The Rationale for Minimum Wage Increases

This morning I gave oral testimony to the Vermont Senate Economic Committee on their proposal to raise the state minimum wage to $15 an hour by 2024. As part of my written evidence, I explored in detail the rationale for minimum wage hikes from the “Fight for $15” campaigners and other think-tanks. Below is a slightly edited version of that section of my testimony, which has wider applicability.

Why Do We Pay So Much More for No Progress?

That is the question asked by Scott Alexander and John Cochrane in discussing high school education, college and infrastructure spending. Despite rising funding, it is not clear outcomes are improving.

Scott highlights the example of K-through-12 public education where spending has increased substantially since 1970 but test scores have remained stagnant. He asks:

Which would you prefer? Sending your child to a 2016 school? Or sending your child to a 1975 school, and getting a check for $5,000 every year?

On college he presents a similar counterfactual:

Would you rather graduate from a modern college, or graduate from a college more like the one your parents went to, plus get a check for $72,000?  (or, more realistically, have $72,000 less in student loans to pay off)

He also highlights the rising cost of infrastructure spending through the example of a New York City subway:

1900…it’s about the inflation-adjusted equivalent of $100 million/kilometer today… In contrast…a new New York subway line being opened this year costs about $2.2 billion per kilometer

As Scott outlines, the underlying crisis here is made all the worse by the fact that new technologies and globalization should have put downward pressure on the costs of provision.

Two questions arise: why is this happening and what can be done about it?

This requires a huge amount of research. Certainly it cannot be answered in a blog post. But I want to suggest an analytical framework for thinking about these examples that can be applied in each case to work out what is going wrong. This is all the more necessary because the absence of meaningful prices in the public sector makes measuring productivity much more difficult than in the full market sector of the economy.

Rather than merely comparing money spent to outcomes, we can break things down as follows:

Taxpayer dollars -> Inputs -> Production process -> Outputs -> Outcomes (quality-adjusted outputs)

Take schooling. We pay money in through taxes.  These are used to fund the labor (teachers, administrators etc), to build schools, and to pay for the goods and services used within schools. The schools then operate. And those inputs work to produce measurable outputs in terms of number of children being taught, hours of teaching, exams prepared for etc. But what we really care about is outcomes, which are linked to but not quite the same thing (think test scores). This is best thought of as a measure of quality-adjusted output. Productivity (to the extent we can measure it) can be thought of as the ratio of outputs to inputs, whereas what we ultimately care about here is improving the effectiveness of money spent (outcomes over taxpayer dollars).

Six Reasons to Downsize the Federal Government

1. Additional federal spending transfers resources from the more productive private sector to the less productive public sector of the economy. The bulk of federal spending goes toward subsidies and benefit payments, which generally do not enhance economic productivity. With lower productivity, average American incomes will fall.

Unions, Productivity, and the 2010 Economic Report of the President

I’ve become a fan over the years of the annual Economic Report of the President, released around this time each year by the Council of Economic Advisers. The more than 100 tables in the back of the book provide an invaluable picture of the economy over many decades, covering all the major indicators from output and employment to interest rates and trade. Each report also contains chapters explaining the economic thinking behind administration policies.

A Few Notes on Climate Change

As the Copenhagen Climate Conference is taking place, it is appropriate to clarify once again what is more or less accurately known about the climate of our planet and about climate change.

Obviously, a brief post can not substitute for detailed studies of professionals in a variety of scientific disciplines – climatology, atmospheric physics, chemistry, geology, astronomy, and economics. However, a short post can summarize basic theses on the main trends in climate evolution, on its forecasts, and on its actual and projected effects.

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