Why Being Poor is Expensive (with Ryan Bourne)

Ryan Bourne joins us today to discuss the intricate hardships that the poor in the United States are experiencing.

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Ryan Bourne joins us today to discuss the intricate hardships that the poor in the United States are experiencing. Some suggest that the United States should raise the national minimum wage, thinking that will solve some issues of the impoverished. Others believe that the poor have different buying and spending habits than the rest of the population.

What do poor people spend a majority of their money on? How does regulation of services actually hurt the poor? How does coning affect housing prices? Should we raise the minimum wage to a ‘living wage’?

Further Reading:

Government and the Cost of Living: Income-Based vs. Cost-Based Approaches to Alleviating Poverty, written by Ryan Bourne

The Regressive Effects of Child-Care Regulations, written by Ryan Bourne in Regulation Magazine

Related Content:

Bringing Wealth to the Poor (with Michael Tanner), Free Thoughts Podcast

Libertarianism and the Poor, written by Matt Zwolinski

People, Not Ratios: Why the Debate Over Income Inequality Asks the Wrong Questions, Free Thoughts Podcast

[music]

00:07 Aaron Powell: Welcome to Free Thoughts, I’m Aaron Powell.

00:09 Trevor Burrus: And I’m Trevor Burrus.

00:09 Aaron Powell: Joining us today is our colleague, Ryan Bourne. He occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. Welcome to Free Thoughts, Ryan.

00:17 Ryan Bourne: Good to be with you. Hi.

00:19 Aaron Powell: You’ve written that the focus on incumbent services has blinded the debate about poverty from the truth that there are lots and lots of state, local and federal policies that increase the price of goods and services the poor spend a disproportionate amount on. What do you mean by that?

00:34 Ryan Bourne: Well, I think conservatives, liberals, libertarians, progressives, we all have different theses and ideas for what the causes of poverty are and the causes of certain households suffering from being very, very low income. But in terms of how we go about alleviating poverty, I think it’s fair to say that there’s been a consensus over many, many decades that the most effective way that the government can help alleviate poverty is through, what I’d call an income-based approach. Now, that either means, transferring resources to poorer people directly through means tested welfare, kind of indirectly through benefits in kind, which then reduce the amount that poor households have to spend on certain services, like healthcare, or indeed through mandates and regulations, such as minimum wage regulation, controls on the prices of certain goods and services, rent control for example. Now, what I’m trying to get across in this paper really is that, in part, the reason why governments are having to, or see the need to engage in such policies, is to compensate for some of their existing mistakes elsewhere.

01:47 Ryan Bourne: So there’s a lot of things that governments do that raise the cost of what I describe as essential goods, basic necessities that every household in the country needs, but which the poor spend disproportionately on. If you look at the bottom 20% of the population, about 60% of their total spending goes toward shelter, food, transport and clothing and footwear alone. In each of those areas governments undertake policies which drive up the cost of living. So, I’m trying to turn the debate around in this paper and say, rather than always reaching for new ways to try and compensate people or raise incomes of people, actually what really matters to people is their real incomes, and how far the income that they do have goes in achieving a decent living standard by acquiring goods and services. And there are many, many things we can do moving things in a free market direction to reduce the cost of living through supply side reforms in all of these markets.

02:49 Aaron Powell: When you say that the bottom 20% of the income distribution spend 60% of their income on that bucket…

02:57 Ryan Bourne: I’m sorry, 60% of their total spending.

03:00 Aaron Powell: Oh, their total spending is on that bucket. How does that compare to the other income quintiles?

03:07 Ryan Bourne: So for the average household, it’s about 51%. So it’s still a very, very significant chunk, but a bit lower. I think it’s right, and I’m right in saying that for the richest quintile we’d talk about 47%. So, these things are a significant cost to people across the income distribution, but they’re disproportionately borne by people in the lower fifth. And of course, that excludes things such as utilities and healthcare and energy costs as well. By the time you include all of those things you’re looking at, say 70 to 80%. But I kind of had to stop somewhere in my paper, [chuckle] ‘cause I didn’t have all the time in the world to write it.

03:46 Trevor Burrus: But it seems like you’re more increasing the denominator in that percentage, if you have to live in Washington DC, you have to pay a certain amount of rent. It’s hard to go under $600 a month, let’s say. And so, if you’re a denominator your actual wages go up, than your proportion of it. If everyone’s paying $1,000 for rent, if you’re poor, that’s much more bigger chunk of your income than if you’re richer. Or is it the case that the poor also have different buying habits? ‘Cause you mentioned apparel and weirdly footwear, which I thought was the most specific thing you put in there. Is there also a buying habit difference?

04:24 Ryan Bourne: Oh well, I was talking about spending here and not income.

04:26 Trevor Burrus: Of course, yeah.

04:27 Ryan Bourne: But you’re right in that averages hide probably much more than they tell us. So obviously if you’re somebody who’s living in Washington DC or New York, the amount that you spend on rent, and probably the proportion that you spend on rent, is gonna be much higher than in many rural areas. If you’ve got children, now one of the things that I haven’t talked about but is included in the paper, if you’ve got children, then obviously you’re much more likely to be spending on childcare services than if you don’t have children, unless you’re compensating somebody else for childcare services. So you’re right in that sense. Now in some of the areas that I write about, you’re also correct in saying that the poor have different spending habits. So if you look at clothing and footwear, for example, there are kind of two affects. The poor tend to spend more as a proportion of their total spending on clothing and footwear than people higher up the income distribution. So, anything that raises the price of clothing and footwear is regressive in that sense. But actually a lot of these… Well, a lot of the protectionism that comes on clothing and footwear is doubly regressive in that the particular products to which higher tariffs apply are more significant on low-quality, low-priced goods than higher price goods. So, to give you an example.

05:52 Ryan Bourne: An acrylic sweater has a tariff rate for countries that the US doesn’t have free trade deals with, has a tariff rate eight times higher than the tariff on a cashmere sweater. So, there’s in all of these things primarily I’m looking at areas in which the poor spend a disproportionate amount. But even if you drill, sometimes if you drill down within those categories you find that some of these policies are doubly regressive.

06:18 Aaron Powell: But these policies, the various regulations and tariffs and restrictions and whatever else, we’re not doing them… Well, tariffs maybe are exceptions… We’re not doing them to raise the cost of these goods. We’re doing them for… We think that these services, childcare needs to be regulated to protect people from poor quality childcare, and so and so forth. So we’ve got these reasons, which might be good reasons. And so then, what’s wrong with saying, “Okay, we acknowledge that we need these regulations for various reasons. They bring benefits. It would be worse if we didn’t have them. But they’re gonna raise the cost across the board, but that’s gonna hit the poor the hardest. So we’re just going to subsidize the poor. We’re going to give them cash or transfers or whatever else to kinda make up the difference.” What’s wrong with that?

07:05 Ryan Bourne: Well, that’s certainly one way of looking at it, and there are debates of evidently which I go into in the paper on all of these areas and the wisdom or otherwise of the regulations to achieve different ends. I’ve tried to be very, very conservative in the way that I’ve judged what the price impact of these regulations are. I’ve also only tried to look at areas where I think there’s a clear case that the regulation not only has regressive effects, but also adversely affects GDP, and where appropriate, I’ve tried to assess whether the regulation is effective in achieving its regulatory goal. So the main example that I’ve thought and written a lot about is, childcare regulation. And you’re right in saying that, in theory, some of these childcare regulations, staff child ratios for example, are imposed because the idea is we want children to enjoy more interaction time with the staff and that will raise the quality of care. Actually, almost all of the literature in this area suggests it doesn’t, on any objective measure, improve the quality of childcare, but the overwhelming effect it does have is to drive up the cost of care. And that actually, because of the price effects, because that raises childcare prices and that affects the poor disproportionately, that means poorer households are more likely, rather than using formal centers to put their kids into home daycare or to stay at home and look after kids themselves.

08:33 Ryan Bourne: Now, in those areas, we have no idea what the quality looks like because it’s measured… There’s less availability of objective measures there. So I think this is a key point that’s often missed in this debate is that, even if, in certain circumstances, some of these regulations could raise the quality or achieve another goal in a particular market, these price effects lead people to substitute a way into often more informal markets or lower quality housing or other settings, which can have an adverse impact on the population as a whole.

09:09 Trevor Burrus: The main form of childcare regulation, the ratio thing, are there other kind of regulations for childcare services? I’m sure there’s your standard kind of public health regulations, but others like licensing rules or anything like that?

09:22 Ryan Bourne: Yeah, there are and that varies state by state. So the two overwhelming, or the two key regulations I’d say are, staff child ratios. And kind of occupational licensing requirements on childcare is usually around how what type of education the carer has to have. Whether they have to have a degree in child development. Whether they have to have a high school diploma. Now this varies dramatically across states, and that’s one of the reasons why we are able to obtain such good evidence in areas like this, because there’s so much variation.

09:58 Ryan Bourne: Economists have been able to run quite effective regression analysis that control for a whole host of other factors, like the prosperity of the state and whatever, and try to identify the effects of these specific regulations on prices or the availability of care. And the overwhelming evidence, particularly on staff child ratios, where there doesn’t appear to be any quality benefit to them, is that these things, not only reduce the availability of care and drive up price accordingly because of that contraction in supply, but that affect overwhelmingly occurs in lower income areas. Actually, in higher income areas, you often get a greater provision of care because a lot of richer parents are kind of quality assured by the existence of the regulation and say, “Well actually, you know, if I know that my child’s gonna get a decent amount of interaction time I’d perhaps be more willing to use formal childcare than I otherwise would.” So again, extraordinarily regressive effects, because, not only is there the price impact, but the availability of care seems to be restricted most in lower income areas.

11:05 Aaron Powell: When you say that the evidence shows that it restricts supply, that it raises prices, but it doesn’t, say with the staff ratios, it doesn’t increase quality. How are you measuring quality?

11:16 Ryan Bourne: Well there’s a whole bunch of different studies that measure quality in different ways. Some measure quality according to fulfilling certain requirements that lead to almost like a kitemark, kind of rubber stamp, through some sort of objective measure, through some of these non-governmental organizations and think tanks that assess things in that way. But there is a major question mark actually of what quality, when it comes to childcare, really means because quality is an extraordinarily subjective variable in a many ways, and some parents when they’re putting their children into childcare might regard quality as just a kind of warm and loving environment for somewhere where their kids can be whilst they’re at work.

12:05 Ryan Bourne: Now almost all of the studies in these areas judge quality according to, either some independently assessed kind of kitemark or some child development objectives. And one of the things that I’ve kind of complained about in this paper and in previous work for other organizations is precisely that the educationalists are almost taking over this debate and defining what they want the ends of childcare to be which can be very, very different from what parents actually objectively want from the care for their children.

12:40 Trevor Burrus: Yeah, you bring up the preferences of the wealthy and in DC you have this class of people who wanna know what the Magnet Childcare Center for Yale is, right, that’s they’re very concern that all these educational attainment things are being realized by their childcare. Whereas other people it’s like, “I’d like a warm family environment. I’d like to do the teaching to my kids myself.” And that preference difference it seems like the educrats are forcing it on the poor, who might have the same preferences or maybe they just want grandma to take care and teach them wisdom of old or something like that.

13:16 Ryan Bourne: Yeah, it’s quite funny, actually. I ran into a guy who used to be head of the Ofsted Inspection Board in the UK, which is responsible for undertaking inspections of childcare centers and actually schools in the UK as well. So this was completely integrated into the educational sector. And I said to him, “Well, look, from a standard libertarian perspective, you do not go around and assess individual parents and judge them according to all these child development metrics.”

13:45 Trevor Burrus: They might want to though.

13:47 Ryan Bourne: “So why do you insist that when parents outsource their decision for who they want to care for their kids, that the child carers have to go through all this?” And he said, he alluded to precisely that. He said, “Well, of course, we don’t have the resources [laughter] to inspect every parent.”

14:02 Trevor Burrus: Oh, I think there’s a lot of people who would like to inspect parents.

14:05 Ryan Bourne: I do too.

14:05 Trevor Burrus: And just in my own experience, when you hear people complain about the education system and they say, “The real problem is parents.” I’ve had people argue that. So, it might be a resources problem. Let’s hope it continues to be a resources problem. Let’s move onto zoning and housing prices, something that actually has been getting more attention, and I think from both sides over the past few years at least than it used to get, especially you have San Francisco and California, which has a particularly bad housing crisis, but overall, how does zoning affect housing prices?

14:35 Ryan Bourne: So there’s a wide range of economic literature now that shows that restrictive zoning or zoning which attempts to circumscribe to a high extent what housing or what apartments blocks should look like and the characteristics that they should have, has an inflated impacts on housing costs. And that’s especially true actually with urban growth boundaries when you try and artificially restrict the growth of the city usually by suggesting that you can’t have any development on the outskirts of cities because you don’t want to allow urban sprawl, whatever. Now economists have looked at this in two different ways. One way that has been pioneered by Ed Glaeser is really to compare house prices or apartment prices to the marginal cost of building. The idea being that in a competitive market, price should roughly equate to marginal cost. So he’s judged any differential between price and marginal cost to building as a kind of regulatory tax. And that’s shown that in certain metropolitan markets, as you alluded to, that regulatory tax can be very, very high. In certain areas in California, it can be as much as 50%, but in some major cities, Boston, DC, we’re talking about 20 to 22%. And even that research was undertaken, sort of 15, 20 years ago now, and from everything that we’ve seen in most of those areas, the zoning burden, or at least the binding nature of the zoning burden, might have got worse in the interim period.

16:08 Ryan Bourne: But that’s been buttressed by a whole another slew of research which has tried to control further factors and measure this econometrically and overwhelmingly all of those studies show as well that areas with tight zoning laws lead to higher prices. Now why is that? Well, it’s mainly because by imposing all of these conditions and regulations, you make the market less responsive to changes in demands and we know that housing demand is going up. As people get richer they demand more in the way of housing and bigger space. Lots of people want yards or gardens or whatever. We also know that with population changes people are living in perhaps smaller households than they did before, so households are dividing up, and when you put all of those different factors in, if you’re making the supply of housing more inelastic, less responsive to changes in price, but at the same time demand is going up and up and up, that means in certain very, very desirable markets prices are rising very quickly or have risen very quickly and are structurally high as a result of these policies.

17:21 Aaron Powell: What arguments do the people who are in favor of these restrictive zoning things, give for this? So like you hear about Berkeley California is always griping about how much the median home price is off the charts, but then you hear these stories about blocking anything and everything in terms of building in the area. And so the people who are blocking it, is it that they have no idea that the reason houses cost a million plus in Berkeley is because of restrictive zoning? Or do they just not care? Or do they think that there are benefits to this zoning that outweigh the fact that middle and low income people simply can’t afford to live there?

18:03 Ryan Bourne: Well clearly new development has effects on other members of a community. Housing has externality effects. Now whether that’s in terms of changing the way that a neighborhood looks or increasing congestion in an area or anything else, there’s gonna be externality effects. So that’s one thing. Now, you can try and get around that by trying to facilitate bargains between existing homeowners and new potential homeowners. So lots of polities around the world have tried to find ways that, as development is going on, and as the first houses are sold, you extract a certain amount in taxes, which is then used to compensate the rest of the community. So that’s something. Now the other impact, of course, is that an increase in a housing supply in any given area, ceteris paribus, puts downward pressure on house prices which is not good for people who are already homeowners in a particular area, and that’s one reason why zoning laws are so pernicious for the poor, because the poor much more so than the rest of the population tend to rent, an increase in rental costs or an increase in house prices and an increase in rental costs at the same time, are unambiguously a negative for people that rent. Whereas if you already own your own home, then lots of these zoning regulations are actually beneficial to you.

19:33 Ryan Bourne: Now that may well not be the case in the long term, and if you’re forward-looking, thinking about future generations, thinking about the availability of your kids being able to live somewhere they want to live, you might have a different view. But whereas for renters this is unambiguously bad. The situation is more different for owner occupiers of housing. And there are clear reasons why you wouldn’t perhaps want new development, or at least mass scale new development in the area that you live.

20:01 Aaron Powell: So you’re saying we should just subsidize home ownership too.

[laughter]

20:03 Ryan Bourne: No, no I’m not saying that.

20:05 Trevor Burrus: Wasn’t that recently proposed by Elizabeth Warren like, or of some sort? You mentioned kids, young people. When we talk about the poor sometimes we’re talking about people beginning in their careers too, 25-year-olds not yet making a ton of money, and it seems that the housing costs in a place like San Francisco or New York City, if you wanted to move there and take advantage of the, as Ed Glaeser says, the dynamics of a city to have better economic opportunity, to have better social opportunity, but you’re just simply being priced out of living in New York City or San Fransisco, anymore. Does that have any measurable huge effects or measurable effects on people’s ability to start a career in an urban environment if they simply can’t afford to live there when they’re 25-years-old.

20:52 Ryan Bourne: Well, some researchers have suggested that the overall impact on GDP is huge. So there was one study in particular, the author’s name escapes me now, but there’s one study that suggested that, if you reduced the extent and the kind of tightness of zoning regulation in just three cities, New York, San Jose and San Francisco to the average across the country, then you could increase GDP by 9%.

21:22 Aaron Powell: Wow.

21:23 Ryan Bourne: Which is a huge, huge impact.

21:24 Aaron Powell: That’s huge.

21:25 Ryan Bourne: Probably… Now that’s been contested. But let’s say even on conservative estimates it’s half of that, that’s still huge. That’s still over a years’ worth of economic growth. So we’re talking about a monumentally big impact. Now clearly, if you are young and you’re trying to access those jobs for the first time and you want to move to a dynamic growing area and zoning makes it more difficult, then it’s gonna mean, on the margin, you’re less likely to be able to move there first of all. It may well mean that you decide that you need to commute from some of the suburbs of that city; sometimes a bit further out and drive in so you can… There’s a big opportunity cost in terms of the amount of time and money you spend on commuting in or traveling each day to work. And some people, because they’re so determined to get decent jobs in these cities, end up living in extraordinarily cramped and undesirable conditions as well.

22:26 Ryan Bourne: Now, it’s much more difficult for poor families, especially those who have children, to adjust downwards in that way in terms of the amount of space that they’re willing to live in without very, very negative consequences. So I’d say that this problem is particularly acute for families with children who would find it less desirable to live in that sort of environment.

22:46 Aaron Powell: So one way that well-meaning, urban residents have tried to address this problem of the poor not being able to live in their cities is through boosting the minimum wage; that you just… The poor aren’t earning enough to live there, so just dictate by law that their employers have to pay them enough; a living wage, it’s called. Do we have… What’s the evidence look like on that? ‘Cause it sounds like a nice picture, right? You just mandate by law that people make enough money to live and then they can do that, which would be wonderful.

23:21 Ryan Bourne: Well, first of all, there’s, before we get onto the economics, there’s a philosophical point right here which I find really bizarre, which is that the living wage campaigns across this country, and indeed internationally, seem to be saying that rather than compensate you for the actual work that you undertake during your working hours, an employer has a duty to compensate you for your external living circumstances; whether that be your rent, your food bills, how many children you have and all of these other things. And that’s a profoundly dangerous idea, which has been picked up actually by members of the political class, including Bernie Sanders, perhaps most famously, this idea that employers have a responsibility to pay you for all of your living circumstances and if they don’t, they are in some way being subsidized by the government, because their employees are then in receipt of various welfare payments. So let’s park that philosophical issue for a second. On the economics, I think it is fair to say that, despite some of the warnings that perhaps economists on the free market side have made over many, many years about the jobs impact and minimum wages, minimum wages set conservatively overall for labor markets do not appear to have major consequences in terms of their effects on jobs and hours.

24:42 Ryan Bourne: And they certainly have differential impacts on different groups within there. Young and unskilled teenagers, in particular, seem to find it much more difficult to be able to find jobs or hours as a result of that. We see instances of companies replacing low-skilled tasks with machines, and that one could imagine on the margin that’s accelerated by higher minimum wages. But set conservatively, it does not appear as if minimum wages have a massive impact on jobs. Now, that said, studies that have looked at much bigger minimum wage hikes, or in the case of Seattle being the obvious example, there was a University of Washington study that looked at a two-stage hike in the minimum wage that was implemented there, and the first raise didn’t appear to have an effect on the overall labor market. But the second raise to, I believe, $11 an hour did have a big impact and it both reduced the number of hours worked by low-paid employees and reduced the number of jobs available, so much that, on average, people within that low paid group defined as earning under $19 an hour, were actually worse off on average as a result of the policy.

26:05 Ryan Bourne: Now, the rest of the literature from my reading, and there’s a lot of back and forth on that, seems to therefore suggest that if you raise the minimum wage too much, or too high, then you do get the effects that classical liberal economists have long warned about. And secondly and importantly, certain studies that in the past have found no impact of the minimum wage on jobs, have tended to look at very specific industries; the restaurant industry is an example. Now the fascinating thing about the University of Washington study is that they looked at the overall impact on low-paid employees across the whole economy in Seattle, but also undertook an analysis just of the restaurant industry, and they replicated the finding of other papers, that in the restaurant industry, there didn’t appear to be a big impact, or if any impact, of the minimum wage on jobs, but more broadly they did, which suggests that many of these previous studies that have proxied for the impact of minimum wages just by looking at the restaurant sector, may have been missing much bigger impacts on other industries.

27:12 Aaron Powell: Why wouldn’t you see the impact? It just makes intuitive sense that if you increase the price of something people will buy less of it. So why would the restaurant industry be able to absorb a minimum wage hike?

27:29 Ryan Bourne: Well, there’s all sorts of ways that different companies can react. One thing that means that it might not be picked up, and it depends on the timeframe of your data, is that many companies don’t adjust straight away, but it may well affect their hiring decisions next time they’re deciding whether to expand or not. There are costs to laying people off as well, don’t forget. There are costs in terms of lost experience and skills. You’ve taken time often to get people used to working in an environment. In some companies, there are redundancy costs and all sorts of other things, so it’s costly to lay people off and it’s costly to retrain. So, as I say, one impact is that you might see future job growth affected rather than an increase in unemployment there and then.

28:20 Ryan Bourne: Some businesses, no doubt, do use it as an opportunity to invest in labor-saving technologies or increased productivity in other ways and make the stock of jobs that they do have more highly productive than they otherwise have been. So they use the minimum wage hike as a catalyst for rethinking their business, and not all businesses are operating on maximum efficiency straight away, so some businesses can deal with it in that way. And some businesses are able, depending on how responsive their demand is, to at least put some of the costs through to consumers in terms of higher prices.

29:00 Aaron Powell: Do we have evidence of that? So in these restaurant industry studies, do we see the restaurants raising prices after minimum wage…

29:06 Trevor Burrus: I personally see it all the time though. They’ll even announce that they’re raising prices because minimum wage went up.

29:11 Ryan Bourne: Yeah, there certainly is a lot of anecdotal and economic evidence. Usually the studies… Well, quite often the studies don’t look at both things at once, but certainly there have been many studies that have looked at the impact on restaurants and fast food chains of increasing the minimum wage and have found that it was in part passed through in higher prices. Yeah. And of course, that can affect poorer people as well, if that kind of price increases primarily in fast food outlets which poorer people are more likely to spend money in.

29:48 Trevor Burrus: There seems another philosophical point which is related to the one you said initially is that there’s something very odd about believing that these people are not well off and then of commanding a business to be the ones who subsidize them as opposed to saying, “It’s all of our jobs to get together and subsidize them directly.” Which of course you’ve mentioned earlier is not the best way of alleviating poverty, but making the business bear this entire cost is kind of odd by itself. And you’ve seen some businesses like Amazon decide to voluntarily go upto $15 an hour, kinda making this claim to that kind of moral authority that, “We will take this on for our business, our workers, pay them the living wage, the ‘Fight For 15’. What do you think about when Amazon or companies like that make this big pronouncement that they’re gonna raise their wages?

30:40 Ryan Bourne: Yeah. Well I got annoyed with a lot of people who messaged me or reporters who got in touch from me and said, “What do you think of Amazon raising their minimum wage to $15 an hour?” I said, “Well, it’s not a minimum wage.” So let’s be absolutely clear. A minimum wage is a statutory mandate of what businesses should pay in terms of the minimum; an hourly rate within the state or across the country or within the city or whatever. What Amazon are trying to do is juggle decisions which businesses are making every day, which is, how much to pay your employees, taking into account what your long-term business plan is, taking into account the political pressure being put on you and your portrayal of your brand in the media, taking into consideration the bad press that you might get as a result of that, and taking into account the long-term profitability of the company. Now, the interesting thing about the Amazon decision is that Amazon has been at the forefront for many years of lots of investment in lots of labor-saving technology. They’ve opened, at least one that I know of, convenience store that has I think, one or doesn’t have any in-house staff. So they’re very well placed as a company in the longer term to make investments that lead to more productive jobs and a lesser need for lower-skilled employees, particularly as robotics and things within warehouses become more prevalent.

32:11 Ryan Bourne: Now, they accompanied their announcement, of course, by saying, “And as well as doing this what we want to do is start lobbying the federal government to raise the statutory minimum wage to $15 an hour as well.” And that will of course affect all businesses, including their competitors, many of which will not be as well-placed to deal with those changes and will not have the potential to invest in some of the technologies that Amazon do. But I do think in part, they were responding to political pressure, particularly from Bernie Sanders and others. And I do think that that is a crucial misguided point that Bernie was trying to kind of get across. He genuinely seems to believe that the existence of programs like food stamps and federal contributions to Medicaid and school meal vouchers and rental assistance and all of this other stuff, represents a subsidy from the taxpayer to companies who are then able to pay less. And I just think that’s wrong from a philosophical perspective, but also wrong economically. And the reason it’s wrong economically, if you think of your basic supply and demand curves, all of those forms of welfare that I’ve just outlined that you can receive in work, they’re conditional on your income level. They’re not conditional primarily on your work status.

33:34 Ryan Bourne: And so if you’re paying people some money through virtue of their income level, irrespective of their work status, then actually employers then have to offer higher wages in order to induce you to work, because now you’ve got this welfare subsidy for not working. So, actually, it has the opposite effect of what Bernie said, which is it contracts the supply of labor, and so other things equal, should be driving up wages that the employers have to pay. Now, it’s certainly true that there are some in-work benefits, the earned income tax credit being the most obvious example, that do to a certain extent subsidize employers because the whole point of them is to subsidize people into work. And the payment levels go up when you move in… Or the payment levels are there when you move into work and then remain high over the first band of income, where you’re earning income, and the result of that is to shift the labor supply out and reduce market wages. Now, that helps the people who it gives jobs to. It’s not good for perhaps substitute workers who are childless and are ineligible for the benefits.

34:42 Ryan Bourne: But the whole point of that program is to induce people into work because policy makers have felt that there are positive external effects from having more people in work. So, to kinda summarize that, the areas that he thinks the federal government subsidizes employers aren’t subsidies to employers, they’re taxes on employers, if anything. I think he’s fundamentally misguided about who should have responsibility for employees or individuals having an arbitrarily defined level of income, which we consider socially acceptable. And curiously, the types of benefits where you do see a degree of subsidy, he doesn’t say anything about, and I think that’s probably for the reason that there is quite a lot of evidence they are effective at getting people into work.

35:39 Aaron Powell: Is there… So for Bernie, one of the reasons that he would say, focus on the employer versus a kind of a community, society-wide obligation to help each other, which would then cash out in terms of paying higher taxes for welfare transfers or whatever, might be that he’s thinking in this kind of Marxist, all employed labor is exploitation sense. So if you’re hiring someone, you’re automatically… You’re just, off the bat, you’re doing something wrong.

36:09 Ryan Bourne: Mm-hmm.

36:10 Aaron Powell: But…

36:12 Trevor Burrus: How dare you!

36:14 Aaron Powell: But that view is not that common. So what’s the reason why people who are advocating like, “We need to boost the incomes of the poor so that they can afford houses in Seattle.” Are pushing for a minimum wage increase as opposed to simply saying, “Let’s subsidize wages. Let’s just do a straight-up wage subsidy.” And so if you’re making less than 15, then the tax payers of Seattle will cut you a check for the difference.

36:42 Ryan Bourne: Well, I think a lot of people are politically astute and recognize that transfer programs are, particularly to working age people; not so much to older people, transfer programs are incredibly unpopular for people who aren’t recipients of transfer programs. If you look around the world at almost any fiscal consolidation deficit reduction program, first and foremost, it goes after working age welfare because it actually is incredibly popular to cut it. Indeed one of the reasons in my paper that I suggest that this kind of supply side agenda and the cost of living should be something that appeals across both platforms, or both political parties or political viewpoints, is precisely that trying to boost people’s incomes through redistribution, is fraught with the timing consistency that views on welfare fluctuate much more than in many other policy areas.

37:42 Ryan Bourne: You go from saying, “We desperately need to alleviate this pain and suffering.” Through to, “Welfare moochers and welfare queens.” And that change can occur quite quickly. Whereas, if you were to undertake a quite robust supply side reform in a range of different markets under an overall banner of trying to reduce the cost of living, it becomes much more difficult to undo all of those reforms, and it’s not something that can change dramatically. Now to go back to your first point, so that’s politically I think is a recognition that certain transfer programs are unpopular. There has been an economic narrative develop in the last few years, and whilst it’s not quite the Marxist kind of viewpoint that you suggested, that all employers are kind of evil capitalists, is pretty much getting there, which is the idea that all employers have a degree of what’s described as a kind of monopsony power. Employers tend to know better the opportunities available to any individual employee better than the employee themselves across the different industry. They’re privy to more information on the broader labor market because they quite often hire a bunch of different people and they interview them and all this other kind of stuff, and that gives them a degree of market power to suppress wages below what they should be in free, open and competitive markets.

39:18 Ryan Bourne: And that traditionally that story was related to the idea of kind of company towns in the 19th century and mining communities where you’d have one overwhelming employer. I really do fail to see how that’s even theoretically possible when we’re talking about a company such as Amazon and employing relatively small numbers of people, except for in a couple of different cities, but small numbers across a wide range of different places. And it certainly doesn’t seem to me that there are many industries that you can conceive of where at a local level, any individual employer has that sort of power to determine wages outside of ordinary supply and demand functions.

40:04 Trevor Burrus: You write about these various programs. We’ve discussed some of them. How much does this add up to these ones that affect the poor disproportionately? How much does it add up to that maybe they’re getting, not fleeced by the government, but at least forced to pay higher prices for various things?

40:23 Ryan Bourne: Yeah, so I look at five different areas, which is housing, childcare, food, transport, clothing and footwear and then a broader occupational licensing impact of occupational licensing across the economy. And that incorporates I believe nine different policy areas. I was incredibly conservative, as I kind of have already implied, in looking at what the impact on people would be, but the direct price impacts on all of these things, depending on where you live and how many kids you have, I’d say that for a household in the poorest 20% of the income distribution, the impact could be anywhere between $800 and $3,500 when you combine all of these things, which is a huge amount when you consider that for the bottom 20% of the population, their total spending is around $25,000 a year. So it’s a pretty big chunk. And that can be much higher if you’re in certain Californian cities, for example, or you have lots and lots of children, that those impacts could be greater still.

41:33 Ryan Bourne: Now, what I miss out in these figures though, and what’s important, is that all of these policy areas are areas where I conceive that reform in the area in the direction I’m talking about, will also enhance GDP and it will also lead to a more productive economy and so higher wages through that mechanism, as well. And that would achieve higher wages, higher market wages, without some of the unintended consequences that you get with higher minimum wages, as we’ve already discussed, or more in the way of redistribution.

42:08 Ryan Bourne: So I think the impact is pretty large, and I think there are good political reasons why this sort of agenda should be appealing, not least because it appears that we have hit diminishing returns when it comes to how redistribution and minimum wages and things can improve the wellbeing of people at the bottom, and not least because we’re facing a huge federal deficit as well, which should at some stage become a binding constraint against people suggesting more and more wacky policy proposals.

42:42 Aaron Powell: What about a federal jobs guarantee, which is another hot proposal from people on the left? So this is where you would simply, if I can’t find a job working for a private employer the government would essentially give me a job and pay me some minimum amount. That seems, if I’m not in the labor market, I’m not being productive. I’m not contributing to the economy. And we have lots, and I don’t know how many people the federal government employs right now but it’s quite a lot. And so, what’s wrong with just increasing those pay rolls enough to kind of get everybody on board?

43:23 Ryan Bourne: Well, there’s a lot wrong with it. One of the things I’m really struck by by this is the labor market in the US is pretty healthy at the moment.

43:30 Trevor Burrus: Yes.

43:30 Ryan Bourne: Unemployment…

43:31 Trevor Burrus: Three point something.

43:32 Ryan Bourne: 3.7%.

43:32 Trevor Burrus: Yeah.

43:33 Ryan Bourne: Some of the kind of African-American, Hispanic unemployment rates are the lowest they’ve been for decades. Yet the radical nature of the suggestions for what we should be doing instead seem to be proliferating at a rate of knots. So not only have you got the jobs guarantee, but of course the discussion about basic income and then everything that comes with that; negative income taxes and a whole range of other things. Now, the suggestion for jobs guarantees that we’ve heard from Bernie Sanders and Cory Booker’s talked about piloting and certain think tanks are pushing, would in essence say that, any private individual that wanted a job, at $15 an hour plus healthcare benefits, financed through the federal government, could have a job. So it’s not just people who haven’t been able to find a job. [chuckle] It’s not just people who are currently unemployed or people who are employed part-time, but wish they were employed full-time, or people that had left the labor market after 2008 and now can’t find a job, this will be open to anyone.

44:38 Ryan Bourne: Now, they think that 16 million people would take this job up. That would make the program, if you looked at it at an individual basis, the largest employer in the world by far. [chuckle] By far by order of magnitude, I think bigger than the next five biggest employers after that combined. But even that only considers that the people that I talked about, people currently unemployed or want to work longer or recently left the labor market take this up. In reality, if your paying a job as its basis, is paying you over $30,000 a year, and you know that that job is guaranteed and you don’t face the kind of perhaps market disciplines or unpleasant working conditions that certain market jobs entail, then I could foresee a situation where the number of people willing to take that up was dramatically higher than 16 million. And the real question is here, “Well, what would all of these people do?”

45:45 Ryan Bourne: Democrats have talked… Democrats who have been pushing this idea have talked about people engaging in infrastructure projects and caring jobs and environmental jobs, and of course I imagine at least some things that people will undertake in these types of things would be worthy in some way. But what this gets fundamentally wrong from an economic perspective, and why it would be so damaging to the economy, I think, is because it fundamentally gets what work is about the wrong way round.

46:12 Ryan Bourne: The reason that work is inherently valuable is because people are engaging in the production of goods and services that other people are demanding. That’s where the value of the value added from work comes from. That’s the whole point of work. Work is a… Jobs are a cost to the production process, but the reason that they’re valuable is they add value in producing the goods and services that we all want. This tries to flip on its head and says, jobs are inherently valuable and what we need is to create work for anybody who wants to work and it almost doesn’t matter what they engage in. Now aside from anything else, you can see when you view it in that way, that through the prism of kind of economic welfare this cannot be anything other than very, very damaging to the productivity levels of the economy. Now, so there are big problems with it. The first problem is, I think, way more people would take this up than is suggested by some of these proposals, and that would mean the cost would be astronomical. Well, you’re talking about anywhere between 2 and 5% of GDP; an additional program, which I believe is bigger than Medicaid, just added to the federal budget straight away.

47:33 Ryan Bourne: I think it’d be damaging for the economy for that because it would be putting more resources towards things that are inherently less valuable for the reason that I’ve outlined. And I think thirdly, it would be prone to a hell of a lot of corruption, and I don’t mean just kind of the usual ostentatious corruption, but actually political candidates and local areas which are kind of bidding for these federal workers engaging in projects that perhaps circumvent the political process in other ways. So, one example that I’ve given of this is, that I have no doubt that if this kind of jobs guarantee was on the books, Democrats in many areas would use it to push for environmental projects, but equally one could imagine Republican candidates, and in particular areas, bidding for workers on the basis of wanting people to say, “Build a border wall.” For example.

[chuckle]

48:29 Ryan Bourne: So I think when you combine those three things that the direct fiscal costs, the economic costs and then the kind of corruption and perverse incentives, I just think it’s a dreadful idea.

48:42 Aaron Powell: Is there provisions in there for like, you can get fired? Because if I’m guaranteed a job, can I just not show up? But because I’m guaranteed I’m still gonna get paid. Or show up but just not do anything? Or if they decide, if they can’t fire me, can I then just kinda go home and log into the website again and say, “Well I’m out of a job, give me another one.”?

49:03 Ryan Bourne: Well, that’s actually a very, very good question, ‘cause it is something that I thought about when I was reading the paper by the Levy Institute. And they seem to suggest in there that, whilst people would be judged on their output to a certain extent, they would not be held to market disciplines, which is actually one of the reasons why I suspect many more people would be willing to take these jobs up than perhaps their initial calculations suggested.

49:28 Trevor Burrus: Much easier, yeah.

49:29 Ryan Bourne: Exactly. And if you know that there’s far less risk and far more economic security working in one of these positions, then I don’t see why the number of people who wouldn’t take it up would be much, more higher.

49:40 Trevor Burrus: When libertarians and conservatives, some libertarians and conservatives, talk about the poor, sometimes they talk about, in an insulting fashion, that the poor deserve their lot and they don’t deserve welfare or things like this. But it seems like your vision is a little bit different; that they’ve been held down by various things to live worse lives by government programs and that this is something the way that libertarians should talk about poverty rather than attacking the poor and believing that the market order is just.

50:14 Aaron Powell: Yeah, I think that’s right. I think that… Look, we could imagine the situation where there were no redistributed programs and no minimum wage or whatever, and we could all speculate as what the outcomes in that market economy would be. It seems doubtful to me that we’d be in a situation where every single poor person was better off if there were none of these programs whatsoever.

50:38 Ryan Bourne: But equally it seems likely to me that, if none of these programs existed we’d see significantly more in way of civil society or charitable institutions undertaking a lot of the functions that governments have. So we can kind of park that theoretical debate. I think the useful thing about this type of agenda is it offers something to everyone. To liberals, I can say, “You don’t have to believe that all welfare programs have failed to think that they’re actually undermined by all of these regressive regulations which drive up the basic costs of goods and services. I mean, the money that you transfer people, isn’t going as far in and delivering high living standards as perhaps you would like.”

51:21 Ryan Bourne: But equally you can turn to conservatives and say, “Well, one of the reasons why we’re seeing demands for high living wages and minimum wages, and one of the reasons why we’re seeing these policy proposals, jobs guarantees and Medicare for all and all of these other programs, is precisely because people at the lower end are struggling, in part, under the burden of some of these regulations, and some of the demand for new programs or demand for improved generosity of increasing programs comes as a result of the need to compensate people for these bad policies.”

52:00 Ryan Bourne: So I don’t think you have to be conservative or progressive to think that this is an agenda that you could sign up to. The basic point I’m trying to get across is that, irrespective of your views on redistribution, irrespective of what you think on the economics of a minimum wage, there are clearly a bunch of things that governments do to drive up the cost of necessities and that has direct financial impacts on the poor. It means they spend more than they otherwise would need to have obtain the same goods and services, but it also makes the economy far less efficient and reduces market wages at the same time.

52:40 Trevor Burrus: Thanks for listening. Free Thoughts is produced by Tess Terrible. If you enjoy Free Thoughts, please rate and review us on iTunes. To learn more, visit us on the web at www.libertarianism.org.