Why Study Economics? Part 37: Big Business Needs You!

Yet another article on why an economics major is awesome!  This time from the Wall Street Journal [HT: Marc Hellman].  Why? Well corporations are waking up to the value of the economist's skill in analyzing data and, in a world of big data, are beginning to respond by hiring economists in droves. 

From the article:

With more data available than ever before and markets increasingly unpredictable, U.S. companies—from manufacturers to banks and pharmaceutical companies—are expanding their corporate economist staffs. The number of private-sector economists surged 57% to 8,680 in 2012 from 5,510 in 2009, according to the Bureau of Labor Statistics. In 2012, Wells Fargo & Co. had one economist in its corporate economics department. Now, it has six. 

"A lot of companies have programmers who are able to process big data," said Tom Beers, executive director of the National Association for Business Economics in Washington, a professional organization with about 2,400 members. "But to find a causality between two things and draw a conclusion really takes somebody with an economics background."

So, what are you waiting for?  Oregon State has an awesome major with four options (including managerial for those interested in business economics) as well as an on-line major that you can do entirely in your underwear! Awesome!  (I just took my boys to the Lego Movie so excuse all the 'awesome's...)

Fred Thompson: The CBO Report and the Minimum Wage II

Fred Thompson checks in again with the second of a two-part post on the minimum wage. Part I was posted yesterday.

THE CBO REPORT AND THE MINIMUM WAGE II

One big difference between the CBO report and how the CEA spins it is that CBO emphasizes that a minimum-wage hike has costs. To put it another way, the minimum wage is like a tax on low-wage work; as is generally the case, when you tax something you get less of it, but as with any other tax, some folks are also left with less money in their pockets. Figure 2 (in my previous post) shows that the costs to those who purchase low-wage work, either directly as employers (through reduced profits) or indirectly as consumers (by paying higher prices for the stuff made using low-wage labor), is A+B or .5*(16.5 million +17 million)*(2000*$2.50) or $83.75 billion. The net loss is therefore B+D. In other words, the losers lose more than the winners gain, $8.75 billion more, which, as the CBO emphasizes, is in this context a fairly small number (about what it would cost to buy 40 F-35s).

Besides, it is in the nature of transfer programs, no matter how they are financed to take in more than they hand out. Economists call this difference ‘the leaky-bucket ratio.” According to the CBO, the minimum wage’s leaky-bucket ratio is nearly as good as the Earned Income Tax Credit’s – it’s associated with greater allocative inefficiency, but is also relatively less costly to administer. It only costs the losers about $1.10-$1.15 to transfer a dollar to a low-wage worker via the minimum wage.

Nevertheless, the CBO also reminds us that less than 20 percent of low-wage workers are from poor (below the federal poverty line) households, which means that if what we are concerned about is how much it costs us to transfer a dollar to a poor family (rather than to a low-wage worker) via the minimum wage, the leaky-bucket ratio is not nine percent but more like 80 or 90 percent, which is distinctly inferior to the EITC.

The CBO also emphasizes that who bears the burden of the minimum wage matters in two distinctly different ways: its effect on the demand for low-wage workers (negative) and its effect on aggregate demand (positive). In both instances, how much depends on whether its burden is shifted back to the owners of the enterprises that hire minimum wage workers (lower profits) or forward to consumers (higher product prices). This is important to an assessment of the employment effect of a minimum-wage hike, because if most of the tax is shifted forward to consumers, the effect will be small; at the same time, consumption taxes tend to be pretty regressive, if minimum wage hikes are entirely shifted forward to consumers in higher prices, the pockets of the families from whom the cash is taken won’t on average be very much deeper than those to whom it is given.

In contrast, business owners tend to have much deeper pockets than the families of minimum-wage workers. If minimum wage hikes come out of profits, they would have the net effect of transferring cash to folks with a much higher propensity to spend it, thus significantly increasing aggregate demand. Unfortunately, they would also result in a lot of low-wage job losses.

The CBO’s analysis finds that about ¾ of the cost of a minimum wage hike will be shifted forward to consumers in the form of higher prices and about ¼ back to profits, which is how they come to the conclusion that the low-wage job losses from a big jump in the minimum wage will be relatively small. At the same time, this finding is also consistent with the conclusion the distributional burden of a minimum-wage hike will be approximately proportional to income, which is significantly but not hugely different from the distribution of households supplying low-wage workers (see the CEA’s point 2 above, for the magnitudes at issue). Hence, the CBO concludes that boosting the minimum wage tends to increase aggregate demand, but only slightly.

The one kicker goes to the minimum wage’s effect on labor supply and how subsequent minimum wage jobs will be rationed. This could actually go either way: higher wages lead to lower turnover, reducing the amount employers must spend recruiting and training new employees. Paying workers more can also improve motivation, morale, focus, and health, all of which can make workers more productive. In addition, business owners can adjust in ways other than reducing low employment – for example, the CEA mentions accepting lower profits, although replacing low-wage workers with capital or higher skilled workers seems more likely, and would be easy to do if a higher minimum wage induced more higher-skilled workers to seek minimum wage jobs.

Finally, the CBO report looks at the effects of a higher minimum wage on the wages of folks who are already earning more than the proposed minimum wage. Many of those folks can expect to see their wages bumped up. The question is, how much? The study referenced by the CEA simply assumed that the gain to above-the-proposed-minimum-wage workers would be equal to the gain accruing to those below the proposed minimum wage. In contrast, the CBO used the variation in state minimum wages – half of America’s workers live in states where the minimum wage is equal to the federal minimum, $7.25; a fourth live in states where it’s $8.01 or higher; and a fourth live in states where it’s somewhere in the middle – to suss out the size of the effect on those above the proposed federal $10.10 level. It concluded that the effect would be about half of the difference between the proposed level and the state’s current minimum, or about $30 billion altogether.

The CBO report is a great illustration of how state policies serve as laboratories of public policy. Nearly every finding in the report is based upon quantitative comparative analysis of how effects vary as a consequence of different minimums across states and over time. As an economist, with an intellectual interest in this issue, I cannot help but wish that Washington State would soon adopt a $15 per hour minimum wage. I’d really like to see what would happen. As a citizen of Oregon, I’d prefer to learn from someone else’s experience.

Fred Thompson: The CBO Report and the Minimum Wage I

Fred Thompson checks in again with a two-part post on the minimum wage.  Part II will post tomorrow.

THE CBO REPORT AND THE MINIMUM WAGE I

This Blog has, over time, paid a lot of attention to the minimum wage, arguably more attention than the issue deserves, given that the effects of changing it are small, mostly invisible or somewhat benign. Of course, as the owner of Oregon Economics, Patrick Emerson, observes, the issue is of special interest to Oregonians. The Pacific Northwest already has the highest state minimums in the land and Washington’s Governor Jay Inslee and Oregon’s Labor Commissioner Brad Avakian are calling for further increases. Then too, there’s the SeaTac initiative, which raised the minimum wage to $15 an hour for the airport’s hospitality and transportation workers, and Mayor Ed Murray's push to extend the $15 minimum to Seattle.

Ds often try to push the issue onto the national legislative agenda in midterm election years. President Obama kicked off this year’s campaign in his State of the Union message, when he called for “a fair wage of at least $10.10 an hour.” Minimum wages are popular with voters and many Ds and their constituents really want to see them increased. The looming election, with its focus on legislative races, greatly boosts the likelihood of enacting an increase. Besides, the minimum wage is an effective wedge issue, distinguishing Ds from Rs. Politically, this is a win-win issue for Ds.

Figure 1: US Minimum Wage History

Consequently, you can expect to hear plenty from both Ds and Rs about a report recently issued by the nonpartisan Congressional Budget Office (CBO). It found that a national minimum-wage hike would bump up earnings for 16.5 million people and cost 500,000 low-wage workers their jobs. In other words, a minimum-wage hike will help a lot of low-wage workers and hurt a few.

This is how the President’s Council of Economic Advisers (CEA) spins the report:

1. CBO finds that raising the minimum wage to $10.10 per hour would directly benefit 16.5 million workers.

2. CBO finds that raising the minimum wage would increase income for millions of middle-class families, on net, even after accounting for its estimates of job losses. Middle class families earning less than six times the poverty line (i.e., $150,000 for a family of four in 2016) would see an aggregate increase of $19 billion in additional wages, with more than 90 percent of that increase going to families earning less than three times the Federal poverty line (i.e., $75,000 for a family of four in 2016).

3. CBO finds that this wage increase would help the economy, injecting about $150 billion into the economy each year. (Note, this is not exactly what CBO said. The $150 million dollar figure comes from another study entirely, one which makes some pretty bizarre assumptions. What the CBO said is that raising the minimum wage will probably increase aggregate demand slightly “because the families that experience increases in income tend to raise their consumption more than the families that experience decreases in income tend to reduce their consumption” and only in the near term.)

4. CBO also found that raising the minimum wage would lift 900,000 people out of poverty and that only 12 percent of the workers likely to benefit from a minimum-wage increase are teenagers.

The CEA then goes on to pooh-pooh the CBO’s claims that a minimum-wage hike would probably cost about 500 thousand low-wage jobs, based primarily on a poll of eminent economists showing 80 percent of them think that boosting the minimum wage is a good idea. The CEA simply dismisses the evidence that minimum wage hikes increase welfare dependence or that less-educated single mothers are the folks most likely to be hurt by a minimum wage increase.

So, what does the CBO report actually say, aside from agreeing that a minimum-wage hike is on balance an OK idea? To answer that question I will show some simple analysis and a few numbers. (Note, I’m simplifying the CBO’s analysis a lot, by ignoring states with minimums higher than the national standard, lumping the folks earning more than their state’s current minimum wage but less than the proposed new minimum in with those now earning minimum wages, adjusting start and end points to produce approximately the same sums as the CBO, and assuming the supply of low-wage labor is fixed – doesn’t vary with the wage offered. The supply assumption is clearly counterfactual, but it makes for the strongest possible case for the minimum wage.) My take on the CBO report is depicted in Figure 2.

Figure 2: Effect of a Minimum-Wage Hike from $7.50 to $10

The CBO reports (I’ll get to how they got there in my next post) that the demand for low-wage labor is quite inelastic (doesn’t vary very much when the minimum wage goes up). This conclusion is reflected in Figure 2 by the line labeled ‘D,’ which shows that increasing the minimum wage by a third (from $7.50 to $10) reduces low wage employment by about 3 percent (from 17 million to 16.5 million). In this case, the net gain to low-wage-workers would be area labeled A less the area D, or 16.5 million*(2,000*$2.50) less .5 million (2000*$7.50), which is, $75 billion (here I’ve used 2,000 hours a year as an estimate of full-time work).

Picture of the Day: Energy

From the Center for Global Development.

Picture of the Day: Vaccination Rates

Oy.  This is a puzzle to me, but perhaps not to public health folks out there who can shed light: Oregon is really bad in vaccination rates for kids as shown in this graphic by Mother Jones:

They look at how easy it is to get vaccination exemptions from the state, and Oregon is rated ion the middle.  So, is it our childhood poverty rate, a cultural artifact, poor public health infrastructure...what?

I await your insight.

Fred Thompson: Is A Separate Capital Budget The Solution To Our Infrastructure Problems?

Once again, Fred Thompson makes a timely contribution to the blog:

Noah Smith, one of my favorite economic bloggers, recently posted about the need to fix our infrastructure and proposed that one way to do this is by separating the capital budget from the regular budget:

We need to rebuild our infrastructure, and now is the perfect time to do it. Interest rates are at historic lows, but they are unlikely to stay there forever... 

But infrastructure budgets have been cut, not expanded. Why? One reason is that in the race to cut the deficit, infrastructure spending has been lumped in with other types of spending. That is a tragic mistake. Unlike government “transfers,” which simply take money from person A and give it to person B, infrastructure leaves us with something that helps the private sector do business, and thus boosts our GDP growth. Infrastructure is a small percentage of overall federal spending, but tends to be a politically easy target. 

One idea to boost infrastructure spending, therefore, is to treat government investments differently from other kinds of government spending by having a separate capital budget.

This grabbed my attention. We all have our manias. Mine is infrastructure investment, especially our inability to make large-scale infrastructure investments, which reduces economic growth and, based on studies by Duflo and Pande and Lipscomb et al., may increase poverty. For me the issue isn’t limited to public investment. We strangle all sorts of large-scale infrastructure investments. Here, the poster child is Keystone XL. Recently, the U.S. State Department’s final environmental review of the proposed Keystone XL pipeline was released for comment. It concludes that Keystone XL would have little or no effect on the rate of extraction of oil sands or on the consumption of oil, that its main effect would be to increase the safety with which that oil is moved about (a little) and its efficiency (a lot), and implies that the opposition to this good thing is largely symbolic. The report’s basic economic argument is that, even if the oil from the tar sands were shipped by rail, its cost would still be less than the current or expected future prices. Consequently, building the pipeline won’t affect the marginal price/cost of oil and, therefore, final supply or demand.

As I see it. The main thing that is strangling large-scale infrastructure investment is that we have politicized these decisions in a system of governance that is highly biased in favor of the status quo. So far as public investment is concerned, the big problem seems to be an inability to manage IT and ICT investments. Even so, granting those claims, wouldn’t it make sense “to treat government investments differently from other kinds of government spending by having a separate capital budget”? Of course it would and, for the most part, we do. More than 80 percent of the US’ nonmilitary public infrastructure is owned by state and local governments. This means that, if we have insufficient public infrastructure, it’s primarily a state and local matter. Most state and local governments already have separate capital budgets.

(Parenthetically, it might be mentioned that the Feds offset the presumed budgetary bias against investment projects by annualizing capital costs in authorizing ‘bricks and mortar’ projects and in appropriating funds for them.)

Therefore, let’s come down to the level where it matters, Oregon, and to an infrastructure issue I know something about, highways. Analysts at the Department of Transportation (DOT – and more disinterested bodies, like the Oregon Transportation Research and Education Consortium – OTREC) are quite concerned about the sustainability of our highway transportation network. They believe that the social returns on certain kinds of highway investments are quite high: maintenance, > 35 percent; projects oriented to reducing urban congestion, > 15 percent, etc. In contrast, ignoring effects on aggregate demand, most other highway projects produce relatively low or negative returns. Because the lion’s share of state money goes to maintenance, this evidence is entirely consistent with the conclusion that we ought to be investing more and that now is a very good time to make such investments (in addition to low borrowing costs, the state doesn’t have to bid fully employed resources away from the private sector). Moreover, the relatively high payoff to the maintenance portion of the DOT budget tends to reinforce Noah Smith’s argument: maintenance seems to be where we are under-spending the most and maintenance spending is usually charged to the current account rather than to the capital account.

Nevertheless, there are a couple of policy issues that are probably more salient than is budget format to fixing infrastructure problems. In the first place, maintenance investment is far less risky and seems to have higher expected rates of return than other highway investments, but gets little or no federal matching, while new construction projects get treated pretty generously by the Feds: about 80 percent of the cost of a project (up to some predetermined limit, then none of the costs, so that the state bears most of the risk of cost overruns, which tend to be high for investments that break new ground, whether literally or figuratively). The solution seems obvious, shift federal transportation subsidies to a formula-based grant, which is how most states allocate motor fuel taxes to local jurisdictions. At the very least, federal matching shares should probably be lowered for new construction and raised for highway maintenance.

Second, highway engineers tell us that road wear is a cubic function of axle weight and a quadratic function of road speed. Oregon’s weight-use-mile tax, imposed on commercial vehicles, approximates the damage they do to the highways (and also provides a very real incentive to reduce axle weight and to comply with the 55 mph speed limit on trucks, thereby, also reducing highway maintenance costs). The gas tax once did pretty much the same thing for private vehicles, insofar as speed and vehicle weight were the principal determinants of fuel consumption. However, the legislature’s consistent failure to raise motor fuel taxes in tandem with construction costs, together with reduced private driving and the shift to more fuel-efficient cars, has depleted the state’s highway fund (it has also increased uncertainty about the benefits of new highway construction and, therefore, the riskiness of these projects, which was already high on the cost side). The solution to this problem lies in increasing revenue.

Currently, Oregon’s DOT is experimenting with GPS systems that would monitor how and when vehicles use the highways and allow the state to bill their owners directly for the road damage their vehicles cause. This would permit revenue from highway x to be devoted to maintaining highway x, and give DOT a better guide to allocating funds for new construction. Furthermore, these charges could be varied by time of day or week, thereby lessening congestion, further reducing the need for new construction. It might make sense to delay most new, large-scale highway construction projects in the state, especially those justified by high congestion costs, until we see how these experiments play out – technically and politically. A moratorium on new construction would also free up a little more money for maintenance projects.

Finally, there is one other point that should be borne in mind: most of the benefits to infrastructure investments accrue directly to users or indirectly to their customers (or their customer’s customers). Insofar as highways are concerned, these benefits accrue about equally to private automobile operators and commercial freight handlers (and/or their customers). If public investment really does produce returns of 20-30 percent, one would expect producers of primary products, manufacturers and freight handlers to be clamoring for the state to impose taxes or float bonds to upgrade roads and highways. The effect on business profits would be high and the cost to business low. They are not or, at least, I don’t hear the clamor. What I hear the business lobby saying is that tax rates (and regulatory burdens) are too high, not that public investment is too low. If that’s what business owners and their employees truly believe, perhaps, it might be wise to treat claims about high payoffs to infrastructure investments (especially risky, big new projects) with a modicum of skepticism.

Snow Day!

OSU Closed today, luckily I was only a few blocks from home when I got the call about the closure.   Thank you OSU admin for making the call early this time.  This winter is officially the weirdest ever...

Should Community College Be Free to All?

An interesting proposal to study the idea of making community college free to all Oregon students is making its way through the legislature.  This is just to study the idea but a few caveats come immediately to mind.

One, shouldn't this benefit be means tested?  Wouldn't the better policy be to target low income households?  It is not clear to me that we have to incentivize high income households to send their kids to college.

Two, this raises the opportunity cost of starting at a four year college.  Under this plan, the wise college degree aspirant would go to CC for two years and transfer.  To know if this is a good thing we'd want to know more about the relative success of such a plan in four year degree outcomes.  This might also have a significant impact on Oregon's public four year universities.

Three, whether it significantly improves the high school graduation rates in Oregon which is, I presume, one of the main policy goals.

Fred Thompson: Should Oregon Take the Lead on Carbon Taxes?

There are two kinds of tax buffs: monomaniacs and standpatters. The monomaniacs want to replace existing taxes with some theoretically superior, often untried alternative: land taxes, consumption taxes, or increasingly these days, wealth taxes. The standpatters generally believe that existing taxes, whatever they are, are pretty much OK, although they might allow for some tinkering at the margins. I am pretty much a standpatter.

Carbon taxes, however, simply make too much sense to be ignored, even by a standpatter like me. Taxes are generally nasty. When you tax something, you get less of it. Most of the things we tax are good things: employment, savings, investment, consumption, etc. Taxing them means that we get less of these good things. But Pollution is a bad thing. As Dale Jorgenson, Richard Goettle, Mun Ho, and Peter Wilcoxen explain in their book Double Dividend: Environmental Taxes and Fiscal Reform in the United States, taxing pollution means you get less of the bad stuff and, at the same times, get revenue that can be used to reduce the nastiness of the existing tax system. Moreover, the authors of Double Dividend don’t rest their case on this obvious point, they simulate the effects of environmental taxes on the U.S. economy using a highly plausible model that takes account of the heterogeneity of producers and consumers, as well as expectations about future prices and policies, to show that environmental taxes can be made to produce win-win outcomes for almost everybody in America.

Can we afford a carbon tax that would properly address the climate change problem? Mikhail Golosov, John Hassler, Per Krusell, and Aleh Tsyvinski, in an article forthcoming in Econometrica  “Optimal Taxes on Fossil Fuel in General Equilibrium,” make an equally plausible case that an optimal carbon tax would not seriously threaten economic growth. That, indeed, it would be no higher than the current carbon tax rate in Sweden, for example.

On Thursday, February 6, from 5-7 PM, I’ll be attending a panel discussion on “Should Oregon Take the Lead on Carbon Taxes?” The event is free and will be open to the public at Portland State University, Smith Memorial Student Union, Room 296/298. Participants will include: Michael Armstrong, Senior Sustainability Manager, City of Portland Bureau of Planning and Sustainability, Yoram Bauman, Standup Economist, Carbon Tax Expert, and Former Lecturer, University of Washington, Jackie Dingfelder, Former Oregon State Senator and Portland State University Ph.D. Candidate and Jenny Liu, Assistant Professor of Urban Studies and Planning and Assistant Director, Northwest Economic Research Center, Portland State University. I hope to see you there.