Poverty and the Minimum Wage

Posted on September 23, 2014 by jackheidel

Americans are a generous and kind-hearted people. We are more than willing to go to bat for the less fortunate among us. The question is how to do it effectively. A post six months ago, “A balanced and Sensible Anti-Poverty Program,” laid out four principles for an effective anti-poverty program from Robert Doar of the American Enterprise Institute. They are:

work requirements for welfare recipients
work incentives such as the Earned Income Tax Credit
fostering married, two-parent families
business growth and investment to create more jobs

There is currently much interest in , and public support for, raising the minimum wage at both the state and national levels. This is viewed by the general public as an effective way of addressing poverty.
However a new report from Mr. Doar makes clear that simply holding a real job, even with low pay, is what makes the biggest difference as to whether or not someone is able to rise above poverty. Even though the overall poverty rate in the U.S. is about 14%, the poverty rate for fulltime workers is only 3% and even for part-time workers it is just 7% (see the above chart).
Furthermore, as detailed in the second above chart, the total income (including selected benefits) of a low-income earner, at $8/hour, with two dependent children, and working fulltime, is $30,204, well above the poverty line.
Conclusion: yes, poor people need public assistance but it is equally important to work with them to find and hold a job, regardless of hourly wage. Not only will this meet their basic material needs, it will also put them on track to become self-supporting, productive citizens.

A Rational Approach to a National Minimum Wage

Posted on September 21, 2014 by jackheidel

In my last post I endorsed raising Nebraska’s minimum wage from $7.25/hour to $9.00/hour because Nebraska’s unemployment rate is only 3.6% and so a minimum wage boost is unlikely to put very many people out of work. I also stated opposition to President Obama’s proposal for a raise in the national minimum wage to $10.10/hour because it would likely put at least 500,000 people out of work.
A recent article in National Affairs by Charles Lane, “A Grand Bargain on the Minimum Wage,”suggests an approach to end a perennial controversy over how to set a minimum wage at the national level. It is based on the following observations:

Increasing the minimum wage has broad public support. A recent Gallop poll found that 76% of Americans support an increase to $9.00/hour.
However, just 4% of minimum-wage workers are single parents. Only 11.3% of workers who would benefit from an increase in the minimum wage come from poor households. The majority of minimum-wage workers do not live in poverty.
A more efficient, better targeted support program for the working poor is the Earned Income Tax Credit which provides a refundable tax credit as high as $6,143 for an adult worker with three children.
Since 1959 the average income for a full time worker earning the minimum wage has equaled two-thirds of the poverty line for a family of four. The current poverty line for such a family is $23,850. This equates to a minimum wage set at $8.00/hour.
Another option would be to set the minimum wage at 45% of today’s average private sector wage of $20/hour. This would make it $9.00/hour. The CBO has estimated that a $9.00/hour minimum wage would put “only” 100,000 people out of work.
Once a new minimum wage level is determined, it should be automatically adjusted for inflation using the Consumer Price Index.
The EITC is not cheap; it currently gives $63 billion in benefits to 27 million workers. However the EITC’s improper-payments rate regularly exceeds 20% per year.
An expansion of the EITC to single, childless workers could be paid for by tightening up EITC’s payment methods.

All of these considerations suggest a way forward to end a long-standing political controversy in a productive manner. The national minimum wage should be raised to somewhere between $8.00 and $9.00/hour and then indexed to the CPI. At the same time the EITC should be tightened up and expanded to single, childless adults. Such a program combines fairness with a strong work incentive and should have broad appeal.

Let’s Raise Nebraska’s Minimum-Wage but Not the Whole Country’s

Posted on September 18, 2014 by jackheidel

In his State of the Union address last January, President Obama proposed raising the national minimum wage to $10.10 per hour from its current level of $7.25 per hour. The Congressional Budget Office has estimated that this would raise the wages of 16.5 million workers but also put at least 500,000 out of work. At a time of high unemployment, with an estimated 24 million people either unemployed or underemployed, this would be a bad tradeoff.
The Wall Street Journal reports, “Some Republicans Back State Minimum-Wage Increases,” that five states, including Nebraska where I live, have minimum-wage proposals on the ballot this year. In Nebraska the minimum-wage would increase in two steps to $9.00/hour from $7.25. Nebraska’s unemployment rate is currently 3.6%, and it is estimated that there are only 27,000 people in the state being paid the minimum wage. In other words, Nebraska actually has a labor shortage and it is unlikely that a mild increase in the minimum wage will put very many people out of work.
A minimum wage contributes to fairness but not to growth. Both are important but growth is the more important of the two. A minimum-wage increase in Nebraska will increase fairness without hurting economic growth and so I support this.
At the national level, an increase in the minimum wage would increase fairness but also hurt economic growth (by causing substantial unemployment) and so I oppose it.

A Glaring Example of the Need for Tax Reform

Posted on September 16, 2014 by jackheidel

Nowadays there are many advocates for both individual and corporate tax reform. I have had several posts recently on this issue. A new report from the Tax Foundation “Is the Tax Code the Proper Tool for Making Higher Education More Affordable?” make a compelling argument that it is futile to try to do this.
For example:

Education tax credits have grown from a $4.5 billion program for 4.7 million taxpayers in 1998 to a $17.4 billion program claimed by over 7 million taxpayers in 2011.
Education tax credits are not well targeted toward low- and middle-income families; almost 50% of the benefits accrue to taxpayers earning more than $75,000, often much more. A much more sensible way to target low income students would be to increase Pell grants.
The overuse of tax credits by the federal government has turned the IRS into a spending agency, with refundable tax credits projected to double to nearly $200 billion in the next five years.
Trading the elimination of education tax credits for lower marginal tax rates would grow the economy by $19 billion per year and create 121,000 new jobs.

The authors go on to say: “It is likely that instead of helping, tax credits may be contributing to the rising cost of college education. Colleges are what economists call price discriminators because they can maximize the price that each student can pay. Because of the Free Application for Federal Student Aid (FAFSA), the college has intimate knowledge of each student’s (or family’s) income and if they are eligible for tax credits, loans, or other financial aid. This information allows the college to simply adjust its financial aid package in order to capture the maximum value of the tax credit. Instead of being a helping hand for students, tax credits have turned into a windfall for universities.”
There are many, many reasons to reform the tax code. The education tax credit is just one very good example!

Why I Support Jim Jenkins for the U.S. Senate from Nebraska

Posted on September 14, 2014 by jackheidel

I have been writing this blog for almost two years because of my great concern about the direction our country is headed on fundamental fiscal and economic issues. Federal spending has been out of control for over thirty years and the situation is getting progressively worse. Our national debt is over $17 trillion and growing at a rate of $500 billion per year. And it will soon be growing much faster than this if we don’t make big changes. Economic growth has been stuck at the anemic rate of 2.2% of GDP ever since the end of the Great Recession over five years ago.
Our national leaders are simply not doing the job they were elected for. Democrats blame the Republicans and Republicans blame the Democrats but excuses are not good enough. We need people in Washington who can figure out how to navigate within the system and actually find solutions to our very serious problems.
I believe that Jim Jenkins, a registered independent from Callaway, is the best qualified candidate to do what needs to be done. Check out his website, Jenkins for Senate, and decide for yourself. Here are a few of his views on important issues:

Fixing the Debt. Jim supports the recommendations of the Simpson-Bowles Commission which calls for dramatically cutting federal spending especially for entitlements and also raising taxes if necessary in order to drastically shrink our annual deficits.
Tax Reform. Jim supports lower tax rates achieved by eliminating many of the tax expenditures (credits, deductions and exclusions) embedded in the code. This is what is needed to boost economic growth.
Affordable Care Act. Jim believes that the ACA has many rough edges but that it is possible to fix them rather than repealing it and starting over.
Immigration Reform. Jim supports comprehensive immigration reform which includes securing our borders but at the same time expanding the number of guest worker visas to meet the needs of business and agriculture.
Veterans Administration. Jim supports setting up a plan to enable veterans to obtain medical care from health professionals within their own communities.

Compare these common sense views with the far more ideological positions of the other candidates in this race. I think that you will agree with me that Jim Jenkins is the person we want representing us in Washington!

Which Is More Important: Increasing Growth or Decreasing Inequality?

Posted on September 11, 2014 by jackheidel

The progressive Global Strategy Group has recently released a new survey report “Focus on Growth to Frame Priorities” with a valuable message for all political candidates, left, right and center.
GSG surveyed 3000 registered voters earlier this year and discovered that they overwhelmingly rate economic growth as a higher priority than economic fairness, economic justice, expanding the middle class, increasing wages or decreasing income inequality. In fact, economic growth trumped all of these alternative policy strategies by wide margins as shown below.
GSG then goes on to list various possible growth strategies in order of voter popularity such as making college more affordable, modernizing infrastructure, improving K-12 education and others (see below). This list of possible growth strategies is made up mostly of new spending programs. The less costly might be doable by reforming existing spending programs. But expensive new programs simply will not fly in today’s high deficit environment.
What is needed is a growth strategy which does not require new spending. The obvious choice is tax reform. For example, the fourth item in the above chart, reduce outsourcing by American companies, could be addressed by reforming corporate taxes.
But an even better growth strategy is individual tax reform whereby tax rates are lowered across the board, paid for by shrinking the many loopholes and deductions which primarily benefit the wealthy.
I described such a plan in detail in a previous post, but here is a brief summary: 64% of taxpayers do not itemize their deductions. This means that any reduction in tax rates will put money in their pockets. Since these are primarily the same middle- and lower-income workers with stagnant incomes, they will likely spend most of their increased pay, thus giving the economy a big boost.
In summary, the GSG report provides ammunition for political candidates of all ideological stripes. Let’s have a contest to see which party can be the most pro-growth. The winner will be the American people!

An Economy Doing Half Its Job

Posted on September 9, 2014 by jackheidel

The Harvard Business School has just conducted its third alumni survey on U.S. competitiveness and finds “An Economy Doing Half Its Job.” “Our report on the findings focuses on a troubling divergence in the American economy: large and midsize firms have rallied strongly from the Great Recession, and highly skilled individuals are prospering. But middle- and working-class citizens are struggling, as are small businesses. We argue that such a divergence is unsustainable.”
Highlights of the survey are:

Survey respondents were pessimistic on balance, although less so than in previous surveys. By a ratio of three to two, those who foresaw a decline in U.S. competitiveness in the next three years outnumbered those who predicted an improvement. Respondents were much more hopeful about the future competitive success of America’s firms than they were about the future pay of America’s workers.
Respondents saw weaknesses in those aspects of the U.S. business environment that drive the prospects of middle- and working-class citizens, for instance, the education system, the quality of workplace skills, and the effectiveness of the political system.
Alumni working in small businesses had more negative views of virtually every aspect of the U.S. business environment. This finding echoes growing evidence from other sources that small businesses are disadvantaged in America.

The authors of the report “see a need for business leaders to move toward strategic, collaborative efforts that make the average American productive enough to command higher wages even in competitive global labor markets. Without such actions, the U.S. economy will continue to do only half its job, with many citizens struggling.” What’s interesting about this report is that it describes the problems of the American economy in a straightforward and practical way with no apparent ideological slant. Of course, addressing these issues requires political action with all of its messy, partisan overtones. Nevertheless perhaps all parties can at least agree on what the basic problem is.

Three Cheers for Blue Cross Blue Shield Nebraska!

Posted on September 7, 2014 by jackheidel

As I reported in my last post healthcare costs in the U.S. are expected to start climbing rapidly in next few years as the economy continues to recover and insurance coverage expands.
The Manhattan Institute’s Avik Roy has proposed a comprehensive new plan, ”Transforming Obamacare” to achieve, at the same time, both near-universal coverage and stringent cost control for healthcare. Mr. Roy emphasizes the need to regulate hospital system consolidation which is especially responsible for driving up the cost of healthcare.
In Omaha NE, where I live, there are three hospital systems: Catholic Health Initiatives, the Nebraska Medical Center and the Methodist Hospital System. According to the insurance company, Blue Cross Blue Shield Nebraska (OWH 9/6/14), “CHI prices are 10 to 30 percent higher than for the Nebraska Medical Center and Methodist Hospital System.” BCBS insists that CHI cut its prices. As of September 1, CHI hospitals are out of network for BCBS and so patients who are insured by BCBS have to pay higher hospital rates.
“We are ready and willing to meet with them when they propose an agreement that gets serious about the cost issue,” said Lee Handke, a senior vice-president for Blue Cross Blue Shield.
Reports the OWH “Blue Cross’ biggest customers are the region’s employers, whose 560,000 workers and family members supply 80% of Blue Cross’ revenue each year. A big share of these people are CHI customers, too. … Blue Cross has told us (an insurance benefits broker) they understand that they might lose some business over this deal, but they feel that the point they have to make on the cost disparity is more important.”
For one hospital system to charge 30% more than two others for the same services is totally unacceptable. It means that customers for the other two systems are paying higher insurance costs in order to subsidize the system with the higher prices.
In the Omaha market, Blue Cross has the clout and the will to force CHI to lower its prices. But many other communities may not be as fortunate.

The High Cost of U.S. Health Care and What To Do About It

Posted on September 4, 2014 by jackheidel

The United States spends 17.2% of GDP on healthcare costs, public and private, almost twice as much as any other developed country, and this percentage is gradually increasing. In today’s New York Times there is a good discussion about these rising costs (see below).
My recent post, “Fixing Obamacare Rather Than Replacing It,” discusses a comprehensive new healthcare reform proposal by Avik Roy of the Manhattan Institute. Mr. Roy’s plan both expands health insurance coverage beyond ACA levels as well as reining in the huge costs of healthcare. As Mr. Roy says “Among the industrialized member countries of the OECD, the average hospital stay cost $6,222 and lasted 7.7 days in 2009. In the United States, the average hospital stay cost $18,142, despite lasting only 4.9 days. In other words, the average daily cost of a hospital stay in the U.S. was 4.6 times the OECD average.” Mr. Roy goes on to show that it is hospital system consolidation which is especially responsible for driving up the cost of health insurance.
There is a clear example of this situation in Omaha NE where I live. There are three hospital systems here: Catholic Health Initiatives, the Nebraska Health System and the Methodist Health System. As stated by the CEO of Blue Cross and Blue Shield of Nebraska in the Omaha World Herald on August 28, 2014, “Our experience in addressing health care costs is precisely what led us to our current negotiations with Denver-based Catholic Health Initiatives. CHI’s Alegent Creighton Health network of hospitals and physicians charges our members up to 30 percent more than other providers in Omaha for the same services. … These numbers reinforce a simple truth: We cannot allow one provider group to charge our members more for the same services they can receive elsewhere.”
We are fortunate in Omaha to have a choice of three different hospital systems and an insurance company with sufficient clout and integrity to fight price gouging by one of these systems. But not every community is as fortunate as Omaha in this respect. This is just one simple example of why cost control needs to be at the center of healthcare reform.

Why Medicare Needs to Be Reformed and How to Do It

Posted on September 2, 2014 by jackheidel

My last post, “Fixing Obamacare Rather Than Repealing It,”presents a comprehensive new healthcare reform proposal by Avik Roy of the Manhattan Institute. His plan has the ambitious goal of expanding health insurance coverage beyond ACA levels and at the same time achieving a huge deficit reduction compared with current CBO projections.
Mr. Roy points out, for example, that for all of Medicare’s huge cost, $635 billion in 2014 alone, it does not provide catastrophic coverage against long-term hospitalizations. The supplemental insurance program, “Medigap,” accelerates Medicare’s wasteful spending by wiping out cost-sharing features such as co-pays and deductibles. Medigap has proven hard to change because it generates huge royalty fees for the AARP, $458 million in 2011, for example. For all of these reasons and others, Medicare needs big changes.
The core Medicare reform of Mr. Roy’s Universal Exchange Plan is to increase the eligibility age by four months per year forever, beginning in 2016. This means that current seniors can stay in the existing Medicare program but that future retirees will remain in the universal state-based exchanges for an increasing period of time. This is estimated to save $6.5 trillion over 30 years.
Additional features of the new Medicare program are:

Reduce Medicare subsidies for hospital’s uncollected bills saving $4 billion per year.
Exempt Medicare Part C and Part D from state and local taxes.
Combine Part A and Part B into a single insurance product saving $30 billion per year by reforming Medigap.
Introduce additional means-testing into Part D premiums.
Reduce waste, fraud and abuse systematically, saving approximately $50 billion per year.
Restore the ability of seniors to opt out of Medicare.
Restore the pre-ACA tax subsidy for employer-sponsored retiree coverage (to encourage more employers to sponsor retiree health benefits).
Address the physician shortage through additional medical education funding costing $6 billion per year.

Medicare spends 30% of its overall budget on end-of-life care (for the last six months of life). The reforms suggested by Mr. Roy will allow it to operate much more efficiently and thereby put a greater focus on the end-of-life care which is its fundamental purpose.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility