The logical floor

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http://www.economist.com/news/leaders/21591593-moderate-minimum-wages-do-more-good-harm-they-should-be-set-technocrats-not

Minimum wages

The logical floor

Moderate minimum wages do more good than harm. They should be set by technocrats not politicians

Dec 14th 2013 | From the print edition 

[1] ON BOTH sides of the Atlantic politicians are warming to the idea that the lowest-paid can be helped by mandating higher wages. Barack Obama wants to raise America’s federal minimum wage by 40% from $7.25 to $10.10 an hour, and more than three-quarters of Americans support the idea (see article). In Germany, one of the few big rich-world countries still without a national wage floor, the incoming coalition government has just agreed on an across-the-board hourly minimum of ?8.50 ($11.50) from 2015. In Britain, which has had a minimum wage since 1999, the opposition Labour Party is keen to cajole firms into “voluntarily” paying higher “living wages”.

[2] For free-market types, including The Economist, fiddling with wages by fiat sets off alarm bells. In a competitive market anything that artificially raises the price of labour will curb demand for it, and the first to lose their jobs will be the least skilled—the people intervention is supposed to help. That is why Milton Friedman called minimum wages a form of discrimination against the low-skilled; and it is why he saw topping up the incomes of the working poor with public subsidies as a far more sensible means of alleviating poverty.

[3] Scepticism about the merits of minimum wages remains this newspaper’s starting-point. But as income inequality widens and workers’ share of national income shrinks, the case for action to help the low-paid grows. Addressing the problem through subsidies for the working poor is harder in an era of austerity, when there are many other pressing claims on national coffers. Other policy options, such as confiscatory taxes, are unattractive.

[4] Nor is a moderate minimum wage as undesirable as neoclassical purists suggest. Unlike those in textbooks, real labour markets are not perfectly competitive. Since workers who want to change jobs face costs and risks, employers may be able to set pay below its market-clearing rate. A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs.

French lessons

[5] Empirical evidence supports that argument. In flexible economies a low minimum wage seems to have little, if any, depressing effect on employment. America’s federal minimum wage, at 38% of median income, is one of the rich world’s lowest. Some studies find no harm to employment from federal or state minimum wages, others see a small one, but none finds any serious damage. Britain’s minimum wage, at around 47% of median income, with a lower rate for young people, also does not seem to have pushed many people out of work.

[6] High minimum wages, however, particularly in rigid labour markets, do appear to hit employment. France has the rich world’s highest wage floor, at more than 60% of the median for adults and a far bigger fraction of the typical wage for the young. This helps explain why France also has shockingly high rates of youth unemployment: 26% for 15- to 24-year-olds.

[7] Theory and practice suggest two lessons for governments contemplating setting or changing minimum wages. The first is to ensure that the level is pretty low—say, less than 50% of the median, with lower levels for less productive people such as the young and long-term unemployed. Germany risks breaking this rule. Its proposed level is, by one calculation, 62% of the median wage. One in six German workers is paid less than that, suggesting that jobs will be lost, especially in the less productive east of the country. Similarly the “living wage” which campaigners are calling for in Britain is 20% higher than the minimum wage. That could hit employment. Though America’s proposed increase is huge, the minimum wage would still be only about 50% of the median.

[8] A second lesson is that politicians should give the power to set minimum wages to technocrats. In Britain, the floor is adjusted annually on the advice of economists and statisticians in the Low Pay Commission; it has generally advanced gradually. In America, the federal floor is set by politicians and adjusted irregularly in huge increments. That does no favours to American workers or their employers.

[9] Finally, governments should remember that minimum wages are a palliative. They should not distract attention from more fundamental causes of low wages—such as a lack of education and skills—and the efforts to address them.

From the print edition: Leaders

http://www.economist.com/news/leaders/21590476-how-barack-obama-can-get-least-some-his-credibility-back-man-who-used-walk-water

America and the world

The man who used to walk on water

How Barack Obama can get at least some of his credibility back

Nov 23rd 2013 | From the print edition 

AN AMERICAN president’s most important power is not the veto pen or the ability to launch missiles. It is the bully pulpit. When a president speaks, the world listens. That is why Barack Obama’s credibility matters. If people do not believe what he says, his power to shape events withers. And recent events have seriously shaken people’s belief in Mr Obama. At home, the chaos of his health reform has made it harder for him to get anything else done. Abroad, he is seen as weak and disengaged, to the frustration of America’s allies.

Not all the barbs aimed at Mr Obama are fair. Our special report this week on American foreign policy notes that he inherited two miserable wars. He began his first term during the worst recession in 80 years. And the Republicans who shut down parts of the federal government last month and flirted recklessly with default bear much of the blame for Washington’s disarray. But the excuse that it is all someone else’s fault is wearing thin. Under Mr Obama, America seems rudderless and its power is being squandered. A more engaged president would handle the Republicans—and the rest of the world—with more skill.

An exchange you can believe in

The debacle of Obamacare has gravely weakened the president (see article). In the days before October 1st, when the online health-insurance exchange opened, he seemed blithely unaware that anything was amiss. Using it would be “real simple”, he told voters in Maryland on September 26th; it would work the “same way you shop for a TV on Amazon”. Alas, it did not. Millions tried to log on; few succeeded. The website was never properly tested, it transpires. Although this was Mr Obama’s most important domestic reform, no one was really in charge. Crucial specifications were changed at the last moment. Contractors warned that the website was not ready, but the message never reached the Oval Office. Big government IT projects often go awry, but rarely as spectacularly as this.

The Economist supported Obamacare when it passed Congress in 2010. We worried that the law was too complex (see article) and did too little to curb medical inflation, but it extended health insurance to the millions of Americans who lack it. The basic idea is sound: everyone must have insurance or pay a penalty. The cash-strapped receive big subsidies, and insurers are barred from charging more to those who are already sick. A more modest version of this reform works quite well in Massachusetts. A man with little interest in details and a disdain for business, Mr Obama tried to impose a gigantic change on the whole country all at once and far too casually.

The longer it takes to fix the website, the greater the chance that Obamacare will fail. Insurers have set their premiums on the assumption that lots of young, healthy people would be compelled to buy their policies. But if it takes dozens of attempts to sign up, the people who do so will be disproportionately the sick and desperate. Insurers could be stuck with a far more expensive pool of customers than they were expecting, and could have no choice but to raise prices next year. That would make Obamacare even less attractive to the young “invincibles” it needs to stay afloat.

To make matters worse, this sorry saga has caused American voters to doubt Mr Obama’s honesty. Time after time, when selling his reform, he told voters that if they liked their health insurance, they could “keep that insurance. Period. End of story.” Policy wonks knew this was untrue. Mr Obama’s number-crunchers quietly predicted that up to two-thirds of people with individual policies would be forced to change them, since the law would make many bare-bones plans illegal. But ordinary Americans took their president at his word; many were furious to learn last month that their old policies would be cancelled.

The poisonous politics of health care point to another common complaint about Mr Obama: that he gives great speeches but fails to build relationships. Abroad, he has cool relations with foreign heads of government. The leaders of allies such as Israel and Saudi Arabia scorn him. Europeans grumble that they are ignored when they want to be heard and spied on when they want to be left alone. Latin Americans feel neglected. Mr Obama’s “pivot” to Asia has made China feel threatened, without reassuring other Asians that America will be there in a crisis. Many doubt Mr Obama’s word—remember his “red line” over the use of chemical weapons in Syria?—and lament his inability to get things done.

At home, he seldom schmoozes with his political opponents—or even with his own side. Past presidents put in far more effort to charm and bully lawmakers, business moguls and anyone who could help them. Lyndon Johnson was famous for blackmailing congressmen to do the right thing, which is a hard art to practise if you barely know them. Mr Obama remains aloof—he has no regular breakfast or lunch even with the main Democrats in Congress. You cannot slap backs and twist arms if you are not in the same room.

Forget the Nobel halo—and roll up your sleeves

There is a personal tragedy in this: a talented man who too often does not follow through. As Bill Clinton is reputed to have said, Mr Obama got all the hard stuff right, “but didn’t do the easy stuff at all”. Assuming that he still has the stomach for the fight, what can Mr Obama do to win back that lost credibility?

At home, the priority is simply to get his health exchange fixed. His announcement last week that people who have lost their old insurance will be allowed to get it back is a sham: he has given insurers neither the time nor the incentive to recreate the policies he previously ordered them to ditch. He should stop making empty promises, get rid of the aides who filter out bad news and roll up his sleeves.

Can he get any more done? Immigration reform is still just possible. He now says he is open to tackling it piecemeal, rather than in a comprehensive bill, which raises the chance that it will happen. An even bigger prize would be a long-term fix for America’s finances, with Republicans accepting some tax rises and Democrats tolerating cuts to entitlements. He has little to lose: at present he will go down in history, alongside George W. Bush, as a skipper who ignored the looming fiscal iceberg.

Fixing those problems would require Mr Obama to discover both Clintonian skills of triangulation and some Republicans who don’t hate him. As with other second-term presidents, foreign policy may offer more opportunity. The Obama brand is less tarnished abroad. And American power is sold short by a lot of people—including, sometimes, Mr Obama. With its matchless armed forces, a web of alliances and omnipresent soft power, the United States is still the world’s indispensable nation—as it has shown in the rescue efforts in the Philippines (see Banyan). When Mr Obama ordered a strike against Osama bin Laden, he proved that he can be decisive; when he patiently built the case with China and Russia for imposing sanctions on Iran, he was persuasive.

So Mr Obama can get things done when he puts the effort in. Our special report lays out the opportunities that a more committed and confident president could seize. In many regions, such as Latin America, just a little bit of attention could yield impressive results. Free-trade deals could tie in allies across the Atlantic and the Pacific. Having over-reached in Asia and with a string of domestic problems, China needs Mr Obama to keep the world stable. If Mr Obama can build a better relationship with China, he will advance both countries’ interests. An immediate test is Iran: an interim agreement to halt its nuclear programme would be a first step towards re-engaging America in the Middle East. But only if Mr Obama works at it and sells a deal to Israel and his Arab allies.

Mr Obama may not be able to walk on water. That is now painfully clear, perhaps even to him. But America’s first black president still has it in his power to leave the Oval Office famous for what he did, not just what he was.

From the print edition: Leaders

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