Of course it would, since deception is the only way to get large cuts in this incredibly popular program. This is why we find the Post applauding New Jersey Governor Chris Christie for his:
“cogent defense of his plan to trim old-age entitlement benefits for wealthy seniors, explaining that the system must be shored up for the poor.”
Of course what Christie said was far from cogent. Christie first totally misrepresented the program’s finances by saying that it held nothing by “IOUs.” Actually, the program holds more than $2.8 trillion of government bonds. Mr. Christie may call government bonds “IOUs” but that is not the common term for them. In any case, the financial markets consider government bonds to be a very valuable asset which is why they pay a low interest rate. Unless the U.S. government defaults on its debt, the program would be able to pay all scheduled benefits through 2033 with no changes whatsoever.
After that date it could pay more than 75 percent of scheduled benefits indefinitely. If we imposed the same sort of tax increases as President Reagan did in the 1980s it would also be sufficient to keep the program solvent indefinitely.
Christie’s proposal about taking away Social Security for people who earn above $200,000 a year was close to complete nonsense. There are very few people in this category. While this group does make lots of money, they do not collect much more Social Security than the rest of us. This is because the program has an income cap and a progressive payback structure.
In order to have any noticeable impact on the program’s finances it would be necessary to redefine “wealthy” to something like $40,000. This is likely Mr. Christie’s intention and the Post apparently wants to help him in that cause.
Of course it would, since deception is the only way to get large cuts in this incredibly popular program. This is why we find the Post applauding New Jersey Governor Chris Christie for his:
“cogent defense of his plan to trim old-age entitlement benefits for wealthy seniors, explaining that the system must be shored up for the poor.”
Of course what Christie said was far from cogent. Christie first totally misrepresented the program’s finances by saying that it held nothing by “IOUs.” Actually, the program holds more than $2.8 trillion of government bonds. Mr. Christie may call government bonds “IOUs” but that is not the common term for them. In any case, the financial markets consider government bonds to be a very valuable asset which is why they pay a low interest rate. Unless the U.S. government defaults on its debt, the program would be able to pay all scheduled benefits through 2033 with no changes whatsoever.
After that date it could pay more than 75 percent of scheduled benefits indefinitely. If we imposed the same sort of tax increases as President Reagan did in the 1980s it would also be sufficient to keep the program solvent indefinitely.
Christie’s proposal about taking away Social Security for people who earn above $200,000 a year was close to complete nonsense. There are very few people in this category. While this group does make lots of money, they do not collect much more Social Security than the rest of us. This is because the program has an income cap and a progressive payback structure.
In order to have any noticeable impact on the program’s finances it would be necessary to redefine “wealthy” to something like $40,000. This is likely Mr. Christie’s intention and the Post apparently wants to help him in that cause.
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Catherine Rampell seems to want to turn trade issues between China and the United States into a he said/she said in a column citing complaints by Chinese businesses over U.S. practices. While there are undoubtedly many instances of U.S. practices that are protectionist, the overall picture is very clear.
China continues to run a large trade surplus. We usually expect fast growing developing countries to run trade deficits. The logic is that they offer a return on capital, leading to large inflows, which drive up the price of their currency. This makes their goods and services less competitive, causing them to run trade deficits.
China’s central bank has bought trillions of dollars of foreign exchange in order to keep its currency from rising. This is why the country continues to run trade surpluses in spite of having a growth that far exceeds that of almost all of its trading partners.
Holding $4 trillion in reserves is not a subtle point. It is not affected by the fact that the United States may have unfair protections in a small number of industries.
Catherine Rampell seems to want to turn trade issues between China and the United States into a he said/she said in a column citing complaints by Chinese businesses over U.S. practices. While there are undoubtedly many instances of U.S. practices that are protectionist, the overall picture is very clear.
China continues to run a large trade surplus. We usually expect fast growing developing countries to run trade deficits. The logic is that they offer a return on capital, leading to large inflows, which drive up the price of their currency. This makes their goods and services less competitive, causing them to run trade deficits.
China’s central bank has bought trillions of dollars of foreign exchange in order to keep its currency from rising. This is why the country continues to run trade surpluses in spite of having a growth that far exceeds that of almost all of its trading partners.
Holding $4 trillion in reserves is not a subtle point. It is not affected by the fact that the United States may have unfair protections in a small number of industries.
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Paul Krugman makes a good point comparing the economy’s performance under President Reagan and Obama. He shows the path of unemployment was actually worse under Reagan than Obama. This is to show there is no real basis for praising the Reagan record. Krugman then concludes the piece by saying, “anyway, I’m surprised that this chart isn’t more widely discussed.”
Actually there is a good reason the record is not more widely discussed. The employment to population ratio is still much lower now than it was before the downturn. This is true even if we restrict the analysis to prime age (ages 25-54) workers to reduce the impact of demographic change.
Employment to Population Ratio: Prime Age Workers
Source: Bureau of Labor Statistics.
If we focus on the EPOP rather than unemployment rates, then the economy still has a long way to go before it recovers. Since it is implausible that millions of prime age workers suddenly decided they don’t feel like working, we need to do much more to get back to something like full employment and a labor market that is tight enough for workers to achieve wage gains.
For this reason many of us are focusing on emphasizing the problems with the labor market rather than trumpeting the comparisons with Reagan, although Krugman is right that the Reagan record is nothing to boast about.
Paul Krugman makes a good point comparing the economy’s performance under President Reagan and Obama. He shows the path of unemployment was actually worse under Reagan than Obama. This is to show there is no real basis for praising the Reagan record. Krugman then concludes the piece by saying, “anyway, I’m surprised that this chart isn’t more widely discussed.”
Actually there is a good reason the record is not more widely discussed. The employment to population ratio is still much lower now than it was before the downturn. This is true even if we restrict the analysis to prime age (ages 25-54) workers to reduce the impact of demographic change.
Employment to Population Ratio: Prime Age Workers
Source: Bureau of Labor Statistics.
If we focus on the EPOP rather than unemployment rates, then the economy still has a long way to go before it recovers. Since it is implausible that millions of prime age workers suddenly decided they don’t feel like working, we need to do much more to get back to something like full employment and a labor market that is tight enough for workers to achieve wage gains.
For this reason many of us are focusing on emphasizing the problems with the labor market rather than trumpeting the comparisons with Reagan, although Krugman is right that the Reagan record is nothing to boast about.
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In case you were wondering whether we can substantially improve the financing of Social Security by means-testing benefits, as Governor Christie advocated in the Republican candidate debate, CEPR has the answer for you. We did a paper a few years back on this very issue.
The key point is that, while the rich have a large share of the income, they don’t have a large share of Social Security benefits. That is what we would expect with a progressive payback structure in a program with a cap on taxable income. When we did the paper, less than 0.6 percent of benefits went to individuals with non-Social Security income over $200,000. Since incomes have risen somewhat in the last five years, it would be around 1.1 percent of benefits today.
However we’re not going to be able to zero out benefits for everyone who has non-Social Security income over $200,000, otherwise we would find lots of people with incomes of $199,900. As a practical matter, we would have to phase out benefits. A rapid phase out would be losing 20 cents of benefits for each dollar that the person’s income exceeds $200,000.
This would mean, for example, that if a person had an income of $220,000, they would see their benefits reduced by $4,000. This creates a very high marginal tax rate (people are also paying income tax), which would presumably mean some response in that people adjust their behavior since they are paying well over 50 cents of an additional dollar of income in taxes. If this was a person who was still working and paying Social Security taxes, the effective marginal tax rate would be over 70 percent.
By our calculations, this 20 percent phase out would reduce Social Security payouts by roughly 0.6 percent of payouts, the equivalent of an increase in the payroll tax of around 0.09 percentage point. That’s not zero, but it does not hugely change the finances of the program.
In case you were wondering whether we can substantially improve the financing of Social Security by means-testing benefits, as Governor Christie advocated in the Republican candidate debate, CEPR has the answer for you. We did a paper a few years back on this very issue.
The key point is that, while the rich have a large share of the income, they don’t have a large share of Social Security benefits. That is what we would expect with a progressive payback structure in a program with a cap on taxable income. When we did the paper, less than 0.6 percent of benefits went to individuals with non-Social Security income over $200,000. Since incomes have risen somewhat in the last five years, it would be around 1.1 percent of benefits today.
However we’re not going to be able to zero out benefits for everyone who has non-Social Security income over $200,000, otherwise we would find lots of people with incomes of $199,900. As a practical matter, we would have to phase out benefits. A rapid phase out would be losing 20 cents of benefits for each dollar that the person’s income exceeds $200,000.
This would mean, for example, that if a person had an income of $220,000, they would see their benefits reduced by $4,000. This creates a very high marginal tax rate (people are also paying income tax), which would presumably mean some response in that people adjust their behavior since they are paying well over 50 cents of an additional dollar of income in taxes. If this was a person who was still working and paying Social Security taxes, the effective marginal tax rate would be over 70 percent.
By our calculations, this 20 percent phase out would reduce Social Security payouts by roughly 0.6 percent of payouts, the equivalent of an increase in the payroll tax of around 0.09 percentage point. That’s not zero, but it does not hugely change the finances of the program.
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Everyone has heard about Donald Trump’s soaring poll numbers as the current leader in the race for the Republican presidential nomination. Many have also heard the explanation that he appeals to those who feel left behind by the economy. Unfortunately the way the media often tell this story has little to do with reality.
We got a great example of creative analysis yesterday in the Post’s Wonkblog section. It tells us:
“Non-college grads have struggled since the turn of the century: Economist Robert Shapiro estimates that incomes stagnated or declined from 2002 to 2013 for American households headed by workers without a degree, a marked departure from prior decades.”
Both parts of this are seriously misleading. First, it is not just non-college grads who have struggled since the turn of the century. Most college grads have seen little or no wage gains since the turn of the century. The second part is wrong also, since wages for non-college grads had also been stagnant since 1980, so the experience of the last 15 years has not been “a marked departure from prior decades.”
Later the piece doubles down on this misleading picture:
“Trump is selling an economic message that unifies growing concerns among liberals and conservatives alike, ‘which is that growing GDP doesn’t necessarily help people on the bottom,’ said Mickey Kaus, the author of the Kausfiles blog… .”
The data clearly show that most people have been seeing little or none of the gains from economic growth over the last decade, not just people on the bottom.
Everyone has heard about Donald Trump’s soaring poll numbers as the current leader in the race for the Republican presidential nomination. Many have also heard the explanation that he appeals to those who feel left behind by the economy. Unfortunately the way the media often tell this story has little to do with reality.
We got a great example of creative analysis yesterday in the Post’s Wonkblog section. It tells us:
“Non-college grads have struggled since the turn of the century: Economist Robert Shapiro estimates that incomes stagnated or declined from 2002 to 2013 for American households headed by workers without a degree, a marked departure from prior decades.”
Both parts of this are seriously misleading. First, it is not just non-college grads who have struggled since the turn of the century. Most college grads have seen little or no wage gains since the turn of the century. The second part is wrong also, since wages for non-college grads had also been stagnant since 1980, so the experience of the last 15 years has not been “a marked departure from prior decades.”
Later the piece doubles down on this misleading picture:
“Trump is selling an economic message that unifies growing concerns among liberals and conservatives alike, ‘which is that growing GDP doesn’t necessarily help people on the bottom,’ said Mickey Kaus, the author of the Kausfiles blog… .”
The data clearly show that most people have been seeing little or none of the gains from economic growth over the last decade, not just people on the bottom.
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This is the question that Neil Irwin raised in a discussion of efforts to reduce inequality by constraining C.E.O. pay. Irwin comments that Walmart CEO Douglas McMillion:
“makes more than $19 million a year (including unvested stock grants) to run Walmart, a company with 2.2 million employees and half a trillion dollars in revenue. That’s a lot of money, no doubt. But 26 Major League Baseball players make more than that. It is a safe bet that the future of the United States economy depends more heavily on how well Mr. McMillon does his job than how well Albert Pujols does his, even if Los Angeles Angels fans might disagree.”
Asking whether the work of a CEO or a great athlete is more important to the country actually misrepresents the issues involved in the determination of CEO pay. We can grant the ensuring that Walmart is well-run is more important, but that is really beside the point. The question is how much to we have to pay to get someone to do a good job running Walmart.
If the New England Patriots did not have Tom Brady, there are few, if any, other people who could do a comparable job as quarterback. This means that they would either have to pay the Tom Brady substitute a comparable salary or get by with a quarterback who would not be nearly as effective in scoring points for the team. (We’re ignoring the deflation problem here.)
By contrast, it is not clear that if Mr. McMillion left Walmart that the company could not find a comparably talented person to run the company. In this case, Walmart need only pay Mr. McMillion the amount that would be needed to attract another comparably talented person.
The example of firefighters can be seen as presenting a similar situation. Firefighters do incredibly important work, often at great personal danger. Certainly pulling people out of burning buildings has to be seen as more important than winning a football game. However firefighters do not receive multimillion dollar salaries because there are other people who are prepared to do this work at a relatively modest salary. This means that if any individual firefighter were to insist on a multimillion dollar paycheck, they could be replaced by someone who could do a comparable job at a far lower salary.
The argument on CEO pay is that the corporate governance system in the United States does not lead to the same sort of market pressures. Board members have little incentive to pressure CEOs to take pay cuts even when it is quite likely that they could get equally comparable replacements at a much lower wage.
Board members can count on six figure paychecks for attending a small number of meetings every year, even if they allow the CEO to be paid far more than is necessary. The fact that well-run and highly profitable companies in Europe and Asia typically pay their CEO’s far less than companies in the United States suggests that it is not necessary to have such exorbitant CEO pay to attract competent managers.
Note: Brady’s first name has been corrected to be “Tom” rather than Jim. Thanks to those who called my attention to this one.
This is the question that Neil Irwin raised in a discussion of efforts to reduce inequality by constraining C.E.O. pay. Irwin comments that Walmart CEO Douglas McMillion:
“makes more than $19 million a year (including unvested stock grants) to run Walmart, a company with 2.2 million employees and half a trillion dollars in revenue. That’s a lot of money, no doubt. But 26 Major League Baseball players make more than that. It is a safe bet that the future of the United States economy depends more heavily on how well Mr. McMillon does his job than how well Albert Pujols does his, even if Los Angeles Angels fans might disagree.”
Asking whether the work of a CEO or a great athlete is more important to the country actually misrepresents the issues involved in the determination of CEO pay. We can grant the ensuring that Walmart is well-run is more important, but that is really beside the point. The question is how much to we have to pay to get someone to do a good job running Walmart.
If the New England Patriots did not have Tom Brady, there are few, if any, other people who could do a comparable job as quarterback. This means that they would either have to pay the Tom Brady substitute a comparable salary or get by with a quarterback who would not be nearly as effective in scoring points for the team. (We’re ignoring the deflation problem here.)
By contrast, it is not clear that if Mr. McMillion left Walmart that the company could not find a comparably talented person to run the company. In this case, Walmart need only pay Mr. McMillion the amount that would be needed to attract another comparably talented person.
The example of firefighters can be seen as presenting a similar situation. Firefighters do incredibly important work, often at great personal danger. Certainly pulling people out of burning buildings has to be seen as more important than winning a football game. However firefighters do not receive multimillion dollar salaries because there are other people who are prepared to do this work at a relatively modest salary. This means that if any individual firefighter were to insist on a multimillion dollar paycheck, they could be replaced by someone who could do a comparable job at a far lower salary.
The argument on CEO pay is that the corporate governance system in the United States does not lead to the same sort of market pressures. Board members have little incentive to pressure CEOs to take pay cuts even when it is quite likely that they could get equally comparable replacements at a much lower wage.
Board members can count on six figure paychecks for attending a small number of meetings every year, even if they allow the CEO to be paid far more than is necessary. The fact that well-run and highly profitable companies in Europe and Asia typically pay their CEO’s far less than companies in the United States suggests that it is not necessary to have such exorbitant CEO pay to attract competent managers.
Note: Brady’s first name has been corrected to be “Tom” rather than Jim. Thanks to those who called my attention to this one.
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That was one explanation in an NYT article on the limited use of direct injection of chemotherapy into the abdomen, even though there is clear evidence of this being an effective way to extend the life of ovarian cancer victims. The article notes that there has been some increase in the use of this method since the National Cancer Institute made a clinical announcement promoting its merits in 2006, but still only 50 percent of patients receive the treatment.
The piece offers the use of generic drugs, which don’t provide large profit margins as one explanation:
“Dr. Markman [the president of medicine and science at Cancer Treatment Centers of America] said that when a treatment involves a new drug or a new device, manufacturers eagerly offer doctors advice and instructions on its use. But this treatment involves no new drugs or devices, so no one is clamoring to educate doctors about it. They are on their own to learn, and to train their nurses, a commitment that will take time and money.”
This is an interesting, if tragic, example of the ways in which patent monopolies reduce the quality of health care. They push people towards the use of patent protected drugs even in situations where they may not be the most effective form of treatment. This problem is widespread, even if the consequences may not always be as serious.
That was one explanation in an NYT article on the limited use of direct injection of chemotherapy into the abdomen, even though there is clear evidence of this being an effective way to extend the life of ovarian cancer victims. The article notes that there has been some increase in the use of this method since the National Cancer Institute made a clinical announcement promoting its merits in 2006, but still only 50 percent of patients receive the treatment.
The piece offers the use of generic drugs, which don’t provide large profit margins as one explanation:
“Dr. Markman [the president of medicine and science at Cancer Treatment Centers of America] said that when a treatment involves a new drug or a new device, manufacturers eagerly offer doctors advice and instructions on its use. But this treatment involves no new drugs or devices, so no one is clamoring to educate doctors about it. They are on their own to learn, and to train their nurses, a commitment that will take time and money.”
This is an interesting, if tragic, example of the ways in which patent monopolies reduce the quality of health care. They push people towards the use of patent protected drugs even in situations where they may not be the most effective form of treatment. This problem is widespread, even if the consequences may not always be as serious.
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The NYT had an article reporting on Secretary of State John Kerry’s promotion of the progress made in reaching a final agreement between the twelve countries on the terms of the Trans-Pacific Partnership (TPP). At one point the piece quotes Kerry:
“No country can expect its economy to grow simply by buying and selling to its own people …. It is just not going to happen. It defies the law of economics. Trade is a job creator and prosperity builder, period.”
Of course no one is proposing that countries not trade, so this is sort of a bizarre counter-factual. It would be bit like responding to opponents of a highway plan by saying that people depend on cars to get around. The assertion doesn’t have anything to do with the merits of the highway, just as the fact that countries trade has nothing to do with the merits of the TPP.
As a practical matter it is entirely possible that the TPP will lead to less trade. The rules that the United States is trying to impose on patents and copyrights and other forms of intellectual property claims will lead to considerably higher prices for the protected items. For example, the hepatitis C drug Sovaldi would sell for less than $1,000 per treatment without protection, but sells in the United States for $84,000 per treatment with patent protection.
As a result of these higher prices for a substantial category of goods, the total volume of trade may actually be lower with the TPP than without it. For this reason, those who want to see more trade may have good reason to oppose the TPP. (The various studies that analyze the impact of the TPP have not incorporated the impact of higher prices due to stronger patent and copyright related protections.)
The NYT had an article reporting on Secretary of State John Kerry’s promotion of the progress made in reaching a final agreement between the twelve countries on the terms of the Trans-Pacific Partnership (TPP). At one point the piece quotes Kerry:
“No country can expect its economy to grow simply by buying and selling to its own people …. It is just not going to happen. It defies the law of economics. Trade is a job creator and prosperity builder, period.”
Of course no one is proposing that countries not trade, so this is sort of a bizarre counter-factual. It would be bit like responding to opponents of a highway plan by saying that people depend on cars to get around. The assertion doesn’t have anything to do with the merits of the highway, just as the fact that countries trade has nothing to do with the merits of the TPP.
As a practical matter it is entirely possible that the TPP will lead to less trade. The rules that the United States is trying to impose on patents and copyrights and other forms of intellectual property claims will lead to considerably higher prices for the protected items. For example, the hepatitis C drug Sovaldi would sell for less than $1,000 per treatment without protection, but sells in the United States for $84,000 per treatment with patent protection.
As a result of these higher prices for a substantial category of goods, the total volume of trade may actually be lower with the TPP than without it. For this reason, those who want to see more trade may have good reason to oppose the TPP. (The various studies that analyze the impact of the TPP have not incorporated the impact of higher prices due to stronger patent and copyright related protections.)
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This is an important piece of information that might have been worth including in a NYT article on premium increase requests by insurers in the state health exchanges. The Commerce Department reports that spending on personal health care services, which accounts for the overwhelming majority of health care spending, increased by 5.4 percent from the second quarter of 2014 to the second quarter of 2015. (The major item missing is prescription drugs, which did have a faster rate of increase.) This means that unless the insurers are facing a very skewed sample or they badly misunderstood the market, they should not need large premium increases to cover their costs.
This is an important piece of information that might have been worth including in a NYT article on premium increase requests by insurers in the state health exchanges. The Commerce Department reports that spending on personal health care services, which accounts for the overwhelming majority of health care spending, increased by 5.4 percent from the second quarter of 2014 to the second quarter of 2015. (The major item missing is prescription drugs, which did have a faster rate of increase.) This means that unless the insurers are facing a very skewed sample or they badly misunderstood the market, they should not need large premium increases to cover their costs.
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Actually, I want to skip over the minimum wage discussion (I’ll come back to it) to address another issue in his column this morning. In his prelude to attacking the $15 an hour minimum wage Samuelson takes a swipe at the economic policies of the 1960s:
“Consider the 1960s. Economists convinced themselves — and the public — that, through government budgets and interest rates, they could minimize recessions and sustain “full employment.” Early success was astounding. By late 1968, unemployment was 3.4 percent. But this was simply an inflationary boom, not a sophisticated advance in economic management. Double-digit price increases soon surfaced. We spent 15 years (and four recessions) combating inflation.”
This is close to incoherent. First, what does it mean to say “we spent 15 years (and four recessions) combating inflation.” If he means that we had people in Washington concerned about inflation, he should probably had said 40 years. Much of the Republican party has been yelling about hyper-inflation even as the inflation rate remains stubbornly below the Fed’s 2.0 percent target.
Does he mean inflation was a problem? Well perhaps it was higher than was desirable for much of the 1970s and the first few years of the 1980s, but that hardly makes it a crisis. After all unemployment has been higher than desirable (as measured by the Congressional Budget Office’s estimate of NAIRU) for most of the last 35 years. Furthermore, the four recessions line also doesn’t make any sense. We had four recessions in the fifteen years before 1960 also.
Furthermore, blaming the inflation on the 1970s on the policies of the 1960s is more than a bit bizarre. The more obvious cultpit would be the quadrupling of world oil prices in 1973-74 when OPEC first flexed its muscles and then again in 1979-1980 when the Iranian revolution shut off oil flows from what was then the world’s largest oil exporter. The sharp reversal of oil prices in the early 1980s, as more oil came on line and demand fell, was a major factor slowing inflation.
In fact, the 1960s were a decade of rapidly rising living standards for large segments of the population. Productivity was growing rapidly and most workers were getting wage gains in line with productivity growth, or close to 2.0 percent annually. That’s more than most workers have seen in the last fifteen years.
This brings us the Samuelson’s “minimum-wage madness.” In the period from 1938 (when the federal minimum wage was first established) to 1968 the minimum wage tracked productivity growth. This means that it not only kept pace with inflation, but minimum wage workers shared in the gains of the economy’s growth. If this pattern had continued, the minimum wage would be $18.42 an hour today.
Undoubtedly there would be large-scale unemployment if we were to try to quickly move to that wage today. Much has changed in the economy over the last 37 years and besides, it would take time for businesses to adjust. However the more modest goal of $12.00 by 2020 is certainly a reasonable target.
As Samuelson notes, there would be somewhat fewer jobs with this wage, but it is important to understand what this means. The jobs affected by the minimum wage tend to be high turnover jobs. People often hold them for only a few months at a time. In this context, fewer jobs will mostly mean that it takes people more time to find a new job when they leave another job or when they first start looking for work. That could mean that low wage workers get to work somewhat fewer hours over the course of a year than they would have liked, but when they do work they take home 65 percent more than if they were working at the $7.25 an hour minimum wage. Most would probably consider this a pretty good deal.
Samuelson is right that the minimum wage levels can be set too high where the loss of jobs more than offsets the benefits of the wage gains. Some cities may be moving into this territory now, but certainly the U.S. economy can support a minimum wage in 2020 that is more than one-third lower relative to productivity than the 1968 minimum wage.
Actually, I want to skip over the minimum wage discussion (I’ll come back to it) to address another issue in his column this morning. In his prelude to attacking the $15 an hour minimum wage Samuelson takes a swipe at the economic policies of the 1960s:
“Consider the 1960s. Economists convinced themselves — and the public — that, through government budgets and interest rates, they could minimize recessions and sustain “full employment.” Early success was astounding. By late 1968, unemployment was 3.4 percent. But this was simply an inflationary boom, not a sophisticated advance in economic management. Double-digit price increases soon surfaced. We spent 15 years (and four recessions) combating inflation.”
This is close to incoherent. First, what does it mean to say “we spent 15 years (and four recessions) combating inflation.” If he means that we had people in Washington concerned about inflation, he should probably had said 40 years. Much of the Republican party has been yelling about hyper-inflation even as the inflation rate remains stubbornly below the Fed’s 2.0 percent target.
Does he mean inflation was a problem? Well perhaps it was higher than was desirable for much of the 1970s and the first few years of the 1980s, but that hardly makes it a crisis. After all unemployment has been higher than desirable (as measured by the Congressional Budget Office’s estimate of NAIRU) for most of the last 35 years. Furthermore, the four recessions line also doesn’t make any sense. We had four recessions in the fifteen years before 1960 also.
Furthermore, blaming the inflation on the 1970s on the policies of the 1960s is more than a bit bizarre. The more obvious cultpit would be the quadrupling of world oil prices in 1973-74 when OPEC first flexed its muscles and then again in 1979-1980 when the Iranian revolution shut off oil flows from what was then the world’s largest oil exporter. The sharp reversal of oil prices in the early 1980s, as more oil came on line and demand fell, was a major factor slowing inflation.
In fact, the 1960s were a decade of rapidly rising living standards for large segments of the population. Productivity was growing rapidly and most workers were getting wage gains in line with productivity growth, or close to 2.0 percent annually. That’s more than most workers have seen in the last fifteen years.
This brings us the Samuelson’s “minimum-wage madness.” In the period from 1938 (when the federal minimum wage was first established) to 1968 the minimum wage tracked productivity growth. This means that it not only kept pace with inflation, but minimum wage workers shared in the gains of the economy’s growth. If this pattern had continued, the minimum wage would be $18.42 an hour today.
Undoubtedly there would be large-scale unemployment if we were to try to quickly move to that wage today. Much has changed in the economy over the last 37 years and besides, it would take time for businesses to adjust. However the more modest goal of $12.00 by 2020 is certainly a reasonable target.
As Samuelson notes, there would be somewhat fewer jobs with this wage, but it is important to understand what this means. The jobs affected by the minimum wage tend to be high turnover jobs. People often hold them for only a few months at a time. In this context, fewer jobs will mostly mean that it takes people more time to find a new job when they leave another job or when they first start looking for work. That could mean that low wage workers get to work somewhat fewer hours over the course of a year than they would have liked, but when they do work they take home 65 percent more than if they were working at the $7.25 an hour minimum wage. Most would probably consider this a pretty good deal.
Samuelson is right that the minimum wage levels can be set too high where the loss of jobs more than offsets the benefits of the wage gains. Some cities may be moving into this territory now, but certainly the U.S. economy can support a minimum wage in 2020 that is more than one-third lower relative to productivity than the 1968 minimum wage.
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