Browsing the blog archives for January, 2015.

Where do the jobs come from?

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The job picture has improved some in recent months. While current statistics overstate the employment rate by understating the number of available workers, it is true that things have gotten a little better. Hopefully we’ll finally have a recovery from the recession, one that is long overdue.

Needless to say, the Obama administration—like any other—is claiming responsibility for anything good that might be happening. But have the President’s policies actually promoted job growth? While there are always many factors to be considered, the lion’s share of the recent gains can be attributed to the long-term unemployment benefits supported by the President, most Democrats, and some Republicans in Congress. Unfortunately for the left, it was the expiration of damaging government intervention that actually helped get things moving.

In a recently posted working paper sponsored by the non-partisan National Bureau of Economic Research, economist Marcus Hagedorn and two colleagues concluded that 61% of the jobs created in 2014 can be attributed to the expiration of long-term unemployment benefits (see www.nber.org/papers/w20884). The technical aspects of this study are beyond they scope of this post, but another finding is also worth noting. States where unemployed workers received the highest long-term benefits experienced (on average) higher unemployment rates than did states with lower long-term benefits prior to the reform that eliminated these benefits. But after the reform, these same states experienced greater employment growth. In other words, long-term federal unemployment benefits hampered job growth through 2013, but their expiration helped promote it in 2014.

You may recall the arguments when federal unemployment benefits were extended on several occasions. Some on the right—those not afraid of being called heartless—suggested ending the long-term benefits because they provided an incentive for many would-be workers to stay unemployed. Those on the left argued that such a move would have been both insensitive and cruel because there simply were not enough available jobs.

The President continues to attribute any positive movement in the economy to his policies, but the Hagedorn study suggests otherwise. As the numbers tell us, it was the end one of Obama’s policies that seemed to trigger the majority of last year’s job growth. Just imagine what would have happened if the feds had stayed out of the long-term unemployment benefit situation in the first place.

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Raising the Gas Tax

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Thanks for the strength of the dollar and the competitive threat from frackers, the price of oil has declined precipitously, resulting in gas prices close to the levels that existed when President Obama was inaugurated. Some legislators—including a few Republicans—see this as an opportunity to raise the gas tax. Raising it might not be the worst idea, but not for the reasons they claim.

The federal gas tax is currently 18.4¢ per gallon. State tax rates vary but average about 30¢ more. The federal portion of the gas tax is supposed to finance the transportation infrastructure through the Federal Highway Trust Fund (FHTF). On paper, this sounds like a good idea. Consumers pay for road upkeep directly based on their road usage and indirectly through the prices of goods and services that are transported by trucks. It’s not a perfect system—for example, consumers with low mileage vehicles end up paying more per mile—but it’s a use tax that everyone has to pay in rough proportion to the benefit they receive. Unfortunately, the system doesn’t actually work this way.

Even with the FHTF, the President and others are constantly complaining about our “crumbling infrastructure.” In fact, the $787 billion stimulus package passed in 2009 was supposed to “create shovel ready jobs” to alleviate this and other problems. Obama’s subsequent admission that many of the jobs didn’t turn out to be so shovel ready after all highlights the reality: Although use taxes are the most rational way to pay for vital public services, politicians rarely honor their original intention; they typically seek to supplement them with more taxes from the general fund or use the money for other projects.

State lotteries are a great example. Their “profits” are typically earmarked for specific, popular projects—usually education—but other state appropriations for the same purpose tend to decline as lottery contributions increase. In the end, expenditures on education might be a little higher than they otherwise would have been, but a big chunk of the lottery money finds itself in other coffers.

My point here is that a use tax is the most rational means of paying for government services, but the system must be honest. Supporting an increase in the gas tax to fix our “crumbling infrastructure” assumes that highway allocations from the general fund wouldn’t be reduced to offset the increase in gas tax revenues. The extra general funds replaced by those from the increased gas tax could be used for, say, “free” community college education or government childcare programs. By the time the 2016 elections roll around, we’d have higher gas taxes, the same roads, more government programs, and continued calls by politicians for more revenues to fix our failing bridges and roads.

Should we oppose an increase in the gas tax? Not necessarily. In fact, I would support an increase in the tax as long as (1) all gas tax funds generated pay for highway maintenance and, (2) rates for all of the federal income tax brackets are reduced by the same percentage to completely offset the gas tax increase. This change wouldn’t have a substantial effect on economic growth and the entire tax code needs to be overhauled anyway, but an even trade of a lower income tax for a higher use tax is rational economic policy. Moreover, it calls the bluff of statists who claim that their proposal to raise the gas tax isn’t really about raising taxes.

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Hiking the Minimum Wage

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The minimum wage was raised in 20 states on January 1. President Obama is calling for an increase in the federal minimum wage from $7.25 per hour to something in the $10-15 range.

The mainstream press continues to clamor for more increases as well. A recent Washington Post article is one such example. In it, Danielle Paquette argues, “Economically, the verdict is mixed on minimum wage: Supporters paint the raises as an economic stimulus, a way to reduce poverty; detractors worry budget-strained employers will be forced to cut jobs.” This is a perfect example of economic ignorance.

http://www.washingtonpost.com/news/storyline/wp/2015/01/05/20-states-just-raised-the-minimum-wage-it-wasnt-enough/

Whatever you think about the minimum wage, the economic argument is clear and Paquette is dead wrong by suggesting that there’s an ongoing debate. It can’t be a stimulus because—even if it resulted in no job losses—it simply takes money that would have been spent by one group of individuals and give it to another group.  In this respect, it’s a wash at best. It’s an obvious job killer as well. Common sense should tell you that companies required to pay workers more won’t be able to afford as many employees. It’s true that companies typically pass part of the increased costs along to customers, but the overall effect has to involve some number of lost jobs. This is not a debatable point. It’s economic reality.

Michael Saltsman provides a clear, more detailed analysis in the video linked to his recent Wall Street Journal article. He also tells the story of a restaurant in Michigan that closed as a result of the wage hike.

http://www.wsj.com/articles/michael-saltsman-a-nonprofit-restaurant-falls-to-the-minimum-wage-1420412563

Back to the Washington Post article…Most of it is devoted to stories of several individuals who work long hours for minimum wage. I don’t doubt their difficulties, but these stories miss the point. Wages are determined by the value workers provide employers. Some who receive minimum wage are actually worth less than that amount. Whenever an employer is required to pay a worker more than the market rate, the difference must be absorbed somewhere else. The naïve among us claim that it comes out of the pockets of greedy business owners. In the long run, it’s always passed to the consumer. In other words, the minimum wage is simply a transfer of wealth from consumers to a small percentage of workers. It’s a hidden tax you pay whenever you shop.

Minimum wage jobs are not meant to be careers and for most they are temporary. Most minimum wage workers are not the primary breadwinners in their homes. They provide opportunities for unskilled workers to gain skills and work experience. Those who work hard can move up or move on.

One of the workers highlighted in Paquette’s article even referred to the minimum wage as modern-day slavery. If anything should offend those committed to seeing a global end to real slavery, this is it.

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