Missouri Prop B: the Unintended Consequences of Wishful Thinking

04 Sunday Nov 2018

Posted by pnuetz in Labor Markets, Living Wage, Minimum Wage, Uncategorized

Tags

Anti-Poverty Programs, Automation, David Macpherson, Disparate impact, Fringe Benefits, Living Wage, Marginal Productivity, Minimum Wage, Missouri Proposition B, The Show Me Institute, Unskilled Labor, William Evan

Proposition B sounds really good to many Missouri voters: all we have to do to help low-wage workers is declare that they must be paid a higher wage. That’s the pitch, of course. But voters should hear the cruel truth about the unintended consequences of this well-intentioned and ill-considered proposition on the ballot this week:

Businesses are likely to increase prices to compensate for a higher mandated wage, which hurts all consumers, but especially the poor.
Some low-skilled job losses or lost hours are assured, and they will hit the very least-skilled the hardest. No matter the legal minimum, the real minimum wage is always zero.
Such job losses have long-term consequences: lost job experience that the least-skilled desperately need to get ahead.
The harms will have a disparate impact on minorities.
Large employers can substitute capital for low-skilled labor: automated kiosks to take orders and increasingly sophisticated robots to perform tasks. Again, the real minimum wage is always zero. As I’ve said before on this blog, automate no job before its time. But that’s what Prop B will encourage.
Employers can make other compensatory changes. That includes reduced fringe benefits and break times, increased production quotas, and less desirable shifts for minimum wage workers.
A large share of the presumed beneficiaries of a higher minimum wage are not impoverished. Many are teenagers or young adults living with their parents.
All of the preceding points argue that an increase in the minimum wage is not an effective method of targeting poverty reduction. In fact, the harm it inflicts is targeted at the most needy.
Small employers have less flexibility than large employers, and Prop B would place them at a competitive disadvantage. To that extent, a higher wage floor is most damaging to “mom & pop”, locally-owned businesses, and their employees. Again, the real minimum wage is always zero.

At least 24 earlier posts appear on this blog covering the topic of minimum wages. You can see most of them here. The points above are explored in more detail in those posts.

William Evan and David MacPherson of the Show-Me Institute have estimated the magnitude of the harms that are likely to result if Prop B is approved by voters on November 6, and they are significant. The voters of Missouri should not be seeking ways to make the state’s business environment less competitive.

Voters should keep in mind that wages in an unfettered market reflect the realities of labor demand and labor supply. Wages and other forms of compensation reflect the actual quantity, quality and productivity of available labor supplies. And for unskilled labor, which is often supplied by those who lack experience, a wage that matches their marginal productivity is one that provides that valuable experience. The last thing they need is for tasks requiring little skill to be performed by more experienced employees, or by machines. We cannot wish away these realities, and we cannot declare them suspended by law. Such efforts will have winners and losers, of course, though the former might not ever recognize the ephemeral nature of their gains. And as long as there is freedom of private decision-making, the consequences of such legal efforts will cause harm to those least able to withstand it.

Degrees of Poverty and The Social Safety Trap

01 Thursday Oct 2015

Posted by pnuetz in Poverty

≈ 1 Comment

Tags

Anti-Poverty Programs, Census Bureau Report on Poverty, David Henderson, Family Disintegration, income inequality, James D. Agresti, Living Standards, Measuring Poverty, Minimum Wage, Poverty, Public education, Robert Rector, War on Drugs, War on Poverty

The poor in the United States are extremely well-off by international standards. That is clear in the chart above, which David Henderson discusses in “The Role of Luck In The Income Distribution“. By luck, Henderson means that one’s country of birth has a huge impact on their ultimate place in the global income distribution. The chart compares positions in a single country’s income distribution with corresponding points in the global distribution (2008 data). For example, an individual in the 20th percentile of the U.S. income distribution (20 on the horizontal axis) is in roughly the 86th percentile of the global distribution (from the vertical axis). Those at the very bottom of the U.S. income distribution have a greater income than half of the individuals in the world. The average U.S. earner in the lowest 20% earns more than nearly 75% of all earners globally. Individuals across the entire income distribution in the U.S. have higher incomes than their counterparts elsewhere.

Within the U.S., we often use the term “impoverished” in a fairly parochial sense: compared to our compatriots, not to the rest of the world. Robert Rector discusses the living standards of the poor in America in “How Do America’s Poor Really Live? Examining the Census Poverty Report“. The actual census report released this month is discussed in The Atlantic here. Rector states the following:

“According to the government’s own reports, the typical American defined as poor by the Census Bureau has a car, air conditioning, and cable or satellite TV. Half of the poor have computers, 43 percent have Internet, and 40 percent have a wide-screen plasma or LCD TV. … Far from being overcrowded, poor Americans have more living space in their home than the average non-poor person in Western Europe.“

Rector notes that the Census Bureau’s measure of poverty is based on a flawed definition of income, one that is inconsistent with how income is defined in calculating official measures of poverty in other countries. The Census definition excludes most welfare benefits, and taxes aren’t always subtracted from income by other countries. The Rector post linked above contains an incorrect link to this recent article on international comparisons of poverty rates. When the measurement inconsistencies are corrected, the official U.S. poverty rate is similar to the advanced economies of Europe, and it is lower than Eurooean poverty rates based on a more inclusive definition preferred by many on the left. And again, the actual standard of living of those below the official poverty level in the U.S. is impressive compared to the rest of the world. It is also impressive from a historical perspective.

Rector discusses the failure of the welfare state and the War on Poverty to lift the impoverished out of dependency. This has been covered here on Sacred Cow Chips several times (see here and here). The terrible structure of incentives built into many anti-poverty programs is one of the primary causes, as well as the failure of public education. Also at fault are minimum wage legislation, the War on Drugs, tax policy and a regulatory regime that discourages job creation by punishing new capital investment and business creation.

The left often claims that the distribution of income in the U.S. is becoming increasingly skewed toward high-income households. In “Myths and Causes of Income Inequality“, James D. Agresti demonstrates that the real causes of this phenomenon are demographic. The splintering of families at low income levels has increased the number of low-income households and reduced average incomes among those households. At the level of individual earners, there is no discernible trend in income inequality. According to Agresti:

“… the rise of household income inequality stems from family disintegration driven by changing attitudes toward sex, marital fidelity, and familial responsibility.“

Agresti stops short of drawing a link between anti-poverty policies and the disintegration of the family, though there are reasons to suspect pernicious connections along those lines.

It is easy to exaggerate the extent and severity of poverty in the U.S.; doing so is of obvious value in promoting the leftist agenda. In reality, the poor in this country are provided with a standard of living through public assistance that is high relative to their counterparts across the globe, and it is similar to other advanced economies. In addition, when changes in the structure of households are neutralized, there has been no upward trend in income inequality, contrary to assertions from the left. Our long-term objective should be to lift able recipients out of dependency, consistent with President Johnson’s original goals for the War on Poverty. That will require major reforms to our anti-poverty efforts, public education and many other aspects of public policy. Most poor families in the U.S. receive support that is enviable to the poor elsewhere. Nevertheless, their plight of dependency has dispiriting and self-reinforcing effects.

Government and Perpetual Poverty

07 Thursday May 2015

Posted by pnuetz in Welfare State

≈ 1 Comment

Tags

Alex Tabarrok, Anti-Poverty Programs, Baltimore City Schools, dependency, Disincentives, Jon Stewart, Ross Dothan, Thomas Sowell, War on Drugs, Welfare State

The welfare state has 1) reduced measured poverty, but it has 2) failed to provide sufficient opportunity and economic mobility. In “Two Premises on Poverty and Culture“, Ross Douthat writes that it should be easy for Left and Right to agree on these points. #1 is a fairly well-established empirical fact, while #2 leaves plenty of room to debate what went wrong and how to fix it. The Left might well call for more resources to be plowed into the effort; the right believes that the welfare state has fostered dependency and subverted social institutions. The best that can be said is that the modern welfare state leaves the poor “running in place”, but that concedes far too much to programs rife with disincentives for legal, market work effort. I wrote about this topic just over a month ago, in “Poverty Maintenance Is Not a Win“. While Douthat’s short essay sought common ground upon which Right and Left can debate reforms, he notes that anti-poverty programs:

“... raise incomes but also increase dependency, encourage idleness, crowd out the basic institutions of civil society, and so on through the libertarian critique.“

This is not to diminish the waste inherent in other areas of government largess, such as corporate subsidies, defense spending, and over-regulation. Virtually any government program can be called out on waste and unintended consequences. Tonight, however, we’re featuring the dismal results of the welfare state. Thomas Sowell, a well-known African American economist, is uncompromising in his condemnation of the welfare state in connection with recent protests by blacks against perceived injustices in “The Inconvenient Truth about Ghetto Communities“:

“Anyone who is serious about evidence need only compare black communities as they evolved in the first 100 years after slavery with black communities as they evolved in the first 50 years after the explosive growth of the welfare state, beginning in the 1960s. …

We are told that such riots are a result of black poverty and white racism. But in fact — for those who still have some respect for facts — black poverty was far worse, and white racism was far worse, prior to 1960. But violent crime within black ghettos was far less.

There is no doubt that the behavioral dysfunctions induced by welfare state incentives have been compounded by the war on drugs. Like all prohibitions, it offers black market “opportunities” to the poor and unskilled while promoting violence and a high risk of arrest and imprisonment, contributing to the destruction of families and communities. But the welfare state itself effectively subsidizes the drug-war pathway to perdition:

You cannot take any people, of any color, and exempt them from the requirements of civilization — including work, behavioral standards, personal responsibility, and all the other basic things that the clever intelligentsia disdain — without ruinous consequences to them and to society at large.

Non-judgmental subsidies of counterproductive lifestyles are treating people as if they were livestock, to be fed and tended by others in a welfare state — and yet expecting them to develop as human beings have developed when facing the challenges of life themselves.“

The usual trope promoted by the Left is that more resources are required to end the cycle of dependency. That is dubious in light of the dramatic increases in U.S. welfare spending over the past 50 years. Those increases have been fairly steady, yet significant decreases in the incidence of poverty came to an end before 1970:

“Today, government spends 16 times more, adjusting for inflation, on means-tested welfare or anti-poverty programs than it did when the War on Poverty started. But as welfare spending soared, the decline in poverty came to a grinding halt.“

Finally, here is a little object lesson in the way Leftists typically misperceive facts surrounding the actual allocation of budgetary resources and the concomitant results. On April 28th, Jon Stewart said:

“If we are spending a trillion dollars to rebuild Afghanistan’s schools, we can’t, you know, put a little taste Baltimore’s way. It’s crazy.“

Alex Tabarrok castigates Stewart for this gross misrepresentation of the foreign aid budget and the complete distortion of the facts surrounding school funding in Baltimore. Actually, per-student funding for the Baltimore city public schools is over 26% greater (a difference of more than $3,500 per year) than for the schools in Fairfax County, VA. The latter is considered one of the best school districts in the country. The funding of Baltimore schools is dominated by state contributions, but federal funding there exceeds local funding.