Tyler Cowen does political romance on minimum wages and covid relief
James Buchanan, one of the most influential free-market conservatives of the past half century, chastised liberals (progressives) for being romantic about politics. His work on Public Choice Theory urged us to look at “politics without romance”.
Buchanan was right. Being overly romantic about politics can lead to serious error, but this error is by no means limited to liberals.
Case in point: Tyler Cowen has recently been criticizing Democratic proposals to raise the minimum wage to $15 per hour, and the $1.9 trillion covid relief/stimulus package proposed by President Biden. In both cases, he treats complicated questions of political strategy as if they were blackboard exercises in economic theory, totally ignoring politics.
Let’s start with stimulus. Cowen has been echoing recent arguments by Larry Summers that the covid bill is too large and may lead to a surge in inflation and/or a Fed-induced recession. No doubt this is possible; a more prudent approach to fiscal policy might be to spend, say, $1 trillion now (to increase vaccine production and distribution, help state and local governments, etc.), and to keep the rest in reserve in case the economy stalls. But this overlooks politics in several ways. It overlooks the high probability – close to 100% – that if the economy does not recover rapidly this year that Congressional Republicans will block any further assistance. This would give Republicans a good shot at gaining control of at least one house of Congress in 2022, and it would likely doom Biden’s presidency. Similarly, it overlooks the fact that Democrats have endorsed $2,000 stimulus/relief checks, and that reneging on that promise might hurt them and help Republicans. Does Cowen think this would be good for the country, given the current degraded state of the GOP? Let’s not romanticize the fact that the GOP has become a threat to democracy and is thoroughly uninterested in effective governance. Of course, Democrats could try to pass a complicated bill with triggers or automatic stabilizers. But Democrats need to pass a bill quickly, they need to craft a bill that can be passed through reconciliation, and they only get one bite at the reconciliation apple. They also must pass a bill that is acceptable to all 50 members of their caucus. Criticizing the bill for falling short of economic perfection is fine if one is clear that an imperfect bill is still fully worthy of support, but Cowen lets an imaginary ideal be the enemy of the good. This is political romanticism.
What about minimum wages? Sure, there are reasons to worry that raising the wage to $15 will have negative employment effects and reduce non-wage job benefits. If I represented a rural, low wage district in Congress I would be thinking hard about possible alternatives (regional variation, wage subsidies, smaller increase, etc.).
On the other hand, the political forces pushing Democrats to push for $15 are considerable and cannot simply be ignored. The fight for $15 has been a long political campaign. Democrats can’t just abandon it and throw activists under the bus without at least trying to fight for it. Cowen emphasizes the need for regional variation. My guess is that many Democrats expect that the final bill will either be for less than $15 or include regional variation, but in politics you negotiate, and you do so in front of an audience, which makes pre-emptive concessions doubly problematic. Furthermore, minimum wages are popular with the public. This is important. Economic theory might suggest wage subsidies or some other alternative for helping low-income people, but we live in democracy, not an economic theory seminar. And just as the Republicans cannot be relied on to provide additional stimulus if the economy recovers too slowly this year, Republicans cannot be counted on to work creatively to find ways to help low-income workers. Cowen advocates for lowering the minimum wage for small businesses in response to the pandemic, but does not suggest doing anything to help workers whose incomes might be affected.
Sauce for the goose is sauce for the gander. Welfare state liberals should not be romantic about politics or economics. Neither should free-market conservatives.
Since FDR, the main impediment to a minimum wage at all, or a minimum wage increase, is that it would take away the south’s cheap labor advantage.
This is what got Mitch so upset about the $600/week.
His work on Public Choice Theory urged us to look at “politics without romance”.
Buchanon added nothing. The more precise theory says political deals in DC are done in a market, and DC had market structure and can be decoded by the market structure. The new theory says we can treat government as a value added channel, and we know how to deal with that.
Good point. But if a tree falls in the forest…
it is interesting to me that economics always finds a sound reason to keep the poor poor if not desperate. (AB post by Waldmann suggests that Summers is not behoden to anyone therefore he might not be lying for money. He (Waldman) may be forgetting that Summers may be a member of that class who lie for money without being beholden.)
the only thing wrong with raising the minimum wage is that it will need to be raised again next year and the next and…
I am not sure people who are still working need a stimulus: i prefer a worker paid tax to fund unemployment insurance for workers. this should take “relief” out of the realm of romantic politics… except that romantic politics won’t let it happen.
Even your (Eric’s) “more prudent approach” seems to leave out the fact that without relief (forget “stimulus”) people are going to lose their homes.
OK – my long term position is that we should be running a policy as follows:
1. Slightly higher deficits on average with more taxes and more transfers
2. Some of that deficit should be financed by printing money (i.e. increasing the size of the central bank balance sheet)
3. Monetary policy should be tighter on average than it is.
So from my point of view this whole fear of the the Fed talking the punch bowl away is wrong headed. Why do we want private debt to continue to increase faster than economic growth. Do we really think it is a good idea for the average person to have more debt, and in particular do we think the average person having more debt is good for economic stability. I want the average person to have less economic insecurity (hence higher transfers) and less debt. I think it is crazy that so many otherwise intelligent people think otherwise.
Now explain to me why I’m wrong.
I’m not certain but do we know if the increased private debt is causing larger debt service for people? Lower rates, large incomes (if that’s the case) might just mean the principal increases are not an issue.
The old ratio for mortgages was 28/36, with 36% being the desired total debt payments. Though that number has been exceeded for quite awhile.
Do we know what % of total debt payments we are at?
i have no idea whether you are wrong or not. i suspect you haven’t looked at enough factors to be “right” but that doesn’t mean you are wrong about the factors you have looked at.
same thing holds for me: i see no reason not to “hold down the debt” by cancellling the last two or three tax cuts. but if the debt does not need to be held down, i have nothing against deficit spending. everyone does it, birds and bees and educated fleas do it.
but personal debt is another matter. i think you would find it hard to get people to give up their credit cards and foolish purchases. even a house can be a foolish purchase if you can’t afford it… or if there is a chance you won’t be able to afford the payments in the event of economic accident.
on the other hand predator landlords have made renting dangerous too. might even be a more serious problem than the national debt.
seems to me Roosevelt solved this problem… temporary transfer payments, worker paid retirement insurance, and laws restricting the dishonesty of the financial industry. politicians and the money interests have worked night and day since 1932 to reverse what FDR did. (while the left has concentrated on the feelings of various identity groups, and, of course, “making the rich pay.”)
we are standing too close to the problem(s) if we only think about managing the debt and stimulating growth.
E Michael – it isn’t yours until you pay of the principle. I think this is why the financial has grown so big – it is earning rents of things that nominally belong to people. And the more people are in debt, the more people will default (and the less choices people have). But my view is also that it is increasing inequality. Bidding up asset prices increases the distance between the haves and the have nots.
i think that’s a feature; not a bug.
Sooner or later, they will have to catch up or refi the loan. The forbearance delayed a lot of bankruptcies.
Government and Private Household Debt Relief During Covid 19
I believe what will happen is there will be many people going bankrupt as they are so far behind in making payments. I do not believe the relief will be great enough to alleviate the debt and I doubt the government will get involved in smoothing out the payment structure for the debt in forbearance right now.
There already is a large debt amount for student loans and 40% of those holding student loan debt are in retirement now when this percentage was quoted in 2014. There has not been much sympathy for students with outstanding usurious loans for which there is no escape. Biden was one of the leaders who kept making it more and more difficult to take loans into bankruptcy since 1993.
sorry to hear that about Biden. maybe when he gets a look at the ghost of christmas yet to come he will have a change of heart.
anybody thinking about a year of jubilee, selected debt forgiveness, or simply adding the missed payments to principle and extending the loan?
i don’t know, but i’d bet ay of these things would not hurt the lenders as much as we might think.
I found this fascinating site that might be of use to the folks here and I would love to see one of you analyze it for accuracy. It attempts to provide a living wage by zip code across the nation taking into consideration local costs. Here is the link.
Since its from MIT, it might have a chance of actually being useful to this discussion.