Sunday, March 17, 2019

Minimum Wage Debate: Meer Versus Galbraith

If you want to see two economists debate the minimum wage, this debate between Jonathan Meer and James Galbraith is one of the best you could find. That's not to say it's an even debate. I think Meer just trounces Galbraith, whose strategy appears to be "Look extremely (unduly) confident to a room full of starry-eyed undergraduates who will credulously swallow whatever an authority figure tells them. Make ridiculous claims in a folksy 'of course, we all agree to this' tone of voice, and hope nobody checks." Galbraith's performance here is a good example of what it looks like when you're trying to "win a debate" without actually bothering to discuss the material. I'll comment on some of the arguments both men make in the video.

Galbraith goes first in giving his opening statement. He is advocating for a $15/hour minimum wage at the national level. What's very frustrating is that he really gives no accounting of how his advocacy changed from $12/hour a few years ago to $15/hour now. He mentions the change. He acknowledges that he was plugging for $12/hour previously, but changed to $15. Like I've argued before, those numbers have to come from somewhere. It must be the solution to some kind of complex optimization problem. There needs to be a reason why the right number is $15, and not $5 or $50. It can't simply be, "Meh, we picked this number because it's a nice, roundish number and it's politically feasible." Listening to his discussion of how he got to $15, it's pretty clear Galbraith came to it by the flippant approach, not the mathematical one. It's disappointing that an economist would take this approach and basically ditch the learnings of the rest of his field. Listen to the entire debate; Galbraith employs very little in the way of economic reasoning, and when he does he gets it wrong.

A few specific claims. Around the 10 minute mark, he starts describing who the "benefits" will accrue to...but this assumes there will be benefits. The Seattle studies imply that low-wage workers lose income on net when you raise the minimum wage to $13/hour; cuts in working hours more than offset the gain in wages. Presumably this becomes more acute if you go all the way to $15/hour (and more so in lower-income areas not currently experiencing an economic boom, unlike Seattle). Around the 13 minute mark he claims that McDonalds is "highly capitalized" and thus unlikely to lose workers. Okay, but what about low-capitalization non-chain restaurants? Is the goal of this policy to drive those out of business and drive the workers to places like McDonalds? At about the 14 minute mark he discusses how low-wage workers are often on various forms of welfare. He wrongly describes this as a "subsidy" to the employers, as if the employers would simply pay the difference if the government stopped paying these people. This has always been a bad argument. If you make "not working" a more attractive option, it means employers need to pay even higher wages to attract workers. Increasing a business's labor costs isn't a subsidy, it's a tax. Galbraith even gives a number; supposedly raising the minimum wage would save $40 billion in welfare costs. Once again, this must be assuming that the minimum wage actually increases earnings; if it doesn't, if it in fact throws more people out of work or results in cutting their working hours, those people will earn less and require more welfare. I don't know how the $40 billion number was arrived at, but it must be making heroic assumptions about how the minimum wage actually works.

At 13:30 he gives an incredibly crude summary of the empirical literature on minimum wages: that there's "no effect" on employment. No effect? No matter how high we raise it? As I've said before, this goes well beyond what even most pro-minimum wage economists claim. Arin Dube says to target half the median wage, which is well under $15/hour in every state. This is the same crude summary of the empirical work employed by politicians and other policy advocates. It's a shame to see an actual economist doing it.

At 15:30 he discusses how a minimum wage incentivizes "better business practices." This is another silly argument that assumes business people will only do what's best for them if we force their hand. If these better business practices are there for the taking, business owners will already be discovering and implementing them. Necessity can be the mother of invention, for sure, but imposing economic duress on companies unless they implement "better business practices" means some of those companies will go out of business. At some point in the debate, you catch Galbraith admitting that (paraphrasing, not quoting here) "Sure, you'll see some disruption. The whole point is to change the structure of the labor market." It just seems incredibly reckless. He flippantly admits that, sure, some of those nasty consequences might show up, but then assumes it will magically work out for the best.

At ~16:20 he argues that if we raise the minimum wage, those jobs that are currently done by immigrant laborers will instead be done by Americans. That seems extremely unlikely. Some of those jobs will disappear or be replaced by capital. Galbraith makes the argument that "unit prices" can increase by a small amount to absorb the cost of labor increase. This commonly repeated argument seems 1) wrong and 2) beside the point. It's wrong, because increasing the unit price could mean losing a lot of customers. I don't get the impression that Galbraith has a sophisticated price-elasticity calculation in mind. It's beside the point because raising the unit price doesn't fundamentally increase the marginal product of an employee. Raising the unit price might mean that the business now technically has enough to pay a higher minimum wage, but it still might not make sense to hire, say, an inexperienced dishwasher at $15/hour. Prices don't work like that. Raising the unit price doesn't proportionally raise everyone's marginal product. It can still make sense to lay off low-skilled workers and replace them with capital or skilled workers.

Meer starts around the 18-minute mark. He describes the minimum wage advocacy, particularly the "fight for $15" variety, as self-congratulatory hashtag slactivism. (This might have been the first place I heard that term. I like it!) He makes the extremely valid point that the minimum wage is an incredibly blunt instrument. He gives some useful figures here. Just 14% of those earning the minimum wage are living below the poverty line. He describes the results of a CBO study: at a $10 minimum wage, for every dollar that accrues to a low-income family, $6 accrues to non-low-income families. If this were a direct cash transfer program, those results would be shameful. It's no less so because the transfer happens off the government's official books. If the goal is to actually help poor people, there are far better tools for that.

Around 22:30 he discusses his own research, which shows that the minimum wage has a subtler impact than what most studies look for. They work by slowing the rate of job growth (which Meer's research was able to detect), rather than instantaneously casting people into unemployment (which is what traditional studies attempt to detect). This is important, because it casts doubt on a lot of previous research on the minimum wage showing "no effect" on employment.

Meer gives a great analogy. He describes throwing bricks into a pool and attempting to measure the water level. The measurer can't detect the tiny difference in the water level after throwing in a single brick. His measuring stick isn't precise enough, there are too many waves, and so on. The measurer keeps trying to measure the impact of each single brick (not all the bricks together, just one at a time) and determines that bricks don't displace water. Then, having "discovered" this scientific principle, says, "Okay, let's throw in a boulder, because rock simply does not displace water." He's making the point that people are making a mistake when they place too much faith in the empirical work on the minimum wage, particularly when they extrapolate those "lessons" well beyond anything that's actually been tested. He's also making the point that empirical work measures the effect of small differences in the minimum wage; it generally does not measure the full effect, with the counterfactual of "no minimum wage" as the comparison group. So we simply have no idea how much harm it's currently doing.

He points out that the true "minimum per-hour labor cost" is more like $20/hour when factoring in unemployment insurance and other costs. An employee costs more than his hourly pay, for sure. He criticizes the "phase-in" of minimum wages as a way of trying to disguise the true cost. I think he has a good point. If all these wonderful things would happen when we raise the minimum, why not have those things happen now? I think Bryan Caplan nailed this a few years ago. The phase-in makes the job losses less blatant and harder to detect. Phase-ins are a cynical ploy to hide the cost of government policy.

Meer points out that some unions are trying to legislate exceptions for their members in places where the minimum wage is too high. That's a wonderful way of eliminating the competition! It's also an implicit admission by the advocates themselves that the minimum wage makes it harder to find work, assuming you raise it high enough. He points out that only 6% of young black men (not in prison or the military) have a full-time job. And he mentions some groups that work with prisoners to try to get them employment; these people are begging for an exemption from the minimum wage, because they know no employers will give ex-cons a chance at $15 an hour (even at $7.25 an hour).

Galbraith responds. He makes the stunning argument that voters will accept a minimum wage increase but will not accept higher taxes to pay for a welfare state. He says something about how voters work hard for their money, and they resent having that hard-earned money taken from them. I was really taken aback by this argument. He's basically admitting that voters will reject a policy when you make them confront the true costs. This bites a huge bullet. He's admitting that he's trying to hide the unpalatable costs of his pet policy from an unobservant public. Answering the argument that "it's everyone's responsibility to help the poor; we can't just heap the responsibility on employers", he responds by saying "that's McDonalds' problem" if it's costly to pay someone a higher wage. A minimum wage would be "self-enforcing", and "It's not the government's problem" to worry about the higher costs to employers. I actually think this is a truly dishonest way to conduct government programs. Contra Galbraith, I think all welfare programs should be explicitly on-budget. The government should be directly taxing citizens to cut checks to other needier citizens. Various labor laws (like the minimum wage and various mandatory benefits laws) attempt to do this transfer off the books, the dishonest way. Make it transparent, so the voters know what they're actually paying. A transfer that happens off the books is still a transfer. It still represents a cost to taxpayers (possibly with an offsetting benefit, possibly not...naturally there are winners and losers), it just doesn't happen to show up on the tax bill. Galbraith also makes the bizarre point that welfare states require an expensive bureaucracy. But we already have such a bureaucracy, which keeps track of people's earnings over time and makes payments that are conditional on past contributions. There's no additional expense to do something like Meer is proposing. In fact, we could easily make the existing welfare state less expensive and more well-target to helping the poor if we made it more contingent upon actual needs (rather than being an entitlement for old people). The bureaucratic expense point is a whopping non sequitur.

There is a theme here that I've seen elsewhere with Galbraith's arguments. In an Econtalk interview, Russ Roberts challenges Galbraith's support for Social Security. Galbraith claims that the system is very fair and reasonable, which is why it's so popular. Roberts asks Galbraith what percentage of the U.S. workforce believes (incorrectly) that their contributions are being set aside for them. His point is that the popularity of the program is built on a lie. Those contributions aren't being set aside for each worker's later retirement. The federal government is spending that revenue immediately. Galbraith totally dodges the point. ("That's a polling question; I'm not a pollster.") This is a shameful evasion. If Galbraith wants to claim a program is popular, he should acknowledge that its popularity is built on a misconception (perhaps a deliberate lie). I think he's doing the same thing with the minimum wage argument. It's actually pretty brazen of him to admit that voters wouldn't accept the minimum wage if it were converted to some kind of direct tax-and-transfer program. Apparently he's okay with keeping the public in the dark if it gets him the policies he want. That's fine. If that were the only way to get my favored policies, I'd be very tempted to plug my nose and do the same. But he shouldn't be appealing to the popularity of these programs if they're sold in such a dishonest way.

Galbraith makes the absurd "multiplier" argument around the 1 minute mark. Put money into the hands of low-income people, the thinking goes, they go to stores and spend it, and there is thus more money that businesses can spend on workers' wages. When he gets a chance to respond, Meer lampoons this as a "perpetual motion machine." He points out that this argument doesn't have any kind of internal solution. That is (once again) there's no reason why this works for $15/hour, but not $50 or $1,000. (Galbraith cuts Meer off when he makes this perfectly valid point, saying "No, that's not true..." but then trails off and makes a completely different point.)

Galbraith attempts a response to Meer's question about "Why throw the bricks in one at a time? Why not all at once?" Galbraith absurdly claims "Because I'm a moderate. Because in many ways, I'm actually a conservative." He says that doing a slow phase-in would give people time to adjust and give policy makers a chance to reverse course if it turns out they'd made a mistake. I wish he would state more clearly what kind of real world evidence might convince him he'd made a mistake. He should pre-commit to some kind of test that proves the minimum wage isn't working. (After saying the phase-in gives us time to reconsider, he is quick to point out that he doesn't think raising the minimum wage is a mistake.)

Around the 35:50 mark, Meer mentions Arin Dube's recommendation of setting the minimum to half the median wage. Once again, $15/hour is well above the median in any state. Galbraith is simply going way beyond what any sensible economist, even pro-minimum wage economist, has proposed.

Around the 40 minute mark, Meer points out the weirdness of the living wage argument. This  "needs-based" theory of wages implies that an employer is responsible for paying a worker more if, say, a spouse loses his job or dies. I pointed this out in a recent post: it's a terrible idea to treat employers as all-purpose social insurers like this, with an open-ended obligation to meet the needs of their employees. (Should they be subject to the kind of reserve regulations of actual insurance companies? Should they be able to charge their employees a premium, like real insurers do?) Even forgetting for a moment how thoroughly this would screw up the labor market, it just seems absurd on its face.

Galbraith misrepresents the empirical work on the minimum wage around the 46 minute mark and claims that Meer's very novel research is "just one study." This is pretty obtuse, because several other studies had duplicated his work by then. Also, it misses the basic point, which is that Meer's work shows that the dominant paradigm for picking up disemployment effects inherently misses the main effect (slower job growth, rather than instantaneously increasing unemployment rates).

The question-and-answer period starts around the 51-minute mark. I can't hear the original question, but Galbraith's response is incredibly arrogant. "The premise that you state is incorrect. Businesses hire whom they need in order to make the sales they expect to make." I'm just rolling my eyes at this, because Galbraith has completely ditched the economic way of thinking for...something else. Oh, really? There's no accounting for labor costs? No business owner every decided against a venture because the underlying expenses made the profit margins to narrow? There's no way that increasing labor costs (usually the highest or second highest expense for a business) can turn a profitable venture into a loss? He again appeals to the ridiculous "multiplier" argument. He then seems to backtrack and says "I'm not saying nothing would change. We're making major changes in the wage structure of the economy." Okay, so we're overhauling the low-skilled labor market, and some places will go out of business while others expand, but we can be totally sure that this won't affect net employment in any substantial way?

At 56 minutes, Galbraith straw-mans Meer's paper as a "Simple economic model with a downward-sloping demand curve and upward-sloping supply curve." When Meer gets a chance to respond, he points out that his paper actually goes beyond the simple econ 101 model and discusses long-term growth in jobs. It allows for the kinds of frictions that simple economic models might assume away. It builds in the possibility that adjustments can take time. Galbraith has simply not grasped this or decided not to address it.

Around the 58-minute mark there is a discussion about Greece. Apparently 24-year-olds are exempt from the minimum wage, which kicks in in full force promptly at age 25. Meer references a paper that demonstrated a significant jump in unemployment at age 25. Galbraith, after an emotional and totally unempirical recounting of the Greece story, seems to agree with Meer. "Oh, sure. That absolutely happens. When they turn 25, they sack them." Okay. But weren't you just telling us that there are enough jobs to go around for everybody? The economy can somehow sustain keeping everyone employed when you subject them all to the same minimum wage, but suddenly has less demand for total workers when you exempt some of them? This contradicts his earlier story, where employers just "decide" how many people they want to hire to meet the sales targets they want to hit. Maybe Galbraith could justify this with some weird assumptions about the demand curves for low-wage labor, but the onus is on him. (What happens when you subject everyone to the minimum wage, but then you exempt one person? Ten people? One percent of people? How does this cast people out of work, when exempting nobody leads to full employment?)

There is an exchange starting around 71:30. Meer points out that transfer programs tend to have phase-outs, which result in very high marginal tax rates for low-income workers. (This piece by John Cochran at his blog The Grumpy Economist is probably the best discussion I have ever seen of this topic.) He is reiterating that welfare is not a subsidy to employers of low-wage workers. "Employers have to pay more, not less, to get people to work" under these welfare schemes. Once again, the "subsidy" argument is exactly backwards. Galbraith misses the point: "As far as the rest of his point, well if you followed it, you have a more subtle mind than I do." It's weird, because Meer's argument is not at all hard to understand. Galbraith is just being dense, hoping that some people in the audience will side with him. He offers a quote by Keynes about logicians tying themselves into knots, lacking the common sense to cut through their own casuistry. It's unfortunate that he doesn't even try to respond to the point in any substantive way. Very poor form on Galbraith's part.

There is more, but I think I've picked out the highlights and major themes of the debate. Why should I bother with this? So an old man made some bad arguments about the minimum wage once, so what? Actually, I think the way Galbraith makes his argument is similar to the way most politicians and other policy advocates make their arguments: a near total absence of economic reasoning, a distortion of the empirical record on the minimum wage, an extrapolation of empirical results far beyond what's appropriate (a $15/hour minimum is a much larger change than almost anything found in the empirical literature), assurances that everything will work out, moral scorn heaped on employers of low-wage earners. I criticized Dube's written testimony in a recent post, but I can at least see the hand of a competent economist in that document. Galbraith seems to be denying the usefulness of economic reasoning altogether, and he winds up saying things that don't make any sense. I've seen good and bad versions of this kind of argument, which challenges or outright denies the usefulness of economics as a science. The good version offers a kind of specific critique of economics, challenging some assumption on empirical or logical grounds and suggesting an alternative theory. The bad version just jettisons economic thinking in general and uses the now thoroughly unconstrained space of ideas to just say anything. Unfortunately, Galbraith does the latter.

If you think I'm being unfair, I encourage you to watch the entire debate. If there's a more charitable interpretation of what Galbraith is doing, I'm open to hearing it.

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