Tag: Regulation

Let the Facts Decide on Minimum Wage

Basic economic theory has very clear predictions on what should happen to a labor market with a minimum wage. If we assume an upward sloping labor supply curve and a downward sloping labor demand curve, a minimum wage will cause demand for workers to fall while supply increases. The result: an excess supply of workers, also known as unemployment.

The real world is obviously much more complicated than the standard Econ 101 textbook story. Perhaps the most important difference is that there is not just one equilibrium wage. No two jobs are exactly the same. Workers with different skill levels will face different labor markets. Location matters. The list of reasons why the real world doesn’t conform to the simplifying assumptions of economic theory is potentially endless.

However, those caveats do not necessarily invalidate the intuition of basic economics. I don’t think it’s a controversial statement that firms will attempt to substitute away from an input when its cost increases. In this case, that input is low skilled workers. As minimum wage increases, so does the necessary productivity of a worker who wants to be hired. A worker who only produces $10/hr of value for an employer will never be paid $15/hr regardless of the level of the minimum wage. Their choice is not between 10 and 15, but between 10 and 0 (unemployment).

But can we be sure that workers are actually paid based on their productivity? Couldn’t it be that they are simply being exploited, with firms pocketing the additional profits they generate? Under this scenario, an increase in the minimum wage could increase wages without hurting employment.

Here we see the limits of theory. Under some assumptions a minimum wage is good and under others it is bad. The clear next step is to look at the facts. Do minimum wage laws hurt or help low wage workers in the real world? Luckily, due to recent experiments with a $15/hr minimum wage in some cities, we have plenty of data to work with.

Supporters of minimum wage laws will be happy to find out that cutting edge research shows we have nothing to worry about (here’s the link to the full study). The increase in Seattle minimum wage to $13 (15 is being phased in over time) hasn’t had severe disemployment effects. There was a minimal decrease in employment, but overall, “results show that wages in food services did increase — indicating the policy achieved its goal.” So take that Econ 101. Minimum wage is great. Case closed.

Well, not quite. Because this morning, just 6 days after the study above came out, we have a new study looking at the exact same natural experiment (although with a different data set). The results are not so nice. They find that “the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.”

Now what? Theory gives us conflicting results and so does data. How can an unbiased observer make a decision about the truth? Well, to be sure of the results of the studies above, they would need to sift through around 100 pages of dense statistical analysis. But of course, anybody untrained in statistics would first have to take a few classes to have any idea what they were talking about. And even with that training, they’d need to take a close look at the datasets used, weigh the pros and cons of each methodology, decide whether the results can generalize to other places, etc. Maybe after about two years of hard work they’d be able to have a qualified opinion on the two studies (never mind the dozens of other studies that have been done on the topic).

What is actually more likely to happen? Everyone who supported the minimum wage will cite the first study and look for flaws in the second (I would bet anything that Arin Dube – one of the biggest minimum wage scholars to support an increase – is scouring it right now looking for something to criticize). Everyone against minimum wage will do the opposite. Both will pretend they are letting the facts decide.

Who Says No? A Climate Change Compromise

Many on the left are up in arms over Trump backing out of the Paris agreement. Ignoring the fact that the agreement says that countries are free to set their own targets and their own policies and is largely symbolic anyway, let’s work under the assumption that liberals actually believe that this policy is disastrous for the earth’s future. In fact, let’s start from the (perhaps ridiculous) assumption that everybody in this debate is being intellectually honest.

Then Republicans have a great opportunity. Offer Democrats a compromise. The United States will re-enter the Paris agreement. And they’ll go even further. Democrats will be given full control over all matters of the environment. Carbon taxes, cap and trade, clean energy subsidies, whatever they want. Completely blank check.

In return, Republicans get everything else. They can pass whatever tax code they want, any deregulation they want. Democrats will have no say in healthcare, no control over education, no input at all over any issue except climate.

So my question is: who says no? Republicans (and Trump) have to go back on one of their key issues and allow the Democrats free reign. But for sucking up their pride on one thing they get everything they’ve ever wanted for a whole range of others. And what about the Democrats? Sure they’d be sacrificing a lot. In their view, we’d be significantly worse off in the short run. But isn’t that worth saving the world? If the results of climate change are truly catastrophic, isn’t it worth some people in the richest country in the world not having health insurance? Isn’t it worth middle class Americans being required to take out student loans to attend college?

Now maybe there are some issues that are as important as climate. If you think Republican control of the military would lead to nuclear war, then of course that can’t be part of the deal. Fine, keep that one. I’ll even throw in gun control, another issue that seems to be of vital importance for the left.  You can come up with your own list of some other issues you would never want to compromise on to save the world. But that list should be very small.

So who says no? I can’t imagine any Republican ever denying the above compromise. But I also doubt a single Democrat would take it. If that prediction is right, we are left with three possible conclusions. The first, which I think we can rule out, is that Democrats believe giving Republicans complete control over anything would be worse than the end of the world. The second, which could be true, is that they believe they can convince Republicans of the correctness of their view without conceding too much. Considering their lack of success to this point, and the apparent urgency with which they believe something needs to be done, this also seems unlikely. So we are left with the third, and in my opinion most likely, option: Despite their rhetoric, Democrats are simply not that concerned about climate change.

Outrage on Net Neutrality

In a previous post I agreed with Bret Stephens that complete certainty about an issue doesn’t help convince anybody that your view is correct and may in fact work against the argument. I extended his point by arguing that not only do people express complete certainty that their ideas are right, but they also tend to find the idea that anybody could think differently completely outrageous. However, I don’t think climate change was the best example to prove that point. If you truly believe that climate change will cause catastrophic changes, you might have a right to be outraged. There is a much better example: net neutrality.

Senator Al Franken recently claimed that the FCC’s plan to roll back some of the regulations on net neutrality would be a “major step to destroying the internet as we know it.” Other reports in the media have had a similar tone: there go those idiot Republicans again trying to convince people that we don’t need the government involved in every aspect of our lives. Perhaps the worst offender is Gizmodo, who I follow for tech news, not to see articles like this one. Now, I suppose it’s possible that a writer for Gizmodo knows enough to have a strong, well qualified opinion on a topic like internet regulation, but I expect their knowledge on the topic is pretty close to mine. And I will freely admit my own ignorance on the topic. I have no idea whether net neutrality is a good idea.

To be clear, just as Bret Stephen’s article was not about the correctness of climate change, this post is not about whether net neutrality is a good idea. Instead, it is about the complete certainty with which its proponents appear to believe it’s a good idea. If you are well read on net neutrality, I’d be happy to hear a more qualified opinion on why this issue is so clear cut. From my perspective, however, the issue is not an obvious one at all and the goal of this post is to sow the seeds of uncertainty for those who haven’t tried to think through the issue in at least a small amount of detail.

I do think I understand the basic argument for net neutrality. Without net neutrality, its supporters argue, internet providers will be free to offer different prices to access different websites on the internet. Right now you pay a fixed price to your internet service provider for access to any website on the internet. ISPs are not allowed to treat bandwidth from one website different from any other. Without this guarantee, it is possible that internet providers could charge more for people who want to access popular websites. You pay $30 per month for internet, but if you want Facebook access too that’s gonna be another $5. Want Netflix too? Well maybe you can get the entertainment package for an extra $15. Even worse, if Comcast wanted to push its own video service, it could completely shutdown Netflix for its customers, leading to higher prices and lower quality service. Special treatment could also go the other way. Large companies could pay to receive faster access to their websites while small startups struggle to survive.

One of the most common ways to summarize the changes is to say that it would make the internet look more like cable TV (see this article for example). Expensive bundles, premium content, bad service. Who wants that? And that does sound bad. But hold on a second. Why do we hate cable TV service? Isn’t the main complaint that you have to buy a bunch of channels you don’t want? If I only want to watch ESPN I can’t buy just that, I have to buy the whole sports bundle. Now, it’s true that net neutrality makes these kind of bundles illegal, but it also makes selling access to individual websites illegal. With internet you only have one choice: buy everything or nothing. Perhaps this method makes more sense for internet than it would for TV, but it’s not immediately obvious that it’s better. It could be that net neutrality leads to inconvenience, higher prices, and worse service. It could also be that it leads to heavy internet users paying more than light users. That doesn’t seem so bad to me.

The good news is we don’t have to guess what the internet would look like without net neutrality. If you don’t know already, take a guess when you think the rules that currently uphold net neutrality were put into place. If you’ve heard any of the horror stories I imagine you would think that the internet has always had these kinds of regulations. You probably don’t remember the internet being a price gouging wasteland in all the time you’ve been using it so the rules must have gone into place in the 80s or 90s at the latest. There’s no way that net neutrality regulations were passed within the last 3 years right? Well…

So we pretty much know exactly what would happen if we get rid of net neutrality. We would destroy the internet as we know it and replace it with the internet of 2015. Why is that a big deal again?

Of course, as I’ve already admitted, I have no idea what I’m talking about on this issue. I think I am barely qualified to talk about macroeconomics, which I study many hours per day. So let’s defer to the experts. Maybe this article about how the effects of net neutrality are minimal. Or this one that shows that there is insufficient evidence to make a strong case that net neutrality rules are needed. The supporters of net neutrality aren’t the only ones making unsubstantiated claims. The claim that net neutrality reduces investment is probably overblown.

I’m sure you can find other articles to support either side. That’s not the point. The point is that net neutrality is not climate change. There is no 97% consensus here. And even if there was, even in the worst possible case, we end up not with the world ending, but with a slightly more expensive internet. The outrage remains regardless. In today’s political climate, every issue has to become a battleground and the urgency of the arguments appears to bear little correlation to either the size of the issue (because everything is a catastrophe) or the probability a person has the correct view (because obviously you are right about everything).