Raising the Minimum Wage Is No Free Lunch

Monday, October 21, 2013
Antony Davies

We are rarely subjected to debate over the minimum wage apart from election season, but America's painfully sluggish return to economic normalcy has politicians scrambling to do something to help the working class. While the minimum wage debate usually plays out at the federal level, there is now a grassroots push across the country to raise wages beyond the federally mandated $7.25 per hour. Unfortunately, success won't guarantee a happy ending for workers.

Washington state voters are considering Proposition 1, which would raise the minimum wage to $15 per hour for workers in and around SeaTac airport. In Minneapolis there is talk of raising the minimum wage to $9.50, and in Washington, D.C. to $11.50. New Jersey's minimum wage is likely to rise to $8.25. Ohio's will increase to $7.95 in January.

It comes as no surprise that politicians love talking about and raising the minimum wage. Few are ever shown the door for being perceived as a friend of the working class. But perception and reality are rarely the same thing in the political world.

According to the Bureau of Labor Statistics, fewer than 3 percent of U.S. workers earn the minimum wage. Those who do tend to be entry-level workers – people with little work history, less education and fewer skills than those who earn more. About one-third of minimum wage earners also earn tips, which, in many cases, actually puts them significantly above the minimum wage in reality, if not officially. In the end, the minimum wage affects very few workers.

So why should we care? For precisely the same reason that politicians do: because minimum wage workers are often the most disadvantaged among us. They cannot compete with the rest of the labor market in terms of skills, education or experience, and as a result they make less money.

For some of these people, an increase in the minimum wage is clearly a good thing – but not for everyone. This is the point that many politicians never fully grasp. Raising the minimum wage does not increase the value of the worker's labor. It increases the cost of the worker's labor. And as everyone knows, the more something costs, the less of it we buy. This is as true of workers in the labor market as it is of anything else.

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Using Tax Dollars for Degrees We Don't Need

Monday, July 29, 2013
Antony Davies

The July 1 deadline for preventing the doubling of government-subsidized student loan rates has passed, and lawmakers continue to hash out the details of a plan to move beyond the current impasse. With the Senate recently approving a proposal to tie the rate to the financial markets, it's worth thinking back to earlier this summer at a Rose Garden event held by President Obama. Flanked by a group of idyllic college students, the president tried to fend off the rate doubling when he declared, “Higher education cannot be a luxury for a privileged few. It is an economic necessity that every family should be able to afford.” Two notions should stand out to the careful observer.

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Detroit & Pittsburgh: A Tale of Two Cities

Saturday, June 22, 2013
Antony Davies

The most recent jobs numbers are good news: Pittsburgh has almost completely recovered from the Great Recession. Employment in the metropolitan area hit its prerecession high of 1.19 million in July 2008. Area employers added more than 20,000 jobs in April, boosting the number of employed people to 1.17 million. Just one more month of 20,000 new jobs and we will have completely recovered from the recession.

And even if Pittsburgh's jobs growth returns to its typical 1,700 new jobs a month, we will surpass our 1.19 million high-water mark within a year. For Pittsburgh, the Great Recession is finally in the rearview mirror.

Not so Detroit. Unlike Pittsburgh, Detroit has not come back from the recession. Instead, our sister city to the west has seen its fortunes plummet to Depression-era levels. In 2000, Detroit hosted 370,000 jobs and the metropolitan area 2.2 million. Fast-forward 10 years to the Great Recession. As Pittsburgh's unemployment rate hit a high of 9 percent, Detroit's skyrocketed to 16 percent in the metropolitan area and a whopping 28 percent in the city itself.

To put that in perspective, in 1933 at the height of the Great Depression, the U.S. unemployment rate hit “only” 25 percent. Today, Detroit's unemployment rate is just under 10 percent in the metropolitan area and 16 percent in the city proper. While Pittsburgh is back to its prerecession fighting weight, Detroit is significantly worse off than Pittsburgh was at the height of the Great Recession. It appears that the Motor City has closed its doors.

Driving this point home, Detroit this month partially defaulted on its massive $18.5 billion debt, offering its creditors 10 cents on the dollar. This is unsurprising since Detroit's tax base has dwindled even as its debt has grown. There are not enough people paying taxes now to repay the city's obligations. Even those who remain have become part of the problem since many have stopped paying city taxes altogether. The city is so broke it can't afford to do anything about it. It is contemplating selling off its art collection to help keep the lights on. Not only has Detroit shut its doors, it's now talking about having a fire sale.

How did it come to this? Pittsburgh and Detroit were both largely single-industry cities that saw their single industries, steel and automobiles, collapse. Pittsburgh took the hit, got back on its feet and thrived. But Detroit just stayed down.

The reason is markets and government assistance. When Pittsburgh's steel industry collapsed, there were no government bailouts. The steel industry disappeared and with it, 85,000 jobs. Times were tough, as anyone who lived through it can easily remember, but Pittsburghers rolled up their sleeves and shifted their talents and resources to other things. Where once there was steel, there are now financial services, research, heath care and even tourism.

But Detroit came to depend on government. Rather than curing the automobile industry, the handouts and bailouts prevented the industry from dying and making way for more healthy industries. Now when we think of Detroit, we think of cars we don't want to drive funded by taxes we don't want to pay. Failure led to more failure, because politicians wouldn't allow Detroit's markets to do what they do best — divert our scarce resources and valuable talents to better uses.

Where Pittsburgh relied on markets, markets birthed a renaissance. Where Detroit relied on government, government created a wasteland.


Film Tax Credit Is a Raw Deal for Taxpayers

Wednesday, June 12, 2013
Antony Davies

Pennsylvania Senate Majority Leader Dominic Pileggi has announced that he will introduce legislation to uncap Pennsylvania's Film Production Tax Credit (FPTC) in an effort to entice production companies to film in the commonwealth.

To justify this sweetheart tax break for the film industry, Sen. Pileggi cites a “detailed report from the Independent Fiscal Office” that “concludes that ‘uncapping' the film tax credit would have a significant positive impact on Pennsylvania's economy with a minimal cost in the coming fiscal year.”

This is partially true. The Independent Fiscal Office (IFO) did release a report. The rest of the senator's statement, like most of what the film industry produces, is pure fantasy.

On page 2, the IFO clearly states that “(the report) does not address the fiscal or economic impact of the FPTC in general, nor does it evaluate the overall effectiveness of the credit.” In fact, the report can be summarized in two points: The tax credit will cost us money and the tax credit will be good for the film industry. The report goes on to say that “for every one dollar in tax credit awarded, the Commonwealth recoups $0.14 in tax revenue from the associated economic activity.”

Put another way, the tax credit sells our tax dollars to the film industry for 14 cents each.

Pileggi's bill would uncap this giveaway, allowing the film industry to buy as many of our tax dollars as it likes at this bargain price.

Granted, these are tax credits — meaning that we aren't exactly giving away our tax dollars so much as failing to collect them. But the IFO admits in its report that it doesn't know how many films would have been made in Pennsylvania if the tax credit didn't exist.

If the answer is “all of them,” we really are giving away our tax dollars. Even if the answer is “only half of them,” we're selling our tax dollars for 28 cents each, not 14 cents each. That's still a raw deal for taxpayers.

Don't get us wrong — cutting taxes spurs economic growth. But to avoid favoritism, tax cuts need to be across the board.

When government picks winners, as Pileggi is doing, it invariably fails because politicians don't put their own money on the line. They put our money on the line. If the bet pays off, they win. It it doesn't, we lose.

If Pennsylvania has $130 million to throw around, then let's cut taxes across the board. Then taxpayers could decide for themselves which industries deserve their hard-earned money.

The job creation would be the same; the economic growth would be the same. What would be different is that the new jobs would be producing things that the people want, not things that the politicians think we should have.

The film tax credit is a slap in the face to the hardworking people of Pennsylvania, delivered by Pileggi as he woos one industry at the expense of the others. If lower taxes mean economic growth, then let's lower taxes for everyone.

And if Sen. Pileggi wants to invest in the film industry, let him do it with his own money.

The Film Tax Credit Farce

Wednesday, May 22, 2013
Antony Davies

Everyone loves a good movie, but with an average cost of more than $8, most Pennsylvanians have to choose carefully what they will spend their money on. Too bad we don't have that same luxury with our tax dollars, which subsidize the film industry to the tune of $60 million a year. If lobbyists for the “film tax credit” have their way, this will increase to $100 million in short order.

The debate over whether to increase the credit clouds the real issue: The debate should be whether the credit should exist at all. Simply put, it should not.

The credit, we are told, is an “investment” in Pennsylvania. By offering this credit we entice out-of-state productions to the state, which creates jobs and increases the tax base. Everybody wins! But if you really want to see who wins, look at who is pushing for the benefit. Filmmakers win. Taxpayers will be left holding the empty popcorn bag.

The film industry claims that the tax credit creates 18,000 jobs and innumerable others benefit as out-of-state money filters through our economy. What is casually omitted from this rosy scenario is the money lost by businesses that are already here.

When people are taxed to subsidize one industry, they have less money to spend the way they want. Some people win, but a lot of others lose. Politicians are simply picking the winners and losers.

Proponents say that our taxes aren't really going up because the $60 million is a credit. Out-of-state film crews don't pay taxes in Pennsylvania, so enticing them here with tax credits means only that they still won't be paying taxes in Pennsylvania. But this ignores the fact that they will be using state services: police and fire protection, public schools, roads and — notably — unemployment benefits when their movies wrap up. We taxpayers will be footing the bill for these services.

According to the nonpartisan Tax Foundation, every independent study of film tax credits has found that the credits are money-losers for the states. Arizona's Department of Commerce calculated that Arizona made back 28 cents in tax revenue for every $1 it “invested” in film tax credits. Connecticut's Department of Economic Development estimated that the state earned 7 cents in tax revenue for every $1 it lost. State agencies in Massachusetts, Michigan, New Mexico and even Pennsylvania's Legislative Budget and Finance Committee found that state coffers received less than 30 cents for every dollar they paid out in film tax credits.

If film production is such a great cash cow, why aren't venture capitalists lining up for a piece of the action? The problem is that the film industry wants special treatment. It wants someone else to shoulder the risk of investment while it keeps the profit for itself. No investor would agree to such a deal, and that is why the film industry has turned to our state government.

Filmmakers know the state can force taxpayers to invest in something taxpayers would never choose on their own.

For Whom the Taxpayer Toils

Wednesday, April 17, 2013
Antony Davies

Each July Fourth, Americans celebrate their freedom, the result of a revolution over "taxation without representation." This month, we celebrate another type of freedom - from our own tax man. It turns out that taxation with representation is no picnic either.

According to the Tax Foundation, Tax Freedom Day - the day on which the average American has earned enough money to pay off his federal, state, and local tax bills for the year - occurs on Thursday. In 2013, the average American had to give up all of his earnings from Jan. 1 through Feb. 6 to pay his state and local taxes. He then had to work from Feb. 7 through April 18 to cover his federal tax bill. On average, each of us will work 108 days this year only to pay taxes, and we'll spend more, shockingly, on taxes than on food, housing, and clothing combined. This is what government costs.

As calls for increased government spending have become popular, spending levels have climbed steadily. But more spending means higher tax rates, and higher tax rates mean that we all spend more time working to feed the government, leaving us less time to work to feed ourselves. Last year, Americans only worked until April 13 to pay for their share of government. The five extra days this year come as a result of the fiscal-cliff deal that raised income and payroll taxes in January. Was the increase in government spending this year worth 40 hours of your life?

Of course these are only averages. Largely because of different state and local tax rates, residents of the various states celebrate Tax Freedom Day at different times. Mississippi and Louisiana celebrate on March 29, while residents of New York and Connecticut have to wait until May 6 and May 13, respectively. Pennsylvanians will celebrate today, putting us in the last one-third of the states to do so.

The earliest Tax Freedom Day has ever fallen was Jan. 22. That was in 1900, when Americans paid less than 6 percent of their income in taxes, as opposed to almost 30 percent today. Of course, the government provides a lot more services today, and therein lies the rub. Politicians want us to think of government as Santa Claus - a jolly fat man with unlimited resources that it hands out to good little boys and girls. Like Santa himself, this is a myth, and it is time we all grew up and realized it.

The government has no money. Every single dollar our governments - federal, state, and local - spend comes from the people. In essence, the government forces people to spend money on things they would not have bought voluntarily, and that we, very obviously, cannot even afford. The current generation is already taxed at a high rate, and future generations will be taxed even more heavily to pay off the massive debt the government is accruing.

Some will say the government spends money for your own good. Never mind that you might have liked to spend more on food, housing, and clothing than on taxes. You can make your own choices starting in late April. This year.

Let Cyprus Be the Lesson

Friday, March 22, 2013
Antony Davies

Greece's chronic overspending led to economic near-collapse last year. Now it is Cyprus' turn.

Were it not for years of overspending, Cyprus might have been able to bail out its banking sector. Instead, the EU and IMF are faced with yet another European economy in financial distress. This time, though, the EU has put a price on its aid to Cyprus.

And that price will be paid for by people who have money in Cypriot banks. It turns out that what used to be their money is now collateral put up by Cyprus in order to secure a $13 billion EU bailout.

But this isn't a story about Greece or Cyprus (last year's and this year's casualties) or even about Italy, Portugal or Ireland (in all likelihood next year's casualties). It is a story about nearly everyone, because nearly every Western country suffers from the same disease: governments that spend well beyond their means.

How can the United States avoid the fate that awaits this growing list of countries? The answer to this question is as easy factually as it is difficult politically: The United States must balance its budget.

This means taming all spending to the point where, each year, our government spends only that which it can afford. Runaway debt destroys economies, and it will destroy ours just as readily as it will destroy Cyprus'.

So what will it take to balance the federal budget? The ruling class will not care for the answer given its recent collective convulsion over a 1 percent sequestration cut, but that will not make the answer any less true or the measures any less necessary.

All that is required is discipline, that rarest of all D.C. birds. Our politicians have learned that what they cannot get from taxing the people, they can get by borrowing from future generations — the ultimate in taxation without representation. This behavior will have to be unlearned. So here is what we must do.

Since the 1950s, federal tax revenue has averaged 18 percent of GDP. A few years ago, it dipped to 14 percent, but has been climbing and currently sits at 16 percent.

Assuming that tax revenue returns to 18 percent of GDP, that GDP grows 3 percent to 4 percent a year, and that the Fed holds interest rates at current levels (all of which are reasonable assumptions), a balanced budget is possible within five years. How?

Washington must cut spending by 10 percent next year, then hold it constant — not even adjusting for inflation — for the next four years. This will sound like Armageddon to Washington, but it's a reality that American businesses, workers and families live with all the time. That's how normal people (read: people who cannot borrow money indefinitely) deal with economic downturns.

We can do this and live with the pain now, or we can wait for the government to confiscate our savings later. There will be pain either way.

It would be better to address the problem of a government that spends more than it has ever had right now. Let Cyprus be the lesson.

Runaway Federal Debt Means Our Money Is Worth Less

Friday, January 11, 2013
Antony Davies

From 1954 through 2012, the federal government shelled out a total of almost $72 trillion on all spending, combined. Over the same period, it collected revenues of under $56 trillion from all sources. The $16 trillion difference is today's federal debt.

But this simple math hides the fact that the dollar in your pocket today doesn't buy what the dollar in your grandfather's pocket bought years ago. There is a sleight-of-hand to Washington's method of dealing with long-term debt. Like every shell game, those who play will lose to those who make the rules.

And make no mistake, we are all playing by Washington's rules.

In 1960, the federal government spent $1.6 billion more than it collected in taxes. Given the deficits we run up these days, $1.6 billion seems almost laughable. Today, Washington blows through that much money in the length of time it takes to sit through a screening of "The Hobbit."

In 1960, though, you could buy six times more stuff for a dollar than you can buy today. That makes 1960's $1.6 billion deficit equivalent to a $10 billion deficit today.

So why is our money worth so much less, and why does it matter? After all, wages keep pace with inflation over time, so it's a wash, right? Well ... no, it isn't. A cost of living wage hike protects the money you earn this year from this year's inflation. It does nothing to protect money you earned last year and saved.

With inflation, the government pays back the number of dollars it borrowed, not the value of the dollars it borrowed. Inflation makes the dollars the government pays back worth less than the dollars it borrowed.

It's like my borrowing your car for a year. Sure, I give you the car back at the end of the year, but because of mileage and wear-and-tear, the car I give back is less valuable than the car I borrowed. Inflation is to the dollar what mileage and wear-and-tear is to the car.

The Politicians Know

Were it not for inflation, the $16 trillion that the government owes would be more than $22 trillion. Where did the $6 trillion difference go? It came out of people's pockets. The same inflation that reduces the value of the dollars the government owes also reduces the value of the dollars you own — your savings, the equity in your house, your retirement fund.

Sure, individual prices rise and fall over time, but that is not inflation. Inflation is the devaluing of existing dollars by the printing of more dollars — something politicians euphemistically call, "quantitative easing" and "lowering interest rates."

Washington's debt has gotten so far out of control that there are no politically viable cuts to make, nor enough rich people to tax in order to balance the budget.

The only thing left is for the government to print money to pay its bills. This is why the Federal Reserve has decided to keep long-term interest rates near 0% for the foreseeable future, and why observant people know that, unless Washington gets serious about cutting spending, we're going to be in for some serious inflation.

Nonexistent interest rates and significant inflation are the only things that will allow the government to continue spending money it does not have. And the more irresponsible the government is with spending, the more inflation will erode away our savings. This is a matter of simple economics.

Unfortunately, Washington's fiscal problem has grown so large that the answer now goes beyond simple economics. We must return government to its appropriate role as a referee in the marketplace, not a player. If we don't do this, the laws of mathematics and the forces of economics will do it for us — and they won't be gentle.

The sad thing is that the politicians all know as much. They just care more about the next election than they care about America's long-term economic health.

Lies and Politicians

Monday, January 7, 2013
Antony Davies

Once upon a time, politicians worked very hard to render their lies believable. That time has passed.

Today, you can tell what a law does simply by reading its title and assuming the opposite. As evidence, consider the American Taxpayer Relief Act of 2012 — Washington‘s solution to the recent “fiscal cliff” debacle. Contrary to its title, the act does not provide tax relief. Contrary to what politicians would have you believe, it neither cuts spending nor reduces the deficit. So what does it do?

Here is the major feature: higher taxes but less tax revenue.

President Obama hasn‘t even been inaugurated yet, but he already has broken his campaign promise not to raise taxes on the middle class. The poor and middle class got hit with a 50 percent increase in payroll taxes. If you earn $50,000, expect to pay an additional $1,000 in taxes this year. Taxes on the rich (where “rich” means those earning $400,000 or more) will be going up as well. Never mind that the rich already pay 30 percent of their incomes versus 11 percent for the middle class. So much for everyone paying his fair share.

Well, at least these higher taxes mean we‘ll be able to reduce the deficit, right? Actually, no. The Congressional Budget Office estimates that the “fiscal cliff” legislation will actually reduce tax revenue by $280 billion this year. That‘s right, we‘ll be taxed at higher rates but the government will be collecting less revenue.

Congress agreed to cut discretionary spending this year by $2 billion. That‘s a lot of money, right? Well no, it isn‘t. Washington spends that much money every four hours. Plus, discretionary spending doesn‘t include Medicare, Social Security, welfare and interest on the debt. Add in those and you‘ll find that spending is actually rising by $50 billion this year.

Obama has another four years in the White House, but most of the spending cuts he signed into law are scheduled to occur more than four years from now. Any rational person should realize that these cuts will simply never happen. Presidents Reagan and Bush (the first) both made deals like this with Congress, and their future cuts never happened. When Obama leaves office, whatever deals and promises he made will leave with him.

If the CBO‘s estimates are correct, then the “fiscal cliff” legislation will increase the federal debt from just over $16 trillion today to $20 trillion by 2022. Believe it or not, that‘s the good news. The bad news is that, historically, the CBO‘s 10-year projections of the federal debt have been too low by almost half. If that trend holds, we should expect the federal debt to be around $35 trillion by 2022. The worse news is that this ignores completely the as-yet-unknown contribution of ObamaCare to the federal debt.

Congress didn‘t avert the “fiscal cliff.” It‘s dangling us over the edge while telling us not to worry.

Every time Congress increases spending or raises taxes or imposes another regulation — every time it replaces the judgment of free people with its judgment of what is best for us — we slip a little. Get used to the “fiscal cliff,” because we now live there. And this is where we‘re going to stay until Washington tames its massively out-of-control spending. Or until it finally loses its grip and we go over the edge.

America's Massive Debt Has Come Back to Bite Us?

Saturday, December 29, 2012
Antony Davies

Politicians once again are debating the debt ceiling.

The reason we teeter at the edge of a $16.4 trillion-high fiscal cliff is that politicians can‘t stop spending money that we don‘t have. Congress has raised the debt ceiling nearly 80 times since 1962. Most recently, the Treasury secretary has suggested doing away with the ceiling entirely.

At present, every American man, woman and child would have to pony up $52,000 to cover our massive debt. All 313 million of us. Although the government won‘t send each of us a bill for $52,000, Americans will pay the debt in five increasingly awful ways.

The first is in a reduction in public services.

Washington currently pays more than $400 billion a year in interest. Out of every dollar of tax revenue the government collects, 17 cents goes to paying interest on the debt. At the current rate of spending, that figure will rise to 25 cents of every dollar within the next decade. The greater the debt is, the higher the interest payment. The higher the interest payment, the less the government can spend on public services.

The second way Americans pay for the debt is in delayed retirement and lower wages.

As debt grows, the Federal Reserve will come under increasing pressure to keep interest rates low. The government currently pays about 2.6 percent interest on its debt. Just five years ago, it was paying 5 percent. If interest rates returned to 5 percent, the government‘s annual interest expense would double. So, we pay for debt by enduring artificially low interest rates. Sure, low rates mean that our mortgages are cheaper. But, low rates also mean that seniors can‘t afford to retire because their investment savings earn such low returns. This increases competition for jobs, which lowers wages for younger workers.

The third way Americans pay for the debt is through higher taxes.

The more the government pays in interest, the greater is the deficit. The greater the deficit, the more political pressure there is to raise taxes. The Bush tax cuts, set to expire in January, are a good example. The Urban-Brookings Tax Policy Center estimates that, if the tax cuts expire, almost all middle-class households will see their tax bills increase by more than $3,000 a year.

Inflation is the fourth way Americans pay for the debt.

The inflation comes when the debt is so large that the government can no longer tax or borrow enough to pay its bills. When this happens the Federal Reserve will print money to pay for government expenses. They call it “quantitative easing” but printing money causes inflation, no matter what it is called. Americans will pay for the debt by paying higher prices for everything they buy.

The last option the government has in its arsenal is cutting promised Social Security and Medicare benefits.

Politicians won‘t admit that they are reneging on their promises to senior citizens but they have done so in the past and will do so again. For example, Social Security retirement benefits used to be tax free. In 1983, Congress changed that by requiring many senior citizens to pay income tax on their benefits. In 2000, Congress raised the retirement age for the first time since Social Security was instituted. Politicians described these changes as “tweaks” to ensure Social Security‘s continued viability.

But for older workers, the government was reneging on its promises. As the debt grows, expect to see a lot of this sort of sleight-of-hand legislation.

The $16 trillion debt is as serious as a heart attack. Each of us owes $52,000. And we will pay. No rhetoric or gimmick will change that. Fewer public services, lower wages, delayed retirement, inflation, taxes, broken promises — this is what we will pay because our government lives beyond our means.

Antony Davies is associate professor of economics at Duquesne University and an affiliated senior scholar at the Mercatus Center. James R. Harrigan is a fellow of the Institute of Political Economy at Utah State University.