Kevin Drum - 2013

Can Conservatives Be Persuaded to Raise the Minimum Wage?

| Thu Oct. 31, 2013 12:47 PM EDT

McDonald's operates a help line called McResource that offers advice to their employees. Among other things, that means directing workers to government programs that can help them, such as food stamps. At the Guardian, Sadhbh Walshe wants to know why conservatives are OK with this. If they hate welfare programs, why are they "seemingly okay with hugely profitable corporations exploiting these programs while they underpay their workers?" This is in the context of an argument for raising the minimum wage to $15, but Adam Ozimek says it's misguided:

Conservatives believe that minimum wages lead to more unemployment, and people on unemployment are going to rely on more not less public assistance....So if you’re going to try to sell them on an argument that a higher minimum wage will lead to less food stamps you’re wasting your time. You may succeed in raising their ire more about food stamps, but you’re simply not going to sell them on a minimum wage with these arguments. My guess is those who write or cheer pieces like this are simply too cloistered in their own ideological bubbles to understand that.

Maybe. At a guess, though, it doesn't really make any difference. Conservative politicians don't oppose increases in the minimum wage because they think it increases unemployment. After all, they oppose even modest increases that, by almost unanimous consensus, don't have any noticeable effect on unemployment. The truth is that they simply oppose business regulations, and the minimum wage is a business regulation.

Of course, this still means that Walshe's argument is falling on deaf ears. That's OK, though, because she's only talking to conservatives in a rhetorical sense anyway. It's the Guardian! The real goal here is to keep pressing a campaign that, eventually, might move the Overton Window among liberals and centrists. Those are the people who might nod along with the minimum wage argument.

So what's the answer? Should we substantially raise the minimum wage? In one sense, I doubt that it would make a big difference. If you raise the wages of fast food workers, you help fast food workers. But you also raise the price of fast food. And who buys fast food? Mostly poor and middle-class folks. But our biggest problem of the past few decades has been a massive redistribution of economic gains to the rich, and since the rich don't eat much fast food, this would mostly leave them unaffected.

Still, it would help a bit, and certainly there are other minimum wage occupations that affect the rich more than fast food. And since most minimum wage jobs are in the nontradable sector these days, a big increase isn't likely to send jobs overseas. For the most part, the kinds of jobs that can be lost to China and Indonesia are either already gone or already pay more than minimum wage.

The bigger wild card is whether a substantially higher minimum wage would make automation more cost effective, thus replacing workers with machines at a higher rate. Regular readers know that I think the use of automation is going to accelerate no matter what we do, and with a tail wind like that already in place, it's certainly possible that a big increase in the minimum wage would put people out of work even faster. But at this point, nobody knows. We simply don't have enough experience to understand what would happen.

I am, generally, in favor of paying people for work rather than giving them means-tested welfare benefits. For that reason, I like the idea of a higher minimum wage, just as I like the idea of the EITC. At the same time, though, I doubt that this would be a truly progressive reform. Welfare benefits are paid out of the general fund, which means that the money comes from income tax receipts. In other words, it primarily comes from the well off, who pay the bulk of the income tax. A higher minimum wage, by contrast, mostly raises the price of goods and services. This hits everyone equally—or maybe even regressively.

I'm still in favor of a higher minimum wage because I believe there's a minimum amount that any working adult should expect to receive for an hour's labor. But it's no panacea. For all its faults, our current system of social welfare is pretty progressive, and given the enormous redistribution of wealth we've seen over the past 30 years, that's probably the most important feature to keep in mind. Ironically, it's also a reason that conservatives should prefer a minimum wage increase: because it's less progressive than food stamps or Section 8 vouchers. We've come full circle to Walshe's original argument.

POSTSCRIPT: For the record, I should note that I mostly agree with Ozimek's post. "Food stamps are an excellent program. It really is the sort of basic safety net that should have near 100% support. The recent cuts to the program only amounted to a 5% change, but there are larger changes being considered. Let’s not try to undermine this program further by putting it on the corporate welfare radar of Tea Party republicans."


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Sometimes It's Better for Reporters to Be Less Precise

| Thu Oct. 31, 2013 11:19 AM EDT

I complain periodically about reporters who make boneheaded arithmetic mistakes—the kinds of errors that are off by a factor of 10 or 100 and should have set off instant alarms. But Felix Salmon points out today that it's also easy to make the opposite kind of error: insisting on numerical accuracy that simply doesn't exist and doesn't matter. The issue at hand is the Norwegian guy who bought $25 worth of bitcoins in 2009, forgot about them, and recently discovered that they were worth $850,000. Sweet! But wait. Was it really $25? Or was it $22? Or $27? Anthony DeRosa was unhappy that different news accounts provided different numbers, but Salmon explains what happened:

It turns out that the reason for the disparity is very simple: the dollar-krone exchange rate fluctuated quite a lot in 2009, and it was unclear exactly when the bitcoins were purchased, so no one knows exactly how much the coins were worth, in dollar terms, when purchased. They might have been worth $22, or they might have been worth $27. Really, it doesn’t make any difference: the man made a profit of well over $850,000 whatever his initial investment was.

But there’s a superficial exactness to numbers that doesn’t exist in words, and so people have a tendency to believe that all numbers are much more precise than in fact they are. If the Labor Department releases a report saying that payrolls rose by 148,000 in September, then a reporter who said that payrolls rose by 150,000 would be considered to have her facts wrong — even though the headline number is only accurate to within 100,000 people either way. The actual number of new jobs could easily be anywhere between 44,000 and 252,000 — and indeed there’s a 5% chance that it’s outside even that large range. But because everybody insists on one hard number, one hard number is what they get.

One of the most important skills in financial journalism is numeracy — having a basic feel for numbers. In this case, the reporters covering the story got the numbers right: they should be applauded for that, rather than having brickbats thrown at them.

Yep. In general, reporters should be more careful with numbers, but ironically, that sometimes means being less exact. Some numbers just aren't precise, and we'd all be better off if we accepted it. Pretending to a precision that doesn't exist is as bad as tossing out a sloppy estimate when a few minutes of work would provide you with the real answer.

How to Save Social Security By Slashing Benefits

| Wed Oct. 30, 2013 5:45 PM EDT

James Pethokoukis grabs my attention with the following:

Is there a way to save Social Security without raising taxes — and make it better? There is, and it has nothing to do with privatization or personal accounts.

What follows is an interview with Andrew Biggs, a colleague of his at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration. So let's hear what Biggs has to say:

Today we spend over $700 billion each year on Social Security benefits, yet 9-10 percent of seniors in America are living in poverty. You could give every retiree in America a poverty level benefit for half the cost of the current Social Security program.

....My solution is if you want middle and upper class people to save for retirement, tell them to save for retirement. Say everybody has to sign up for a 401(k) with their employer. Their employer has to match their contributions. That’s going to go a long way towards solving this problem because if everybody’s saving, then Social Security’s job is easier.

....The benefit would be paid irrespective of your earnings and labor force participation. It’s a universal retirement benefit. New Zealand and a few other countries have the universal pension. The idea is, We’re going to pay you these benefits, so you’re not going to starve. This is going to take the place of sort of the redistributive end of Social Security, also take the place of a number of welfare programs like Supplemental Security Income.

Nobody will get a benefit below the poverty line. The poverty rate among seniors should go from 9 percent to 0 percent. But nobody will get a benefit above the poverty line. If you want more than that, you have to save for it. That’s where these individual-based accounts come in.

I thought this plan had nothing to do with personal accounts. But it does. Biggs explicitly says that we should make 401(k) contributions mandatory, which sure sounds like a personal account to me.

As for benefits, the current poverty level for an individual is $11,500. According to the Social Security Administration, about 70 percent of beneficiaries currently receive benefits above that level. So the Biggs plan would amount to a substantial cut in individual benefits for most retirees.1

So what this proposal boils down to is this: Cut future benefits dramatically for most people; increase benefits for a few people; and put in place a forced savings plan to make up the difference. There's nothing very new about this, and it fails on both of the initial promises: to make Social Security better and to do it without personal accounts. I think it also explains the "natural skepticism" that Biggs (accurately) says liberals have with conservative reform proposals, which he chalks up to the fact that "Republicans have often treated Social Security as a budget problem to be solved by cutting spending rather than treating it as a program that they want to fix." He's right. But this is just more of the same.

1The size of the cut depends a lot on the details of Biggs' plan. What's the retirement age? Do married couples get two individual benefits or a single poverty-level benefit for two? What about disability payments? Etc. However, Biggs says his program will cost half of what the current program costs, so regardless of details, he's plainly counting on a substantial average drop in benefit payments.

New Poll Shows Democratic Incumbents in Big Trouble

| Wed Oct. 30, 2013 1:49 PM EDT

Today brings a new poll from Democracy Corps titled "Revolt against DC and the Republican Congress." And it's true: their polling shows that even in Republican districts, the GOP's brand has taken a beating.

But once you get past the generic questions and ask about approval/disapproval of actual members of Congress, the picture turns sharply. I've combined two charts to show what happens when you ask people in battleground districts about their own representatives:



POSTSCRIPT: There's also a very weird result (on slide 20) showing that voters in Republican districts are more eager for their representatives to work with President Obama than voters in Democratic districts. I have no idea what to make of this. In fact, it's so strange that it makes me wonder if there's something wrong with this poll.

NSA Has Even More Access to Google Than We Thought

| Wed Oct. 30, 2013 1:05 PM EDT

As we all know, the NSA has a program called PRISM that allows it to collect vast amounts of information from companies like Google and Yahoo. Apparently, though, PRISM isn't vast enough. The Washington Post reports today that NSA collects even vaster amounts under a program called MUSCULAR that has hacked into the internal networks where documents are moved around before they're encrypted:



....For the MUSCULAR project, the GCHQ [the British counterpart of the NSA] directs all intake into a “buffer” that can hold three to five days of traffic before recycling storage space. From the buffer, custom-built NSA tools unpack and decode the special data formats that the two companies use inside their clouds. Then the data is sent through a series of filters to “select” information the NSA wants and “defeat” what it does not.

This is apparently all done overseas in order to evade rules that govern domestic data collection. According to the story, "Two engineers with close ties to Google exploded in profanity when they saw the drawing." As always, read the whole thing.

Our Economy Is Suffering From an Investment Drought, Not Low Treasury Rates

| Wed Oct. 30, 2013 12:30 PM EDT

Paul Krugman alerts me today to the latest argument against the Fed's policy of keeping interest rates low. Unfortunately, I don't get it. It comes from bond king Bill Gross, and his argument is that if the yield on other investments—corporate bonds, stocks, private equity, etc.—is as low as the yield on treasury notes, then no one will bother investing their money and the economy will stall. Here's Krugman:

When I read Gross and others, what I think is lurking underneath is a belief that capitalists are entitled to good returns on their capital, even if it’s just parked in safe assets. It’s about defending the privileges of the rentiers, who are assumed to be central to everything; the specific stories are just attempts to rationalize the unchanging goal.

Interest, classically (and I do mean classically, as in Mr. Keynes and the), is the reward for waiting: there’s supposedly a social function to interest because it rewards people for saving rather than spending. But right now we’re awash in excess savings with nowhere to go, and the marginal social value of a dollar of savings is negative. So real interest rates should be negative too, if they’re supposed to reflect social payoffs.

This really isn’t at all exotic — but obviously it’s a point wealth-owners don’t want to hear. Hence the constant agitation for monetary tightening.

Maybe. But that's not how I read Gross. His complaint doesn't seem to be that risk-free returns are low. His complaint is that returns on risky investments are also pretty low. And if those returns are low, investment stalls and the economy suffers.

I don't understand this. It's backward. Real investment yields aren't low because the Fed is keeping treasury rates low. They're low because the economy sucks and nobody has much confidence in the future. This lack of confidence keeps cash on the sidelines, and this in turn means there's a huge supply of investment capital competing for a small number of good investment opportunities. When this happens, any project that's even halfway promising can demand very low rates because investors are all clamoring to be let in. They bid each other down, which produces low yields even on risky investments.

I suppose Gross has some baroque explanation for why this is the fault of low Fed rates, but if he does, it's nowhere to be found in his investment letter. The boring truth is that if we want higher investment yields, what we need is a stronger economy, one where the middle class is likely to thrive and consumption will increase robustly. In that economy, there are lots of great investment opportunities and yields will increase.

In the meantime, it's hard to see how raising treasury rates would help things. As best I can make out, Gross is supposing that if Fed rates went up to, say, 3 percent, then corporations would have to offer 5 percent on their bonds. If they did that, then investors would pile in and the economy would start to roar. But that makes no sense. If the hurdle rate for new investments goes up, corporations will simply cut back on their bond issues. It doesn't matter if investors would love to give you money at 5 percent; what matters is whether your project makes long-term sense even if you have to pay 5 percent for financing. If it doesn't, the project doesn't get approved; there are fewer corporate bond issues; and interest rates get competed down once again.

At least, that's what Economics 101 says. Maybe I'm missing something here. But my take is that the risk premium depends primarily on whether there are lots of good investment opportunities in the real world. There haven't been for a long time, which is why our economy has been powered by housing bubbles and financial rocket science for the past decade, rather than real-world investment. This investment drought is the problem we need to solve. Fussing over Fed rates is irrelevant.

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Republicans Launch Debt Ceiling Apology Tour

| Wed Oct. 30, 2013 11:23 AM EDT

I didn't realize this, but when the Senate voted a couple of weeks ago to raise the debt ceiling, the legislation included a provision that there would be a second vote expressing approval or disapproval of the first vote. That vote was held yesterday:

Twenty-seven Republican senators voted with Democrats on Oct. 16 to lift the debt ceiling and avert a catastrophic default. And each one of those 27 senators voted Tuesday to "disapprove" of their own votes. The vote Tuesday was a symbolic "resolution to disapprove" of the debt limit hike. It was mandated by the deal thanks to a last-minute provision inserted by Senate Minority Leader Mitch McConnell (R-KY). The motion failed 45-54 because all Democrats opposed it.

WTF? Does this make sense even on craven political grounds? Do these guys really think the tea partiers are going to forgive them as long as they cast a vote saying they're really, really sorry about caving in and saving the American economy from massive default and Armageddon?

I dunno. Maybe this will now be a standard feature of all legislation: a first vote on the legislation itself, followed by a second "apology tour" vote in which you make it clear that you're sorry you did what you did. At a guess, I'd say that voting to apologize for your voting record would only make the zealots—not to mention every other non-comatose human being in the country—even more contemptuous of you, but what do I know? Everything's worth a try.

Who Pays Corporate Income Taxes?

| Wed Oct. 30, 2013 1:46 AM EDT

It's fairly easy to examine tax returns and figure out the share of personal income taxes paid by various groups. But what about the corporate income tax. Who pays that?

One way or another, people ultimately end up paying corporate taxes. Corporate shareholders pay much of it in the form of lower profits and dividends, but not all. So who else? Bruce Bartlett summarizes some new reasearch on this:


Most economists don’t believe that much, if any, of the corporate tax is shifted onto consumers this way, because corporations face competition from noncorporate businesses, such as sole proprietorships and partnerships, and from businesses based in countries with higher or lower corporate taxes. Competition sets prices for goods and services without regard to the corporate tax rate.

While economists still believe that the bulk of corporate income taxes is paid by the owners of capital, in recent years they have come to believe that workers ultimately pay much of the tax in the form of lower wages. This results from lower capital investment due to a higher cost of capital, which reduces productivity and hence wages, and because capital investment moves to other countries where corporate income taxes are lower.

So when you take all this into account, what's the distribution of corporate income taxes? The Joint Committee on Taxation took a crack at estimating this and came up with the following table:

The numbers in this table represent the total amount of taxes paid by various income groups, in millions. The lowest income group, for example, pays an aggregate of $5.5 billion if you don't count corporate taxes, and $6.5 billion if you do. Thus, corporate taxes increase their federal tax burden by 17.8 percent. Other groups see similar kinds of increases.

Bartlett suggests that this might make a bipartisan deal on corporate taxes more likely. "Politically, it is now easier to show that a cut in the corporate tax rate will have benefits that are broadly shared." That might be true if these estimates are confirmed by other groups. But it would still depend a lot on what kind of tax replaced the lost revenue.

Are All Those Insurance Company Cancellation Letters Too Good to Check?

| Tue Oct. 29, 2013 7:06 PM EDT

Paul Waldman recounts yet another story of someone allegedly getting screwed by Obamacare. This time the victim is Deborah Cavallaro, profiled yesterday on the NBC Nightly News:



In a follow-up post, Waldman makes the right point about this:

I want to talk about the thing that spawns some of these phony Obamacare victim stories: the letters that insurers are sending to people in the individual market....There's something fishy going on here, not just from the reporters, but from the insurance companies. It's time somebody did a detailed investigation of these letters to find out just what they're telling their customers.

....If the woman I discussed from that NBC story is any indication, what the insurance company is offering is something much more expensive, even though they might have something cheaper available. They may be taking the opportunity to try to shunt people into higher-priced plans. It's as though you get a letter from your car dealer saying, "That 2010 Toyota Corolla you're leasing has been recalled. We can supply you with a Toyota Avalon for twice the price." They're not telling you that you can also get a 2013 Toyota Corolla for something like what you're paying now.

I'm not sure that's what's happening, and it may be happening only with some insurers but not others. But with hundreds of thousands of these letters going out and frightening people into thinking they have no choice but to sign up for a much more expensive plan, it's definitely something someone should look into. Like, say, giant news organizations with lots of money and resources.

It's true that there are some people who are going to end up paying more for coverage under Obamacare than they're paying now. But Waldman is right: there's something very fishy about these letters. Over the past three years, insurance companies have swapped their plans around so fast and so often that virtually no one today has a plan more than a couple of years old—something that seems an awful lot like a deliberate effort to evade Obamacare's original intent that most individual policies would be grandfathered and therefore remain available to existing customers who wanted to keep them.1 Now, having engineered a situation where most current policies aren't grandfathered, millions of people are getting letters canceling their existing plans and being told that the replacement is far more expensive.

I'm not sure what's going on here, but there's at least one lesson in this for the press: never take these letters at face value. If you find someone who's going to end up paying more thanks to Obamacare, fair enough. Run with the story.2 But first, you'd better perform the due diligence to find out what a comparable plan really costs. That means getting income and coverage details from the subject of your story and then doing a detailed search of the local exchange to find out what's on offer. We're not seeing enough of that.

1Plans in existence before March 23, 2010, are grandfathered, which makes them exempt from most of the new requirements of Obamacare. However, if your insurance company switched you into a "better" plan after that date, it's not grandfathered and can be canceled at any time.

2Of course, it would be nice if you also ran some stories about people who are benefiting from Obamacare, especially since they probably outnumber the other folks by 100:1 or so.

The NSA Strikes Back

| Tue Oct. 29, 2013 4:59 PM EDT

The great European spying scandal just got a little more complicated. There's been an uproar in France and Spain over reports that the NSA has collected millions of phone records in those countries, but today brought this news:


Hmmm. What records were involved? Why were they turned over?

Army Gen. Keith Alexander, director of the NSA, said reports to the contrary, based on revelations by former NSA contractor Edward Snowden, were “completely false.” He said European intelligence services collected phone records in war zones and other areas outside their borders and shared them with the NSA.

“This is not information that we collected on European citizens,” Alexander told the House Permanent Select Committee on Intelligence. “It represents information that we and our NATO allies have collected in defense of our countries and in support of military operations.”....The French and Spanish intelligence agencies have had extensive, long-running programs to share millions of phone records with the United States for counterterrorism purposes, according to current and former officials familiar with the effort.

And what do Spain and France have to say about this?

The NSA declined to comment, as did the Spanish foreign ministry and a spokesman for the French Embassy in Washington. A spokesman for Spain's intelligence service said: "Spanish law impedes us from talking about our procedures, methods and relationships with other intelligence services."

Roger that. The NSA, aka "current and former U.S. officials," is also fighting back on a different front, saying that European countries have targeted the communications of U.S. citizens in the past. The obvious implication is that European leaders should cool it on the feigned outrage over NSA wiretapping of their citizens.

Will this work? Or will it simply piss off the European public even more? I can't decide. Wait and see.