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Costs in any market, including health care, are reduced by raising productivity. The best way to achieve this is to release the forces of competition inherent in free markets. Proposed reforms of the Affordable Care Act (aka Obamacare) seek to do this on the demand side by incentivizing patients/consumers to shop for the best and lowest-priced care via i.e., health savings accounts (HSAs) and cross-state-border sales of health insurance. However, less attention has been paid to supply side reforms.

When suppliers in any market are protected from competition they can charge higher prices.  They are also less efficient, adopt cost-saving technology more slowly and provide lower-quality services. Thus, the project of freeing the demand side is likely to backfire unless the supply side is also freed. A certificate-of-need program is an anti-competitive supply-side barrier under state control.

What is a Certificate-of-Need Program?

Under these programs applicants must establish to the state that there is a need for additional capacity before a certificate is granted to build additional health care facilities or make major equipment purchases. This was due to a mistaken idea that excess capacity raises prices, a plausible possibility under Medicare cost-plus pricing. Medicare reimbursement has since been reformed. Moreover, there was no evidence that health care costs were, in fact, restrained. For these reasons the federal government eliminated the incentive to establish certificate-of-need (CON) programs in 1987 after creating it in 1974. Nevertheless, state CON programs linger on in 34 states, including Delaware.

This planned-economy approach to health care supply is equivalent to denying a grocery store (like Walmart) a permit to build because there is already adequate grocery store supply in the area. A new, more efficient store enters because it can underprice existing stores. This creates excess capacity which forces less efficient stores to close. Even the threat of a new store will force existing stores to become more efficient, in order to deny the new entrant a market opportunity. This is how Walmart drove productivity gains in the retail sector throughout the US in the 1990s.[1]

Clearly, it is advantageous to existing health care providers to convince lawmakers to retain CON programs. One justification is that providers are required to provide free care to indigents. However, this is very inefficient.  Just as we provide EBT (food stamp) cards so families can shop at the best value grocery store, it would be more efficient and fair to switch to an explicit tax on health care providers to fund health care vouchers/HSAs for the indigent. Otherwise this anti-competitive barrier reduces the threat of entry, and insulates existing providers from price competition.

Delaware’s Certificate of Public Review (CON) Program[2]

Title 16, Chapter 93 of the Delaware Code establishes the program. It covers the construction or establishment of any health care facility, the acquisition of a nonprofit health facility, the expenditure of more than $5.8 million by a health care facility (with some exceptions), a change in bed capacity of 10 beds or more than 10% of licensed capacity (whichever is less), and the acquisition of major medical equipment (excluding replacement and with some exceptions).  The review process considers the ‘need of the population’, the effect on existing providers, the effect on cost and quality of health care, and the availability of less costly/more effective alternatives in-state or out and co-ordination with the Delaware Health Resources Management Plan (§9304-6).

In the application kit, applicants are asked to provide demographic data, utilization rates of existing providers, and impacts on existing providers. They also get the opportunity to describe the impact of the project on cost and quality of health care in the service area. There are even some irrelevant questions (e.g. Has the Applicant evaluated alternative uses to which these monies,..could be used…? Does the Applicant intend to employ energy conservation principles..?). Extensive financial data are expected and any other studies/analysis that Applicants may have conducted to reach the decision to file the application. More serious hurdles lurk in the Delaware Health Resources Management Plan.

The Plan (last updated in 2014) explicitly prohibits the establishment of hospitals in Delaware for 5 years based on current versus projected capacity needs. Capacity needs are calculated using explicit formulas in the Plan. CPR applicants’ requirements for indigent (charity) care are laid out. While there is some discussion of other considerations, the major consideration appears to be whether additional capacity is justified based on demographic data and current capacity (existing providers). However, it is not really possible to determine how much weight is given to any one factor, including cost.

It is fair to conclude that Delaware’s CPR program is an anti-competitive barrier. Undue weight is given ‘current capacity’, i.e., existing providers. Applicants must provide highly detailed data, which will be made public thereby possibly giving away competitive advantage. Applications can be denied on a wide range of factors. Although only two applications of 47 were denied (2005-2016), there are no data on withdrawn and deterred applications.

Evidence of Effects

Statistical studies on the impact of CON programs such as Delaware’s CPR program on health care costs indicate that costs are not reduced. There is some evidence that costs are increased.[3] Studies on quality are mixed. However, it is difficult to measure the true impact of CON programs statistically because they are widespread (small control group) and their effect is through the deterrence of cost-saving activity which is hard to measure. Anecdotal evidence is easier to come by. The Federal Trade Commission and the Anti-Trust Division of the US Department of Justice make a very strong case for elimination of state CON programs, and cite specific instances of anti-competitive behavior by health providers that was facilitated by CON regulations.[4]

Conclusion

It is impossible to see any upside for health care consumers or insurers to Delaware’s Certificate of Public Review program, other than to ensure that providers are qualified and licensed to provide care. Excess capacity should not be a consideration, indeed, it is the mechanism through which new entrants to the market puts pressure on suppliers to reduce price. Nor should the financial/economic viability of new entrants or existing suppliers be a factor since it is better for consumers if inefficient providers are driven from the market. Right now, most care is paid for by third parties such as the State itself, or Highmark Blue Cross-Blue Shield. This may account for the failure to eliminate this program already. However, demand side pressure is likely to intensify as health care costs increase and the Affordable Care Act is reformed, as it must be to remain viable. The State of Delaware should eliminate this costly anti-competitive barrier as soon as possible.

by Stacie Beck, Associate Professor of Economics, University of Delaware

& CRI Advisory Council Member

Footnotes:

[1] The income gain through lower prices, especially to lower income families, has been established in the economic literature (Hausman and Leibtag, 2007)

[2] This information is available at dhss.delaware.gov/dhss/dhcc/hrb/cprpinfo.html

[3] See National Conference of State Legislatures at www.ncsl.org/research/health/con-certificate-of-need-state-lasws.aspx and Mitchell, Matthew “Do Certificate-of-Need Laws Limit Spending?” Mercatus Working Paper, September 2016.

[4] Joint Statement of the Federal Trade Commission and the Anti-Trust Division of the US Department of Justice to the Virginia Certificate of Public Need Work Group, October 26, 2015.

 

 

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At the ninth annual National Summit on Education Reform sponsored by the Foundation for Excellence in Education held (November 30 to December 2) in Washington, D.C., Governor Jeb Bush, the keynote speaker, told the attendees that they had to, “Be big, be bold, or go home.”  Tweaking has a role to play in improving education but the current situation demands boldness.

In an article, “Choice, Charter Schools, and Education Reform”, written by William E. Manning, former president of the Red Clay Consolidated School District, he described the current Delaware school system as a “large bureaucracy” which he referred to as “the Blob”.  He also observed that, “…the system isn’t worth repair.” and “…let’s just pitch it and get a new one…” designed along certain principles. 

He recommended a confederation of independent schools each locally managed and free of regulations about who to hire and how to teach.  The schools would be evaluated only by performance data that would be shared with the public.  Since district responsibilities would be significantly reduced, the new system would need only a small administrative cadre.  Professional assistance would be provided to schools but only if they requested it.  Districts would offer,” …helpful resources rather than regulation.”  Teachers would be offered meaningful professional development as their status in the system would be elevated along with appropriate compensation.  These are most of the points.

The Caesar Rodney Institute is supporting a systemic change to our education bureaucracy called the “BOLD PLAN”.  It significantly alters the way the current education system operates by empowering the individual schools to make operational decisions to best serve their students.  The concept was introduced in Delaware in 1995 and was supported by the Governor, the Delaware Department of Education, and the business community.  A few charter schools were to pilot the idea and to serve as models for the traditional public schools.  Through a controlled growth plan and appropriate administrative development, every traditional public school would eventually have the same decision-making authority as a charter school with a much simplified district oversight function.

CRI’s BOLD PLAN incorporates the best features of the 1995 Charter School Law and the Memorandum of Understanding designed by Delaware’s DOE for Priority Schools.  If the changes proposed in the MOU were expected to raise the performance of the state’s lowest performing schools, why wouldn’t those changes be offered to all public schools?

The new system would recognize the importance of autonomy for local school leadership (principals and teachers answerable to parents), the need to focus on performance-based accountability, the value of customized education, and the critical role played by an established school culture of success.

BOLD legislation would specify areas of local decision-making.  Such areas would include: 1) Authority to hire and dismiss all staff; 2) All programing inputs (school calendar, schedule, curriculum aligned to Delaware standards, instructional practices and methodology, textbooks, technology, etc.); 3) Marketing and planning; 4) Support services including transportation, food, and maintenance; 5) Budget preparation and expenditure control with surplus operating funds retained by the school.  Schools will have autonomy from any district or Delaware DOE requirements not mandated by state or federal law.

District school board responsibilities would include: 1) Hiring and performance evaluations of Chief Education Officers (CEOs, formerly, principals); 2) Approval of proposed annual budgets and major capital projects; 3) Review of appeals of CEO decisions; 4) Operational support in areas such as legal, financial, personnel, facilities, etc. as requested by CEOs; 5) Facilitation of intra and inter district meetings of CEOs if requested by them.

For a state the size of Delaware, nineteen school districts is more than what is needed.  New York City and Los Angeles have many more students but each has only one school district.  Any cost savings could be used for additional expenses that may be incurred by the transition.

The BOLD PLAN complements Delaware’s other education improvement efforts (Visions, Races, etc.).  In fact, it may even complete them.  At the very first Vision 2015 meeting hosted by Dan Rich, then Provost of the University of Delaware, he ended the meeting by telling the attendees that if they wanted to improve Delaware’s public schools they had to be bold and, if they didn’t want to be bold, they should get out.  Hmmmm, it seems that Dan was way ahead of Jeb.

Ron Russo, Senior Fellow, Caesar Rodney Institute

Founding President, Charter School of Wilmington

Former Principal, St. Mark’s High School

 

 

 

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Delaware and Maryland utility commissions have one more shot to convince electric grid regulators to lower the cost of the Artificial Island Transmission Line.  Governors Markell and Hogan have joined forces to fight the burdensome cost of this project, but a new approach is needed.  If we want to win this fight we need to negotiate using an alternative approach.  More local power generation could replace the transmission line.  This could lead to lower electric rates instead of higher rates, to a more robust economy, and to improved electric reliability.

 

The Artificial Island project is a technical response to importation of power.  Maryland and Delaware are the second and fifth highest electricity importing states in the country.  In 2015 Maryland imported 41% of its power, and Delaware imported 32%.

 

Importing power lowers electric grid reliability.  It also adds cost.  Regional grid manager, PJM Interconnection, is responsible for maintaining reliability with a combination of pricing mechanisms, and transmission line policy.  There are line charges to compensate for longer power transmission distances, congestion charges to encourage lower peak demand, and capacity charges to encourage more local generation.  See the graph below to see how these premiums can go.  These premium charges roughly equal the added monthly costs of the proposed transmission line, are already added to our electric bills, and most of the cost will continue even if the new transmission line is built!

 

Cost Premiums in Delaware & Maryland for Grid Congestion and Transmission Cost

dave stevenson Artificial Island

Source: PJM Interconnection Real Time Statistics

So, how do we boost local generation?  Start by asking electric generation and distribution companies already invested in the state what state policies would encourage more generation.  State policies led to lower local generation in very real ways and changed policies can help reverse the trend.  Prepare to kill some sacred cows when we hear the answers.

 

Maryland and Delaware are the only two states in the thirteen state PJM region with a tax on carbon dioxide emissions from power plants.  The cost of that tax is passed on as a hidden tax on electric bills.  Our generating facilities burning coal and natural gas have to charge more, and lose bids to supply power.  Consequently, local power plants operate less frequently.  For example, the Indian River power plant in Millsboro, Delaware, is only operating 20% of the time compared to an average of 55% for coal fired plants nationally.

 

The tax was designed to reduce emissions but all it has really done is shifted the emissions out of state, and discouraged power plant construction locally.  The revenue was supposed to be used for energy efficiency and renewable energy projects, but after a decade of work only a quarter of annual tax revenue is being spent on such projects.  Ending the tax would lower electricity prices and would allow more power to be generated locally.

 

In Delaware we only need to build the equivalent of three to four new power plants to become self-sufficient.  Calpine recently completed a new natural gas fired power unit in Dover and has the permits needed for a second unit.  What incentive does Calpine need to build the second unit?

 

Exelon recently acquired Delmarva Power, the state’s largest electric distribution company, and is one of the largest generation companies in the nation.  A decade ago distribution companies owned all the generation facilities as well with a guaranteed rate of return regulated by the Public Service Commission.  Delaware and Maryland joined a handful of other states in deregulating the price of generated power thinking this would increase competition and lower electric cost.  The actual result was the sale of generating facilities and a 70% increase in electric rates in the deregulated states.  Partial reregulation might encourage distribution companies to build at least some new generation capacity.

 

Exelon is one of the largest builders of large scale solar farms in the country.  A little known fact is utility scale solar is now essentially competitive with conventional power plants during high demand daylight hours.  Delaware policy has emphasized building smaller scale systems that actually add cost to our electric bills.  Yes, in this case bigger is better and a policy change is needed.

 

Land acquisition is a barrier to building more solar.  The state could offer marginal state owned open space land for long term lease for solar farms to lower start-up costs.  The revenue could be used for state park operations.

 

No doubt a dialogue to boost local power generation would uncover more opportunities.  The result would not only avoid the added cost of the Artificial Island project but might lower existing electric rates by as much as 15% removing a barrier to job creation, and could lead to up to a billion dollars in new construction projects.   

David T. Stevenson, Director

Center for Energy Competitiveness

                               

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AEI interviewed University of Chicago economist Steven Kaplan about income inequality and the perception of unfairness in American’s economy. Below is a portion of the interview.

JP: I want to start off with a quote from presidential candidate Bernie Sanders. He gave a big speech recently on democratic socialism and what it means. And here’s just a few sentences of what he said.

Democratic socialism means that in a democratic, civilized society the wealthiest people and the largest corporations must pay their fair share of taxes. Yes, innovation, entrepreneurship, and business success should be rewarded. But greed for the sake of greed is not something that public policy should support. It’s not acceptable that in a rigged economy in the last two years, the wealthiest 15 Americans saw their wealth increase by $170 billion, more wealth than is owned by the bottom 130 million Americans.

But let’s not forget what Pope Francis has stated. We have created new idols. The worship of the golden calf of old has found a new and heartless image in the cult of money and the dictatorship of an economy which is faceless and lacking any truly humane goal.

So from your research, what do we really know about income inequality and what’s driving it in the United States today?      

SK: There is, I think, some truth in what he’s saying and then some real problems in what he’s saying. So here is my view of what’s happened in the last really 30-35 years. We’ve had a huge amount of technological change. And that has coincided with globalization. And they’re related. Technology allows you to do a lot of things overseas that you couldn’t do before. And so the combination of technological change and globalization has put pressure on the middle class and particularly the less skilled in the developed countries. So it’s the U.S. and Western Europe.

And I think there’s some anxiety and clearly anger about that happening. And at the same time, the people at the top have done very well in the United States. So that’s, I think, the problem that Bernie Sanders has stated. Now what he doesn’t state, and I think is extremely important to recognize is that the world is hugely better off – hugely. And Angus Deaton, who recently won the Nobel Prize in economics and is, you know, archconservative, wrote a book called “The Great Escape.” And that book starts by saying, and I quote, “Life is better now than at almost any time in history. More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.”

So the system and capitalism in particular, around the world, has been spectacularly successful over the last 30 or 35 years. The number of people who are living above the poverty level – actually, take the number of people living below the poverty level – has declined in absolute terms and has declined hugely in relative terms.

The world is so much better off. And I think for Sanders and politicians to say that that’s terrible is really just morally abhorrent. … So now the question is, okay, we have this – so it’s great. Around the world, I would not give this up. This has been spectacular. Now, you do have the issue of what do you do in the United States and Western Europe, where you have had – it has been uneven in how the benefits have been distributed.

Folks on the left, they don’t much talk about the role of capitalism bringing  hundreds of millions of people in Asia out of really deep, extreme poverty. They focus really more on the U.S. story and they’ll even concede that there’s been economic growth. But they also that it really hasn’t helped the vast majority of the middle class for 30 or 40 years. They talk about stagnant wages. If the median person, the average person, they’re not getting richer, what’s the point of it?

So the median person in the world is much better off. Let’s be clear. So now, let’s go to the median person in the US and try to figure out what to do about him or her.

So first of all, the after-tax numbers are much better than the pre-tax numbers. And this is also, you know, kind of ignored to some extent, is that if you look at – I think these are Congressional Budget Office numbers or they’re not the IRS numbers that are pre-tax that get a lot of play – the increase in inequality, when you include taxes and transfers, is not as high as it is pre-tax. And that’s because there is a safety net. There are transfers.

But even that said, let’s say there has been an increase. Now the question is what do you do about it. And the real issue is you do have this headwind of technological change and globalization. And so now the question is, what do you do about it?

And one set of proposals which I think Bernie Sanders and Hillary Clinton and the Democrats in general push [is] to raise the minimum wage. And that’s precisely the wrong thing to do here because if you’ve got a headwind of technology and globalization, which is making it harder to hire people and it makes jobs more difficult to create, raising the minimum wage exacerbates that. It’s exactly the wrong thing to do.

If you want to encourage job creation, I think job creation is the most important thing. And I know your boss at AEI, Arthur Brooks, is very articulate on this, the way you encourage jobs is, you know, have an Earned Income Tax Credit or something of that nature, rather than raising the minimum wage. Because raising the minimum wage, you just put more headwinds into job creation.

I would say the same thing about mandated leaves, which is also a big campaign plank among the Democrats. Because, again, that makes jobs more expensive. It makes employment more expensive. And what are companies going to do in response to making jobs more expensive? Well, let’s apply more technology. Let’s try to find jobs in places where the costs are lower. So that is – you know – it is a real conundrum what to do with technology and globalization, but the answer is to make it easier to hire, rather than harder.

At the same time, where I think the Republicans sometimes are not quite so sensitive is [that] you do need to have safety net. If you think this is going on, you really want to make sure you have a solid safety net, so that people do not, you know, go too far down.

Read the rest of the interview here

to perhaps answer their own question, AEI posed some graphs on income earns in America:

income1

They wrote:

“Perhaps the stagnation and decline in US household income that gets so much media and political attention isn’t necessarily the result of the usual negative factors that get cited so frequently: stagnating wages, reduced economic and employment opportunities for the average, middle-class American, the increased share of rising income or wealth going to the top X%, the hollowing out of the middle class, the claims that the middle class is shrinking/losing ground/disappearing/declining, etc. Rather, perhaps there’s a less-nefarious, demographic-driven reason that household incomes have been stagnating/declining in recent years — the increase in the share of US households with no earners, which is largely driven by the aging US population and the increasing number of retired workers, and to a lesser extent by the increasing number and share of disabled workers. Finally, there’s been nearly a six percentage point decline in the share of US households with two or more earners since 1999, which could be another demographic change that has contributed to a decline in median household income.”

We’d love to hear your opinions on what AEI is presenting. Enter them in the comment section, and don’t forget to follow our feed.

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The Pew Research Center recently published a report called “The American Middle Class is losing ground.” They cite data from the U.S. Census Bureau and the Federal Reserve Board of Governors to determine household incomes to suggest the Americans who once made up the majority of hardworking, moderate income Americans comprise now less than half the adult population.

Share of adults living in middle-income households is falling

Approximately 120.8 million American adults are considered “middle class”, which Pew defines as their income is 50-66% the media income based on household size.

Who is “middle income” and “upper income”?

 

These findings emerge from a new Pew Research Center analysis of data from the U.S. Census Bureau and the Federal Reserve Board of Governors. In this study, which examines the changing size, demographic composition and economic fortunes of the American middle class, “middle-income” Americans are defined as adults whose annual household income is two-thirds to double the national median, about $42,000 to $126,000 annually in 2014 dollars for a household of three.3 Under this definition, the middle class made up 50% of the U.S. adult population in 2015, down from 61% in 1971.

Basically what’s happened is that those who once comprised the solid middle class of Americans- people who made enough to live comfortably but not enough to live luxuriously- had eroded. An increasing number of people either move into the top 10% (often known as the ‘professional’ class due to the high number of post-graduate degrees this group has earned) or into the bottom 30%, the ‘working poor’, families struggling to pay for even the most basic of expenses.

Older people, married couples and black adults improved their income status more than other groups from 1971 to 2015

 

 

 

 

 

 

 

 

Black adults, many of whom start with little or nothing, have gained because the number who were well-to-do in 1971 was very small. Those with less than a bachelor’s degree have been hurt economically, as have younger adults and the unmarried (many of whom are young). Older, married White couples are the most likely to do well, though not having children has helped some married couples.

Predicting the future is tough, but the data suggests America already is a class-based system, and will become even more so as the earnings between college graduates (particularly those with a master’s or doctorate or equivelant) increase much faster than those near the bottom (fast-food workers, construction workers, those whose jobs can be more easily replaced via computer or immigration) can keep up, which will widen income inequality. The Minimum Wage argument will actually serve to hasten this gap, as business owners obtain the means and desire to replace so-called ‘low-skilled’ workers with automation.

The positive is that the number of ‘upper middle’ and ‘highest’ has grown as a percentage, which suggests that for some there is economic mobility that was not present in 1971.

What do you think? What does the data suggest about American earnings and our future?

 

 

 

 

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Objective Truths Regarding Minimum Wage

Lenzini Photo portrait

Guest post by Matthew Lenzini, chairman of the Colonial Region Republicans.

I can’t recall a time when both of my parents didn’t work. My father for most of my childhood worked nights and weekends managing a Diner in South Philadelphia. My mother waited tables as a night shift waitress at the Philadelphia Airport Marriott. My first job in High School paid $4.75 an hour and truth be told, given my skill set at the time, I was probably overpaid. My parents instilled a sense of hard work and frugality in me that exists to this day. We never had much money and though I have been able to find some success in my life, I am a firm believer in adding value to society and living below my means. I believe that personal growth and success are core American Values. I believe that we live in the land of opportunity and that with hard work and a little luck, everyone has the ability to better their circumstances. This by no means, guarantees success but unlike many countries in the world, we all have a shot at the American Dream.

There has been a tremendous amount of discourse on the national stage regarding the federal minimum wage. Economically speaking, raising the minimum wage is actually bad for growth and harms those that we are most seeking to help, entry level workers and the working poor. I believe that much of what has been cast in the media is misleading. It is either intentionally misleading for political reasons or misguided due to misinformation and a lack of understanding. Unfortunately, feel good economic policies, catch the attention of the press and politicians oft present what appear to be efforts geared at helping the public but, are in fact bad policies based on popular demand, rather than sound judgement. I’d like to take a more objective and analytical look at unwinding four popular myths surrounding minimum wage in America that when analyzed, are in fact wrong and misleading:

  1. Minimum wage has not kept up with inflationary pressures
  2. Increases to minimum wage will improve the economy and decrease unemployment
  3. Minimum wage earners are on average 35 years old
  4. Raising the minimum wage helps working families

Myth 1: Minimum Wage has not kept up with Inflationary Pressures

The first minimum wage was enacted in the United States in 1938. At the time, the rate was set to $0.25 cents an hour.  There is a popular myth that the minimum wage rate has not kept up with inflation.

Objective Truth 1: Minimum Wage has kept up with inflation and the Consumer Price Index

If the 1938 wage were adjusted for annual inflation through 2015, the minimum wage rate would currently be around $4.90 give or take a few pennies. The federal government has reset minimum wage a number of times; typically during or after periods of rapid inflation. The table below highlights a few of the federal adjustments to minimum wage and the inflation adjusted wage today if there were no additional adjustments to the wage by the federal government.

Lenzini 1

                                  Lenzini 2 

                                   Lenzini 3

I’d like to note a few things regarding the table above. Inflation adjusted, the minimum wage has fluctuated some but typically stays within one or two standard deviations of the average, which is approximately $8.20. We have had an inflation adjusted range high of $10.07 in 1981 and a low of $4.97 in 1939. All in all, the current rate of $7.25 is well within one standard deviation, which is about +/- $1.25 of the average (this is well within tolerance limits for statistical measurements).

Now, there is an argument that rather than using inflation, one should use the Consumer Price Index. After all, the cost of goods and services changes over time. CPI uses a baseline year (1984) as an index. As such, 1984 has an index of 100 and all other years are adjusted using a percentage of the index. For instance, 1939 has an index of 13.9. If we take the 1981 wage of $3.35 and multiply it by 13.9 percent, we have a 1939 equivalent rate of $0.47. If we were to use similar dates to our inflation based analysis, we would get the following CPI adjusted rates. Again, we find that the federal rates are within a reasonable level of tolerance of the average. The greatest deviation occurring in 1939, one of the first years that a minimum wage ever existed which also happens to occur in the midst of the great depression.

Lenzini 4

Myth 2: Increases to minimum wage will improve the economy and decrease unemployment

The U.S. labor participation rate is currently sitting below 63 percent. The last time the rate was this low, was in the late 1970s when we had according to President Carter, a crisis of confidence. The reason I use the labor participation rate instead of the more popular unemployment rate is that the unemployment rate only represents people that are actively seeking work. Anyone that has given up the hope of finding work, does not show up in the U.S. unemployment figures. The “real” rate of unemployment is closer to 10 or 11 percent. The unemployment rate has improved for the wrong reason; people have stopped looking for jobs. A number of legislators have pushed for an increase in the minimum wage. Their thought process is that a higher minimum wage will improve the economy and get people back to work. Unfortunately, that is very far from the economic reality.

Objective Truth 2: Increasing the Minimum Wage will actually increase unemployment rates

The labor market reacts similarly to any other market. It is primarily driven by the laws of supply and demand. Without a minimum wage (which is effectively an artificial floor on the price of labor), the market would settle at a rate where the demand for labor and the supply for labor meet. In other words, without an artificial floor, we would reach the maximum economic output and we would have the lowest level of unemployment (excluding externalities such as a disincentive to work because one could “make” more on government subsidies aka welfare).

Artificial floors create economic loss. Essentially, supply will be higher than demand and the gap, essentially becomes unemployment. The higher the wage, the more people will be willing to work so there is more supply. However, given the higher wage, a business with limited resources will be able to hire fewer people. The graphic below highlights the conceptual increase in unemployment when the artificial floor is raised. This is not unique to labor, it is an economic reality for all goods and services. The unemployment rate is the gap that exists between the supply of labor and the demand for labor.

Lenzini 5

Howard Schultz the CEO of Starbucks was asked about the $15 minimum wage in Seattle. He said that Starbucks would adapt. They can leverage technology and automation allowing them to hire fewer people but smaller companies don’t have that option – “I wouldn’t want to see the unintended consequences of job loss as a result of going that high. That would not be the case at Starbucks, but I suspect that most companies, especially small- and mid-sized companies, would not be able to afford it.” The net effect will be one of a few scenarios: a) the company uses more technology to maintain its margins b) the company raises prices c) the company goes out of business. None of these bode well for the employees or the consumer.

Myth 3: Minimum wage earners are on average are 35 years old

There is a myth that the average age of a minimum wage earner is 35 years old. I believe that this is a purposely misleading statistic, put forth by certain politicians seeking populist support for re-election.

Objective Truth 3: The distribution of minimum wage earners is skewed

If you have four 17 year olds and two 68 year old retirees (who are most likely working to have a second income above any retirement benefits), you have an average of about 35. When we look at the underlying data, we do in fact see that the distribution is skewed towards young people who are working in their first job and older Americans who may be working to supplement their income. So let’s also be clear that only about 4.3% of all working Americans earn the minimum wage. Most other workers earn more than the current rate. That number is down significantly from the 1980 high, where 15% of working Americans earned the minimum wage. 50% of minimum wage earners are under the age of 24 and 25% of minimum wage earners are teenagers.

Lenzini 6 Lenzini 7

The vast majority 64% are part time employees who mostly occupy low skill jobs in the food services or retail spaces. Only about 20% of those that receive minimum wage are married and only 13% of minimum wage earners are married and over the age of 25. The vast majority, nearly 80% do not have a college education and most do not have a high school diploma. So the argument that too many Americans are trying to support their families on minimum wage is just not true. The percent of family head of household minimum wage earners is actually the lowest it has been since the metrics have been tracked, and the path to higher wages is and always should be improving your skill set.

Myth 4: Raising the minimum wage helps working families

A common element that is often missed in the debate surrounding minimum wage is the role of the earned income tax credits. Many supporters of raising the minimum wage will state that the intent is to help young working heads of household, support their family.

Objective Truth 4: Raising the minimum wage hurts those we intend to help

Unfortunately, by raising the minimum wage, we do the exact opposite, as mentioned above, when we raise the wage uniformly, we actually create higher levels of unemployment. A better targeted approach to helping families, is to continue to leverage the earned income tax credit. The earned income tax credit provides a financial benefit to those that are heads of their household and those with children. In essence, it is a much better way to pinpoint those working adults while still allowing businesses to employ as many people as possible (for instance high school students in their first job who have minimal skills and few responsibilities). The graphic below, is from the United States Treasury Department.

In 2014, a married minimum wage earner with two children, receives an additional $5,460 dollars of tax credits.   Assuming that the average work year consists of 2080 hours at 40 hours a week, this would equate to an additional $2.63 an hour above the minimum wage. If we were to add the two, the hourly wage would be $9.88 an hour. This figure does not include any other state benefits, housing assistance, education assistance or other government program support.

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Summary: I have only touched on a few of the more common misconceptions that surround the minimum wage debate in America. The truth of the matter is, that many politicians will push for an increased minimum wage rate either because they know it will get votes or because they are ill-informed. The minimum wage has been raised in the past. It will be raised again. We cannot however afford to do so arbitrarily and without thoughtful and informed decision making. Plenty of ideas feel good but they have to make sense in the longer run. We need to do away with feel good economics and political ideologies that are crafted on ideals that are not grounded in economic truths. Policies that pander to populist ideas that will only hurt those that we intend to help.

Matthew can be reached at Lenzinml@yahoo.com

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Bernice Whaley, director of the Delaware Economic Development Office (DEDO), recently provided a glowing assessment of Delaware’s economy in a News Journal article. Ms. Whaley cites a current unemployment rate of 4.7% and growth over the last two years of 4% in Delaware jobs and 6.5% in personal income. And she notes recent increases in high technology employment in the state.

It might be helpful to put these statistics in perspective relevant to the average Delaware household.

The Delaware unemployment rate has thankfully fallen from a high of 8.7% in 2009 to 4.7% today. Two things are worth noting. First, in the year prior to the recession the state’s unemployment rate was 3.4%. Second, according to the most recent Census data, the percent of Delaware residents age 16 to 64 working dropped from 80.7% in 2009 to 76.7% in 2013. In other words, one major reason for a lower Delaware unemployment rate is that a large number of working age individuals have simply stopped looking for employment.

Total jobs in Delaware have expanded by almost 4% (2% per year) over the past two years. While it took more time to get there, this is similar to the job growth rate following the last recession in Delaware. Many of the jobs being added, however, are lower paying positions in such industries as temporary services and restaurants. The result from the Census is that between 2009 and 2013 the inflation adjusted median earnings of working Delaware residents with a high school degree has dropped 7% while that of residents with a bachelor’s degree or more has dropped almost 3%.

The earnings of Delaware workers are on average moving backwards.

Delaware personal income has grown at least 6.5% over the past two years. This compares to 13.8% growth following the last recession. More disturbing, the slowest growing component of Delaware personal income during the past two years has been earnings by residents while the fastest growing component has been transfer payments (e.g., Social Security, Medicaid, Medicare, food stamps, TANF).

Finally, growth in high technology industries in Delaware is positive, but it provides few opportunities for the almost two-thirds of working age Delaware residents who have less than an associate’s degree. Tests of Delaware public school students from 4th grade through high school evidence that the majority of students are not proficient in reading or math.

Obviously it is the job of DEDO to be positive and sell Delaware. And in all fairness DEDO has little control over the poor performing public schools, the green energy policies that have driven Delaware electric rates 35% above the nation, and the lack of a right-to-work law.

Nevertheless, a victory lap seems premature.

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