Topic: Government and Politics

Why Support for the Minimum Wage Persists in Congress: A Thought Experiment

It might seem obvious why support for the minimum wage persists in Congress. Politicians always want to be seen as helping the little guy. So they would naturally support an increase of the minimum wage to $7.25, as is currently being proposed.

Let’s assume that everyone who supports an increase in the minimum wage also knows – and perhaps even agrees with – the fundamental economic insight that such an increase would lead to either lower-skilled workers being laid off or prices for goods going up or both. It’s conceivable that someone could still support a minimum wage increase after being convinced of that. It’s a price worth paying, they might say. Or they could argue, as some supporters of the current proposal do, that an increase to $7.25 – phased in over three years, no less! – won’t do that much damage. After all, it’s not a $15 increase.

Now let’s try a little thought experiment. Assume support for a minimum wage increase is conditional and dependent upon the proposal offered. A call for a $20 minimum wage, for instance, would arguably be greeted with much less enthusiasm. Evidence of this is the fact that even supporters of the minimum wage aren’t willing to go so far as to propose such a thing.

What follows, then, is a workable assumption about the politics of this issue: How adversely affected by the policy a congressman’s district would be is the main determinant, all other things being equal, of that congressman’s enthusiasm for a minimum wage increase. A congressman representing a rural district with many small businesses that the proposed minimum wage would burden most heavily would be a less enthusiastic supporter than one from a big city with many large businesses, the employees of which make far more than the minimum wage.

But the cost of living differs dramatically in different parts of the country, too: $7.25 doesn’t buy the same amount of stuff in Manhattan as in Kansas City. And there’s the rub. It’s easy for a congressman from Manhattan to support a $7.25 minimum wage since it might have only imperceptible economic effects in his district. In Kansas City, however, the effects would be relatively greater.

Now consider what might happen if Congress were required to adjust the federal minimum wage by the cost of living in each congressional district. In areas where the cost-of-living is close to the national average, the minimum wage would be around $7.25. In Manhattan – where it costs twice as much to live when compared to other areas, like Kansas City – the minimum wage would be at least $14.

This would set off all sorts of protests from congressmen in districts in which the upward adjustment is greatest. Now the businesses in their districts would feel a pinch they wouldn’t feel under a non-adjusted minimum wage. Those formerly enthusiastic congressmen might even start to question why it’s the federal government’s business to meddle in the often complex process – going on all around the country within hundreds of companies and cities, each of which are faced with vastly different economic situations – by which an employer and employee come to their own agreement on compensation for employment. And isn’t that the sort of debate we should be having?

The Power of the Purse

Hey, don’t look at us, we’re just Congress: that was Senator Joe Biden’s take on Meet the Press Sunday when asked about stopping the surge and winding down the war.  As Senator Biden put it: “There’s not much I can do about it.  Not much anybody can do about it.  He’s commander in chief.”  A little later, Tim Russert asked him, “Why not cut off funding for the war?” and Biden replied “I’ve been there, Tim.  You can’t do it.”

Actually, you can, as Walter Pincus noted in the in the Washington Post in November

In 1969, Congress’s ruling Democrats began to offer amendments to funding bills – often approved with Republican votes – to limit President Richard M. Nixon’s military alternatives in Southeast Asia. Although the Hatfield-McGovern amendment to cut off money for the war was defeated in August 1970, it accelerated Nixon’s steps toward Vietnamization of the fighting. And three years later, with withdrawal of U.S. forces having begun, Congress voted to cut off all funding for “offensive” military action, sealing the deal.

Some 20 years later, Congress used similar tactics to end our nation-building excursion in Somalia.  A month after the Black Hawk Down incident, in the Defense Appropriations Act for FY1994, Congress used the power of the purse [.pdf] to “cut off funding after March 31, 1994, except for a limited number of military personnel to protect American diplomatic personnel and American citizens, unless further authorized by Congress.”

Of course, Congress is not about to start cutting off funding for the Iraq war anytime soon.  To the extent that the new Congress invokes the power of the purse over Iraq, it’s likely to pursue an intermediate strategy of attaching appropriations riders to the funding it authorizes, passing the funding, but barring troop increases, for instance.  What seems likely to happen with that strategy is that the president will take the money and ignore the strings.  Consider the signing statement Bush issued while signing the Intelligence Authorization Act of 2005, summarized here by the Boston Globe :

Dec. 23, 2004: [Congress] Forbids US troops in Colombia from participating in any combat against rebels, except in cases of self-defense. Caps the number of US troops allowed in Colombia at 800.

Bush’s signing statement: Only the president, as commander in chief, can place restrictions on the use of US armed forces, so the executive branch will construe the law ”as advisory in nature.”

Thus, in the president’s view, Congress cannot prevent him from using American troops in a shooting war with Colombian drug traffickers, should he decide that’s a good idea.  His position is, in essence, shut up and pay, it’s my army and my call. 

Faced with that sort of intransigence, those members who want an end to the war in Iraq are probably going to have to demonstrate their willingness not to pay.  Of course, that strategy leaves one vulnerable to charges of undercutting the troops.  (“Supporting the troops” apparently entails extending their tours and sending more of them to die in an operation that just about no one thinks will work).  Clearly, sending the president a letter–as Speaker Pelosi and Majority Leader Reid just did–isn’t going to do it.  

Pressure on funding pushed Nixon out of Ahab mode on Vietnam.  It may be the only thing that can force this president to change direction in Iraq. 

Napoleon’s Educational Dynamite

When Reagan education secretary Bill Bennett and the NEA start singing from the same hymnal, it’s time for a reality check. Both have now called for the federal government to promote uniform national curriculum standards, but neither has made a compelling case for doing so. Obviously, its important to set high standards for all students, but that does not mean that it’s a good idea to set precisely the same standards for every single child of a given age. Children are not all identical widgets who can be run along an educational conveyor belt and learn every subject at the same pace. The best thing we can do for our kids is to treat them as the individuals they actually are, helping them progress through their studies at the best pace they are capable of – and that pace is not going to be the same for every student.

The idea that the federal government should be dictating a single standard for what every child in America should be learning violates both liberal and conservative ideals. It is at odds with the progressive view that learning should be adapted to and guided by each individual student, and runs contrary to the conservative ideals of limited government and individual liberty.

To find a political tradition that really is compatible with this idea, you have to go back a ways. Hippolyte Fortoul, the education minister of Napoleon III, apparently liked to boast that he could pick up his watch at any time of the day and tell you what every high-school student in France was learning at that moment. So we’re taking our policy cues from 19th century French imperialists now?

More on why federal government education standards are a bad idea here.

Plug-In Pablum

One can’t swing a dead cat in Washington these days without hitting someone who’s ranting about how plug-in hybrid vehicles (part gasoline engine, part battery-powered engine, but rechargeable like a wall appliance) are the wave of the future.  Of course, if they really were the wave of the future, there would be no need for ranting in Washington - automobile manufacturers would be busy making them as we speak.  It’s only when corporate America is cool to an idea that the prophets turn to the taxpayer or the regulator.  This illustrates Taylor’s law - “the commercial merit of any particular technology is inversely related to the degree of political tub-thumping heard in Washington for said technology.”

Which brings us to plug-in hybrids.  Noted automobile engineers James WoolseyFrank Gaffney, and Gal Luft, among others, have been going into overdrive of late to demand federal action to compel the manufacture and sale of these sorts of cars, which they assure us perform so splendidly and can be so wildly profitable for both buyer and seller that only some sort of inexplicable insanity explains their absence from car lots all across America.  This “Neo-Cons for Neo-Cars” alliance is picking up steam and is increasingly embraced by all sorts of smart opinion leaders who can barely program a VCR, much less design an engine.

An invaluable reality check, however, can be found in the Sunday New York Times.  There, reporter Lindsay Brooke notes that, while automobile companies are busily developing plug-in prototypes, there remains one little problem - the battery necessary to make such a car go from here to there has yet to be invented.  While the industry is optimistic that something will come along in the near future, industry executives confess when pressed that the cars would be so expensive to manufacture that they probably wouldn’t sell without government subsidies or consumption mandates.

Why are Neo-cons and other assorted hawks so obsessed with automotive powertrains?  My guess is that they fear U.S. foreign policy is being terribly constrained by our need to import oil.  Plug-in hybrids would liberate the country from worrying about how our actions play on the Arab street, freeing Uncle Sam to act even more uninhibitedly around thew world.

Look, if the auto industry wants to make these things and consumers want to buy them, fine with me.  But before we start bossing Detroit or their customers around and turn over automobile manufacturing to the very same crowd that manufactured the war in Iraq, consider yourself warned.     

A Head-Check on Earmark Reform

Today, President Bush called for reform of budget earmarks, the fiscal baddie de jour. Those are the budget items commonly called “pork projects.” Think of the funding for the World Toilet Summit, for instance, and the obvious jokes about fiscal incontinence.

In this morning’s Rose Garden speech, the president summed up why these projects are bad:

Washington insiders are able to get billions of dollars directed to projects, many of them pork barrel projects that have never been reviewed or voted on by the Congress … Some of the earmarks are not even included in legislation. They are stuffed into committee reports that have never been passed, and are never signed into law. Earmarks often divert precious funds from vital priorities like national defense. And each year they cost the taxpayers billions of dollars.

He closed with what was touted by his press spinners as a grand proposal to curtail earmarks:

Congress needs to adopt real reform that requires full disclosure of the sponsors, the costs, the recipients, and the justifications for every earmark. Congress needs to stop the practice of concealing earmarks in so-called report language. And Congress needs to cut the number and cost of earmarks next year by at least half.

It’s certainly nice to hear this rhetoric coming from the president. And nobody can really object to what he’s proposing. It’s hard to disagree with an attempt to shine some light on what über-lobbyist Jack Abramoff called the “favor factory.” Even Nancy Pelosi has endorsed the goal of “transparency” in earmarking by requiring members of Congress to put their names alongside the projects they sponsor.

These reforms assume that members of Congress will be shamed into stopping these sorts of projects when forced to attach their names to them. But the truth really isn’t that members of Congress don’t want their names affiliated with most of these things. It’s that so many of them do! When earmark sponsors remain anonymous, numerous congressmen could take credit for a single project. There was no way to verify who was telling the truth. Now there is. Think of it as intellectual property protection for government waste. It just might lead to more pressure to multiply the number of earmarks, not less.

Even if “earmarks” as currently defined are monitored and reduced, there are no promises that these silly projects won’t appear in other ways and other places. The congressional budget process is nothing if not a game of reinvention. You can call these spending items Happy Funtime Projects instead and sock them away in another part of the budget. They will still remain the coin of the K Street realm.

Of course, Congress could simply give a bucket of money to an agency, no strings attached. But then it’s also likely a member of the Appropriations committee would write a letter to the department head that reads something like, “Gee, wouldn’t it be nice if Project X got some of this pot of money?” Can you really blame a department head who reads a letter like that – from a member of Congress who has power over their budget and oversight of their agency – and takes it seriously? It would strike anyone in that position as similar to Tony Soprano walking into the corner grocery store you own and saying, “Damn shame if anything were to happen to this nice little place.”

Earmark transparency shouldn’t be seen as the endgame of budget reform. It is merely a beginning. Yet the goal should be to reduce the scope of government overall. As long as a culture of spending persists in Washington – fueled by a budget process that commands Uncle Sam to be all things to all people – earmarking in some form will always be with us no matter who is in power.

A King, Not a President?

Gene Healy praises former president Gerald Ford for proclaiming himself “a Ford, not a Lincoln” and demonstrating “a modest approach to the most powerful office in the world.” The Washington Post notes:

Ford never forgot his humble roots, famously presenting himself as “a Ford, not a Lincoln.” He was not even born a Ford. His original name was Leslie Lynch King Jr. 

So if not for his mother’s remarriage, he could have begun his presidency by declaring “I’m a King, not a President.” But that’s a claim better suited to the current president than to President Ford.

An Oil Royalty Mystery

With oil prices still above $60 a barrel, do oil companies need inducements to find and produce more oil? That’s the underlying question of today’s NYT front-page article about an Interior Department report questioning the value of royalty rebates and tax breaks for gas and oil production.

The rebates are targeted at expensive and difficult exploration, usually in deep water or that requires deep drilling. The intention is to incentivize that exploration, allowing the United States to increase its domestic reserves using “unconventional oil.”

But it’s unclear how effective the incentive is, given the expense of producing such oil. Here’s the article’s punchline:

[The report] estimates that current inducements could allow drilling companies in the Gulf of Mexico to escape tens of billions of dollars in royalties that they would otherwise pay the government for oil and gas produced in areas that belong to American taxpayers.

But the study predicts that the inducements would cause only a tiny increase in production even if they were offered without some of the limitations now in place.

The article notes that royalties and corporate taxes deliver into federal coffers about 40 percent of the revenue produced from oil and gas extracted from federal property. The worldwide average government take is about 60–65 percent. A 40 percent federal take may have been fair at a time when oil prices and profits were lower, the article suggests, but the government should be getting a much higher cut from today’s prices.

Reading the article, I thought about a question that my colleague (and boss) Peter Van Doren has often asked: Why do we have federal royalty payments at all? Why not, instead, use the initial mineral rights auction as the sole source of government revenue from extracting oil or gas? 

A switch to auction-only taxation would yield much more money to the federal government up-front, as oil and gas companies would bid heavily for the leases. (I’ll be agnostic on whether the government receiving more money is a good thing.) An auction-only process would also be much more transparent and would do away with the “gaming” of royalty payments. And, perhaps most importantly, an auction-only process would better align oil companies’ incentives with consumers, vis-a-vis the current system.

In essence, the federal government uses a two-step tax process on oil and gas: up-front payment from the auctioning of the right to extract from a certain reserve, and ongoing royalty payments calculated from the amount of hydrocarbons extracted. To participate in the auction, oil and gas companies must estimate the value of the hydrocarbons they expect to extract over time, subtract the royalty payments they would have to make, and then determine how much of the remainder they would be willing to offer to the government as an auction price.

This system gives a decided advantage to oil companies that are willing to “game” the royalty system. Those firms can outbid competitors, because the gamers know their royalty payments would be lower than the other firms’ payments would be.

To get rid of the gamers’ advantage, the feds need only scrap the royalties scheme. That would force oil companies to bid heavily during the lease auction, where cheating is much more difficult. The brilliant feature of an auction is that it forces all parties to reveal exactly how much they value the product that is up for bid.

That feature would do away with the need to incentivize firms to tap into expensive but worthwhile unconventional gas and oil. Suppose there are two gas reserves up for auction: one an easy-to-tap reserve on government land in Wyoming and the other a similar-size reserve in the deep waters of the Gulf of Mexico. Extraction firms would bid heavily on the Wyoming reserves, but they would also bid (albeit not as much) on the Gulf reserve if they thought it worthwhile. No explicit incentive system would be needed — the firms would simply reveal to the auctioneer their own estimates of the Gulf reserve’s value.

Switching from an auction & royalty system to a straight royalty system would also better align oil and gas companies’ interests with consumers. Currently, as a well nears the end of its productive life, royalties would encourage the operator to take the well out of production sooner, because each hydrocarbon produced means more revenue taken from the oil or gas company and given to the government. By changing the tax to an up-front auction payment, oil and gas companies would have the incentive to continue operating the well until every profitable hydrocarbon has been extracted. That incentive change would be especially beneficial to consumers in times of tight supply and high prices.

As the NYT article notes, members of the incoming Democratic congressional majority are declaring that they will cut back on the royalty relief and tax cuts given to oil and gas companies. They would do the nation’s taxpayers and consumers an even bigger service if they would reconsider the royalty system altogether.