrong, and should be immediately reformed.

Inequality is a complicated issue. Properly addressing it requires both asking and answering the right questions. Ask how real-world people are doing, not abstract income ratios. And ask about policies that can help people escape poverty. The answers are numerous, and Iain’s and my papers do not pretend to have all of them.

But, we humbly submit, a general ethos of not stamping down on impoverished hands would be a good start. It would also be quite a change from current policy in the U.S. and many other countries.

For more, see our papers, People, Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions, and The Rising Tide: Answering the Right Questions in the Inequality Debate.

How the Overtime Rule Hopes to Design Higher Salaries, But Can’t

The Labor Department has just issued a new overtime pay regulation for salaried employees. Under the new rule, all salaried workers earning less than $47,476 per year must be given overtime pay when they work more than 40 hours in a given week. This roughly doubles the previous threshold of $23,660. This will affect an estimated four million workers, raising their wages by $12 billion over the next decade, or an average of $1.2 billion per year.

By my calculations, that’s roughly $300 per worker per year. That can certainly help families with bills to pay—the problem is that this pay bump comes with tradeoffs. These range from reduced salaries to reduced hours—avoiding overtime pay altogether—to reduced non-wage benefits such as paid vacation, free parking, free meals, and other perks. These tradeoffs could easily cancel out any pay increases, leaving working families no better off than before, and possibly worse off.

Trey Kovacs is CEI’s resident expert on the overtime rule (see also CEI’s coalition letter we sent to Capitol Hill). But I cannot resist commenting on Labor Secretary Tom Perez’s remark that “[t]hese good paying middle class jobs were not a fluke brought about by an invisible market forces. They were good paying middle class jobs by design[.]”

F.A. Hayek’s most famous quote, from his final book, The Fatal Conceit, is “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Secretary Perez has unintentionally played right into Hayek’s invisible hand.

Employers would be delighted to pay every single one of their employees minimum wage, from the lowest entry-level position all the way up to high-powered senior executives. But they can’t, because market forces won’t allow it. Markets are the reason middle class salaries exist at all. Absent any top-down direction from Secretary Perez or other political operators, employees leverage their skills to bargain for higher wages. If your employer isn’t paying you what your skills are worth, you can take your talents elsewhere.

High turnover and the constant training that goes with it hurt a company’s bottom line. That is why Henry Ford paid his workers very high wages by the standard of the time. As workers gained experience and skill, they created more value. Better for Ford’s bottom line to pay skilled workers a middle class wage and keep them around than to have to constantly search for and train rookies.

A similar process plays out all over the economy, from construction to accounting to photography. Middle class wages are the product of human action, not human design. People respond more readily to their incentives than to political orders. Bottom-up, not top-down.

If anything, the overtime rule gives employers an incentive to be less generous to their employees, not more. And that may be just what we see in the coming years. Secretary Perez’s design will likely turn out rather differently than he intends. This is unfortunate, but also completely foreseeable.

New York State Mulling Minimum Wage Increase

A few weeks ago, the New York Times ran an article asking, “It’s Summer, but Where Are the Teenage Workers?” It’s a good question:

Since 2000, the share of 16- to 19-year-olds who are working has plummeted by 40 percent, with fewer than a third of American teenagers in a job last summer. Their share of the overall work force has never been this low, and about 1.1 million of them would like a job but can’t find one, according to the Bureau of Labor Statistics.

The next paragraph begins, “Experts are struggling to figure out exactly why.” Over the course of more than 1,300 words, the article doesn’t once mention a major culprit: the minimum wage.

The article even features a chart showing a pronounced decrease in teen employment closely tracking the most recent federal minimum wage increase, which phased in from $5.15 to $7.25 from 2007 to 2009. The start of the increase and its impact on teen employment began before the financial crisis made job-hunting more difficult for everyone else, too. In recent years, some cities and states have begun raising their local minimum wages above the federal minimum, helping to keep teen employment at historically low levels.

The Times should look into commissioning a follow-up story for next summer, because the paper is now reporting that New York State is considering implementing a$15 hourly minimum wage for fast food restaurant chains, which heavily employ teens. Increasingly, they are also “employing” automated kiosks.

New York State currently has a statewide $8.75 minimum wage. If the state legislature were to adopt the study committee’s recommendations, the $15 minimum wage would phase in through 2021 throughout the state, and 2018 in New York City, where living costs are higher.

The increase would not affect restaurants with fewer than 30 locations, or other teen-heavy employers, such as retailers.

That means it would disemploy fewer people than would a blanket increase. But while some teens will get hefty raises, othes will be unable to find a job at all.

Advocates of the increase should look not just at the beneficiaries, but at the people it would hurt, too. As Henry Hazlitt points out in Economics in One Lesson:

The art of economics consists… in tracing the consequences of that policy not merely for one group but for all groups.

Iain Murray and I compiled a few other possible unintended consequences of minimum wage increases:

Workers are fired, hours are cut, jobs are not created, non-wage perks, including insurance, free parking, free meals, and vacation days evaporate, annual bonuses shrink, prices rise, (squeezing minimum wage earners themselves), big businesses gain an artificial competitive advantage over their smaller competitors, and crime rates rise. It is a bleak litany.

Many willing workers could be denied a chance to get that first job that could help them gain the experience and skills they need to start to climb up the economic ladder. It’s a lesson more well-meaning people need to learn if they are to reduce poverty outright, rather than help some at the cost of hurting others.

Dodd-Frank Is Five Years Old

On July 21, 2010, Congress passed the Dodd-Frank financial regulation bill. Today, that bill turns five. It is not a happy anniversary.

As CEI’s John Berlau points out in a new paper, Dodd-Frank has actually reduced competition in the financial sector. By codifying too-big-to-fail and adding in price controls and other regulatory hoops—27,669 total regulatory restrictions and counting—Dodd-Frank insulates incumbent banks from pesky upstart competitors. In fact, in the last five years, precisely one new bank has opened for business. This stagnation is not healthy for innovation or for competition—or for capital-hungry entrepreneurs throughout the economy.

A few other Dodd-Frank facts worth pondering:

  • The original bill text is 848 pages long. The edition of Herman Melville’s Moby Dick on my bookshelf is 602 pages long.
  • Dodd-Frank requires regulatory agencies to issue 398 regulations. Five years later, many of them have yet to be issued. Hopefully they stay that way.
  • Since each of those regulations contain multiple regulatory restrictions (some of the rules are hundreds of pages long and are extremely detailed), the actual number of regulatory restrictions Dodd-Frank enacts could eventually top 40,000, or even 50,000. Nobody knows yet.
  • Its price controls on debit card interchange fees have raised the cost of banking for small businesses and the poor (See Iain Murray’s new paper).
  • Dodd-Frank does not address the root causes of the 2008 financial crisis—banks took on too much risk, especially in the housing sector. Instead, by codifying government bailouts for major financial institutions, Dodd-Frank reduces incentives for financial institutions to keep their risk at manageable levels. Whatever its stated intentions, Dodd-Frank potentially sets the stage for another financial crisis and more bailouts.

For more, see John’s extensive Dodd-Frank research.

Costco CEO Favors Minimum Wage Hike

An overlooked argument in the minimum wage debate is that a high minimum wage gives big businesses an artificial competitive advantage over their smaller competitors. As I noted recently:

When states are considering hiking their minimum wages, big companies like Walmart routinely lobby in favor of the increases. They know that while they can afford the extra payroll, the mom-and-pop store down the road might not be able to. Advantage: Walmart.

As if on cue, the Huffington Post reports today that Costco CEO Craig Jelinek came out in favor of increasing the minimum wage to $10 per hour, even higher than President Obama’s proposed $9 per hour. The article notes that Costco has a reputation for paying its employees very well, and would be mostly unaffected by such an increase.

Who would be affected? Costco’s smaller competitors, who would have to raise prices and/or trim their workforces to make payroll. Advantage: Costco.

Given how popular minimum wage increases are with non-economists, Jelinek stands to reap some good PR for Costco from his announcement. And maybe he really believes that a minimum wage hike would be a net good for the working poor. But another plausible explanation is rent-seeking — using government regulations to gain artificial competitive advantages (and profits). And that’s something a struggling economy could do without.

Progressives Should Be Wary of a Minimum Wage Increase

President Obama set off quite a debate when he proposed raising the federal minimum wage from $7.25 $9.00 per hour. Minimum wage hikes poll very well, especially among progressives. Over at the American Spectator, I argue that progressives should look elsewhere for ways to help the poor:

Then there is the matter that high minimum wages help big businesses at the expense of smaller competitors. When states are considering hiking their minimum wages, big companies like Walmart routinely lobby in favor of the increases. They know that while they can afford the extra payroll, the mom-and-pop store down the road might not be able to. Advantage: Walmart.

Just because a progressive proposes a policy doesn’t mean that the policy is, in fact, progressive. A high minimum wage causes regressive income redistribution.

Read the whole thing here.

CEI Podcast for August 16, 2012: Drought, Food Prices, and Ethanol

Have a listen here.

Severe drought in the Midwest has driven corn prices to record levels. Policy Analyst Brian McGraw argues that ending the federal government’s ethanol mandate could help families who are struggling to pay their heightened grocery bills. Under the mandate, nearly 40 percent of this year’s corn crop will be used for fuel instead of food.