Response to the President’s comparison to European growth rates

At that Manhattan fundraiser last night President Obama repeated one of his more frequent recent economic lines:

Over the last five years, our economy has recovered faster and stronger from the worst financial crisis and economic crisis since the Great Depression, better than any other developed country on Earth.

President Obama’s is drawing on the Economic Report of the President released by his Council of Economic Advisers on Monday. Here is the relevant chart, showing the U.S. at a higher relative GDP level than the major European economies, with 2007 as the starting point for the comparison.

Figure 1-4 -- GDP Per Working Age Population in Crisis Countries R2

Here is the CEA’s accompanying text:

[A]mong the 12 countries that experienced a systemic financial crisis in 2007 and 2008, the United States is one of just two in which output per working-age person has returned to pre-crisis levels. The fact that the United States has been one of the best performing economies in the wake of the crisis supports the view that the full set of policy responses in the United States made a major difference in averting a substantially worse outcome—although it in no way changes the fact that more work remains to be done.

(Technical note: “GDP per working-age population” is weird. I wonder what this same comparison with the more conventional “GDP per capita” looks like.)

This provokes three responses.

1. Apparently we’re supposed to feel good that the U.S. economy has grown more rapidly than the major European economies. But Europe had a second financial crisis during this time period, one which might still not be over! So the U.S. economy, recovering from one severe financial crisis in the past six years, is performing better than the European economies which have suffered two crises during that same time? Talk about setting a low bar.

2. While a relative comparison might in theory be interesting, it’s not very useful. We should care about how the American economy is doing in absolute terms, and relative to the potential of the U.S. economy. Is the U.S. economy growing as fast as it possibly can? How big of an output and employment gap do we have to close? (Answer: we’re about 6 million jobs short.) If Europe were to go into recession the relative U.S. position would be even stronger, but surely that wouldn’t be a good thing, right? We should want the U.S. and Europe both to grow faster, even if that were to mean a smaller relative advantage for the U.S., yes? Greater relative growth doesn’t teach us much that we can use.

3. The conclusion that “We’re growing faster than Europe so therefore our policies worked” makes no sense to me. And I write this as someone who helped enact and implement some of those U.S. policies (including TARP, the money market mutual fund guarantees, and the first tranche of auto loans). I think some of these policies worked as desired and helped end the financial crisis and make the ensuing recession shallower. I differ with Team Obama on how much the fiscal stimulus in particular contributed to those positive growth effects, and whether the additional growth from fiscal stimulus was worth the added debt costs. But whatever conclusion you reach about the growth benefits of any of those policies, you can’t get there from comparing the recent U.S. growth path to that of Europe. There are way too many other things going on, both in the U.S. and especially in Europe with its two crises, for anyone to be able to isolate the effects of just the U.S.-specific policies. If you want to argue that the U.S. policies worked as intended, you need to find another way to make the case.

I think the President’s statement, that the U.S. economy has recovered more rapidly than other major developing economies, is technically correct. But it’s a sad thing to boast about, it’s not a meaningful measure, it’s not the standard we should use, and it doesn’t support the argument that U.S. policies made a major difference in averting a substantially worse outcome.

Response to the President on economic anxiety

Response to the President on economic anxiety

At a Manhattan fundraiser this evening President Obama said the U.S. economy has “bounced back”:

Over the last five years, our economy has recovered faster and stronger from the worst financial crisis and economic crisis since the Great Depression, better than any other developed country on Earth.  And you can take a look at the charts and see that because of the actions we took — because of the Recovery Act, because of the Fed — because of swift, coordinated action, we have bounced back.

We’ve created 8.5 million new jobs over the last five years. We’ve had four years of consecutive job growth as well as economic growth.  We have seen an auto industry that was basically flat-lining rebound in ways that very few people would have anticipated.  The stock market is close to the highest that it’s ever been; close to $10 trillion of wealth has been recovered that was lost.

Presidents always want to be optimistic, but even so this is a very positive framing. He then offers his analysis of why, notwithstanding this good news, Americans are so “anxious and uncertain” about their economic future:

That’s not bad.  And yet, if you talk to folks around the country, there is still enormous anxiety and people feel uncertain about their futures, and more importantly, their children’s futures.  And why is that?  Because although we have rebounded and we are growing and there are all kinds of indicators that tell us that the 21st century can be the American Century just like the 20th was, that growth has been uneven and the beneficiaries of that growth have been uneven.

Set aside for the moment the irony of President Obama saying the problem is increasing income inequality when speaking at a $32,400/plate fundraiser in Manhattan. There’s a better explanation than the increasing income inequality explanation offered by the President. CBO gives it to us:

Employment at the end of 2013 was about 6 million jobs short of where it would be if the unemployment rate had returned to its prerecession level and if the participation rate had risen to the level it would have attained without the current cyclical weakness.

President Obama’s thesis is that the economy has “bounced back,” things are looking pretty good in the aggregate, and people are down because income inequality is increasing and the middle class isn’t benefiting sufficiently from economic growth.

The reality is that the economy is growing, but way too slowly, and only fast enough to roughly keep up with population growth. The economy is still about 6 million jobs short of where it should be if it were firing on all cylinders. Income inequality is increasing, but that trend goes back to the 1970s. It’s not a credible explanation for recent economic pessimism.

President Obama’s diagnosis is wrong in two respects. While the economy is growing slowly, it has not “bounced back.” And people are pessimistic about the economy because there aren’t enough jobs, period. Even worse, President Obama has no proposal to even try to fix that.

(photo credit: Family O’Abé)

Defense v. ObamaCare

DEFENSE SECRETARY HAGEL: To close these gaps, the President’s budget will include an Opportunity, Growth and Security Initiative.  This initiative is a detailed proposal that is part of the President’s budget submission.  It would provide an additional $26 billion for the Defense Department in Fiscal Year 2015.

defense v obamacare v2

Source for $88 B number: Congressional Budget Office, “Insurance Coverage Provisions of the Affordable Care Act–CBO’s February 2014 Baseline,” Table 1 (Net cost of coverage provisions for FY 2015).

Message to Governors: Biden v. Obama

Here is VP Biden, speaking this morning to all Governors:

THE VICE PRESIDENT:  It’s great to see you all.  And I don’t know about you all, I had a great time last night and got a chance to actually do what we should be doing more of — talking without thinking about politics and figuring how we can solve problems.

And here is President Obama, speaking at a dinner last Thursday night to just the Democratic Governors:

THE PRESIDENT: Now, unfortunately, state by state, Republican governors are implementing a different agenda.  They’re pursuing the same top-down, failed economic policies that don’t help Americans get ahead.  They’re paying for it by cutting investments in the middle class, oftentimes doing everything they can to squeeze folks who are bargaining on behalf of workers.  Some of them, their economies have improved in part because the overall economy has improved, and they take credit for it instead of saying that Obama had anything to do with it.  I get that.  There’s nothing wrong with that.  But they’re making it harder for working families to access health insurance.  In some states, they’re making it harder even for Americans to exercise their right to vote.

 

How CBO’s minimum wage analysis changes the debate

How CBO’s minimum wage analysis changes the debate

CBO’s intellectually solid new analysis concludes that the proposal, endorsed by President Obama, to raise the minimum wage to $10.10 an hour by 2016 would result in higher wages for some and destroy jobs for others. CBO’s most important conclusions are that this proposal would:

  • likely result in 500,000 fewer workers, with a range of roughly 0 to 1 million fewer;
  • increase wages for about 16.5 million workers who now have wages between $7.25/hour and $10.10, as well as for some others who now have wages a bit above $10.10.

I think CBO’s analysis is improving the minimum wage debate. President Obama and his allies have been selling this proposal as a free lunch, a policy that will raise pay for some with no costs for anyone: “Give America a raise.” Proponents of raising the minimum wage now must contend with a reputable nonpartisan analysis that the proposal has costs as well as benefits. Congress must decide whether higher wages for some are worth destroying jobs for others. Every responsible news story will now include a sentence like, “At the same time, the Congressional Budget Office projects the President’s proposal would result in lost jobs for half a million low-skill workers.”

I doubt the new numbers will change the minds of many proponents of a higher minimum wage. If you were previously inclined to support an increase, either for policy or political reasons, you can easily use CBO’s analysis to reinforce that conclusion: there are 16-31 times as many winners as losers.

The principal impact will come for a Member of Congress who thinks (knows?) that wage controls are bad policy and who opposes a higher minimum wage on policy grounds but was previously afraid to take the political risk to vote no. CBO has made it easier and more credible for this Member to explain to his or her constituents why he will vote no and why that’s good policy for those trying to enter the workforce. Here’s an example.

Q: Congressman, why do you oppose raising the minimum wage? Don’t you want to give Americans a raise?

A: You’ve heard the saying “There’s no such thing as a free lunch?” The President’s proposal to raise the minimum wage would put between half a million and a million low-skilled people out of work. Sure it would mean higher wages for some, but it would destroy jobs for others, and those others are the lowest wage, lowest skilled workers whom we should want in the workforce. It’s particularly important to have as many low-skill jobs available as employers want to offer so that people can grab the first rung of that ladder of opportunity and start to climb.

I appreciate that others may make a different judgment call, but when our biggest economic problem continues to be that not enough people are working, I want to make it easier for employers to hire people, not harder.

This Congressman or woman (probably a Republican) could have made this argument before CBO’s report, but now he has CBO to back up his numbers and his logic. That helps mostly with the press and also with some voters who are undecided on the merits. In the past Congressional Republicans who opposed a minimum wage increase would typically argue that it “hurts small businesses.” Now they can and should argue that it “will destroy jobs for low skill workers.”

In short, CBO’s analysis makes it easier for a free market member of Congress both to vote against expanding wage controls and to convincingly explain why doing so is motivated by a compassionate goal.

The Obama team had two options in choosing to react to the CBO report. They could have accepted CBO’s analysis, embraced the tradeoff between higher wages and fewer jobs, and used CBO’s numbers to support their judgment call on that tradeoff.

Instead they went the other way, sticking with their disingenuous “free lunch” logic and attacking CBO’s credibility. The path they chose was both intellectually and politically weaker. Now they’re fighting with CBO (rarely is there an upside to that), they’re indirectly highlighting CBO’s conclusions for the press, and they’re fighting what we all learned in first semester microeconomics, that when you raise the price of something people buy less of it. They are also making this not just a dispute about the measure of the costs and benefits, but whether there are any costs to their proposal. They will lose that fight, especially with CBO on the other side.

Team Obama could have argued “We agree with CBO that there are costs to raising the minimum wage, and we think those costs are worth it.” But if they had done this, they would be forced to acknowledge that opponents of raising the minimum wage have a point, that one can want to help poor, low-skilled people and just come to a different conclusion about whether this proposal does so. Had Team Obama granted this point they would have sacrificed their specious claim that opponents of a minimum wage increase hate the poor. This would then become a disagreement about judgment calls on a difficult policy tradeoff (which it is for many), not a battle between the forces of good and evil.

In a market economy prices play the central role in balancing supply and demand. Government should let market forces determine prices. In my view the only case where there’s even theoretical support for government intervention in the price mechanism is when there’s an externality, and even then I’d be cautious to make sure that a well-intentioned but poorly implemented government interference in a market price to address an externality doesn’t do more harm than good.

If you don’t like the results of how a free market allocates resources, then adjust the outcome through explicit after-the-fact transfers, not by interfering in the market mechanism that determines wages or prices. If you want to help the poor more now, expand the Earned Income Tax Credit and use taxpayer dollars to subsidize those lowest on the wage scale rather than forcing an employer to pay them more.

Policies that destroy jobs are bad. Let’s instead maximize the opportunities for people at all levels of education, skills and abilities to find work.

(photo credit: Maryland GovPics)

For every working American

I’ll let President Obama’s words and CBO’s analyses speak for themselves.

THE PRESIDENT: … that has jeopardized middle-class America’s basic bargain — that if you work hard, you have a chance to get ahead.

I believe this is the defining challenge of our time: Making sure our economy works for every working American. It’s why I ran for President. It was at the center of last year’s campaign. It drives everything I do in this office.

Source: President Barack Obama, Remarks by the President on Economic Mobility (The ARC, Washington, DC, December 4, 2013.)


CBO: Once fully implemented in the second half of 2015, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects.

Source: Congressional Budget Office, The Effects of a Minimum-Wage Increase on Employment and Family Income (February 18, 2014) Summary, page 1


CBO: The reduction in CBO’s projections of hours worked represents a decline in the number of full-time-equivalent workers for about 2.0 million in 2017, rising to about 2.5 million in 2024.

Source: Congressional Budget Office, The Budget and Economic Outlook: 2014 to 2024, Appendix C, “The Labor Market Effects of the Affordable Care Act: Updated Estimates” (February 2014) page 117.


CBO: About one-tenth of a percentage point is attributable to the incentives generated in 2013 by extensions of UI benefits (from the usual 26 weeks to as much as 99 weeks), primarily because the program’s rules led some people to remain in the labor force and to continue to search for work in order to remain eligible.

Source: Congressional Budget Office, The Slow Recovery of the Labor Market (February 2014) page 8.


THE PRESIDENT: So our job is to not only get the economy growing but also to reverse these trends and make sure that everybody can succeed. We’ve got to build an economy that works for everybody, not just the fortunate few.  Opportunity for all — that’s the essence of America.  No matter who you are, no matter where you come from, no matter how you start out, if you’re willing to work hard and take responsibility, you can succeed.

Source: President Barack Obama, Remarks by the President on Fuel Efficiency Standards of Medium and Heavy-Duty Vehicles (Safeway Distribution Center, Upper Marlboro, Maryland, February 18, 2014).

Why high government debt is a problem

The Obama Administration is trumpeting that the budget deficit has been cut by half, “the largest four-year reduction since the demobilization from World War II.” Indeed, CBO projects the deficit this year will be 3 percent, maybe dropping a few tenths over the next few years before beginning an inexorable climb driven by demographics, health cost growth, and unsustainable entitlement benefit promises to seniors. If you listen to the President, our only problem is that future one and that’s a few years off. Now that deficits have come down, he says we’re OK for the time being. Deficits around 3 percent will hold debt constant relative to the size of the U.S. economy, and he appears to think that’s fine.

I don’t. Look at this graph from CBO.

deficits-vs-debt

In their recently released annual Economic and Budget Outlook CBO lays out the four costs of higher debt (page 7).

  1. “Federal spending on interest payments will increase substantially as interest rates rise to more typical levels;”
  2. “Because federal borrowing generally reduces national saving, the capital stock and wages will be smaller than if debt was lower;”
  3. “Lawmakers would have less flexibility … to respond to unanticipated challenges;”
  4. “A large debt poses a greater risk of precipitating a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.”

CBO attributes these damaging effects to “high and rising debt,” and doesn’t distinguish between high (where we are now, in the mid 70s as a share of GDP) and future entitlement spending-driven growth. The same logic applies both to today’s high debt and to future even higher debt. These are real and significant costs we are bearing today.

It’s obvious that we can’t allow debt to increase forever as it will begin to do a few years from now but there’s an additional important question that is being largely ignored. Momentarily setting aside future projected debt growth, is debt/GDP in the mid-70s acceptable? Should the goal be to not let the problem get worse, or both to solve the future debt growth and, over time, to reduce debt/GDP to be closer to the historic pre-crisis average?

CBO has done policymakers a great service by explaining these four costs of high and rising debt, and I wish more members of Congress understood them and talked about them. This is important enough that it’s worth the time to understand it well. You can find a slightly expanded version from CBO on pages 9 and 10 here.

I want to expand a bit on CBO’s points. I’ll take them in reverse order and start with the last one, the increased risk of a fiscal crisis. Those on the left who argue that high debt isn’t a problem like to (a) pretend that this increased risk is the only consequence of high debt, and then (b) dispute that the higher risk is significant enough to cause concern. I worry that when the U.S. has doubled its debt/GDP in five years, and when our future debt path looks like it does, that the risk of a fiscal crisis is significant. But this risk is unknowable, and even if we could somehow measure this risk, we can never know when that crisis would occur. My stronger arguments are (1) fiscal crisis risk is undoubtedly higher at a higher debt level; (2) the risk is only going to increase on our current path as debt increases; and (3) there are three other costs to higher debt, so even if you’re not worried about crisis risk, you need to address those other costs.

Moving up the list we get to CBO’s “less flexibility” point. CBO’s projected debt path assumes a (very) slow but basically steady return to macroeconomic health. If we have another recession, terrorist attack, or war, the numbers will be worse, and whatever increased government spending or fiscal stimulus we will then need will be initiated from a much weaker starting point (a much higher level of debt). Because our debt is so high we are poorly prepared to address future risks that require significant short-term deficit spending or tax relief.

Then we get to the cost with the greatest political impact: lower future wages. This is really a cost of the big recent deficits that resulted in today’s higher debt, and an additional cost of projected future deficit growth. The reduced national saving caused by big deficits leads to a smaller capital stock. This lowers productivity and therefore wages. To reduce our public debt government would have to save more (or even, perish the thought, balance the budget), leading to higher national saving, a bigger capital stock, higher productivity and higher future wages. To be politically crass: lower government debt means more shiny new factories with high wage American jobs. I’m willing to sacrifice quite a lot of government spending in exchange for higher future wages.

Finally, the item at the top of CBO’s list is the one most likely to drive Congressional action. Our government debt is now 37 percentage points above its pre-crisis average, but government interest payments are relatively low because interest rates are low because the short-term economy is still weak. When the economy eventually recovers and the government debt rolls over, that additional debt is going to increase government net interest payments by about 1.85 percent of GDP (37% X CBO’s 5% 10-year Treasury rate). Relative to the rest of the federal budget, 1.85% of GDP is enormous. That increased interest cost is as much as the federal government will spend this year on all military personnel (uniformed + civilian) plus all science, space, and technology research plus all spending on the environment, conservation, national parks, and natural resources plus all spending on highways, airports, bridges, and all other transportation infrastructure. Higher debt means higher interest costs which will squeeze out spending for other things that government does. It will also increase pressure to raise taxes even further.

Government debt is twice as large a share of the economy as it was before the financial crisis. In addition to increasing the risk of another catastrophic financial crisis, high government debt squeezes out other functions of government, creates pressure for higher taxes, leaves policymakers less able to respond to future recessions, wars, and terrorist attacks, and lowers future wage growth. This problem will only increase as entitlement spending growth kicks into high gear a few years from now, but simply stabilizing debt/GDP in the mid 70s is an insufficient goal. Don’t rest on your laurels because deficits are smaller than they used to be. High government debt is a big problem.

Response to Senator Cruz on the debt limit

Response to Senator Cruz on the debt limit

On the Mark Levin show Thursday Senator Ted Cruz said:

The single thing that Republican politicians hate and fear the most, and that is when they’re forced to tell the truth. It makes their heads explode. And actually look, this debt ceiling example is a perfect example. The Republican members of the Senate, they all wanted the perfect show vote. So the whole fight was, was every Senator in the Senate going to consent to allow a clean debt ceiling, to allow Barack Obama to get a blank check to raise our debt, while doing nothing about spending, with just 51 votes? Now in order for that to happen, all 100 Senators have to consent to it. Now there were an awful lot of Republican Senators who thought that was perfect, cause then they could all vote no, and go home and tell their constituents, “See, I voted no, I did the right thing.” But it only happens if they allow it to happen. And all I did was very simple, I said, listen, when I told Texans when I ran for office, that I’m going to fight with every ounce of strength I have to try to help pull this country back from the fiscal and economic cliff, I wasn’t lying to them, I meant it. So if your ask of me is will I consent to let Harry Reid to do this on 51 votes, the answer is no. I will vote no at every stage against it, because it’s irresponsible, because it’s wrong, because we’re bankrupting our children. And Republicans’ heads exploded, because it meant … Look, make no mistake about it. This was their desired outcome. An awful lot of Republicans wanted exactly what Barack Obama wanted, exactly what Nancy Pelosi wanted, exactly what Harry Reid wanted, which is to raise the debt ceiling, but they wanted to be able to tell what they view as their foolish, gullible constituents back home they didn’t do it, and they’re made because by refusing to consent to that they had to come out in the open and admit what they’re doing and nothing upsets them more.

In one respect I agree with Senator Cruz. Senate Republican Leaders did “want” the clean debt limit bill to pass the Senate and they wanted the political cover of voting no. Senator Cruz exposed this through his objection, forcing not just Senators McConnell and Cornyn, but a bunch of others as well, to vote aye on cloture so that they could get to a final passage vote where the bill passed but all Republicans voted no.

But they were right to vote aye on cloture. Senator Cruz skips over why the others wanted this outcome: the only other legislative alternative was not increasing the debt limit. At that point no one, including Senator Cruz, had an alternative strategy to pass a debt limit bill that cut spending, or repealed or modified ObamaCare, or made any other good policy change.

If you want to defeat a bad bill you need both a better policy and a viable legislative strategy to achieve it. In some cases that legislative strategy could be blocking enactment of any bill, but that would not have worked here. In this case I believe strongly that not raising the debt limit is far worse than enacting a clean debt limit increase.

This then provokes a series of questions for Senator Cruz.

Q1: “Do you agree that not raising the debt limit is a worse policy outcome than enacting a clean debt limit increase?”

If the answer is yes, then:

Q2: “What was your alternative legislative strategy for enacting a debt limit increase that also contained some other reform?”

If the answer is “I didn’t have one,” then:

Q3: “Weren’t the Senate Republicans who supported cloture therefore doing the right thing, even at some political cost to themselves?”

It’s easy for any one person to design a bill that is (debt limit increase + X), where X is a good fiscal or other policy reform. It’s much harder to get a lot of votes for any particular such bill. House Republican leaders were unable to pass such a bill in the House with any X, good or not-so-good.

And once the House had passed the only debt limit increase it could pass, Senate Republicans were stuck in a take-it-or-leave-it position. Informally we say the House jammed Senate Republicans: Senate Rs were forced to choose between two outcomes, both of which they hated. Had House Republicans been able to pass a debt limit increase with an additional reform attached, then Senate Republicans would have had available another, less worse, option.

Last year I proposed a legislative strategy (including in the Wall Street Journal) to get a small policy concession along with a debt limit increase. The House did a version of this strategy and, as a result, successfully pressured a Democratic Senate into passing a budget resolution. I pushed a variant of this strategy again in September, but this time House Republicans couldn’t execute because they didn’t have the votes.

As was the case in last fall’s CR/shutdown battle, this week Senator Cruz did not have a legislative strategy with an endgame. He neither presented an alternative strategy to his colleagues nor pursued one as a lone wolf on the Senate floor. In both cases he simply made a single aggressive tactical legislative move that didn’t point toward an alternative outcome, then accused his colleagues of being cowardly, unprincipled, and deceptive for not following his lead into a blind canyon.

Some will say, “At least Senator Cruz was willing to fight!” Unfortunately, this argument always stops there, and never explains how a willingness to fight without a strategy translates into a policy win. Legislative conflict is not a schoolyard tussle in which the bigger or tougher guy usually wins. It’s not a Hollywood movie in which the hero triumphs simply because he is virtuous. Legislative conflict is more like chess in that the battle is waged according to strict rules. Those who favor bigger government know how to play chess and some of them are quite good at it. Many of those who favor smaller government now seek praise for tipping over the board or eating the pieces. While momentary rebellion is flashy and can feel good for a moment, it’s not a strategy to win, not how you change policy. And the goal is to change policy for the better, not just to build a bigger mailing list, right?

It’s frustrating because I agree with many of Senator Cruz’ substantive policy goals. I want a smaller government and a larger private sector, less government spending, and less debt. I want to replace ObamaCare with consumer-driven health policies. I am frustrated by the President’s economic policies, by those who twist policy to suit their self interests, and by politicians in both parties who facilitate that behavior.

But having the right policy goal isn’t enough to succeed, to change policy. You also need a legislative strategy with an endgame and some chance of success. As best I can tell Senator Cruz didn’t have one last fall and he didn’t have one earlier this week. His tactical legislative moves, then and now, need to be considered in that context. The same is true for his public comments surrounding those legislative moves. His objection this week served only to expose that Republicans were boxed in, forced to choose between facilitating passage of a bill they didn’t like and an even worse policy outcome. And they were boxed in because they could not build sufficient support for a unified legislative strategy that had a chance of success.

I hope that in the future Senator Cruz can use his intellect, political savvy, and external base of support to produce effective strategies that produce the good policy results we both support, instead of using his prodigious skills and resources only to assign blame for the bad outcomes.

Response to the President on minimum wage

Response to the President on minimum wage

In his weekly address, Calling on Congress to Raise the Minimum Wage, President Obama said:

And this week, I took action to lift more workers’ wages by requiring federal contractors to pay their employees a fair wage of at least $10.10 an hour. … This will be good for contractors, for taxpayers, and for America’s bottom line.

I see how a higher mandated minimum wage benefits low wage workers working at federal contractors. I don’t see how increasing labor costs is good for the contractors that employ those workers or how it’s good for the taxpayers who pay those federal contracts and must now spend more for a given amount of labor.

The President further says:

These are workers who serve our troops’ meals, wash their dishes, care for our veterans …

OK, I agree that employees of some federal contractors do things that I think are good. But raising their wages means that any given amount of tax dollars spent on troops meals and veterans’ care will buy fewer hours of labor delivering those services. While those who serve the food and give the care (and still have their jobs) are better off, those eating the meals and receiving the care are worse off because fewer hours are being spent delivering those services, right? The only way to make both the workers delivering the care and the veterans receiving that care better off, after a wage increase, is for taxpayers to pay more.

In other places the Administration cites research that workers who are paid higher wages have more job satisfaction, do better work, and quit less frequently. The logic is that higher paid workers are happier workers, and happier workers will move the food line faster and deliver better health care to veterans. That seems reasonable, but employers, including federal contractors, have economic incentives to take those benefits into account when they decide how much to pay their employees. As employers try to get the most output for each dollar they spend on labor costs, they are (if they want to be competitive) balancing the morale, productivity, and turnover benefits of paying higher wages with the costs of hiring fewer higher-wage workers for fewer hours. What President Obama did was instead substitute his judgment for where that balance point should be set, and we know he has to be getting it wrong in a lot of cases because that balance will differ from one employer to the next.

The President says:

The opportunity agenda I’ve laid out is built on more new jobs that pay good wages … Right now, there’s a bill in Congress that would boost America’s minimum wage to $10.10 an hour. … If they don’t support raising the federal minimum wage to ten-ten an hour, ask them “why not?”

I oppose any increase in the minimum wage because it lets government decide to sacrifice more jobs for some, to get higher wages for others. I don’t think government should make that call.

The higher the government-mandated minimum wage, the fewer jobs and hours of labor employers will buy. Those on the Left don’t dispute this, they instead respond, “But it’s not a big cut in jobs and hours.” While I think many of the advocates for a higher minimum wage cherry-pick their studies, I also don’t think the government should force any cut in jobs and hours, even a small one. I therefore think the market should determine this trade-off, not politicians running for elected office and courting the support of organized labor.

President Obama is for higher wages for some, with fewer jobs and hours for others, with both determined by politicians. I’m for more jobs and hours, with wages determined by competition in a healthy and growing market economy.

The best ways to help low skill workers are (1) to help them raise their skills over time through education and job training so they are worth more to potential employers; (2) to have government policies that encourage strong short-term and long-term economic growth so that employers want to hire more people and bid wages up in a competitive and flexible labor market; and (3) to reduce government barriers, like high implicit effective tax rates, that make it harder for these workers and their families to reach the middle class. If those policies don’t raise their incomes enough in the short run, then the way to help them is through explicit redistribution policies like the earned income tax credit and food stamps, not by substituting campaigning politicians’ judgment for that of the market.

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