Sunday, December 8, 2013

Economics From Barack Obama

Here's two very simple, very fundamental economic principles:

1.) Incentives matter.

2.) Supply and demand matters.

You would think that the President of the United States would understand both of these principles. However, he still says things like this:

"And the evidence shows that unemployment insurance doesn’t stop people from trying hard to find work." 

And this:

"But there’s no solid evidence that a higher minimum wage costs jobs."

Both of these statements are incorrect. There is indeed a large amount of evidence that unemployment insurance and the minimum wage have significant, negative impacts on employment. Indeed, such evidence has been discussed on this blog (here and here)

It's also true that such evidence does not necessarily mean that increasing the minimum wage or extending unemployment insurance are bad ideas. It does mean that these policies have real costs that need to be considered.

My real concern with these statements, however, is not that Mr. Obama is misrepresenting the literature on these issues (even though he is). Instead, my real concern is that these statements both are highly illogical from an economic point of view.

One need not look at large amounts of evidence to know that, all else equal, unemployment insurance leads to less employment. All one needs to know to understand this is that incentives are real. If Barack Obama is saying that unemployment insurance has absolutely no effect on employment, he is essentially saying that incentives don't exist.

The same is true of the minimum wage. Wages are determined by supply and demand. Putting a binding minimum on a wage or price, all else equal leads to less demand for that good or service. In the context of wages, that means lower employment. Barack Obama's statement on this is not merely incorrect. It is illogical.

If the literature indeed showed what Barack Obama said it showed (which it does not), the correct way to phrase it would be that these policies do not have large enough effects to make a significant difference in lieu of other factors.

This is not meant as a criticism of Barack Obama, but the fact that our president is saying things like this is a bit disconcerting.

Thursday, December 5, 2013

Popularity of Single Payer

In my recent post criticizing the single payer model of health care, I left out an important component of the affirmative argument for single payer: the popularity of such systems where in place. There are two questions to ask here:

1.) Are single payer systems actually popular where in place?

2.) Does this mean that single payer is a successful model?

To the first question, the answer is complicated. I was able to find some data from the Commonwealth Fund that does shed some light. They asked people in various if they thought their respective health care systems needed minor changes, fundamental changes, or total rebuilding.

In Canada, which sports the model of single payer that advocates in the USA often want to emulate, the results indicate that only 10% of Canadians are willing to say they want to completely rebuild their system. Only 38%, however, said only minor changes are needed. That leaves a majority (51%) of Canadians saying that their system needs "fundamental change". That isn't terrible, but it is hardly the picture of a popular health care system.

It only looks popular in comparison to the USA. Here, 27% say complete rebuilding is necessary, 42% say fundamental changes are needed, and 29% say only minor changes are needed. Canada's numbers look a good deal better when put into this context.

However, a study that I linked to in my last post on single payer provides data regarding a different but closely related question: how people feel about the care they personally receive. Here, the numbers are quite different. 51% of Americans aged 18-64 report being very satisfied with the health care services they receive. For Canadians, only 42% of those aged 18-64 report being very satisfied with their health care services. For people over 65, the results are closer but even here the USA comes out on top.

In other words, Canadians like their system more than Americans like their system, but Canadians are less positive about the care that they personally receive than are Americans about the care that they receive.

This moves to the second question I posed above. The popularity of a given system is, in my view, shaped more by perception than reality.

I've been to countries with single payer health care, and there is a sort of "health care nationalism". Criticism of the NHS or Canadian Medicare are seen as unpatriotic. The medias in these countries lavish praise upon these systems constantly. By contrast, within America, criticism of the system is universal. Indeed, defenders of the USA status quo in health care are often seen as contrarians.

The people in countries with single payer generally know that these systems have great flaws which is why, at least in Canada, they aren't keen on the service they personally receive. Despite this, they still tend to believe that their system is pretty good. Another reason for this is that most people never encounter any other health care systems other than their own. So, most people really don't know what other health care models are actually like.

Another simple reality is that in systems of single payer, care is free at the point of delivery. Care still costs money, but most of it is paid through taxes. From the point of view of many people in these systems, I would imagine, the care simply seems "free". There is so little direct connection between the costs of health care and benefits of health care that people in these systems only see the benefits. They still bare the costs through taxation, but the connection is often not made. People are more willing to look past the flaws of a system that they think is "free" than a system that they do see the costs for.

This also explains the popularity of Medicare (USA Medicare). People see the benefits, but they don't see the costs. The costs are there, but they are harder to see for the average American.

Single payer health care systems only seem more popular than other models because of perception among the public and how far removed users of the systems are from the costs of the systems. The argument for single payer from popular opinion can be added to the long list of bad arguments for single payer.

Tuesday, December 3, 2013

A Few Points on the Minimum Wage

The NYtimes has a couple of articles advocating a hike in the minimum wage (here and here), as do many other news outlets. Scott Winship offers an excellent piece that takes a look at the actual facts in the minimum wage debate. Here's a few thoughts:

1.) First, in my post about the economics of the 1950s and 1960s, I made a point about the minimum wage being around $22 today had it kept up with productivity since the 1960s. This is technically true, but it is an entirely useless piece of data. In fact, to compare the relative minimum wage over time, we should look at the "real" minimum wage that is simply adjusted for changes in cost of living. Winship points out that the historical peak in the minimum wage (1968) would only be $8.32 today using a "chained" price index. That means that, contrary to what I said previously, President Obama's proposal would indeed raise the minimum wage above its historical peak. Even if we use a different measure of inflation, the minimum wage was still under $10 in real terms in 1968.

2.) Only 3% of the workforce is paid the minimum wage today compared to 8% in 1979. Likewise, this 3% has benefited from a greatly expanded EITC. This 3% has also benefited from cheaper goods (Wal Mart). The point is that low wage workers today are probably better off than the low wage workers of 30 or 40 years ago.

3.) The standard economic argument against the minimum wage is that it increases low skill unemployment and raises prices. The standard response to this argument is that the literature finds this effect to be very small if even existent. That is to say, advocates of the minimum wage frequently argue that the costs of the minimum wage are very limited. The fact that only 3% of the work force is paid minimum wage also suggests that the benefits of the minimum wage are quite limited. After all, at most, only 3% of the workforce are paid more because of the minimum wage. When doing a cost/benefit analysis of the minimum wage, we need to weigh the benefits of 3% of the population getting slightly higher wages compared to slightly higher prices for all and a small group that will not find employment because of the minimum wage.

4.) Winship does a good job of summarizing the empirical literature. However, given simple economic logic, even economists that are strong supporters of a higher minimum wage will usually admit the obvious truth that there is at least some cost in terms of employment that comes with a higher minimum wage. The only people who deny even a small impact on employment are advocates and non economists who are typically not very familiar with the empirical literature or economics in general.

5.) Despite claims to the contrary, the empirical literature suggests, with very little ambiguity, that there is at least some negative effect on employment stemming from a higher minimum wage (look here). The size of the effect is, however, much less clear.

6.) For whatever it's worth, Scott also points out that 70% of the workforce today reside in states that have higher minimum wages than the national $7.25. That means that, effectively, the minimum wage is higher than $7.25 for about 70% of the workforce. This was true of virtually nobody prior to 1980.

7.) It's often pointed out that the minimum wage disemployment effects should be low because, unlike manufacturing jobs, minimum wages jobs are usually in the service sector and cannot be outsourced. This line of thought seems to ignore the fact that, also unlike manufacturing, jobs in the service sector can be easily eliminated in favor of "self service". Gas stations, for example, no longer hire people to fill up tanks. Instead, they just have people fill up their own tanks. It's not unthinkable that the minimum wage had at least something to do with this shift. Service sector employment is not necessarily less sensitive to minimum wage hikes. More on this here.

8.) It is often argued that raising the minimum wage would reduce public spending on anti poverty programs by increasing the wages of low income workers to high enough levels to reduce their eligibility for such programs. Of course, this argument entirely ignores the disemployment effects of the minimum wage. If raising the minimum wage decreases employment, that means more people in need of more public assistance. As stated above, the literature is pretty clear about the fact that there are at least some negative employment effects stemming from the minimum wage. The effect on public finances depends on the size of this effect. All things considered, it seems quite unlikely that a higher minimum wage will actually reduce anti poverty spending.

9.) A significant portion of those earning minimum wage (37%) are teenagers living with their parents (look here). That's not exactly the portrait of minimum wage workers that the media often presents.

10.) It's fairly clear that raising the minimum wage increases prices at least somewhat (look here for some evidence on this). However, just like the employment effects, the size of this effect is much less clear.

When all is taken into consideration, my view is that the costs of raising the minimum wage far outweigh the benefits which is why I oppose such an increase. However, other views are welcome as always. Given the ambiguity in the literature, diverging views can exist even among those very knowledgable about the issue.