Topic: Health Care & Welfare

California’s Unprecedented Minimum Wage Hike Brings Major Risks

Californian lawmakers and labor unions have reportedly reached a deal to increase the minimum wage to $15 an hour by 2022, and index it to inflation after that. If this deal becomes a reality, California would be the first statewide experiment with the $15 minimum wage. The ratio of the minimum wage to the median wage in California would be one of the highest in the world among high-income countries. California’s minimum wage deal brings with it unprecedented risks, and any resulting adverse results will be primarily borne by younger workers, people with limited job skills, and people living outside of major cities.

Ratio of Minimum Wage to Median Wage, California (2022) and High-Income Countries (2014)


Source: OECD.

Note: European OECD countries, with the addition of Australia, Canada and United States. California projection assumes two percent real wage growth.

Unlike the recent deal in Oregon, which included a tiered minimum wage with lower levels in smaller cities and rural areas, California’s increase would apply uniformly throughout the state. While major cities like San Francisco or San Jose that generally have higher wages might be able to absorb some of the adverse effects of this increase, non-metro areas will be the most impacted by this deal. The New York Times estimates that in 2022 the $15 minimum will be 40 percent of the median wage in San Jose, but 74 percent in Fresno, significantly higher than France and approaching the 77 percent seen in Puerto Rico. Arindrajit Dube, a prominent minimum wage researcher who has found relatively small disemployment effects from past increases, acknowledged that “In rural areas like Fresno, a majority of workers will be affected.” There is also more slack in the labor market in places away from the major urban metros: ten of the thirteen metropolitan statistical areas (MSAs) with the highest unemployment rates in the country are in California, and people in these places will find it even harder to deal with these minimum wage increases.

Another potential pitfall of the new deal is it would effectively lock California into a rigid trajectory for the next six years, which will limit the state economy’s ability to adapt to changing circumstances. With a phase-in stretching to 2022, it’s likely that a recession will hit at some point during this period. This could cause wage growth to stall out, which would push up the ratio of the proposed minimum to median wage ration even higher. Even Governor Brown recognized the implicit trade-offs in minimum wage increases of this magnitude, warning in his most recent budget proposal that in this scenario “such an increase would require deeper cuts to the budget and exacerbate the recession by raising businesses’ costs, resulting in more job loss.” The Sacramento Bee reports that the tentative deal includes a provision giving the governor the ability to temporarily halt future increases during a recession, but given how quickly Governor Brown has reversed course in the face of pressure from unions and activists, it is hard to see how a future governor would halt increases in the future.

The increases do not end in 2022.  After that, the minimum wage would be indexed to inflation. One of the arguments employed for increases now is that the real value minimum wage has eroded over time, because it has not been linked to inflation. This leads to a “sawtooth pattern” in the real value of the minimum wage. Businesses might be less likely to respond to minimum wage increases that they perceive as temporary in nature. Shifting investment and hiring decisions is disruptive and costly for employers, so if the impact of the minimum wage increase will be attenuated by inflation and broader wage growth, the adjustments will be more muted. Responses to a minimum wage increase of this magnitude that will then be indexed to inflation will be significantly larger than most previous cases that have been analyzed.

Sawtooth Pattern: Real Value of Federal Minimum Wage


Source: Federal Reserve Bank of St. Louis, Federal Reserve Economic Data.

Studies focusing on discrete job levels over a short time frame might be failing to accurately measure where these adjustments are taking place.  Jonathan Meer and Jeremy West suggest that the impact of a minimum wage increase is primarily driven by reduced job creation, rather than companies firing people. Over a longer time period, they estimate that a 10 percent increase in the minimum wage leads to a 0.8 percent reduction in total employment, with these effects concentrated among lower-skilled workers. California’s much greater minimum wage increase would lead to slower job growth in the future, which would disproportionately harm people at the lower end of the skills spectrum.

With this deal, California ventures into largely uncharted waters for the United States experience with the minimum wage, and the ratio of minimum wage to median wage would be one of the highest in the world. While other cities have passed a $15 minimum, and Oregon recently enacted a significant increase, California would impose uniform minimum wage hikes throughout the entire state, which could especially harm people outside major cities. After reaching $15, the minimum wage will be indexed to inflation, which could lead to disemployment effects larger than many recent studies have found. Young workers and people with limited job skills will bear the brunt of any negative consequences from California’s minimum wage experiment, while rural areas and smaller towns will see the most disruption. 

The Hidden Costs of ObamaCare’s Millennial Mandate

Guests mingle during the second annual Future of America gala at the House of Sweden in Washington, D.C., U.S., on Friday, Oct. 3, 2014. "Our guests are not people that are traditionally struggling with unemployment," said David Pattinson, founder of David Pattinson's American Future, a Washington-based nonprofit, which aims to get the millennial generation more fully employed. Photographer: T.J. Kirkpatrick/Bloomberg

There is a current running through the ObamaCare debate that goes something like this:

Every other advanced country provides health insurance to all its citizens for a fraction of what Americans spend on health care. ObamaCare emulates what those countries do. Anyone who complains about ObamaCare increasing premiums or imposing other costs is therefore a right-wing nut who doesn’t understand that universal coverage results in lower spending, not higher spending.

This line of reasoning, so to speak, leads supporters to believe ObamaCare is a free lunch. Their ignorance is not accidental. MIT health economist and ObamaCare architect Jonathan Gruber helpfully explained some years ago that he and his co-architects deliberately designed the law to hide its costs and make the benefits seem like a free lunch.

ObamaCare’s “Millennial mandate”—the requirement that employers who offer health coverage for employees’ dependents continue to offer such coverage until the dependents turn 26 years old—is one of those supposed free lunches. This mandate’s benefits unquestionably come at a cost. Expanding health insurance coverage among adults age 19-26 leads them to consume more medical care. When those people file insurance claims, health-insurance premiums rise. Yet ObamaCare does an amazing job of hiding those costs from voters.

Does ObamaCare impose a special tax that the IRS collects to pay for that extra coverage? No. That would be far too transparent. The cost just gets added to your premiums.

Does ObamaCare require employers to include a line-item on your premium payments, to show you how much this additional coverage is costing you? Absolutely not. That, too, would make the costs dangerously noticeable. The additional cost just gets thrown onto the pile, hidden among the costs of all the other mandated coverage you don’t want, and the coverage you actually do want.

Maybe workers see their premiums rising, and are merely ignorant of the fact that the Millennial mandate is part of the reason? Nope. ObamaCare hides the cost further still. Explaining how requires a little bit of labor economics.

The ACA’s Sixth Anniversary Is A Wake, Not A Birthday Party

Six years ago today, President Barack Obama gave the Affordable Care Act his signature. There is no sense in marking the ACA’s anniversary, however, because the ACA is no longer the law.

Realizing the law he signed was unconstitutional and unworkable. President Obama and the Supreme Court have since made a series of dramatic revisions that effectively replaced the ACA with something we now call “ObamaCare.”

ObamaCare–not the ACA–is the law under which Americans now live.

  • Under ObamaCare, the Supreme Court used Congress’ taxing power–a power Congress declined to use under the ACA–to force Americans to purchase government-approved health-insurance plans.
  • Under ObamaCare, the Supreme Court severed the connection between the (ineffective) Medicaid expansion Congress enacted and the rest of the Medicaid program–a bifurcation Congress never contemplated, much less intended.
  • Under ObamaCare, the president imposed and the Supreme Court green-lighted taxes on nearly 100 million Americans whom Congress clearly exempted.
  • ObamaCare gives members of Congress a special exemption from the ACA. (It’s good to be the king.)
  • Under ObamaCare, the president can tax and subsidize whom he pleases. Even if Congress didn’t provide the funding. Even if Congress says he can’t.

The ACA, in effect, is dead. ObamaCare is the law governing Americans’ health care–even if we don’t know what that law is from one day to the next. The ACA had legitimacy. No legislature ever approved ObamaCare. It has no legitimacy.

Unfortunately, ObamaCare doesn’t work much better than the ACA. ObamaCare is still causing Americans to lose their health plans. As one voter pointedly reminded Hillary Clinton, ObamaCare is still driving premiums higher. It is still causing their coverage to erode.

If you want to celebrate something on March 23, celebrate the anniversary of the last time Democrats put the legislative process and political legitimacy ahead of their ideological goal of universal coverage

Little Sisters Case: We’ll Likely See a Third Contraceptive-Mandate Argument

Today’s argument in Zubik v. Burwell was very different than what we saw two years ago on Hobby Lobby. The focus was almost entirely on whether the “accommodation” offered to religious nonprofits constitutes a substantial burden on those employers’ religious free exercise. Indeed, much of the argument involved a dispute over how exactly the “accommodation” works and whom it burdens – not simply whether adequate alternatives were available.

But getting past these technicalities of instance regulations, the result looks to be the same as what we saw regarding for-profit corporations: the progressive justices are in lockstep for the government, the conservatives support the religious-liberty claimants, and Justice Kennedy is in the middle but almost certainly leaning towards the conservatives. Of course, after Justice Scalia’s passing, that suggests that the vote will be 4-4 – meaning an affirmance of conflicting lower-court rulings and a Schroedinger’s mandate that lives on in some of the country but not the rest.

The Court could avoid this untenable result – as well as the messy casuistry and the culture-war battle – by following the administrative-law line suggested by Cato in our amicus brief. We argued that the Department of Health & Human Services simply lacked the authority to create law in this sensitive area. As Josh Blackman and I write in the current issue of The Weekly Standard:

Conveniently, there’s an alternate argument, based on the Hobby Lobby and King rulings, that could command a majority opinion: The agencies lack both the expertise and power to exempt some religious groups while forcing others—deemed “less” religious—to be complicit in what they consider sin. By rejecting this bureaucratic assertion of executive authority, Zubik can thus be resolved without further politically fraught haggling over RFRA.

In other words, if Congress had imposed this regime, that would’ve been one thing, but we cannot assume that the Congress that passed Obamacare – including especially the pro-life Democrats whose votes were essential – delegated such awesome power to administrative agencies without saying so explicitly.

Alas, the Court didn’t seem at all interested in that nifty solution, and so, rather than releasing that impossible tie, what we’re likely to see is a setting of Zubik for reargument at a time when the Court gets its ninth justice. That means we’ll be doing this all again next year, when it really will be deja vu all over again.

More Losses Ahead for Obamacare’s Troubled CO-OPs

Twelve of the 23 Obamacare health cooperatives (CO-OPs) have shut down already. 627,000 people were enrolled in CO-OPs that ceased operations, and the federal government had disbursed more than $1.2 billion to these CO-OPs, and it might be difficult to ever recover any of these taxpayer funds. A GAO report released this week reveals that the CO-OP losses could be far from over.

4 of the 11 CO-OPs still operating in 2016 have not yet reached the benchmark of 25,000 enrollees, which CMS officials say is the minimum needed for a CO-OP to have financial solvency. More than 69,000 people were enrolled in these plans as of January 2016, and the federal government has already disbursed $265 million of the $407.8 million in loans awarded to them. The people enrolled in these plans and millions of dollars in government outlays are both at risk in the coming year. The map below, based on a figure from the report, shows how level of attrition so far, with the addition of highlighting the states where the CO-OPs have failed to reach the enrollment benchmark.

Interview with John Goodman on How to Replace ObamaCare

Last year, the Cato Institute held a forum on John Goodman’s latest book on health reform, A Better Choice: Healthcare Solutions for America (Independent Institute, 2015). Goodman founded and was the longtime president and CEO of the National Center for Policy Analysis. The Wall Street Journal calls him “the father of health savings accounts,” and he is currently president of the Goodman Institute for Public Policy Research and a senior fellow at the Independent Institute. Video of the book forum is available here.

I posted a lightly edited transcript of my interview of Goodman, which did a good job of highlighting the differences among ObamaCare opponents, in three parts:

For more on the three schools of ObamaCare opponents, see Cato’s previous book forum on Philip Klein’s Overcoming Obamacare: Three Approaches to Reversing the Government Takeover of Health Care (Washington Examiner, 2015).

If You Want to Pass for Serious in Wonktown

It turns out that Will Wilkinson’s latest anti-libertarian screed is actually worth a look. It’s wickedly funny in places, and you can’t tell me you haven’t heard plenty of the lines that he pins on his hapless interlocutor. Oh the silly things we get up to, whenever we start from first principles! And when the lines do ring false, well, strawmen can be funny too.

I have to wonder, though, about Will’s purportedly realistic, hard-nosed, no-first-principles-here political strategy: Is it really a good idea to scrap libertarian theory altogether, because it’s just not paying off too well in state dismantlement? Should we really work to shore up the welfare state as a means of reining in the regulatory state? Is this the jiu-jitsu we’ve been looking for?

[I]f we patched up the already existing, already very large American welfare state so that it did a better job of preventing people from falling through the cracks, that might make the zero-sum thinking of economic nationalist politicians like Donald Trump and Bernie Sanders less attractive, and an agenda of economic liberalization might be more feasible.

Now, the dialogic format means a lot of elision, and as a result, “patch up” could mean nearly anything. This to me seems a bit too carefully calculated to please nonlibertarians, and among them particularly the wonkier sort, who love patching up existing anythings whenever they’re found in the government and leaking. “Take us seriously,” these lines seem to say, “because we’re a whole lot like you are!”

Yet there’s a politically popular reason why (1) the U.S. welfare state is so expensive and (2) so many people fall through the cracks anyway. Both of these can be explained with reference to the U.S. middle class, which receives a very large share of the total benefits, on much flimsier than the usual Rawlsean justifications. But hey, they vote! Every once in a while, a left-leaning pundit will notice this fact, feel ashamed, and be forced to make a discreet retrograde maneuver. Almost nothing ever comes of it, policy-wise.

In layman’s terms, patching up the welfare state – which I charitably take to mean “helping real poor people, instead of pretend poor people” – would require scrapping a whole bunch of middle class tax breaks. Give Bernie Sanders credit for honesty, I suppose, although even he’s understandably reticent about the kinds of taxes that would be necessary for his proposed programs.

Apart from the details of tax policy, it also seems to me that Will’s approach risks growing the U.S. welfare state while leaving the regulatory state completely untouched. If we both agree that the regulatory state is the real problem, then we ought to attack it directly, rather than attacking it in the most oblique way imaginable, by praising an extensive welfare state.

A more modest political strategy might concede that we don’t actually know the consequences of a prominent, welfare-skeptical political faction, like libertarians, collectively changing their minds about welfare policy. It’s not entirely unreasonable to think that it will lead to a larger (but neither juster nor more efficient) welfare state. And that it won’t do anything else at all.

As Will’s own stand-in says, “I believe the social world is too complicated and unpredictable to see more than one or two steps down any path. I think you believe that, too.” And I do believe that!

So let’s attack the regulatory state in one step, shall we? At this point, were it anyone other than Will Wilkinson, and were it any institution other than Cato’s impish kid brother, I would introduce both the author and the institution to… those brave, fire-eating, first-principles libertarians over at the Institute for Justice. IJ works directly to roll back the regulatory state. No mucking about with the welfare state for them! IJ just finds one appalling regulation after another, and it sues the pants off the regulators. Often, IJ wins. (So, for that matter, does Cato’s own legal affairs team.)

Our success in challenging the regulatory state directly is a big part of the reason why I’m not so interested in abandoning first principles. I just don’t see first principles necessarily getting in the way of effective activism. The two can work well together, even if sometimes they don’t, and even if, when they don’t, it can make for some amusing dialogue.

Translating first principles into effective activism is, agreed, actual work. Like, about messaging and priorities and stuff. But I think we can do it, and that it’s likely easier than performing a massive two-step with the welfare state.

And finally, I do agree that first principles can make you seem like a loon at times, even just on their own terms. And that can make for a pretty lonely life, and a frustrating one, in a city that doesn’t much care for first principles of any sort at all.

Still, it’s worth considering how really, truly weird libertarianism is, by the lights of Wonktown, and how much we’d have to give up to fit in here: The establishment adores the surveillance state. It wants to keep the war on drugs, even if it doesn’t quite look to expand it for now (whew). The establishment views eminent domain as just another fun and totally legitimate thing the state can do, for whatever reason it thinks might be good. The establishment doesn’t flinch at imprisoning millions. The establishment wants to spend, by our lights, insanely too much on defense, and it’s now debating whether the solution to all of America’s foreign policy problems is to bomb not-necessarily-identified people whose cell phone usage fits a statistical profile.

I have to wonder how, let alone why, I would choose to be cozy with the defenders of these policies, rather than holding them in a well-regulated and professional disdain (which need not, of course, preclude a working relationship, when such is required).

Do note: Wonktown gives no credit whatsoever for a theoretical willingness to use the state to help poor people: “Can we please,” the Wonks will immediately ask, “can we please keep delivering our help in the inefficient, signal-y, vote-getty ways that we’re used to? I mean, it’s charming that you care about the poor, my dears, but really… Did you think that that’s the reason why we were doing it? And – anyway – enough about helping people: Can we talk about all the ways that you plan to hurt people? Because if you want to pass for serious in Wonktown…”