Economic theory, but only when it's convenient
By Scott Sumner
A few weeks ago, I did a post pointing to an inconsistency in progressive thought. Progressives worry a lot about low wages in Mexico stealing jobs form Texas, but not at all about a $7.25 minimum wage in Texas stealing jobs from California, where the minimum wage will gradually be increased to $15/hour.
A few days ago, a commenter provided another example, echoing the common progressive complaint that the Earned Income Tax Credit might be viewed as a subsidy to Walmart, allowing them to pay even lower wages. I’m glad to see people applying economic reasoning, but I wish they would follow through with the implications. Here are a few examples:
For the same reason that Walmart might react to an EITC with lower wages, almost all of the data that has ever been provided by progressives on income inequality is essentially worthless. The simple fact is that economists do not know how to measure the tax incidence of either the personal or the corporate income taxes. And in the case of the personal income tax, many of them don’t even know that they don’t know.
For instance, suppose that becoming a brain surgeon is such an onerous procedure (lots of schooling and residency) that their salaries need to be four times higher than the average salary of an accountant. Say $400,000 instead of $100,000. But which salary, before or after tax? Presumably people care about after tax salaries. Thus if there is a high income tax rate on people making $400,000, reducing their after-tax salary, then fewer people will want to enter the field. That will push up the cost of brain surgery, until the four to one ratio is restored. The cost of that “income tax” will be passed on to consumers of medical services.
Now of course the preceding example is oversimplified, and in the real world not all of the tax is passed on in higher prices. Unfortunately, we don’t know how much is passed along. But the same is true of Walmart and the EITC. Not all of it will be offset by lower wages at Walmart, and we don’t know how much will be.
Here’s another example. Progressives often favor laws mandating that companies provide certain benefits, such as vacation days, or overtime pay for work that exceeds 40 hours/week. At first glance, it would seem that those sorts of benefits would help workers, but the Walmart/EITC example suggests just the opposite. Companies will react to the extra benefits by reducing pay.
At this point you might think it’s a wash, lower pay offset by more benefits. But it’s even worse. If workers valued the extra benefits at more than the foregone wages, then companies and workers would already have struck a deal to provide the extra benefits. Thus suppose workers valued a smoke-free environment at $1100 per worker, and it only cost the company $1000/worker (in lost workers who quit due to a smoking ban). In that case, the company would have an incentive to ban smoking without any government regulations. They could hire their workforce more cheaply. On the other hand, if the regulation produces only $900 in benefits, then it actually hurts, workers, by leading to $1000 in lower wages. The regulations that government forces down the throat of companies could just as easily be viewed as regulations being forced down the throat of workers. Employment mandates hurt workers.
[Of course there’s also the issue of benefits that are back door increases in the minimum wages, which are even less efficient than the already inefficient minimum wage.)
In summary, I like it when progressives actually try use economic theory—I wish they’d do it more often. Of course another entire article could be written about blind spots on the right. The right is concerned about “burdensome government regulations that don’t pass the cost-benefits test”, except when they provide a way to discourage minority voters from going to the polls, or involve expelling millions of productive workers from the country, or ban pot smoking. That sort of thing.
PS. Don Boudreaux and Liya Palagashvili have a study showing how the Obama administration’s new overtime regulations actually hurt workers.
PPS. This Market Urbanist blog has coined the term “supply and demand denialism” (SDD) which seems increasingly common on the left.