There is currently a lively debate happening in Washington about the proposed $1.9 trillion that Joe Biden has proposed spending on COVID relief in his new bill. This discourse has devolved into a tedious debate: are the Democrats violating norms by passing the bill on a strict party-line vote? People are especially concerned because part of Joe Biden’s campaign centered on unity. Between his executive orders and this proposed bill, people are pointing out somewhat that these are not unifying actions.
This is a reasonable debate to have, but I want to avoid getting too deep into that argument because I have already written about how eroding norms tend to escalate. It's a very tedious subject. On the one hand, up to this point, every COVID relief bill so far has been bi-partisan, so passing on a party-line vote does depart from that norm. On the other hand, when Trump took office in 2017, the GOP used the opportunity to pass a strict party-line bill (the Trump tax cut) and attempted to pass another (the Obamacare repeal bill), which ultimately failed because several GOP senators thought they were going too far. From what I have seen, GOP operatives are focused on the “norms-departing” point while Democrats are focused on the “this is exactly what the GOP did” point.
However, what is “allowed” for a political party is often not what is best for the country. Biden ran on unity, had an inauguration focused on unity, and I think he should take seriously the importance of making substantive gestures towards unity, not just symbolic ones. Our system was designed for bi-partisanship -- if your goal is to build enduring policy. If you try to solve big problems on narrow party-line votes, you should not be surprised if the next administration and Congress reverse all that.
I start from the premise that the Biden bill's high-level goals are to 1) help people who are still suffering during COVID and 2) create long-term policies that will help working-class families who COVID has uniquely impacted. I want to make a case that Biden’s bill would actually be better at achieving these goals if the bill took conservative ideas seriously.
To be perfectly honest, I have no idea what the GOP's current economic policy is post-Donald Trump. I think it will take quite some time for the GOP to figure it out. But this is clear: what people in the conservative intellectual movement (at least those I read and listen to) have had to say about the relief plan. If Democrats took these ideas seriously by focusing on the points of intellectual consensus across ideology rather than simply focusing on the “most progressive” ideas, they would have a better bill.
I will lay out three proposals, two in this blog and another one tomorrow:
Proposal 1: Better Targeted Relief
I briefly talked earlier this week about how we should be thinking about debts and deficits in this era: there is a great deal of uncertainty about when and if the debt will start to be a serious issue for the US economy. The lesson I take from that is that we need to have an eye toward fiscal sustainability. I think Ed Dolan lays out a good framework which he borrows from environmental sustainability:
we could define sustainable fiscal policy as a set of rules for taxes, expenditures, budget balances, and liabilities that allows the present generation to meet its economic needs without compromising the ability of future generations to do the same.
This means keeping in tension two ideas:
Not being so fearful of debt that we eschew important opportunities to invest in our future.
Keeping in mind that constraints on the budget still exist, prioritizing goals for spending is always essential.
I believe that the pandemic necessitates a government safety net for those who are in need. I also believe even more strongly that we should be spending money on public health to get the economy back up and running. These are both investments in our future: we know that even short-term desperate need has long-term effects on people’s health and economic ability. We know that investing in public health will help our economy get back to normal more quickly.
To achieve these goals, funds are best spent on vaccine distribution, COVID testing to allow schools to re-open, unemployment insurance extension, housing subsidies, and relief to parents whose children are not in school. Biden’s plan funds many of these things, and to the degree that it does, I support it. However, the bill also contains many things (roughly 33-50% by my math) that are not as clearly essential.
One discretionary item is aid to state and local governments. Now, Democrats have a point that some states and localities have suffered from COVID’s impact on tax receipts. While in hindsight, we can say that states should have saved in the good times of 2015-2020 (ironically, California did well at this time under Jerry Brown). But we cannot change that now. One can make a case that if we do not help cities out, we risk seeing essential public services like public transit programs entering a death spiral where decreased funding leads to decreased frequency of service. Those familiar with public transit will note that when you reduce the frequency of service, you also reduce ridership, and on down the spiral. But that said, the GOP also has a case to make that the problems of state and local governments stem from deficient fiscal planning, an issue that has plagued them for years, in both red and blue states. So there is a strong case for making sure that any funding includes conditions that will ensure that state and local governments take care of long-standing issues like pension programs becoming insolvent. Otherwise, you risk creating the moral hazard of states and cities perpetually expecting bailouts every time there is a bad fiscal year. I also support creating mechanisms that tie school funding to actually opening schools in person (the reason schools are asking for the funding).
The place where I find myself most out of step with the bill is the idea of giving everyone a check for $1400. This has become very popular with “populists” across the political spectrum: Left populists like AOC, Right populists like Josh Hawley, and even some Libertarians. Their three arguments for these checks seem to be:
Universal stimulus checks are an effective way to stimulate the economy.
Some people are going to fall through the cracks of the other relief measures.
Universal welfare state programs, like direct checks that everyone partakes in, are very popular.
To address #1: I agree 100% that direct checks are an effective stimulus in theory because they can be implemented quickly and fairly (everyone gets a check!). I thought the checks were a good idea last April when Congress had no idea what was happening with COVID or the economic effects of COVID. However, now we know what categories of people are suffering (unemployed, parents with kids at home, etc.). We also know that stimulating the economy RIGHT NOW will not facilitate the economy that is shut down because the virus is still (rightfully) scaring people. Economist Raj Chetty has found the last round of stimulus checks were wholly ineffective at getting higher-income Americans to spend money:
To address #2: I think it is fair to argue that people are falling through the cracks of current relief measures (I have seen in it my community!), but I would love to see a case for who these people are categorical. Maybe it's people who get sick and cannot work: you could make a case for stipends/subsidies for paid sick leave. Maybe it is essential workers exposed to the virus at work, or maybe it is parents who are working reduced hours because their kid is not in school. If so, this is a case for categorical programs for these types of people! Policy people should be encouraging Congress to be more creative in addressing concrete problems people face.
I suspect reason #3 is the real reason the checks are going to get included in the final bill, as polling shows 62% of Americans want a $1400 check:
But spending 500 billion dollars on sending out money to almost everyone simply because people like money smacks of a toxic kind of populism. It is almost impossible to overstate the opportunity cost of 500 billion dollars: the total cost of the EITC (one of our most significant social safety net programs) was $70 billion in 2019. You could double the size of the EITC for 7 years for the cost of these checks!!! I understand that average voters do not understand these trade-offs, but we should expect our elected officials to understand this! Expect officials should not simply be driven by what ideas are popular but what ideas are prudent. It baffles me that many on the left have made this kind of untargeted populist spending their rallying cry instead of doing more to help low-income people who have obvious and present needs!
Again, I am not a deficit hawk: I think the government should be spending money in a time of crisis. But I think it is also misguided to spend money on things that you cannot demonstrate will help those in need or help our economy in the long-run. I may be missing something here, but until I am shown that I am, that is my view.
Proposal #2 Less Focus on the Minimum Wage
Part of Biden’s relief plan is the implementation of a $15/hour minimum wage. Proponents of the higher minimum wage argue it is one of the most effective ways to get more pay in the hands of working-class people in the US, which is a goal I very much support. But it is an incredibly divisive issue: if you are a psychopath who likes twitter fights, the quickest way to get “Economics Twitter” angry is to post a strong take about the minimum wage:
Traditionally, economists have been very skeptical of minimum wages for their price distorting effects. Specifically, economic theory would predict that raising the minimum wage would reduce the number of low-wage jobs (and hours worked by low-wage workers). But the last 30 years have seen the econ world (especially center-left economists) soften on the minimum wage. This is best illustrated by the New York Times Editorial Board, which in 1987 said there should be no minimum wage, by 2019 had drastically changed their mind and was calling for a $15/hour federal minimum wage.
Part of this sea change is because empirical studies of the minimum wage have been far less clear about the effects of minimum wages on low-income workers' jobs than traditional economic theory. Some studies show a negative impact; some do not. Some of this is also that there has been a push by activists to show how popular the idea of the $15 minimum wage is to most voters. Last November, Florida elected Donald Trump (he won by 3 points) AND approved a $15 minimum wage (which won by 20 points). And while it is difficult to discern what is the fruit of activism and what is the fruit of rigorous empirical study, economists are indeed pretty divided on the effects of raising the minimum wage. A UChicago survey of economists found that the majority still thought it would reduce hours worked by low-income workers, by only by a very narrow margin, with many uncertain:
I could write a much longer post just on this subject, but I want to keep this brief, so I will make a couple of points here that I may expound on at a later date:
First, the vast majority of economists (even those who agree with a $15 minimum wage as policy) believe that there will be SOME significant negative impact of a higher minimum wage. The trick is realizing that not all of the effects are likely to be seen directly on jobs:
Rather many of the following unintended consequences are likely to happen on some small margin in response to a higher minimum wage:
The number of low wage jobs/hours will be cut
Worker benefits will be cut
Small businesses will be forced to close
Prices for consumers will go up
Working conditions and customer service will go down
Machines will replace human labor (think of ordering through an app or kiosk)
Underground markets emerge where businesses pay workers under the table
Taken together, that may not sound like much, but it does constitute a negative effect. The nonpartisan Congressional Budget Office, whose job is to try to model the economic effects of legislation, ruled this week that raising the minimum wage would raise 0.9 million people out of poverty but that employment would go down by 1.4 million. The CBO models also show that everyday goods prices would go up across the board, which disparately impacts working-class families. Could the CBO be wrong? Definitely! But we should take seriously this potential that raising the minimum wage will have unintended consequences.
Second, to the degree that unintended consequences impact workers, they will probably be the workers most marginalized in society. We have seen historically how regulation of wage rates in the past have disproportionately impacted Black men, who face more barriers in the labor market:
Everyone agrees that a job paying $15/hour is better than $11/hour. But a job paying $11/hour is also much better than no job at all. What is the more important tradeoff here?
Third, during a pandemic would be the worst time to try a minimum wage hike. Common sense says that if those currently unemployed are having trouble finding jobs at the current minimum wage, they are much less likely to take much longer to find a higher minimum wage job. Do we want to risk extending the long-term unemployment of those currently out of the labor force? If you believe in a higher minimum wage, the best time to do it is when the economy is “running hot” and businesses are tripping over themselves to hire new workers.
Lastly, a 15 dollar minimum wage is already law in many states and big cities. But the FEDERAL minimum wage is meant to be a kind of “floor of floors,” only impacting the states with low or no minimum wage. These laws tend to hurt poor and rural states with low costs of living:
For instance, In Mississippi, calculations of a living wage (aka a wage you can support a family on) are about ~$9/hour. Mississippi’s MEDIAN wage is only about $15/hour. A minimum wage of $15 would disrupt the wage structure of the whole working class in Mississippi. Again, to the degree that there will be unintended consequences, they will be felt very disproportionately in places like Mississippi (not to mention the impact in Puerto Rico if it was to become a state).
All of that said, I would not take it upon myself to die on the hill of the minimum wage. I do not take lightly that a $15 minimum wage will lift some families out of poverty, which I think should be one of our highest policy priorities as we rebuild after COVID. I suspect that the minimum wage hikes that LA has had have had some unintended consequences, but they have also been popular with my working-class neighbors. And in the booming pre-COVID economy, many jobs were being created and filled by folks who had struggled to find work. So if there is a minimum wage hike in Biden’s plan, I don’t think it will doom the whole plan to failure. But I think the GOP (and moderate Democrats!) should push back and force a debate on whether this is the best way to help the working class during a pandemic. This would be good even if the result compromises at a federal wage at something like $10 or $11/hour. But it would require them to make the case that the minimum wage is ultimately the triumph of easy policy-making over substantive policymaking.
Alternatives to the Minimum Wage
I would argue that a better idea for helping working people during COVID times is simply implementing a hazard pay incentive structure. I think this would have been a much better way to help working-class people who were forced to work in hazardous jobs through this pandemic. Mitt Romney had introduced a plan last year that would have subsidized pay raises for essential workers 3 to 1 during the pandemic, meaning a grocery clerk making $12/hour would get bumped up to $16, $3 of which comes from the government, and $1 from the business. While this would be very expensive, it would also be a much better use of funds than the PPP program for small businesses has ended up being, and better targeted towards working-class folks than the $1400 checks would be.
Now, looking at the longer-term, I think the better framework for raising the pay of low-income workers is likely found in three broad policy ideas:
1) Targeting full-employment with monetary policy: part of why workers were doing so well pre-COVID because the federal reserve under Jay Powell had kept interest rates lower than many people thought they would. Traditionally, the Fed has made its monetary policy decisions keeping in mind the balance of both include more people in the labor force while also keeping inflation low. But we saw in 2018-2020 that even though the fed allowed unemployment to get lower and lower, inflation did not rise meaningfully. The growing economy and a shrinking unemployment rate gave workers more power and raised wages significantly for non-college graduates. Companies were so eager to recruit quality workers that Taco Bell was offering $100,000 salaries to its store managers as a way to try to entice talented individuals. This has become a popular position both with pro-worker economists, both on the left and the right. Of course, there are limits to this: inflation should still be a concern, especially if the government is engaging in the level of deficit spending proposed in Biden’s plan. But if done with care, monetary policy is a tool that can allow the competitive labor market to give workers power rather than government mandate.
2) Expanding wage subsidies. We already have a wage subsidy program, the EITC, that subsidizes low-wage work. The EITC is not a perfect program in its design and accessibility; there are reasons to think that excessive wage subsidies will incentivize companies to hire more low-wage workers, which has its own unintended consequences. But the existing EITC does do a great job of raising millions of people above the poverty line and reducing poverty for many others. We could do more to expand it, to increase the rate at which work pays, and help working-class families by subsidizing their paycheck
3) Investing in Job-Training and Labor Mobility: We know that helping workers move into higher-skilled jobs, either by moving up the skill ladder or moving to access more dynamic labor markets, can make a huge difference in their job prospects. At the moment, our existing job training programs are clunky, too hard for workers to understand, and hard to find funding for. Compare this to apply to college, which is a process that all-but guarantees lower-income residents funding through pell grants and subsidized loans. One proposal is to embracing something that looks like Ron Wyden’s ELEVATE Act from two years ago:
Wyden’s plan would make it easier to fund job-training, for workers to start their own business, or to relocate to a city or state with a better labor market. While I think the Wyden bill's specifics can be debated, its general framework would be a step in the right direction.
I believe that if the GOP wanted to offer constructive criticism of the minimum wage while maintaining the goal of helping workers in the long-run, these three policies would be a much more impactful way of going about that goal, and I suspect many Democrats would agree.
Look out for Part 2: the merits of a Bi-Partisan Plan for Families