Topic: Regulatory Studies

Raise the Wage Act Is More Rhetoric than Reality

When U.S Congressman Robert C. “Bobby” Scott (D-VA) and U.S. Senator Patty Murray (D-WA) introduced the Raise the Wage Act on April 30, they promised that their bill would “raise wages for nearly 38 million American workers.” Their bill would also phase out the subminimum tipped wage and index the minimum wage to median wage growth.

With rhetorical flourish, Sen. Murray said, “Raising the minimum wage to $12 by 2020 is a key component to helping more families make ends meet, expanding economic security, and growing our economy from the middle out, not the top down.”

The fact sheet that accompanied the bill claims that passing the Raise the Wage Act would reduce poverty and benefit low-wage workers, especially minorities. Indeed, it is taken as given that the Act “would give 37 percent of African American workers a raise”—by the mere stroke of a legislative pen. It is also assumed that “putting more money into the pockets of low-wage workers stimulates consumer demand and strengthens the economy for all Americans.”

The reality is that whenever wages are artificially pushed above competitive market levels jobs will be destroyed, unemployment will increase for lower-skilled workers, and those effects will be stronger in the long run than in the short run.  The least productive workers will be harmed the most as employers substitute new techniques that require fewer low-skilled workers.  There will be less full-time employment for those workers and their benefits will be cut over time.  That is the logic of the market price system.

Why Are Environmental Policy Conflicts So Intractable?

On Earth Day the op-ed pages remind me of “Groundhog Day.”  Environmentalists argue we need stricter environmental regulation.  Business interests argue such regulations reduce economic growth and cost the economy jobs.  Each also invokes “sound science” as an adjudicator of the conflict.  Environmentalists invoke “science” in the case of CO2 emissions and effects while business interests invoke “science” in the case of traditional pollution emissions.  Each year we wake up and the same movie plays out.

The scientific validity of people’s preferences plays no role in the market’s delivery of private goods.  Markets can and do supply organic lettuce regardless of whether it is really “better” for your health.  The scientific validity of people’s preferences is irrelevant.

Air- and water-quality environmental disputes are more challenging to analyze than the supply of organic lettuce for two reasons.  First, while property rights exist for lettuce, they often do not exist for air and water.   Thus, environmental politics involves continuous struggle over implicit property rights and the wealth effects that flow from such rights.  Second, both conventional air and water quality are “local” public goods (club goods) rather than private goods, thus individual differences in consumption, the primary method of reducing conflict associated with private goods, are not possible.  Instead, everyone’s varied preferences for environmental goods can only result in one jointly consumed outcome.

One possible impediment to the implementation of market-like solutions to air and water quality is that the initial ownership of property rights to air or water emissions not only has wealth but also efficiency effects.  That is those particular property rights (the right to a pristine environment) are so valuable relative to other assets that their initial allocation alters the willingness of people to pay for them and thus affects how much pollution exists.  In such cases the initial distribution is the whole ballgame because it determines the resulting air- and water- quality levels.

IRS Budget Cuts and Tax Filing

For taxpayers needing IRS help, this year’s filing season could be a nightmare. The Washington Post today reports on the long lines at IRS offices. The newspaper suggests that five years of Republican budget cuts are to blame, even though Democrats control the White House and, until recently, the Senate. But, whoever is at fault, the IRS commissioner is correct that his agency’s service is “abysmal.”

Let’s take a closer look at those alleged budget cuts. Using data from the OMB budget database, I split total IRS outlays into two activities: administration and handouts. Administration includes tax return processing, taxpayer help, enforcement, and other bureaucratic functions. Handouts are mainly refundable tax credits, particularly the earned income tax credit, child credit, and Obamacare exchange subsidies, which began in 2014.

The chart shows that the IRS budget for handouts has skyrocketed (red line). The IRS has become a huge welfare agency. Handouts quadrupled from $30 billion in 2000 to an estimated $121 billion in 2015. Handouts have spiked the past two years because of Obamacare exchange subsidies of $13 billion in 2014 and an estimated $29 billion in 2015. (Data for 2015 are the president’s estimates).

How about IRS administration costs? They have been relatively flat (blue line). They grew from $8.4 billion in 2000 to a peak of $12.3 billion in 2011, and then they dipped to an estimated $11.3 billion in 2015.

Economists Weigh-in on the TPP

In recent weeks, a number of prominent economists have expressed views on the Trans Pacific Partnership (TPP).  David AutorDavid Dorn, and Gordon Hanson are for itTyler Cowen is for it, mainly for foreign policy reasons; Noah Smith is for it; Larry Summers is a maybe; Paul Krugman thinks it’s not a big deal and questions whether Obama should spend “political capital” pushing it; Brad DeLong is more positive than Krugman; Dean Baker is skepticaland Matt Yglesias is skeptical, noting that “[t]he political economy and public choice issues around what’s become of the mutlilateral trade process stink.”

Before jumping to any conclusons, though, I think DeLong makes an important point here: 

“It is foolish to debate whether a trade agreement that has not yet been negotiated is a good idea and should be ratified. Such a debate should properly begin only once there is something to analyze.”

That’s very true: We don’t have a negotiated agreement yet, so it’s difficult to judge its content.  If this were an old-school trade agreement whose main function was to get rid of tariffs, it would be easier to make an assessment in advance.  If we knew all or most tariffs would be brought to zero, and that’s all that would happen in the agreement, we would know just about everything we needed to know.   However, today’s trade agreements have lots of substantive policymaking in them, and the details are important.  

Curing Cancer with Innovation

While a “cure for cancer,” is not yet in hand, it is probably not as far away as you think. As an article in yesterday’s Wall Street Journal shows, we are making tremendous strides in the fight against cancer.

Let us take a moment to look at the data and rejoice in the many lives saved by medical innovation. We focus on gains made against the top four deadliest cancers: lung cancer, bowel cancer, breast cancer, and prostate cancer.

Consider how the lung cancer death rate per 100,000 men has decreased since the 1980s:

While the decline is global, the greatest gains can be seen in wealthy, developed countries like the United States. This is in part because, as HumanProgress.org advisory board member Matt Ridley notes, “In the western world we’ve conquered most of the causes of premature death that used to kill our ancestors,” and with old age comes an increased incidence of cancer, making gains against cancer more notable.

Housing and Wealth Inequality

American Nightmare is in some ways the most profound of the three books I have written for Cato. It covers a wide range of issues, including a detailed explanation of the 2008 financial crisis. But the overarching theme is that urban planning and zoning are best viewed as a form of economic warfare by the upper and middle classes against the working and lower classes. While that might not have been the original intent, to judge by the smug attitudes of the beneficiaries of such planning and zoning, they are perfectly happy with the results.

The book, therefore, was really about inequality, an issue that of course has been made popular and controversial by Thomas Piketty’s book Capital in the Twenty-First Century. Piketty’s thesis is that income inequality is necessarily rising because the returns to capital wealth are greater than overall economic growth, thus giving people one more reason to hate capitalists.

Last month, a paper by an MIT graduate student in economics named Matthew Rognlie, examined Piketty’s thesis in detail. Rognlie found that, contrary to Piketty, the returns on most kinds of wealth and capital have not been greater than overall economic growth, and therefore haven’t been contributing to income inequality. The one exception, Rognlie found, was housing.

Innovating Within an Overregulated Alcohol Landscape: A #CatoDigital Discussion

April is Alcohol Awareness Month. What better time to take a close look at one of our nation’s most heavily regulated industries and the inventive ways entrepreneurs are innovating within this realm?

The ratification of the 21st Amendment may have officially ended this nation’s failed experiment with alcohol Prohibition, but the policy hangover has had lingering effects. From dry counties to bans on Sunday sales, the sale of alcohol is severely restricted in a confusing patchwork of local, state, and federal regulations. Homebrewing was not legal in all 50 states until 2013 (and homebrewers still cannot legally sell their product). Eighteen states maintain a state monopoly over the wholesaling or retailing of some or all categories of alcoholic beverages. But, even in this stifling economy, intrepid businesses are finding new ways to serve thirsty consumers.  

One real-world example of this is Klink, formerly known as DrinkDrivers, a rapidly growing start-up with a strong foothold in the nation’s capital. The app-based alcohol delivery company relies upon the mechanisms of the sharing economy—which has faced its own share of difficulties from overzealous regulators—to navigate the treacherous legal landscape of the American alcohol industry.

The concept behind Klink is a simple one: modern consumers want the ease of on-demand goods and services, deliverable at the touch of a button, wherever they are. Yet, Klink is not an alcohol provider in the traditional sense.

Unlike many other businesses in the sharing economy, Klink is stringent in its adherence to the laws and regulations governing alcohol sales. When you place an order, the company does not itself process your payments or deliver your alcohol. Instead, Klink plays the role of middleman, partnering with licensed liquor retailers, providing an easy-to-use online platform to connect alcohol providers with customers and occasionally running localized marketing campaigns.

Tomorrow at noon, I’ll be moderating a live-streamed lunchtime discussion featuring my colleague Matthew Feeney, who is Cato’s leading expert on the sharing economy; David Ozgo, the Distilled Spirits Council of the United States (DISCUS)’s Senior Vice President of Economic & Strategic Analysis; and Klink’s Founder and CEO, Jeffrey Nadel.

We’ll be discussing the ways in which Klink is navigating the treacherous regulatory waters of both the sharing economy and the alcohol industry, the regulatory hurdles standing in their way, and what this means for the future of tech innovation and alcohol sales. The panel will be live-streamed, and at-home viewers are encouraged to participate in the Twitter discussion—and tweet their question—using #CatoDigital.