Thoughts on Manzi Argument

Posted by Deepish Thinker on November 18, 2013
Economics, US Politics

Links to this, not entirely convincing, argument against negative income taxes by Jim Manzi have shown up in a couple of places lately (Tyler Cowen and Megan McArdle).  There are several aspects of the post that are somewhat questionable.  The one that I find most interesting is that we can achieve the same goals by simply recycling policy from the 90s.

“the only method that has consistently demonstrated in the U.S. that it can humanely get people off welfare and into jobs was the workfare movement of the 1990s (which it did without increasing government costs, by the way).”

1990’s reform was indeed fairly effective at reducing welfare dependency.  However, context is important.  In times of economic prosperity and relatively abundant job opportunities, limiting welfare eligibility can act as the spur that pushes people into active participation in the labor market.  In tougher times it becomes somewhat questionable policy.  In 2012 President Obama granted waivers to states allowing them breach limits specified in the legislation.  Many Republicans were harshly critical of this move.  However, the lousy economy meant there was no realistic way for states to meet the targets.

Fundamentally, workfare operates on the assumption that employment opportunities are available if people are willing to take them.

This need not always be the case.

Employers are willing to take on an additional worker if a couple of things are true.  Firstly, the value of the worker’s output must exceed the cost of employment.  Secondly, the cost of employment must be less than plausible alternatives, primarily outsourcing and automation.

We live in a world where two things are inarguably true.  The cost of employing people is going up.  Obamacare is just the latest in a long line of policy initiatives which make employing people more expensive.  Given the current Liberal enthusiasm for jacking up the minimum wage, it is almost certainly not going to be the last.

Meanwhile, the cost of alternatives to employing people has collapsed.  It is clichéd to point out that globalization and automation have reduced low skill employment.  However, with regard to automation, we may be closer to the beginning than the end.  Consider, for example, how many people with high school educations make a living driving.  Then consider how close we are to a world in which most of those drivers won’t be needed.

This is not an argument that low skill employment must inevitably disappear.  In a more economically rational world the price of low skill labor would fall to the point where employment opportunities would reappear – Say’s Law to the rescue.  But this is not an economically rationale world, it’s a political one where the government mandates a floor price (minimum wage + payroll taxes + insurance + unemployment + ……) for low skill labor.

In this world mandating that low skill people find work isn’t going to achieve very much.  They can’t legally accept employment at a rate that sane employers would be willing to pay.  Or, in other words, it isn’t legal for low skill wages to fall to the market clearing rate.

It’s tempting to suggest that we should simply get rid of the minimum wage laws, payroll taxes, insurance requirements and regulations that drive up the cost of employing people.  However, as politically viable policy this pretty much a non-starter.   Even if Republicans had the House, the Whitehouse and a filibuster proof majority in the Senate can you imagine them repealing the minimum wage and replacing it with nothing?

For political (and humanitarian) reasons, doing something about employment costs requires that we also have an alternative way of maintaining the total income of low skill people.

Considered in this light, a well-designed Negative Income Tax solves two problems.  It offers a better alternative to the horrendous existing tangle of welfare programs that supports people while preserving the incentive to work, which would be the usual argument made in its favor.  In addition, it offers a possible solution to one of the more difficult policy challenges we face.  How do you keep low skill people employed in a labor market which generates less and less demand for low skill labor at the current price?