Category Archives: Economic Freedom

Does the minimum wage increase unemployment? Ask Willie Lyons.

President Obama recently claimed:

[T]here’s no solid evidence that a higher minimum wage costs jobs, and research shows it raises incomes for low-wage workers and boosts short-term economic growth.

Students of economics may find this a curious claim. Many of them will have been assigned Steven Landsburg’s Price Theory and Applications where, on page 380, they will have read:

Overwhelming empirical evidence has convinced most economists that the minimum wage is a significant cause of unemployment, particularly among the unskilled.

Or perhaps they will have been assigned Hirschleifer, Glazer, and Hirschleifer’s widely-read text. In this case, they will have seen on page 21 that 78.9 percent of surveyed economists either “agree generally” or “agree with provisions” with the statement that “A minimum wage increases unemployment among young and unskilled workers.”

More advanced students may have encountered this January 2013 paper by David Neumark, J.M. Ian Salas, and William Wascher which assesses the latest research and concludes:

[T]he evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.

Some students may have even studied Jonathan Meer and Jeremy West’s hot-off-the-presses study which focuses on the effect of a minimum wage on job growth. They conclude:

[T]he minimum wage reduces net job growth, primarily through its effect on job creation by expanding establishments. These effects are most pronounced for younger workers and in industries with a higher proportion of low-wage workers.

Students of history, however, will be aware of another testimonial. It comes not from an economist but from an elevator operator. Her name was Willie Lyons and in 1918, at the age of 21, she had a job working for the Congress Hall Hotel in Washington, D.C. She made $35 per month, plus two meals a day. According to the court, she reported that “the work was light and healthful, the hours short, with surroundings clean and moral, and that she was anxious to continue it for the compensation she was receiving.”

Then, on September 19, 1918, Congress passed a law establishing a District of Columbia Minimum Wage Board and setting a minimum wage for any woman or child working in the District. Though it would have been happy to retain Ms. Lyons at her agreed-upon wage, the Hotel decided that her services were not worth the higher wage and let her go.

Ms. Lyons sued the Board, claiming that the minimum wage violated her “liberty of contract” under the Due Process clauses of the 5th and 14th Amendments.* As the Supreme Court would describe it:

The wages received by this appellee were the best she was able to obtain for any work she was capable of performing, and the enforcement of the order, she alleges, deprived her of such employment and wages. She further averred that she could not secure any other position at which she could make a living, with as good physical and moral surroundings, and earn as good wages, and that she was desirous of continuing and would continue the employment, but for the order of the board.

For a time, the Supreme Court agreed with Ms. Lyons, finding that the minimum wage did, indeed, violate her right to contract.

The minimum wage was eliminated and she got her job back.

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*Legal theorists might well claim that the Immunities and/or Privileges clauses of these amendments would have been more reasonable grounds, but those had long been gutted by the Supreme Court.

New resource: Mercatus Center’s 2013 State and Local Policy Guide

Are you interested in the practical policy applications of the kinds of research the State and Local Policy Project is producing?

For an accessible and very useful review have a look at the inaugural edition of the Mercatus Center’s 2013 State and Local Policy Guide produced by our Outreach Team.

The guide is divided into six sections outlining how to control spending, fix broken pensions systems, control healthcare cost, streamline government, evaluate regulations, and develop competitive tax policies. Each section gives an overview of our research and makes brief, specific, and practical policy proposals.

If you have any questions, please contact Michael Leland, Associate Director of State Outreach, mleland@mercatus.gmu.edu

Burden of DC’s Wal-Mart Minimum Wage would be Borne by City’s Poor

Plans to bring six Wal-Marts to the District of Columbia may fall through over city requirements for the big box store to pay an hourly wage of $12.50, more than a 50-percent increase over the District’s $8.25 minimum wage. Yesterday, the DC City Council voted 8-5 to approve this higher minimum wage, creating a higher wage requirement for stores with over 75,000 square-feet and retailers that make over $1 billion annually.

The council passed Large Retailer Accountability Act under the rhetoric that raising the minimum wage would benefit the District’s workers and that Wal-Mart can afford to pay higher wages:

Vincent Orange was one of the most vocal supporters of the bill. “We don’t need Wal-Mart, Wal-Mart needs us,” he said. “The citizens of the District of Columbia demand that we stand up for them.”

While supporters of higher minimum wages say that they are helping their least well-off constituents, in fact raising the minimum wage for Wal-Mart will hurt the very members of the city’s labor force that  council members say they are trying to help. That raising a minimum wage raises unemployment is uncontroversial among most economists. When the employment rate falls with a higher minimum wage, those left without a job will be lowest-skilled workers with the fewest job choices. While a higher minimum wage will benefit a group of employees who keep their jobs and otherwise would have made the lower minimum wage, policymakers must acknowledge the tradeoffs involved in a minimum wage law and that by supporting a minimum wage, they are hurting society’s least well-off members.

Furthermore, by discouraging Wal-Mart from opening stores, DC’s council is doing another disservice to residents by reducing availability of low-cost goods. Again, the burden of this policy decision falls hardest on the city’s lowest-income residents. Because those with lower incomes tend to spend a higher percentage of their income on food and other basic goods sold at Walmart, discouraging the company from opening DC locations is a regressive policy. Even for those who don’t choose to shop at Wal-Mart, the retailer’s low prices create pressure for other city stores to reduce their own prices to compete, benefiting an even wider net of consumers.

Mayor Vincent Gray has the option to veto the bill, which would require a ninth vote from the Council to overturn. If the DC City Council actually wants to benefit the city’s low-income residents, allowing Wal-Mart to provide jobs and affordable goods would create broader, lasting benefits to the community than a restrictive minimum wage. Requiring large stores to pay a higher minimum wage than other retailers would limit consumer choice, especially for consumers who have few choices, and it would eliminate job opportunities for the least-skilled workers.

Rhode Island to unionize daycare workers

Last week, the Rhode Island legislature passed a law to permit daycare workers who receive any subsidies from the state to either form a union, or join an existing union such as the SEIU. While they would not be eligible for state pensions or health benefits, and not permitted to strike, the law allows workers to collectively bargain over subsidies, training and professional development and “other economic matters.”

Daycare workers represent a target population for unions. A new law in Minnesota permits daycare workers to unionize so home providers can advocate for higher subsidy payments from the state. In New York in 2010, Governor Paterson pushed for daycare workers to pay union dues to the teachers’ unions in his 2011 budget proposal.

With Rhode Island in the mix, 17 states now permit or strongly encourage daycare workers to unionize. In the rush to unionize private business owners, the ostensible benefits – a voice in the legislature to lobby for higher state subsidies – are touted – and the costs are ignored For example, in Massachusetts, if a private daycare owner accepts clients who pay with state daycare vouchers, the daycare provider must be represented by a union and pay dues. These dues are skimmed off of the state subsidy for low-income parents which is paid directly to the daycare provider. To avoid unionization, the provider would have to turn away low-income families who receive state subsidies for childcare.

The SEIU claims unionization will improve the quality of childcare and offers economic justice for workers. But, the most dramatic result seems to be this:  where daycare workers unionize, the SEIU immediately gains a windfall of new dues transferred from a program meant to help low-income families pay for daycare, (to the tune of $28 million in Michigan, where similar legislation was recently passed).

As James Shrek writes in National Review, one of the more remarkable things about this effort is that it represents a new strategy by unions. The target group for unionization are private individuals or business owners who are also the recipients of government benefits. For instance, at one point in Michigan, a parent receiving Medicaid to care for a disabled child could receive SEIU representation. Some parents found the only result was a reduction in their monthly Medicaid payments and no representation, effectively, “forcing disadvantaged families to pay union dues out of their government benefits.”

As Shrek notes, the Minnesota law, which authorizes AFSCME to unionize in-home daycare providers, also potentially covers short-term summer camps, and grandparents watching their grandkids, or “relative care.”

Shrek asks, does this tactic represent a sign of desperation on the part of unions who are actively seeking new members to the point of organizing, “unions of one”? With a growing number of states joining the trend, it is worth watching how these laws affect those people and families that the unions are claiming to help.

 

 

 

 

Does economic freedom matter among wealthy countries?

In response to my last post, alert Neighborhood Effects reader Shane Phillips writes:

Are there charts like these that just compare the nations in the top quintile? It’s good to know that economic freedom leads to these positive outcomes, but knowing the difference between the Central African Republic, for example, and the US doesn’t really tell me as much as the US vs other modern, developed countries would.

This is a great question and the answer is yes, there has been some attempt to examine these relationships in a sub-set of wealthier countries. One area in which this has been done is in the literature looking at the effect of government size on economic growth. Government size, remember, is just one aspect of economic freedom (in the EFW, the other components are “legal system and property rights,” “sound money,” “freedom to trade internationally,” and “regulation”).

Speaking broadly, most economists who have looked at this, tend to approach the question with the following theoretical relationship in mind:

government size and growth in theory

In other words, at low levels of government spending, additional spending may be able to increase growth by financing things like property protection and public goods. But at higher levels of government spending, marginal increases in government size detract from growth as taxes become more distortionary and as government becomes less effective.

Andreas Bergh and Magnus Henrekson have a very nice survey of this literature. The whole study is worth a read, but one of the more important findings is that while the relationship is fairly ambiguous when all countries are included, it is less-so when you look at the sub-sample of wealthy countries:

The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach—of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time—reveals a more consistent picture. The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate.

To me this suggests that the theoretical prediction may not be far from the mark. It’s interesting to note, by the way, that government size is generally negatively correlated with other aspects of economic freedom. So the freer, more-developed countries are often the ones with the largest public sectors. This helps explain why the relationship isn’t consistent across a larger sample: some of the countries with the smallest size governments are also those with the most regulation, the most barriers to trade, etc.

What about economic freedom more broadly defined? Has this been studied among the subset of relatively wealthy and relatively economically-free countries? I’m unaware of any formal studies, but as it turns out I’ve done some simple correlations myself. In the chart below, I graph economic freedom along with per capita GDP in OECD countries. The relationship is positive and statistically significant, though I’d caution that it is a small sample size and I have no control variables.

economic freedom and per capita GDP in OECDOne nice thing about focusing on the subset of OECD countries is that doing so allows me to examine the relationship between economic freedom and median income (which isn’t readily available for non-OECD countries). Per capita measures are problematic because they are sensitive to outliers. A handful of super-wealthy people in the U.S. or Luxembourg may give the false impression that everyone is wealthy. The median, however, doesn’t have this problem because it is unaffected by the levels at the extremes of the sample. Here the relationship is in terms of median income:

economic freedom and median income in oecdAs before, the same caveat applies: This is statistically significant; but it is a small sample and I have no control variables.

Why are there no libertarian countries?

In a recent article in Salon, Michael Lind posed a question:

Why are there no libertarian countries? If libertarians are correct in claiming that they understand how best to organize a modern society, how is it that not a single country in the world in the early twenty-first century is organized along libertarian lines?

He (or more likely his editors) called it the “question libertarians just can’t answer.” The headline of E.J. Dionne’s piece in praise of Lind’s article was more direct, calling the question “Libertarianism’s Achilles’ heel.”

Before addressing the substance of the question, it is worth noting that Lind seems to have misunderstood a central tenet of libertarian thinking: Few libertarians claim to have any superior knowledge of how to organize society. More often, libertarians come to their world view precisely because they think that no one could know how to plan the affairs of others.

Setting this aside, though, is the absence of a purely or even mostly-libertarian state proof that libertarian goals are unworthy? I don’t see how. No one thinks that the existence of poverty makes charity an unworthy goal. Why should the existence of widespread government intervention in private affairs make individual freedom an unworthy goal?

The key here is to appreciate the distinction between an optimal position and an equilibrium position. Optimality—whether it is defined as Pareto efficiency or justice as fairness—is a normative description of the degree to which we think a condition is ideal. Equilibrium, on the other hand, is a positive description of the way we think the world will actually turn out.

The two can be one and the same, as when economists predict that the outcome in a competitive market will be efficient. But the two needn’t be the same.

And in fact, a long list of libertarians and libertarian-leaning thinkers seem to have believed that liberty is emphatically not a stable equilibrium. Perhaps the most famous statement to this effect is Thomas Jefferson’s lament that “The natural progress of things is for liberty to yield, & government to gain ground.” More recently, in his introduction to Capitalism and Freedom, Friedman averred that “Freedom is a rare and delicate plant.”

Perhaps these statements can be dismissed as rhetorical flourishes. But formal public choice models quite often predict sub-optimal political equilibria. And libertarians frequently cite these models in support of their limited government perspective. So, like a great deal of progressives, it turns out that libertarians seem to think that “what is” is not optimal and that we should strive for, well, progress.

Much of the rest of Lind’s piece is dedicated to Mauritius, a small economically-free island nation off the coast of Africa. Mauritius often ranks high in economic freedom while, Lind notes, it has comparatively high infant mortality and comparatively low literacy rates. From this sample of one, he concludes:

Libertarians seem to have persuaded themselves that there is no significant trade-off between less government and more national insecurity, more crime, more illiteracy and more infant and maternal mortality, among other things

This is not the way social science–or any science–should be done. Do you know someone who regularly exercises yet seems to struggle with a weight problem? If so, this is hardly a reason to conclude that limited exercise is statistically significantly related to excess weight. It might be an indication of a broader relationship. But wouldn’t you want to gather more data and examine it in light of your existing theories?

Fortunately, economic freedom indices such as the Economic Freedom of the World Index (EFW) by Gwartney, Lawson, and Hall, have permitted researchers to do just that. And as it happens, each of the “trade-offs” that Lind names has been examined. Let’s take each in turn:

  • National insecurity and economic freedom: David Steinberg and Stephen Saideman examined the relationship between government involvement in the economy and ethnic violence in a 2008 article published in International Studies Quarterly.  In their words, “Our theory of insecurity predicts that free market economies reduce violent ethnic conflict by reducing fear and insecurity. We present statistical analyses, using data from the Minorities at Risk project and the Index of Economic Freedom, showing that government involvement in the economy increases ethnic rebellion. Our results suggest that the overall size of the public sector is less important than government interference with the market allocation mechanism.”
  • Crime and economic freedom: Edward Stringham and John Levendis explored the relationship between economic freedom and homicide in their chapter in the 2010 EFW. They found economic freedom and homicide to be negatively correlated. Here is Figure 6.1:

economic freedom and homicide, 2010 EFW

  • Illiteracy and economic freedom: A number of authors have looked at the relationship between economic freedom and literacy, often focusing on male/female inequality in literacy. In her 2006 study in Independent Review, for example, Michelle Fram Cohen used a Gender Empowerment Index that included disparities in female and male literacy, life expectancy, and income.  She found economic freedom was positively related to the female empowerment index. Michael Stroup also looked at this relationship in his 2007 article in the Journal of Economic Behavior and Organization. He, too, found a positive association between economic freedom and female literacy (he also found economic freedom was positively associated with life expectancy, fertility, and contraception use by women). Then there is this chart in the 2011 EFW (click on the chart to make it larger):

economic freedom and literacy, 2011 EFW

  • Infant mortality and economic freedom: This relationship was charted in the 2007 EFW:

economic freedom and infant mortality, 2007 EFW

  • Maternal mortality and economic freedom: Stroup visited this question in his chapter in the 2011 EFW. Here is the chart, which also shows the relationship between economic freedom and adolescent fertility:

economic freedom and maternal mortality

For an overview of the entire literature, check out Lawson and Hall’s recent article in Contemporary Economic Policy (here is a non-gated working paper version). They reviewed 198 articles using the EFW as an independent variable. In their words:

Over two-thirds of these studies found economic freedom to correspond to a “good” outcome such as faster growth, better living standards, more happiness, etc. Less than 4% [MM: 8 articles] of the sample found economic freedom to be associated with a “bad” outcome such as increased income inequality. The balance of evidence is overwhelming that economic freedom corresponds with a wide variety of positive outcomes with almost no negative tradeoffs.

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Update:

Here is Jonah Goldberg’s response to Lind. Many others have had excellent responses as well.

 

Is an economically freer society a more tolerant society?

Last week was a difficult one. It’s not clear what motivated the heinous acts in Boston but it seems safe to say that intolerance played some role. New research published by Niclas Berggrenn and Therese Nilsson in the journal Kyklos suggests one way to make the world a better, more tolerant place:

Tolerance has the potential to affect both economic growth and wellbeing. It is therefore important to discern its determinants. We contribute to the literature by investigating whether the degree to which economic institutions and policies are market‐oriented is related to different measures of tolerance. Cross‐sectional and first‐difference regression analysis of up to 69 countries reveals that economic freedom is positively related to tolerance towards homosexuals, especially in the longer run, while tolerance towards people of a different race and a willingness to teach kids tolerance are not strongly affected by how free markets are. Stable monetary policy and outcomes is the area of economic freedom most consistently associated with greater tolerance, but the quality of the legal system seems to matter as well. Through instrumental variables and first‐difference results we find indications of a causal relationship.

An un-gated version is here.

Happy Tax Freedom Day

Today, the Tax Foundation notes that Americans have worked enough to pay off their 2013 taxes, leaving the rest of the year’s earnings available for private consumption and investment:

Tax Freedom Day is the day when the nation as a whole has earned enough money to pay its total tax bill for the year. A vivid, calendar based illustration of the cost of government, Tax Freedom Day divides all federal, state, and local taxes by the nation’s income. In 2013, Americans will pay $2.76 trillion in federal taxes and $1.45 trillion in state taxes, for a total tax bill of $4.22 trillion, or 29.4 percent of income. April 18 is 29.4 percent, or 108 days, into the year.

Because of the increase in payroll taxes and income taxes on high income earners as part of the fiscal cliff deal, Tax Freedom day falls three days later this year than it did last year. While many limited government advocates will view this tax burden as too large, the Tax Foundation website points out that the $4.22 trillion we will pay in taxes this year will not cover the full cost of government spending. Including this year’s deficit spending, which is a tax on future earnings, would push Tax Freedom Day out to May 9th.

Separation between art and state

In Utah, the Sutherland Institute is leading an effort to stop state support for the Sundance Film Festival. On the organization’s blog Derek Monson writes:

Given the amount of sexual promiscuity that Sundance Film Festival regularly brings to Utah, it seems similarly indecent that Utah’s major economic development agencies basically endorsed the event: providing “critical support” to the festival as a “global branding” opportunity, and being listed under the event’s “Corporate Support” banner.

The institute’s president Paul Mero says that the organization is opposed to all corporate subsidies. From an economic position — and one of fairness — this makes sense. As Matt has written, subsidies that favor one type of business lead to inefficient investment thereby decreasing economic growth. When Utah policymakers tout the economic benefits that the festival brings to the state, they are ignoring that the festival would likely be held in Park City for its scenic location without a subsidy and the unseen costs of directing taxpayer resources away from what they would otherwise be invested in.

In this case of subsidized art, however, those receiving the subsidies should be as wary as the taxpayers providing them. No one at the Sutherland Institute has suggested placing restrictions on the content of the films allowed at Sundance, rather they object to their tax dollars supporting supporting a film festival, and one that contains films some may find offensive at that. But in many other cases, public funding for art breeds censorship.

In 2010, the Smithsonian’s National Portrait Gallery famously removed a video by David Wojnarowicz which had been a part of an exhibit called Hide/Seek in response to conservative groups and the Catholic League which described the work as  as “designed to insult and inflict injury and assault the sensibilities of Christians.” Understandably, these groups protested their tax dollars being spent on art they found offensive, but just as understandably artists participating in the exhibit objected to government censorship of their colleague’s work. In reaction, AA Bronson asked the National Portrait Gallery to remove his work in protest, but his request was denied by the museum.

The many examples of censorship of government-funded art and art museums provide compelling reasons for art and state to remain separate, both to protect taxpayers and economic growth along with artists’ freedom of expression.

Economic Freedom and Economic Privilege

Heritage indexLast week, the Wall Street Journal and the Heritage Foundation released their annual Index of Economic Freedom by Terry Miller, Kim Holmes, and Edwin Feulner. I was delighted to contribute a chapter on government-granted privilege. I began by noting that despite the manifest evidence of a strong empirical link between economic freedom and economic prosperity, large numbers of people still lack basic economic freedoms.

In the latest edition of the Index, for example, 92 countries—home to nearly 70 percent of all of humanity—were listed as “mostly unfree” or “repressed.” Even among the freer nations such as the United States, economic freedom in recent years has been declining.

Why? I suggest two answers. The first is that ideas matter and we are currently losing the battle of ideas.

The second answer is more difficult:

Put simply, some entrenched interests benefit from the current lack of economic freedom and are prepared to go to great lengths to maintain the unfree status quo.

If this is not immediately obvious, it may be because the advocates of economic freedom often fail to emphasize it. Too often, those of us who argue for freedom highlight the fact that taxes are crushing, that regulations are burdensome, and that government involvement in the economy is an impediment to progress. While this is typically true, it is also true that tax dollars line the pockets of some well-connected companies, that regulations often allow some firms to profit at the expense of customers and competitors, and that almost every intervention in the market creates both losers and winners.

The chapter, adapted from The Pathology of Privilege, can be found here.

There are other interesting contributions from Robert Barro on “Democracy, Law and Order, and Economic Growth”; James Roberts and John Robinson on how “Property Rights Can Solve the Resource Curse”; and by Myron Brilliant on how “Good Business Demands Good Governance.”

Also, don’t miss Miller’s OpEd from the Wall Street Journal. It offers a nice overview of the latest data and a summary of the chapters. Lastly, be sure to spend some time exploring the data and the website. They’ve done a brilliant job of bringing all of this information together and presenting it in a user-friendly way.

My thanks to Heritage and especially to Terry Miller for the opportunity.