Two cents on the minimum wage

Once upon a time, the minimum wage, like free trade, was a basic test of whether you were awake in the first week of econ 1. We put a horizontal line in a supply and demand graph. Minimum wages increase unemployment of poor people.

It's  back of course. I won't review here the debate over Card and Kruger's provocative results, diff in diff estimators, empirical work without theory (is there really no substitution to capital or high skilled labor? Is the price elasticity really zero?) and so on. This is all low-hanging fruit. (See Greg Mankiw, who asks if $9 why not $20,  David Henderson's nice post with great quotes from Paul Krugman on just how bad minimum wages were before evil Republicans didn't like them, the Becker-Posner Blog, and Ed Glaeser, noting how minimum wages are hidden taxing and spending and better ways to achieve the same goals, and this clever Steve Chapman oped asking, why not fix prices lower instead?.)

Let's presume for the sake of discussion that a rise in the minimum wage would indeed not much change the demand for labor, the costs would just be passed on in the form of somewhat higher prices, with little decline in output -- as usual in non-economics, assume that all elasticities vanish.

It still strikes me, that like much of the current policy discussion, we're asking the wrong question. The question is not "is this great" or "is this terrible" but "does this have anything to do with current problems?"  The fiddling while Rome burns is worse here than the belief in minor economic magic.

Bloomberg TV on debt and magic

I did a short interview on Bloomberg TV this morning. Nothing new for readers of this blog, but fun anyway. Coffee just starting to kick in at 6:15 AM. As always, walking home I figured out 10 better ways to answer.

Surprising candor at NYT on health care

The New York Times published a surprisingly sensible piece on health care on Sunday, "The health care benefits that cut your pay" by David Goldhill. A sample

We manage health care as if our needs were always urgent and unpredictable, ignoring how deeply this industry is integrated into our lives, with a vast amount of care now devoted to treating ongoing, chronic conditions.

Our system takes resources from all of us, pools the cost of certainties disguised as risks, extracts enormous costs of administration and complexity and then returns — to almost all of us — a fraction of the money we’ve put in.

Try to imagine what homeowners’ insurance would look like if we expected everyone’s house to burn down and then added coverage for each homeowner’s utility bills and furniture wear-and-tear. This would be insanely expensive without meaningfully reducing anyone’s risk. That, in short, is how health insurance works.

...Traditional health experts may repackage their ideas, but they are never discouraged by past failure. So the new Accountable Care Organizations are a reinvention of H.M.O.’s. The Independent Payment Advisory Board is the new Medicare Payment Advisory Commission, or MedPAC. Bundled payments are the new Prospective Payment System.

We often see some early benefit from the introduction of new ideas, but over time such initiatives are always subjugated by our system’s nefarious economic incentives. Implement cost control reforms and watch providers circumvent new rules and guidelines. Reduce reimbursement rates for procedures, and witness providers expand the definition of required services. Convert fee-for-service reimbursements into bundled payments, and soon more severe diagnoses are given. Attempt to use government buying power, and see providers turn to lobbyists to keep prices up. We are approaching a half-century of fighting this losing battle

...

Here’s a completely different idea, one that might actually work. Let’s give every American health insurance, but only for truly rare, major and unpredictable illnesses. In other words, let’s cover everyone but not everything. It would take a generation to transition fully to such a system, but eventually the most routine and expected medical treatments, from checkups and minor illnesses all the way to common chronic conditions and expected end-of-life care, would be funded from our individual health savings; only the most major needs — for example, cancer, stroke and trauma — would be paid out of insurance.

Defining insurable events more narrowly and enabling Americans to use the premium savings to build health savings would reduce the distortions inherent in our insurance approach. Most importantly, it will also compel providers to compete on the basis of price, quality and service, as they meet the one force that creates real incentives for good performance, innovation and safety: the consumer.

Sheer poetry, in few words accomplishing what took me many pages of "After the ACA."  Newspapers often publish contrary views to show they are balanced (or so a WSJ editor once told me when I complained!) But that this can even get aired at the Times is pretty remarkable.

What's holding back the US economy?

This is a video I did with Steve Davis and Amir Sufi, moderated by Hal Weitzman, part of the new Chicago Booth "The Big Question" series. Youtube link here. I'm actually a lot calmer through most of it than I appear in the cover shot.

Three views of consumption and the slow economy

I'm still digesting New-Keynesian models. As part of that effort, today I offer some thoughts on how economists come to such different views of the current situation and desirable policies. It's a nice story, in the end. Real economists, unlike much of the commentary and blogging world, come to different conclusions by using much the same model, but making different assumptions and simplifications, each of which we can look at and evaluate, and hopefully come to some consensus.

The economy is not doing well. The black line in the graph shows log consumption. (The units are percent increase in consumption since 2002.) After trending up steadily at close to 3% per year through the previous decade, consumption -- along with output and everything else -- took a dive, totaling 10% loss relative to the red trendline. And consumption has been stuck there ever since.

So, the big questions: why, and what might be done about it?