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Minimum Wages: A Survey of the Evidence

January 3, 2017 4 comments

With the new year, minimum wages are rising in many cities and states, including Michigan where I live. I have written before on this subject (a link is given below) but I ran across a nice article containing a very readable summary of the evidence on this subject. It is a nice read for non-economists because it has no equations (gasp!) and it is not very long but it does provide an accessible summary statement of the empirical scientific evidence on the effects of the minimum wage. But I have another motive in providing this summary of the evidence.

The nature of scientific inquiry is that not all studies on a subject produce the same answer. As a result, more than one study is necessary because, as the evidence emerges, hopefully a consensus forms about the problem that is being studied. So undoubtedly there are studies suggesting that there is no connection between smoking and cancer but it seems quite likely that the preponderance of the evidence, and the highest quality work, reveals a link between smoking and cancer. I once saw Barack Obama “cherry-pick” evidence, citing one particular study indicating that minimum wages do not cause unemployment. But one study isn’t important; the entire literature is and here is a summary of what that literature shows.

An extensive survey by Neumark and Wascher (2007) concluded that nearly two-thirds of the more than 100 newer minimum wage studies, and 85% of the most convincing ones, found consistent evidence of job loss effects on low-skilled workers.

This statement is taken directly from the article linked above. The Neumark and Wascher (2007) article is a scholarly study providing a more thorough analysis of the evidence.

The good news for an economist like me is that what we tell students in Econ 101 is correct: minimum wages cause unemployment. Some workers gain and some lose and the tragedy of the policy is that it harms those in our society who are the least-able to deal with a job loss and the loss of skill-accumulation that goes along with working. Namely, the policy harms people at the low end of the income distribution. This is just another example, in a long list of examples, of how a government can harm some of its citizens while the politicians, implementing the policy, claim that it helps those citizens. As long as the public is unaware of the evidence, politicians can get away with this destructive behavior.

Previous Post on Minimum Wages: minimum-wages-to-rise-in-2013

Random Thoughts After a Long Hiatus

September 21, 2015 2 comments

It has been quite a while since I last posted on this blog. I finally decided to catch up by posting a series of remarks on a number of issues that are of interest to economists and (hopefully) others.

Disparate Impact Analysis

I teach in a university economics department. If you were to attend one of our faculty meetings, you would observe that nobody in the room is a seven-foot Chinese basketball player. Does that mean the faculty in my department discriminated against the seven-foot Chinese basketball players in the world who wanted to be on our staff and attend this meeting? If you were to use a nonsensical theory known as disparate impact analysis, then if seven-foot Chinese basketball players were a politically-protected group, the answer is yes and my university could be charged with discrimination in federal court.

To say the least, disparate impact analysis ignores the scientific method which most of us learned in primary school. The fact that a person has the disease known as AIDS does not imply how the person got that disease. The reason is that medical science has determined that the disease can be contracted in more than one way. Similarly, if one group of individuals makes less money than another group, there are many reasons why this may be so.  One of those reasons could be discrimination but how do we know this to be true? Put differently, there are causal relationships in an economy and there are many random events that can make a group of individuals have the demographic characteristics that they have. Read more…

Two Lessons from the VA Scandal

The press has been full of reports on the dreadfully low quality health care provided by several VA hospitals and the attempts to cover up this low quality by VA employees. As most all of us would agree, this really is a terrible and tragic situation but, as with almost every tragedy, there are lessons to be drawn from it. Two are worth mentioning here both of which have been stated previously on this blog.

One is that there is simply no good management in government by the Congress because of the sheer size of the organization. The federal government is now a gargantuan bureaucracy with thousands of employees (the Bureau of Labor Statistics provides data on government employment at bls.gov).  One of the best arguments for shrinking the size of the federal government is that it may be possible to do a better job of management if the government is smaller. It is hard to believe that anything like the VA scandal could arise if there was competent management by the Congress.

Second, the VA scandal reveals the reality of what government-run health care would be if we actually had socialized medicine as found in the U.K. and elsewhere. Barack Obama and other Democrats have expressed the opinion that what they would prefer is a single-payer medical insurance system or Medicare for all. On first glance, you might say that this system would not be what is found in other countries but look at the way Medicare currently operates. It sets the prices that it will pay for medical services and it determines the quantities (that is, the medical procedures) that it will cover. This is functionally equivalent to running almost all medical care facilities since, for the vast majority of patients, the Medicare insurance system will dictate how they are treated. People with the resources will go outside the system to get whatever care they deem best for their health. This is precisely how the U.K. system operates. People who stay in the system get lower quality care (for example, they may wait months to see a specialist) whereas those who go outside the system and pay their own way get higher quality care (they get to see the same specialist in a short time). Medicare for all will provide low quality health care for all are confined to it.

If you want to know why the VA scandal is a disaster for Democrats, it is not just because of the scandal itself which is indeed terrible. It is a disaster for what it reveals about the espoused health care policies of the Democratic Party.

On the Differing Policy Prescriptions of Economists

January 28, 2014 2 comments

To a person who is not a professional economist, it can seem difficult to understand why economists can have such disparate views on economic policy issues.  Part of the explanation for these apparent differences in professional opinion is that some economists are willing to sweep aside the implications of economic theory when theory leads to policy conclusions that the economist dislikes. A recent newspaper article (War on the Poor) illustrates this behavior by some economists.

Alan S. Blinder is a distinguished economist at Princeton University who specializes in macroeconomics. He has produced a substantial body of influential research in his academic career. He also served as a member of the Board of Governors of the Federal Reserve System. He recently published an article discussing what he called a “war” on the poor being waged by the government. This is provocative stuff and he lists a number of policy issues which he believes are illustrative of this so-called war. Here is a revealing quote from this article. Read more…

The Obamacare Exchanges Open for Business

October 1, 2013 3 comments

Today is the day that the Obamacare insurance exchanges will open. Finally there will be an opportunity to fully understand what works and doesn’t work in these exchanges because information has been scarce about the workings of these web sites. The President has referred to “glitches” that will be present in these web sites, suggesting that the problems will be temporary. But there are indications that there are serious problems with these web sites that are anything but temporary. ObamaCare’s_Technology_Mess is one article discussing the difficulties implementing what are very complex IT projects.

In addition, there is now evidence that many insurance companies will not join these exchanges, apparently deciding to wait to see how they work before they commit to participation. This article describes how some firms are not offering policies on the exchanges (the article also describes how people will lose their existing insurance because of Obamacare) but it also reveals something else which I suspected would also be true about the exchanges. The policies sold on these web sites will be subject to price controls.

I have seen press reports about the price controls in Massachusetts, the state which is the template for Obamacare. When insurance companies lose money on the health insurance exchanges, they will petition for price increases which must be approved by politicians. If those increases are denied for political reasons, lawsuits result and so the health insurance system degenerates into yet another lawyer relief act. These price controls can ultimately destroy the exchanges by driving away all insurance companies if these companies cannot make a profit due to price controls.

These design flaws, as well as the others discussed in earlier posts on this blog, simply reaffirm my view that Obanacare will turn out to be a monument to the folly of central planning.

Implementing Obamacare

July 4, 2013 1 comment

News reports of the delay in imposing the fines on firms for not providing health insurance got me to thinking about how educational Obamacare should be regarding the folly of central planning. The Soviet Union collapsed in large measure because central planning destroys the incentives for innovation, efficiency, and wealth creation and yet there are many people in this country who continue to think that it is the government’s role to intervene in markets to dictate what gets sold and at what price. Consider just a few of the problems already revealed about the implementation of Obamacare.

What would make anyone think the the government has the expertise to carry out a sophisticated IT project which is what is involved in creating the exchanges for buying insurance? The government has a history of failed IT projects and a consultant to the government has commented in the press that creating such an infrastructure usually requires much more time than the government has to get the exchanges up and running. And so there is now a GAO report delicately suggesting that there is a considerable chance that the exchanges will not be available October 1. Why do we need these anyway? Life insurance gets sold without the need for government-run exchanges. Are there problems in the life insurance marketplace because there are no exchanges run by the government for the purchase of life insurance? I am not aware of any.

The insurance pricing is now becoming available (see this WSJ article) and, although the cheapest policy will now cover more than cheap policies currently available, the insurance could be two or three times more expensive than it is now for young people. Does anyone seriously think that a person of modest means, say earning a pre-tax income of $35,000, is going to spend a third of his/her income on health insurance? The only way they pick it up is if the cost is paid to a large extent by the taxpayers and it appears that the subsidies disappear at this income level.

There are reports that some health insurance systems and insurance companies will not participate in the exchanges. As for the insurance companies, I have written previously (see this post) about the risks of adverse selection which could bankrupt insurance companies so it is quite reasonable for insurance firms to wait to see what buyers do before entering the exchanges. With some health systems refusing to participate, there is the possibility of few physician choices for those buying insurance in the exchanges. Thus it appears possible that the billions of dollars spent to create the exchanges will result in exchanges with very little activity since they provide low quality products.

Finally, by delaying the fines, the Administration seems to think that this will prevent firms from cutting hours and/or employment (there are already reports of reduced employment and hours in the media) but this only postpones the inevitable. Further, as Calvin Coolidge so clearly stated, firms act in anticipation of tax increases (see my post on Coolidge here) so it is doubtful the the delay will make much difference. It is hard to see this delay as anything other than a political ploy aimed at the 2014 elections but, if so, it will have little effect.

The Affordable Care Act is an exercise in central planning and the Law of Unintended Consequences seems to be arising yet again. Will the supporters of central planning finally figure out that central planning is a failed idea that can ultimately destroy the economy in which it is used?

Minimum Wages to Rise in 2013

January 3, 2013 3 comments

There are reports in the news media that minimum wages, a type of price control, will rise in a number of U.S. states in 2013 (here is a link to one such article). This is yet another example of the destruction of economic lives by governments. There is a substantial body of evidence compiled by labor economists that minimum wages create unemployment beyond what would otherwise occur. This is a classic “winners and losers” scenario as there will be workers earning higher incomes as a result of the policy but those losing their jobs will also not acquire the human capital (knowledge) that they could use to improve their economic prospects in the future. Yes, the reason for minimum wages is the desire to help those at the low end of the income scale (although not everybody favors minimum wages for this reason). But as they say, the road to hell is paved with good intentions. There are other ways to improve the prospects of low-wage earners that do not require the creation of more unemployment. For example, a negative income tax would do the job (government gives money to individuals below some level) or the government’s subsidies for education can be viewed as an attempt to raise incomes.

The minimum wage is also an example of a market intervention by economic illiterates. As I have argued elsewhere on this blog, many people practice economics without a license. When this happens, there are always unintended consequences and, sadly, young people at the low end of the wage scale will experience these unintended consequences caused by minimum wages.

 

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