Topic: General

Gap Pay Raise Follows Rand Not Obama

Clothing retailer Gap Inc. has won praise from the White House in announcing its decision to raise entry-level wages to $9 an hour this year, and $10 next year. President Obama applauded Gap and argued that Congress should follow suit by passing a bill to increase the federal minimum wage from $7.25 an hour to $10.10 by 2016.

But there’s a big difference between a voluntary increase in a market-determined wage rate and a government-mandated minimum wage.

Gap must report to shareholders and make a profit to stay in business; politicians report to voters and must win elections to stay in office. Polls show that the American public strongly support a higher federal minimum wage — but only if it appears to be costless.

President Obama, in promoting a higher minimum wage, argues that it would “lift wages for more than 16 million workers—all without requiring a single dollar in new taxes or spending.” This is the free lunch that politicians love to promise—and it is an illusion.

When the government arbitrarily pushes up wage rates above the competitive level, two things happen: some jobs are lost; and more workers look for jobs but can’t find them, so unemployment of lower-skilled workers increases. These effects are greater in the long run as employers switch to labor-saving technology.

When firms make adjustments in expectation of higher minimum wages (both federal and state), there will be a decrease in the number of jobs for lower-skilled workers (mostly younger, inexperienced, less-educated workers) but an increase in the demand for higher-productivity, skilled workers who complement the new technology.

Gap has already made significant investments in labor-saving technology and recently implemented a “reserve-in-store” computer program that relies on higher-skilled workers whom Gap invests in to enhance their human capital. Gone are the days when high-school dropouts could easily get a job with retailers. As Gap raises its starting wage, there will be more competition for a dwindling number of jobs. More workers will want a job, but fewer workers will be hired, and those that are will be of higher quality.

Glenn K. Murphy, Gap’s CEO, told the company’s employers upon announcing the change in policy, “To us, this is not a political issue. Our decision to invest in front-line employees will directly support our business, and is one that we expect to deliver a return many times over.”

This is free-market, Randian thinking: self-interest is the motivating factor, not altruism.

When President Obama says, “It’s time to pass [the minimum wage] bill and give America a raise,” he is making a promise that can’t be kept: some workers will gain (those who have higher productivity) but others (the least productive workers who most need a job to gain experience and move up the income ladder) will lose.

Indeed, the Congressional Budget Office now tells us that an increase in the federal minimum wage to $10.10 an hour could cost a loss of 500,000 jobs. Those most affected would be low-productivity workers in low-income families—making them poorer, not richer. (If the government promises a wage of $10.10 an hour but a worker loses her job or can’t find one, then her income is zero.) There is no free lunch!

People do what is in their own best interest. Gap may win some friends by increasing entry-level wages and saying this is in tune with company “values,” but unless that business decision is profitable Gap will lose sales, and its shares will drop in value. There is thus a market test of the decision to raise wages.

The government has no business telling private employers what to pay or telling workers they cannot offer their labor services at less than the legal minimum wage, even if they are willing to do so to retain or get a job. The President’s minimum wage is anti-economic freedom and violates personal freedom; Gap’s higher entry wage does neither. This is a case of “the emperor has no clothes!”

Jared Bernstein’s “Tax Reform” Assault on Pensions, IRAs and 401(k)s

The bad habit of defining “tax reform” in terms of fairness or “closing loopholes” sidesteps the most essential task of effective tax policy – namely, to collect taxes in ways that do the least possible damage to incentives for productive effort, investment and entrepreneurship.

The Joint Committee on Taxation list of “tax expenditures” is arbitrary accounting, not economics, and tax expenditures are not necessarily “loopholes.” These estimates do not take taxpayer behavior into account and therefore do not estimate revenues that could be raised by closing the so-called loopholes (e.g., a higher tax on capital gains would shrink asset sales and revenues). Policies that make sense in terms of economic incentives can therefore be portrayed as useless tax subsidies in the purely static accounting of “tax expenditures.”

For example, a recent New York Times article by former vice presidential adviser Jared Bernstein complains that tax deferral for retirement savings is unfair because, “most savings subsidies go to households that would surely save anyway, while almost nothing goes to the households that need help to save.” 

These “subsidies” for high-bracket taxpayers mainly consist of deferring rather than avoiding taxes, which only partly offsets the way savings are double-taxed. Even if higher-income households would actually save the same without 401(k) accounts (which contradicts research), they would still end up with much smaller retirement savings. Dividends and capital gains would then be repeatedly taxed, year after year, rather than being continually reinvested within a tax-deferred pension, IRA or 401(k) account. 

Estimated “subsidies” from tax deferral are deceptive: Instead of having recent dividends and capital gains taxed at a 15-20 percent rate in recent years, distributions from tax-deferred accounts will later be taxed at rates up to 39.6 percent. It’s a subsidy only if you don’t live much past 70.

Bernstein presents a graph showing the top 20 percent getting a 66 percent share of these “subsidies” for pensions and defined-contribution plans while the middle fifth gets only nine percent and the poorest 20 percent just two percent. What these figures actually demonstrate is that (1) people who work full-time for many years have more income to save than those who don’t, and that (2) people who pay no income tax cannot benefit from any policy that reduces taxable income, even temporarily.

There are five times as many workers in the top 20 percent than there are in the bottom 20 percent. To exclude young singles and old retirees, Gerald Mayer examined the work experience of households headed by someone between the working ages of 22 and 62. Average work hours among the poorest 20 percent still amounted to just 1,415 hours a year in 2010, while those in the middle fifth worked 2,771 hours, and the top 20 percent worked 4060 hours.

If Bernstein’s “subsidies” were properly expressed as shares of income, rather than as shares of foregone tax revenue, the differences nearly vanish. The Congressional Budget Office (the undisclosed source of his estimates) shows tax benefits for retirement savings worth only about twice as much to the top 20 percent (2 percent of net income) as to the middle 20 percent (0.9 percent of income). Retirement savings incentives appear to be worth only 0.4 percent of income to the poorest 20 percent, since they rarely owe taxes, yet annual benefits are a poor guide to lifetime benefits. Those in low income groups while they are young commonly move up to higher tax brackets by the time they start saving for retirement.

The alleged unfairness of lower-income households not getting the same dollar tax break as couples earning more than $115,100 (the top 20 percent) could be alleviated by reducing marginal tax rates on two-earner families. But Bernstein instead suggests “closing loopholes that make it easy for wealthy individuals to exceed contribution limits to tax-preferred accounts (as was found to be the case with Mitt Romney), reducing contribution limits for high-income filers, or simple limiting the value of tax breaks for the wealthiest of filers (e.g. allowing them to deduct such contributions at 28 percent instead of 39.6 percent.” None of these schemes would add a dime to the savings of low or middle-income households, of course, and they wouldn’t work.

It is not legal – and therefore not “easy”– to exceed strict contribution limits for high-income taxpayers, and Mitt Romney certainly did not do so.  What Romney did was to roll over qualified retirement plans into an IRA and then earn high compounded returns on very successful investments.  Similarly, albeit on a much smaller scale, I rolled-over a lump-sum pension into an IRA in 1990 when I changed jobs, and that IRA is now 12-times larger thanks to compound interest and bold investments.  Since I never contributed another dollar after 1990, tougher or lower contribution limits would have been entirely irrelevant.  

Bernstein’s final proposal is from the Obama budget – “allowing taxpayers to deduct contributions at 28 percent instead of 38.6 percent.” But that too is irrelevant. Any alleged “loopholes” for retirement savings have nothing to do with itemized deductions for top-bracket taxpayers, who are not allowed to deduct contributions to an IRA.  Failure to include employer contributions as taxable income is not an itemized deduction to begin with, nor is the exclusion from adjusted gross income for contributions to a Keogh retirement plan for the self-employed.  

In the process of giving “tax reform” a bad name, Jared Bernstein uses a sham fairness argument to justify arbitrary and unworkable anti-affluence policies that are irrelevant to any ill-defined problems. 

 

 

 

 

 

 

Nick Gillespie and Matt Welch on the New Episode of “Free Thoughts,” the Libertarianism.org Podcast

On Free Thoughts, the newish podcast from Libertarianism.org, Aaron Ross Powell, myself, and our guests explore the deep questions in libertarian thought. Guests include philosophers, economists, other Cato scholars. Rather than focusing on current public policy issues, we try to take a deeper look at how libertarians see the world. 

Nick Gillespie and Matt Welch joined us for this week’s episode, and Jason Kuznicki filled in for Aaron. We discuss whether there is a growing movement of independents that is a cause for optimism among libertarians. Are we in for a better, more libertarian era than ever before? Or should we be skeptical of this kind of optimism, given the growth of the federal government in recent years?

You can also subscribe to the iTunes feed or the RSS.

Obama Administration Turns Antique Collectors And Dealers Into Criminals

The Obama administration is preparing to treat virtually every antique collector, dealer, and auctioneer in America as a criminal.  In the name of saving elephants, the administration is effectively banning the sale of all ivory objects, even if acquired legally decades ago.  Doing so will weaken conservation efforts and enrich those engaged in the illegal ivory trade.

Under the Convention on the International Trade in Endangered Species of Wild Fauna and Flora (CITES) only ivory from before 1989 can be sold.  Unfortunately, ivory prohibition has not stopped the slaughter of elephants. 

The greatest demand for new ivory comes from Asia.  Most ivory in America arrived legally, many years ago. 

Until now the rules were simple and sensible.  Ivory imported legally can be sold.  Moreover, the burden of proof fell on the government to convict you of violating the law.  That’s the way America normally handles both criminal and civil offenses.

However, in mid-February the administration issued what amounted to a ban on ivory sales.  As I point out in my new Forbes online column:

In practice, virtually every collector, dealer, auctioneer, and other person in America is banned from selling ivory items, even if acquired legally, owned for decades, and worth hundreds or thousands of dollars.  Every flea market, junk shop, estate sale, antique store, auction showroom, and antique show is at risk of raids, confiscations, and prosecutions.

First, no imports are allowed, not even of antiques, which before could be brought to America with a CITES certificate. 

Second, all exports are banned, except antiques (defined as over a century old) in what the Fish and Wildlife Service says are “exceptional circumstances.”  At best the administration is raising the administrative and cost burdens of exporting to countries which already limit ivory imports to items with appropriate CITES documentation.  Or the new rule may restrict the sale of items previously allowed, thereby hindering Americans in disposing of their legal collections. 

Core-ites Awaken

How do you know the Common Core is in trouble? You could religiously follow the news in New York, Indiana, Florida, and many other states. Or you could read just two new op-eds by leading Core supporters who fear their side is getting bludgeoned. Not bludgeoned in the way they describe – an education hero assaulted by kooks and charlatans – but clobbered nonetheless. As Delaware governor Jack Markell (D) and former Georgia governor Sonny Perdue (R) put it:

This is a pivotal moment for the Common Core State Standards.

Although 45 states quickly adopted the higher standards created by governors and state education officials, the effort has begun to lose momentum. Some are now wavering in the face of misinformation campaigns from people who misrepresent the initiative as a federal program and from those who support the status quo. Legislation has been introduced in at least 12 states to prohibit implementation and states have dropped out of the two major Common Core assessment consortia.

Sadly, Markell and Perdue’s piece, and one from major Core bankroller Bill Gates, illustrate why the Core may well be losing: Defenders offer cheap characterizations of their opponents while ignoring basic, crucial facts. Meanwhile, the public is learning the truth.

Both pieces employ the most hulking pro-Core deception, completely ignoring the massive hand of Washington behind state Core adoption. For all intents and purposes, adoption was compulsory to compete in the $4.35-billion Race to the Top program, a part of the “stimulus” at the nadir of the Great Recession. While some states may have eventually adopted the Core on their own, Race to the Top was precisely why so many “quickly adopted the higher standards.” Indeed, many governors and state school chiefs promised to adopt the Core before it was even finished. Why? They had to for Race to the Top! And let’s not pretend federal coercion wasn’t intended all along: In 2008 the Core-creating Council of Chief State School Officers and National Governors Association published a report calling for just such federal pressure.

No Big Deal. Just Taxpayers Getting Clobbered

According to Ben Jacobs at the Daily Beast, Sen. Elizabeth Warren (D-MA) will soon be introducing legislation to allow holders of federal student loans to refinance at lower interest rates. There’s no indication that the new rates would be in exchange for longer terms, or anything like that. Just lower rates because someone might have borrowed at 7 percent, rates for new loans are now at 3 percent, and, well, paying 7 percent is tougher.

According to Jacobs, the proposal “seems to encapsulate…free-market principles” because recent changes to the student-loan program connect rates on new loans to broader interest rates. Apparently, pegging interest rates to 10-year Treasuries is very free market-y.

Perhaps more concerning than the questionable use of the term “free-market principles,” however, is the article’s handling of my reponse to the author’s request for comment. Apparently, I was fine with Warren’s rough idea, except for one little thing. Writes Jacobs:

In fact, Neal McCluskey, a higher education expert at the libertarian Cato Institute, had difficulty finding objections to the concept of Warren’s bill though he cautioned that was without any legislation for him to read. Instead, he was agog at the issues involved with reducing government revenue through lowering interest rates because the lender has to pay for it and, in this case, the lender is the American taxpayer.

How much bigger an objection could there be to “the concept of Warren’s bill” than that such a move would leave taxpayers holding the bag? As I often try to emphasize, taxpayers are people, too. There are lots of other concerns – most centrally, easy aid fuels tuition inflation – but to gently paraphrase Vice President Biden, reducing revenue that’s already been budgeted is a big deal!

Let me rephrase that: It should be a big deal. But as proposals like this indicate, it’s not nearly as big as it ought to be.

 

The School Computer Mania

The Washington Post reports that President Obama is cheerleading for more spending on high-speed Internet, tablet computers, and Wi-Fi in the nation’s K-12 schools. There are budget and federalism reasons why the president of the United States should not be sticking his nose into local schooling activities, but let’s put those concerns aside here.

I’m very skeptical of putting so much money into technology in the classroom. Just because kids think computers are fun does not mean that’s the best way for them to learn math, reading, science, and history. Politicians love doing photo-ops for their tech “initiatives,” but new computer gizmos are added distractions that students probably don’t need.  

This year my kids are entering a public middle school, which recently had an open house for parents. One of our stops was a science class that had few computers but lots of shop tools and woodworking machines. In this class, the kids learn about things such as aerodynamics and magnetism by building and testing actual models. The teacher said his optional class was in very high demand. I asked why. He said something to the effect, “The kids are saturated with computers in their other classes, but here they can get away from it and learn while working with their hands.”

Recently, I was horrified when the superintendent of our school system said that she wants to issue an Apple iPad to every student. But why? Today’s textbooks are often very colorful and interesting. And many teachers these days are highly trained with advanced degrees—so shouldn’t kids be engaging with them during school time rather than becoming computer zombies? Shouldn’t they be listening to a human rather than staring at a screen?

My kids seem to learn mainly by interacting with their parents and their excellent teachers, and by reading books, doing assignments, and focusing on homework written on old-fashioned paper. They also learn from TV and computers, but there is a balance here that tech-in-the-school advocates seem intent on obliterating. The Washington Post story quoted Obama administration officials saying that their tech initiatives were a “breakthrough investment in schools” and that “this is a transformative moment for teaching and learning in this country.” Baloney.