Topic: Tax and Budget Policy

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 California Health Plan

A few things I find interesting the proposed California health plan.

1. Although it mandates health insurance, it envisions high-deductible health insurance policies as satisfying the mandate. Apparently, the thinking is in terms of a deductible of $5000 for an individual, as opposed to Massachusetts, where they think that “high-deductible” is about $1000.

2. It does not create an equivalent of the Massachusetts “connector.” The more one looks at it (see this description, for example), the “connector” is micro-managing individual and small-group health insurance in Massachusetts, leaving the private sector essentially no room to maneuver. The “connector” really ought to be re-named for what it is, a central planner.

3. Funding the plan with a tax on health care providers is interesting. In my new Cato Unbound essay, I write about today’s overly generous health insurance coverage:

For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctors’ recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a health care provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price.

The Governator’s plan is to pay for a subsidy to health care consumers by putting a tax on health care producers. Thus, the push for health insurance becomes something other than a pure windfall for providers.

4. The plan explicitly envisions health insurance for illegal immigrants. If you think of that as a humanitarian issue, you may like it. But if you think about it in terms of the incentive it provides to illegally immigrate, it sounds problematic. Also, I am curious as to how the state is supposed to administer a program for illegal immigrants with one hand and enforce immigration laws with the other.

Of course, not all details have emerged, and the legislature has yet to put its imprint on any plan. So it may be premature to comment at any length.

Rock on, Canada

I realize I have already blogged about agriculture today, and normally I would spare you a second blog entry, but there has been an important development in agricultural trade circles. Canada has requested consultations (the first step in a full-blown trade dispute) with the United States over U.S. farm programs.

Specifically, the Canadians want to discuss the subsidies given to U.S. corn farmers, and the damage they did to other world corn producers because of price suppression effects. Enquiring minds in Canada also want to know more about the amount of trade-distorting support that the United States paid to its farmers overall in “certain years” (the press release doesn’t specify which).

It’s hard to say at this point what effect, if any, this development will have on the U.S. farm bill debate, or the WTO negotiations in the Doha round. But it would be a stupid brave Congress indeed that paid no heed to the WTO effects (in litigation or negotiation) of American farm subsidies when drafting a new farm policy. History has shown that the costs of farm welfare to consumers and taxpayers tend to get short-ish shrift when juxtaposed with the farm lobby, but firms facing possible retaliatory sanctions or failed market access ambitions as a result of an adverse ruling against the United States might carry more weight.

Has U.S. Income Inequality Really Increased?

There are frequent complaints that U.S. income inequality has increased in recent decades. Estimates of rising inequality that are widely cited in the media are often based on federal income tax return data. Those data appear to show that the share of U.S. income going to the top 1 percent has increased substantially since the 1970s. A new study by Cato scholar Alan Reynolds shows that these claims are wrong in both their premises and their conclusions. In “Has U.S. Income Inequality Really Increased?,” Reynolds concludes, “There is no clear evidence of a significant and sustained increase in the inequality of U.S. incomes, wages, consumption, or wealth since the late 1980s.” Cato will also host an event on income inequality on January 11.

Some Quick Links on Farm Policy Reform

Cato’s Center for Trade Policy Studies is putting together its ideas for a sensible farm policy (the current farm bill comes up for renewal later this year). Needless to say, the Cato plan will look substantially different from the anachronistic, interventionist pork-fest that was the 2002 Farm Bill.

In the meantime, those interested in U.S. farm policy might like to check out the following links: today’s editorial in the Washington Post and an article by Jonathan Rauch in Friday’s National Journal. Both contain plenty of arguments for what is wrong with U.S. agricultural policy today and are best read on an empty stomach. For a good overview of the farm bill debate, this article by Catherine Richert (Congressional Quarterly) is a pretty good bet.

Solar-Powered Welfare

In the “House & Home” section of yesterday’s New York Times, reporter Gregory Dicum tells what’s obviously intended to be a feel-good story about the rapid growth of roof-top solar energy systems in California homes. Ah-nold, you see, has decreed that 3,000 megawatts of the stuff be installed in California over the next decade — a 20-fold increase over the amount of solar power installed at present — and, gosh darn it, those Golden Staters are apparently on pace to do the governor proud. Interviews with enthusiastic manufacturers, installers, and homeowners follow, and not one discouraging word finds its way into a happy, by-golly feature piece that might as well have been written by Ned Flanders.

But there are plenty of facts that wander out of the mouths of these enthusiasts, and they should have given the reporter a reason to pause. For instance, a Mr. Nicky Gonzalez Yuen tells us that he spent $16,000 on his “modest, 3 kilowatt” solar energy system, but that it would have been $26,000 without a generous federal tax credit and state rebate check. A Dr. William Leininger tells the reporter that he spent $39,000 on a solar energy system for his 2,400 square foot home, but that it would have cost $63,000 without those federal and state rebates and tax credits. And then there’s a Mr. Robert Fenton, who tells the reporter that he spent $225,000 on a solar energy system to cut back on his $2,500 a month (!) electricity bills, but that federal and state taxpayer generously pitched in to relieve Mr. Fenton of the extra $134,000 that his system would have cost without government help.

Now, I have nothing against solar power or photovoltaic panels. But if they are such a great investment, why do we need to subsidize them? 

The decision a homeowner is asked to make when considering a residential solar energy system is a very common one in the business world; to whit, whether to invest an initial sum of money in a project that reduces annual costs over a long period of time. Take Mr. Fenton’s case, for example. He could invest $225,000 in a solar energy system that reduces his electricity costs (now at a staggering $2,500 a month) for the next 30 years, or he could invest the $225,000 somewhere else and use the principal and returns on that money over the same time period to pay his monthly electricity bills. 

Which is the better decision in strict financial terms? The amount of money he would need to invest now to pay electricity bills at the rate of $30,000 a year for the next 30 years is $434,571 [a calculation that assumes investment in a mixture of securities and bonds that earned 7% per year, but 5.53% after federal taxes (15%) and California state taxes (9%, reduced to 6% after the federal deduction for state tax payments)]. To achieve the same result through a residential solar energy system, Mr. Fenton only has to invest $359,000, of which taxpayers pay $134,000. Thus, the solar system makes financial sense for Mr. Fenton without the subsidies. The $134,000 subsidy is simply a gift from taxpayers to the obviously very wealthy Mr. Fenton.

Mr. Fenton’s result should not surprise. He noted in the article that because California has a tired rate system that charges large users more, his rates are triple the rates for modest residential use. If electricity rates are high enough and they reflect the real costs rather than a tax on large users to subsidize small users, then fine — alternatives to conventional sources of electricity might well make perfect economic sense.

In the case of Dr. Leininger, a more typical residential user, the economic case for the solar investment is doubtful even with the subsidy. His system, remember, cost $39,000 with the subsidy and $63,000 without. He is quoted in the article as saying it would “pay for itself in a dozen years.” I interpret that to mean a savings in electricity costs of $3,250 a year for 12 years. Again, what sum of money would someone have to invest today to yield $3,250 a year for the next 12 years? At an after-tax return of 5.53% (calculated as before), someone would need to invest just under $28,000. Because this is less than the alternative way of achieving the same result (investing $39,000 in a solar system), the solar investment doesn’t make strict financial sense even with the subsidy … and certainly doesn’t without.

If people want to spend their money foolishly — or, put another way, spend their money on environmental status symbols — then fine. But they don’t have a right to force other people to underwrite their extravagant indulgences. While I’m not aware of any data telling us what the average household income is for buyers of this stuff, I’ll bet you a roof-top solar energy system that it’s a heck of a lot more than the household income of the average or mean taxpayer. Simply put, federal and state solar energy subsidies amount to little more than welfare for the trendy well-to-do.

Of course, rich and trendy Californians have a million reasons for why some shmoe at Wal-Mart ought to be underwriting their killer solar energy panels. Mr. Felton, for instance, tells us that “solar is certainly a way to get off foreign oil,” a claim echoed by Dr. Leininger. But only about 3 percent of all the oil used in the United States goes toward generating electricity, heating homes, or what-not. And most of that consumption occurs in the Northeast, not the Pacific coast. So even if every house in America was plastered over with photovoltaic panels, foreign oil imports would continue to increase pretty much as they would under a business-as-usual scenario. Residential solar energy systems will displace domestic coal, natural gas, hydroelectric power, or nuclear energy — but not oil (foreign or otherwise).

But aren’t we reducing our “carbon footprint” and thus saving the planet from global warming? Maybe, maybe not. Manufacturing photovoltaic panels is a very energy intensive process and the materials necessary to put these things together are likewise products of heavy industry. Absent a comprehensive life-cycle analysis of the carbon energy involved, we can’t say for sure. I’m not aware of any such study in the literature.

What we can say for sure, however, is that there are far more cost-effective ways to go about reducing greenhouse gas emissions than putting solar panels on rooftops. If global warming is worth addressing, put a tax on carbon and let consumers decide for themselves how best to live under that regime. Having the government tell us exactly how to go about reducing greenhouse gas emissions is a bad idea.

This brings us back to the article. Did it ever occur to the reporter to ask whether taxpayers should foot the bill to light up, heat, and cool Mr. Fenton’s sprawling, high-tech mansion (the NYT’s picture of his house is really something to behold)? Or to double-check all of the wild claims made about how cost-effective these systems are? Or to double-check the ridiculous claim that solar energy will have any significant impact on foreign oil imports? Did it ever occur to Mr. Fenton’s editor? OK, this was a “House & Home” piece — not a place one might expect rigorous journalism — but the New York Times has a habit of parking stories about solar energy, energy efficiency, and related matters in that section. They deserve to be a cut above something out of People magazine.

Rich and Successful Flee France

Johnny Hallyday, the French singer and actor, has had enough of high taxes in France and decided to move to Switzerland.

According to Hallyday, “Like many people in France, I have had enough of paying these ridiculous taxes we are forced today. That’s it, I’ve made my decision.”

French politicians are reported to be shocked. Jean-François Copé, the Budget Minister, has even said that “Johnny Hallyday was not carrying out his patriotic duty of paying his taxes to his own country.” It appears that no prominent politician in France has even considered the possibility that Hallyday may be right to want to keep more of the money he has earned!

Of course this is not the first time that a French celebrity has opted to live in a country with lower income tax. Some years ago, Laetitia Casta, a French supermodel, got upset over high taxes in her home country and left for London.

There she joined tens of thousands of her compatriots, who find the French taxes too burdensome and job opportunities too scarce. Casta’s flight would have been unremarkable had it not been for the fact that she was cast as the model for the bust of Marianne, symbol of the French Republic, an honor formerly held by Bridgitte Bardot and Catherine Deneuve.

The above stories personify the conflict between the image of France purveyed by the governing elite and the reality. On the one hand, France is portrayed as a strong and confident country, whose people, unlike the Americans, are committed to “social solidarity.” On the other hand, there is the reality of high taxes, high unemployment, uncertainty, and a general feeling of malaise. As more of the young, educated, and successful French move abroad, the welfare state will grow more unsustainable.

The question is, do Nicolas Sarkozy and Segolene Royal recognize the need for deep reforms, or will the victor of this year’s presidential elections turn out to be the younger version of Jacques Chirac?