Susan Pendergrass is joined by Elias Tsapelas, director of state budget and fiscal policy at the Show-Me Institute, to explain what was actually at stake in the recent federal government shutdown. They break down the debate over extended Affordable Care Act subsidies, why health insurance costs keep rising, how COVID-era provisions distorted the marketplace, and what Congress may do next.

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Timestamps

00:00 Understanding the Government Shutdown
06:31 The Debate Over ACA Subsidies
09:10 Impact of the Affordable Care Act
13:24 Proposals for Health Care Reform
17:53 The Future of Health Care Costs

Transcript

Susan Pendergrass (00:00)
Well, this is going to be a very timely and interesting conversation with the Show-Me Institute’s own Elias Tsapelas. You are the Director of State Budget and Fiscal Policy, two things that are front and center right now, but I really wanted to just have you on to talk about a little bit of stuff around the recent government shutdown.

And I just want to say upfront, if I understand this correctly, the federal government can’t pay its bills unless it’s got an approved budget to pay the bills, right? And the fiscal year runs October 1st to September 30th. And if you don’t have a new budget for the next year, you can’t pay your bills. So it’s up to the Senate, the House, and the President to agree on a budget. And this past September, as has happened before, they could not agree, and Democrats were holding out, and that caused the government to shut down. What were Democrats saying they were holding out for?

Elias Tsapelas (00:52)
Well, I guess I should start with just a little caveat that some of what the Democrats were saying they were holding out for was not precisely what was on the table. So no matter what happens, health care premiums are going to be going up, that’s just a fact, because health care costs are up. Health care costs are going up everywhere. Hospitals, Medicaid, we see it everywhere.

Susan Pendergrass (00:56)
You know, fix it up for me. Why?

Elias Tsapelas (01:20)
What they were holding out for were these extended or expanded ACA subsidies, Affordable Care Act subsidies. We’re talking about the marketplace here. This is typically for people making between 100 percent and 400 percent of the federal poverty limit. For example, a couple of two: 100 percent of the federal poverty limit is about $21,000 per year, 400 percent is about $85,000 per year. That’s roughly the range you’re looking at.

Now, some small employers do purchase plans through the marketplace, but the big piece here is that the ACA provides subsidies for people. And the way it works, essentially, is that people pay a proportion of their income. If your income is 100 percent of the federal poverty limit, you’re going to pay roughly 2 percent of your income. Now, there are extended subsidies that change that calculation. But the point being, the law set out that if you make this amount of money, you’re only going to pay this much on health insurance, and the government is going to subsidize the rest. You are not sensitive to costs at all, because your costs are tied to your income.

Susan Pendergrass (02:54)
So, for example, if you earn $4,000 a month, theoretically, and I don’t know the numbers, the government would say you won’t pay any more than $300 in insurance premiums?

Elias Tsapelas (03:05)
Yep. And so that is a percentage that you pay scaled off how much income you have from that 100 to 400 percent. That is a core piece of how the Affordable Care Act worked, and everyone paid a portion based on the base subsidies.

Now, what the debate was about, or what Democrats were holding out for, was expanded subsidies, which came about during COVID as part of the American Rescue Plan, ARPA. And it did a couple things, but they were subsidies on top of regular subsidies. So this was not, “If this doesn’t happen, everyone is going to be paying unsubsidized plans.” This was an additional type of subsidy. These additional subsidies were set to expire at the end of the year, at the end of December. ARPA gave four years of subsidies.

Susan Pendergrass (04:04)
Because it was COVID related, temporary, and they said, “We’ll cover more of your premium through December 31, 2025.”

Elias Tsapelas (04:14)
Yes, I think part of the calculation was that people were going to like it so much that it would be hard to get rid of. And it’s certainly the case: if these subsidies go away, people will be paying more.

Susan Pendergrass (04:15)
Ahem.

Elias Tsapelas (04:27)
But that is not to say there would be no subsidies at all. These extended subsidies did a couple things. For people between 100 and 150 percent of the federal poverty limit, quick caveat: in Missouri, if you make under 138 percent, you’re on Medicaid, so you don’t pay anything, but in many states without Medicaid expansion, people go on the marketplace. What these expanded subsidies did is: if you made between 100 and 150 percent of the federal poverty limit, you paid zero percent of your income. You got a plan for free.

You would still have some cost sharing, and the sliding scale up to 400 percent that the normal subsidies used was lowered, so people under regular subsidies who made 400 percent of the federal poverty limit were paying about 10 percent of their income. With the expanded subsidies, you’d only pay 8.5 percent, and the subsidies no longer stopped at 400 percent. They would go all the way up. You would never pay more than 8.5 percent of your income.

Susan Pendergrass (05:30)
Okay.

Elias Tsapelas (05:42)
But typically, people above 400 percent of the federal poverty limit don’t want to buy ACA plans because 8.5 percent of income is expensive. Still, a decent number of people were impacted. It costs a decent amount of money. The Congressional Budget Office says extending these expanded subsidies costs about $350 billion over 10 years. Very expensive. But there are a lot of issues here, which Republicans are pushing back on as they negotiate whether to extend these by the end of the year.

Susan Pendergrass (06:31)
So now we’re in this argument of whether we extend COVID subsidies or not. And like you said, Republicans seemed willing to say maybe a year, or maybe we’ll vote on it in December. Essentially the Democrats didn’t get any of what they asked for, right?

Elias Tsapelas (06:48)
Yeah. A key piece is that when Democrats passed this in ARPA, no Republicans voted for it. There’s a variety of reasons, but a big one is that it exacerbates problems with the Affordable Care Act. People buying health insurance are seeing higher prices, high deductibles, high copays, so people don’t want to buy it. These additional subsidies got more people into the market, but at a very expensive cost. And because people are not cost sensitive, their share is tied to their income, the subsidies scale regardless of what insurance companies charge. That creates unintended effects. There were allegations of fraud. And a larger discussion: if we’re going to spend $350 billion per 10 years, is there not a better way to get healthier people to buy health insurance? Is there a better way to help people?

And the people most impacted are those around 400 percent of the federal poverty limit, not very low income people. Higher income people. And often near retirement folks who aren’t working anymore but aren’t yet on Medicare. They need health insurance, they have health needs, and insurance gets very expensive. That was something the Affordable Care Act tried to deal with. But doubling down on continuously funding this subsidy system is something Republicans didn’t want to do.

Susan Pendergrass (09:10)
Yeah. So we had Brian Blase of Paragon on the podcast, and he absolutely did not want those COVID related subsidies extended. He claimed that the Affordable Care Act caused health related expenses to go up. Do you know how that works?

Elias Tsapelas (09:45)
There are a couple things going on. One big thing Brian talks about is likely enormous fraud from the expanded subsidies. Bloomberg had a good article about what happened in Florida. As soon as the federal government offered zero premium plans for people between 100 and 150 percent of the federal poverty limit, background: Florida hasn’t expanded Medicaid, so people enroll on the marketplace. What happened is that it became a business for insurance brokers to get people enrolled. Brokers make money off enrollments, and people don’t care if they aren’t paying premiums.

So you had an enormous increase in people supposedly making between 100 and 150 percent of the federal poverty limit. Census data suggests far fewer people actually make that income. Tons were getting health insurance for free, and many weren’t using it. You’d expect higher usage. There are reasons to think there was widespread fraud.

More broadly, ACA plans must cover many things people don’t need, which drives up costs. And the marketplace risk pool is heavily made up of sick people, fewer healthy people, which makes insurance expensive.

So the bigger discussion is: how do you get healthier people into the market? How do you offer plans people want? Republicans are taking a stand that doubling down on the ACA model, with subsidies disconnected from costs, won’t work long term.

Susan Pendergrass (13:24)
Correct me if I’m wrong on this, but didn’t Senator Thune or somebody suggest just sending people $5,000?

Elias Tsapelas (13:30)
I don’t know if it was exactly that amount, but yes, there have been proposals essentially saying: maybe there will need to be a one year extension of subsidies because new plans start soon and it would be hard to roll out big changes in a month. But some ideas, from Senator Cassidy, Senator Thune, and others, propose approving the same amount of money but sending it directly to people instead of insurance companies. For many people, subsidies are worth over $30,000 a year. If people got $30,000, they might not spend it all on an ACA plan costing that much. They might buy a cheaper plan, use out of pocket spending, or seek non ACA compliant plans. There are ideas: HSAs, short term plans, specialized plans. A key piece is giving the money to people, not insurance companies, so someone has an incentive to reduce costs.

Susan Pendergrass (15:47)
Yeah. Well, the shutdown ended. Nothing really changed, right?

Elias Tsapelas (15:52)
Yeah. Congress will have to work a lot in the last month of the year. I’m a little disappointed. There were almost some very interesting budget related court cases that could have come from the shutdown. One argument was whether the government must fund food stamps, or SNAP, during a shutdown, whether they must give out money not appropriated. Some judges said yes. That raises major questions: can courts tell the executive branch to spend money Congress didn’t appropriate?

Susan Pendergrass (16:54)
I think they were told that they don’t, right, in the end?

Elias Tsapelas (16:59)
The Supreme Court basically said courts needed to wrestle with the issue. It got resolved before a final answer. We don’t know for now. Judges were on different sides. Democrats pushed back noting that in previous budgets, they fought to fund things, but the executive branch simply didn’t spend the money. There’s a lot of interesting stuff: can courts force funding, can the executive disregard congressional appropriations? I’m upset that didn’t get resolved. But the ACA issue is big enough that Congress has its hands full.

Susan Pendergrass (17:53)
Some folks said that because of the SNAP benefit question, we were just getting to the point where Americans were paying attention to the shutdown and then it ended. And what’s interesting is the amount of misinformation and hard to follow information. I saw headlines about someone’s insurance premiums going from $300 to $2,600. I don’t know if any of that was right, but it got a lot of play.

Elias Tsapelas (18:28)
I don’t think it was covered especially well in terms of what was being argued, because the government shut down far before these subsidies expired. There was a lot of muddying of the waters. Some people thought if subsidies weren’t extended, no one would have subsidies, even though the people most impacted would just go from paying 8.5 percent of income to 10 percent. Not nothing, but not catastrophic.

Health care costs are going up broadly. Medicare enrollees are getting renewal notices. Everything is going up. ARPA was designed to be temporary. If it were supposed to be permanent, Congress could have made it permanent. Whether Democrats thought it would be continued forever or just help temporarily is unclear. But if Congress comes up with something that makes health insurance better, I’m all for it. There are tough decisions. Congress has struggled with ACA reform for a decade.

Susan Pendergrass (20:20)
I think we know the answer to that. At the federal level, when they want to do big splashy things, ARPA, the ACA, the Tax Cuts and Jobs Act, they make expenses short term to reduce the fiscal note, assuming someone will renew them later. Same thing with the Tax Cuts and Jobs Act. They assume future lawmakers will extend them. So it’s not unreasonable that ARPA had temporary provisions assuming they’d get extended. I guess not this time.

Elias Tsapelas (21:12)
People’s health care costs going up is a big issue. People won’t be happy regardless. But returning to issues that should have been addressed when the ACA passed is important. The marketplace is dysfunctional and too expensive. Hopefully Congress finds something better. And I don’t want to minimize issues for people close to retirement. That’s a big issue: people between 55 and 65, not on Medicare yet, often have significant health needs. If you tell a 60 year old who isn’t working that coverage is $40,000 a year, that won’t work.

Susan Pendergrass (21:53)
Yeah. That’s right.

Elias Tsapelas (22:23)
More options will be good. That is an important group that needs to be addressed.

Susan Pendergrass (23:07)
Well, thanks for explaining it so clearly and helping our listeners understand what was actually on the table. It’s a complicated topic, but we’ll watch it unfold over the next year, and hopefully you’ll come back and explain what’s happening as it unfolds.

Elias Tsapelas (23:23)
Hopefully something does happen, so there is something to explain. That would be the best case scenario.

Susan Pendergrass (23:25)
That’s right. All right, well, thanks so much, Elias. Really appreciate it.

Elias Tsapelas (23:31)
Thank you.

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The post What the Government Shutdown Was Really About with Elias Tsapelas appeared first on Show-Me Institute.

Susan Pendergrass is joined by Elias Tsapelas, director of state budget and fiscal policy at the Show-Me Institute, to break down the sweeping new federal legislation known as the “One Big Beautiful Bill.” They discuss what it really means for Medicaid recipients, food stamp programs, state budgets, and Missouri taxpayers.

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Timestamps

00:00 Understanding the One Big Beautiful Bill Act
06:44 Medicaid: Changes and Implications
11:23 SNAP Benefits: New Regulations and Effects
14:18 Tax Implications for Missourians
19:09 Future of Medicaid and State Budgets

Episode Transcript: Understanding the One Big Beautiful Bill with Elias Tsapelas (Download Here) 

Susan Pendergrass (00:00)
Okay, here we go. You ready? Elias Tsapelas, we are going to talk about IT—the big IT—the One Big Beautiful Bill Act. I don’t feel like I understand it. I suspect there’s a lot of people reading the news that don’t understand it, but you seem to understand a lot of it. So thanks for coming to talk to us about it today.

Elias Tsapelas (00:19)
No problem. I think there’s a lot of misconceptions, especially about what’s happening with the welfare programs in the bill. So I’m happy to dive into those.

Susan Pendergrass (00:27)
Yes, yeah. I’ve definitely seen claims that this is going to basically strip health care from millions and millions of people and that kids will be hungry. And I don’t want to minimize that. But we had Brian Blase on the podcast, and I thought I had an understanding of it that didn’t exactly line up with that narrative. So let’s just start there. People are saying that tens of millions of people are going to lose health insurance under the One Big Beautiful Bill Act. Explain that to me.

Elias Tsapelas (01:01)
Well, the first thing people need to understand about Medicaid is that it’s gotten tremendously more expensive in recent years. The Biden administration made a lot of changes during COVID—changes to how the program works and its future trajectory. Even after the One Big Beautiful Bill goes into effect, we’re basically just putting the program’s costs back on the trajectory it was on in 2021. This isn’t going back to the Stone Age—it’s more like going back five years.

A lot of this stems from efforts to eliminate waste, fraud, and abuse. And while there’s certainly some of that, what many people don’t realize is that most states, including Missouri, now contract with private health plans to cover people on Medicaid—particularly the Medicaid expansion population, which consists of healthy adults.

Susan Pendergrass (02:11)
Okay, so let’s just pretend we know nothing. Medicaid is a program that covers health insurance costs for low-income and disabled individuals?

Elias Tsapelas (02:24)
Yes. About 50% of kids in Missouri are on Medicaid. The program covers around two-thirds of all nursing home costs and over a third of all births in the state.

Susan Pendergrass (02:34)
So low-income pregnant women can get Medicaid coverage, and their children can as well. Who exactly is in the “expansion population”?

Elias Tsapelas (02:47)
Good question. And just to clarify—yes, Medicaid also covers a lot of very disabled individuals who private health insurance wouldn’t. But the expansion population refers to healthy adults making up to 138% of the federal poverty limit. These are not permanently disabled people. They’re generally able to work.

Before 2021, someone like me—unmarried and childless—couldn’t qualify for Medicaid in Missouri, even if I lost my job. Medicaid expansion changed that, and with it came a lot of problematic incentives. One issue is that states are paying health plans monthly for enrollees, but there isn’t always a process to verify whether those people are still eligible.

Susan Pendergrass (04:53)
Let me just stop you there. So the state is paying monthly premiums for people who might not even know they’re on Medicaid? And they might have a job now and no longer qualify, but the state hasn’t gone back to check?

Elias Tsapelas (05:40)
Exactly. Ideally, people would notify the government when they get a job, but most don’t, and the IT systems don’t really catch that. Previously, states just paid the bills as they came in. If someone didn’t go to the doctor, there was no cost. Now we’re paying premiums whether they use care or not, which adds up quickly.

Susan Pendergrass (06:40)
So what’s in the One Big Beautiful Bill? Are states required to recertify people?

Elias Tsapelas (06:45)
Yes. One big provision is that states must check eligibility at least twice per year. The Congressional Budget Office projects significant enrollment losses just from checking more often. That’s raised concerns about red tape, but the goal is to ensure people who are no longer eligible aren’t still receiving coverage.

Susan Pendergrass (07:13)
Can Missouri do that? Do we have the systems in place?

Elias Tsapelas (07:20)
I’d like to think so, but I’m not sure. During COVID, states weren’t allowed to check eligibility at all for over three years. Missouri spent an entire year catching up when that ended. Right now, about 1.2 million people are on Medicaid in Missouri, including 350,000 in the expansion group. So yes, it would mean more IT strain.

Another major part of the bill is requiring “community engagement” or work requirements for the able-bodied expansion group.

Susan Pendergrass (08:24)
So that’s people under 65 who aren’t disabled? How do they know who’s supposed to work?

Elias Tsapelas (08:32)
There are carve-outs—new moms, parents with kids under 14, people over 65, etc. The idea is to target people who could be in the workforce. There are also alternative ways to meet the requirements, like volunteering. And it’s worth noting: the SNAP program (food stamps) has had work requirements since the 1990s.

Susan Pendergrass (10:25)
Then why are people saying this will “kick people off”?

Elias Tsapelas (10:33)
Because people will have to meet work or volunteer requirements, and the state will recertify them more often. The question is: how many people will get caught in red tape? That depends on how well states implement the changes. Most of the bill’s provisions are phased in over time to allow states to adapt.

Susan Pendergrass (11:34)
Let’s talk about SNAP benefits. People are saying this will take food away from families. What’s actually changing?

Elias Tsapelas (11:46)
The federal government will now penalize states with high error rates in SNAP administration. Missouri’s overpayment error rate is about 10%, and some states are worse—Alaska’s is nearly 25%. Under the bill, if your error rate is over 6% for two years, the state will have to start covering some of the cost. So Missouri may have to pay a portion of benefits if it doesn’t improve.

Susan Pendergrass (14:06)
How does the bill impact taxes for Missourians?

Elias Tsapelas (14:14)
The standard deduction is going up—by $750 for single filers and up to $6,000 more for seniors. There’s also a new deduction for car loan interest and temporary exemptions for taxes on tips and overtime. Since Missouri’s tax code follows the federal code, that could mean less state revenue, too.

Susan Pendergrass (15:41)
So what will this cost Missouri?

Elias Tsapelas (15:46)
It depends. If we reduce our SNAP error rate, the cost isn’t too bad. But a bigger issue is the provider tax cap dropping from 6% to 3.5% over a few years. Missouri is at 4.2% now, so we’ll need to lower it. That tax generates about $1.5 billion per year for hospitals.

Susan Pendergrass (17:09)
How does the rural hospital fund come into play?

Elias Tsapelas (17:24)
The bill creates a $50 billion Rural Hospital Fund to be distributed over five years. States will get a portion based on how rural they are. The hope is this fund offsets the provider tax losses—at least through 2030. But after that, the fund ends. So there’s concern about what happens long-term.

Susan Pendergrass (19:18)
Senator Josh Hawley mentioned he supports the bill but hopes to fix the provider tax issue in five years.

Elias Tsapelas (19:29)
That seems to be the thinking—pass it now and revisit the unpopular parts later. A lot of the tax and spending changes are temporary, which is partly how they got the bill to comply with budget rules.

Susan Pendergrass (20:30)
This reflects what voters asked for—smaller government and more state responsibility. It reminds me of the Department of Education cuts. Missouri will have to decide which programs to keep and how to fund them. But I was surprised the expansion of the MOScholars tax credit program made it in.

Elias Tsapelas (22:35)
Yes, Medicaid will continue to dominate the state budget if we don’t address it. Every year it’s, “How much more is Medicaid going to cost?” Then we build the rest of the budget around that. This bill will force Missouri lawmakers to reevaluate some of those assumptions and perhaps reconsider whether managed care is working.

Susan Pendergrass (25:02)
That’s going to be interesting to watch. Thanks for breaking it down, Elias. This bill is being talked about a lot, but I think a lot of people are still unsure what it really does.

Elias Tsapelas (25:16)
No problem. I think we’re all looking forward to seeing what happens next.

Produced by Show-Me Opportunity

The post Understanding the One Big Beautiful Bill with Elias Tsapelas appeared first on Show-Me Institute.

Over the past few months, I’ve talked a lot about Missouri resuming its Medicaid eligibility redetermination process. In short, during a three-year pause on eligibility checks, Missouri experienced enormous Medicaid enrollment and cost growth. Today, more than 20% of all enrollees are likely ineligible for the program, either because they make too much money, have coverage from their employer, or have moved out of state. This means that Missouri is wasting upwards of $120 million each month footing the bill for health coverage for people who aren’t qualified to receive it.

Missouri’s Medicaid agency is now two months into processing redeterminations and enrollment has finally started dropping, albeit slowly. Recent reports from both national and local news outlets are attributing the enrollment decline to “paperwork issues.” In my opinion, this characterization is incredibly misleading.

States classify anyone who fails to respond to a renewal application as being removed from the program for “procedure reasons.” This is being referred to as “paperwork issues” by some. This is in contrast to the other classification of individuals removed from the program—those who were “determined ineligible.” The problem is that if the state never hears back from an enrollee after repeated attempts to confirm their eligibility, they can only be removed from the program for “procedure reasons” because there wasn’t enough information to determine their eligibility one way or another. Calling all failures to respond to the state Medicaid eligibility checks “paperwork issues” misses a key point.

Someone who knows they no longer qualify for coverage is incredibly unlikely to go through the effort of filling out and returning the Medicaid renewal application. For years, individuals on essentially every welfare program (including Medicaid, Supplemental Nutrition Assistance Program [food stamps], and Temporary Assistance for Needy Families) have been required to inform the state when something changes that would make them ineligible for services, but they rarely do. Recently, the Congressional Budget Office estimated that more than 5 million Medicaid enrollees nationally are currently enrolled in private health coverage, meaning states are losing billions providing coverage to individuals for whom it’s completely unnecessary.

Most Medicaid rules are biased toward recipients maintaining continuous coverage, which may sometimes be a good thing, but for many people, Medicaid is a resource they only need temporarily. No one is saying that eligible Medicaid enrollees should be removed from the program, but even if that does happen, they’re still effectively covered because the federal government will cover up to three prior months of health costs once they’re determined to be eligible again.

Removing Medicaid recipients who don’t provide evidence of eligibility is a necessary act of fiscal prudence—an act of prudence that, prior to three years ago, was standard, federally mandated operating procedure.

There’s no getting around the fact that more state tax dollars being spent on ineligible Medicaid enrollees means less money for other state spending priorities, such as education and infrastructure. If Missouri’s elected officials ever want a chance at reining in Medicaid’s runaway spending, scrutinizing the program’s rolls must remain part of the equation, and occasional drops in enrollment must be normalized as simply par for the course.

The post Problems with Paperwork appeared first on Show-Me Institute.

The good news: progress has been made. According to data released last week, the May consumer price index (CPI) inflation rate came in at 4%, which is far less than the 9% peak from mid-2022. However, now is not the time to move the goalposts. For years, the Federal Reserve has said its inflation target is 2%, and the economy is running at twice that rate. By contrast, before passage of the American Rescue Plan Act stimulus bill in early 2021, the economy had consistently remained at or below 2% inflation for the better part of a decade and had not hit 9% in over four decades. It turns out that former Treasury Secretary and National Economic Council Director Larry Summers was spot on in spring 2021 when he warned that “I think this is the least responsible macroeconomic policy we’ve had in the last 40 years.”

What is the reason for falling inflation? One explanation can immediately be ruled out. No, the Inflation Reduction Act (a misnomer if there ever was one) did not defeat inflation. For one thing, inflation was already falling before the bill passed in August 2022. Secondly, many of the provisions of the law have yet to go into effect. In fact, the treasury department and IRS just released guidance on some of the significant provisions of the Inflation Reduction Act just last week—nearly a full year after the bill’s passage.

The idea that the Inflation Reduction Act was going to reduce inflation has always been implausible, seeing as its tax hike provisions constrain supply, and its supposed deficit reduction does not begin to take place until 2028. The law increases deficits in the years 2024–2027. More artificially stimulated demand and constrained supply is not a recipe for bringing down inflation. If anything, the Congressional Budget Office is likely taking an overly sanguine view by saying that the law will have a negligible effect on inflation.

Instead, the Federal Reserve’s interest rate hikes and the expiration of American Rescue Plan Act provisions are likely the key factors behind the decline in inflation. Broadly speaking, there are essentially two ways to bring down inflation: reduce spending demand or expand the supply of goods and services. The second approach is preferable in that it simultaneously allows for lower inflation and higher economic growth, but the types of regulatory and tax policy changes needed to expand supply would require consensus in Congress and the White House abandoning the anti-growth policy agenda pushed by many progressives.

The first approach (reducing demand) is what the Federal Reserve has pursued. As the Fed raises rates, borrowing becomes costlier, which makes it less attractive for consumers to purchase things like houses, vehicles, and appliances using credit. Higher interest rates also make saving more attractive. The result: consumers pull back demand. Similarly, the expiration of stimulus from the American Rescue Plan Act reduces overheated demand while the expiration of anti-work provisions removes part of the straitjacket imposed on supply.

Is the falling inflation a surprise? Prognosticators have been all over the map with their inflation forecasts during the past two years, but it ought not to be surprising that inflation would come down once the Federal Reserve finally began to take action and hike rates. At the beginning of the year, soon after the release of the December 2022 inflation data, I published a blog post with a forecast of where inflation might be headed in the first half of 2023. In the spirit of accountability, the figure above shows my inflation projection through May 2023 compared to how inflation has actually played out in reality.

The red (projection) and blue (actual) curves track each other remarkably well in 2023. In fact, my earlier blog post stated “topline year-over-year inflation readings are set to fall rapidly over the next several months—possibly even falling below 4% by early summer.” As a reminder: the May inflation rate came in at exactly 4%. Although my projections were mildly on the optimistic side, they have mostly held up.

Does that mean inflation is no longer a problem? Quite the contrary. The figure below shows that higher prices have essentially been locked in. The Federal Reserve is not even attempting to bring prices down. It is just trying to moderate the future pace of price increases to historic norms. Unfortunately, purchasing power is still more than 3% lower than it was at the beginning of 2021, as shown in the figure below. Until wages start to consistently outpace prices, workers will continue to suffer from the lingering effects of the inflation surge. Here, too, the economy faces serious headwinds, considering that labor productivity is on the decline. But addressing the low productivity crisis is a topic for another day.

Where do we go from here? There is no such thing as almost landing an airplane. You either land it, or you crash. In this case, the Federal Reserve has one task: to land inflation at 2% sooner rather than later. The longer it takes to achieve the 2% target, the less inflation-fighting credibility the Fed will have as people start to accept a persistently higher inflation rate as normal, which will make the Fed’s job even more difficult.

While the headline inflation number is moving rapidly in the right direction (and will likely continue to do so at least for one more month), some of the components of inflation are still concerning. In particular, core inflation (which excludes food and energy) is falling much more slowly. The latest core inflation rate from the CPI report is 5.3%, which is only modest progress from the 5.6% rate from the start of the year. One glimmer of hope is that housing costs have been a significant recent driver of inflation, but the data are lagging. Because most people who rent sign one-year leases, large rent increases from several months ago when conditions were different in the rental market still affect current inflation readings. As tenants begin to roll over into new leases, the data should adjust and likely show a slowdown in rent increases.

The bottom line is that the inflation picture has improved, but we are arguably entering a murkier phase over the next several months. The Federal Reserve made clear in its statement regarding pausing rates that it was likely not done raising rates. Rather, the pause is an opportunity for more data to come in to guide future actions. But one thing is clear: the mission is not yet accomplished.

The post Taking Stock of Inflation and the Recent Fed Pause appeared first on Show-Me Institute.

What is the debt ceiling, and what would have happened had we not raised it?

The debt ceiling (or debt limit) is a legal limit on how much money the U.S. government is authorized to borrow. Once the country reaches this limit, the Treasury is not permitted to issue more debt.

Can we simply not raise the debt limit?

The Congressional Budget Office (CBO) projects that the federal government will run a deficit of more than $1.5 trillion in 2023 alone, with spending amounting to $6.4 trillion and revenue coming in at $4.8 trillion. Of the $6.4 trillion in spending, $4 trillion is for mandatory programs that operate without Congress needing to regularly reauthorize them (e.g., Social Security and Medicare), $1.7 trillion is discretionary spending, and $660 billion goes to interest payments. Balancing the budget and eliminating the deficit in one fell swoop would require essentially zeroing out discretionary spending or making instant, draconian cuts to mandatory programs. Given the deep fiscal hole that the federal government has put the country in, there was no real alternative to raising the debt ceiling.

If both sides agreed that the debt ceiling had to be raised, what were the negotiations about?

Historically, occasions when the government has reached the debt ceiling have produced negotiated agreements that both raise the ceiling and limit spending, as was the case with the Budget Control Act of 2011 during the Obama-Biden Administration. However, this time around, the White House insisted for months that it would not negotiate on any spending reforms as part of raising the debt ceiling.

Given the unsustainable fiscal path that the United States is on, the White House was essentially sending the message that the only way to avert a debt crisis now (by raising the debt ceiling) was to cement the current spending trajectory in place—and thereby increase the chance of a debt crisis down the road. The House of Representatives disagreed with this false choice between a debt crisis today and a debt crisis later and instead passed the Limit, Save, and Grow Act, which simultaneously raised the debt ceiling and slowed the trajectory of spending, among other reforms. Passage of this bill forced the White House to the table, abandoning its no-negotiations stance on spending reforms.

What is contained in the debt ceiling deal?

The debt ceiling deal contains a number of elements. First, it raises the debt ceiling through the end of 2024 and it establishes spending caps for fiscal years 2024 and 2025 that limit the growth of spending to 1% with tough enforcement provisions during the appropriations process, which is when Congress formally makes detailed, program-level spending decisions. In addition, the bill prescribes a 1% cap on spending growth through 2029. By way of comparison, the CBO projected an 8.1% jump in discretionary spending between 2024 and 2025, followed by average annual increases of 2.8% through 2033.

Besides affecting topline spending, the debt ceiling bill rescinds certain COVID-19 and IRS funds, expands work requirements for food stamps and welfare, and implements energy-permitting reforms to reduce delays from excessive and unresponsive bureaucracy.

What is the overall effect?

The CBO projects $1.5 trillion lower spending growth (or in Washington, DC parlance: cuts) because of the deal. Without the deal, discretionary spending would have risen from $1.7 trillion in 2023 to $2.4 trillion in 2033, whereas now the projection is for $2.2 trillion in discretionary spending in 2033.

To give further perspective, the figure below plots three different projections for the path of discretionary spending as a percentage of the country’s annual economic output. The blue dots are CBO projections made in fall 2019 under the previous administration and before COVID-19. The orange dots are CBO projections from this May, but before the debt ceiling deal. The red arrow showing the upward shift from the blue dots to the orange dots represents the persistent increase in discretionary spending under the current administration’s policy plans. The gray set of dots represent discretionary spending under the debt ceiling deal, with the green arrow showing the reduction relative to what was slated to occur before the deal.

As the figure makes clear, the debt ceiling deal essentially takes discretionary spending halfway back to the path it was set to follow before COVID-19 and the change in administration.

Figure 1: Discretionary spending as a percentage of GDP. Source: Congressional Budget Office, Show-Me Institute calculations.

How should Missourians view this deal?

The United States faces a profound and troubling fiscal situation with its unsustainable spending levels, not to mention slow economic growth, declining productivity, and inflation that remains much too high. It is important to recognize that the country has a spending problem, not a revenue problem. Federal revenues are currently above historical average, but the reason deficits are so large is that spending as a share of GDP is higher than it has ever been over the past century except during peak COVID-19 and World War II. The debt ceiling bill does not fully reverse the spending increases of the past two years, but it represents a step in the right direction, especially compared to the White House’s previous no-negotiations spending stance.

Taking a step back, whereas the debt ceiling debate focused on discretionary spending, the vast majority of federal spending goes to mandatory programs, chiefly entitlements. The CBO projects that, absent reforms, federal spending will rise from 23.7% of GDP in 2023 to over 30% by 2053, annual deficits will more than double to over 11% of GDP, and the national debt will balloon to almost 200% of GDP. In this scenario, interest payments on the debt would triple as a share of the economy and would represent the single largest spending item for the U.S. government. Even this scenario is rosy in that it assumes an infinite willingness among investors to buy U.S. debt regardless of how dire the fiscal picture becomes—a rather implausible assumption that America would be wise not to test.

Going forward, much work remains to be done to right-size government and revitalize economic growth so that Americans can enjoy a more prosperous future free from the risk of steep tax hikes, crippling inflation, debt crises, and adversarial foreign governments buying up large quantities of government debt. The debt ceiling deal is by no means a cure to the country’s current fiscal ills, but it’s one step in the right direction, and the starting point for a much-needed national conversation.

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Beginning in early 2022, the Fed initiated a rate hike campaign that, to date, has taken the federal funds rate (which influences other interest rates in the economy) from 0% to over 4%. We now have evidence that the Fed’s rate hikes are beginning to bite. Consumer price inflation peaked in the summer of 2022 at over 9% and has been on the decline ever since, most recently hitting 6.5%. This lag between rate hikes and inflation dropping is common. Moreover, because the monthly inflation increases were so high in the first half of 2022 and have been considerably lower over the past few months, the topline year-over-year inflation readings are set to fall rapidly over the next several months—possibly even falling below 4% by early summer. The figure below visualizes a plausible path of inflation over the next few months.

If this projection comes to pass, it would of course be very good news for families’ pocketbooks. Keep in mind, however, that inflation is declining despite the federal government continuing to spend too much money, and not because of any of the recently passed legislation. Absent the spending binge of 2021 and 2022, the United States would almost surely not have seen the decades-high inflation that has robbed families of precious purchasing power—an erosion shown in the figure below. Since the passage of the American Rescue Plan Act in early 2021, consumer prices have risen cumulatively by nearly 14%. During that same period, worker earnings have increased by less than 10%. This four-point gap marks a significant decline in purchasing power that is showing no immediate signs of reversing.

By contrast, if one looks at recent history—namely, the period between early 2017 and the beginning of the COVID-19 pandemic—earnings noticeably outpaced inflation, as shown in the figure below. In fact, inflation-adjusted median household income jumped by the most on record during that period, just as poverty rates hit historic lows. It is worth pointing out that economic gains of that size were not expected. Instead, the economy outperformed earlier projections from the Congressional Budget Office made prior to the pro-growth tax reforms passed in 2017 and the concerted effort across federal agencies to streamline and reduce the burden of regulations.

Looking forward, the good news is that inflation is likely to continue falling, and possibly at a faster pace over the next few months. Producer price inflation is also moderating, with the most recent core reading (which strips out volatile components related to food, energy, and trade services) coming in at “just” 4.6% year-over-year. However, it is important that we do not move the goalposts and lower the bar for victory. The objective clearly stated by the Federal Reserve—and to which Americans have become accustomed over the past few decades—is inflation that is 2% or less. For this reason, nobody should expect the Federal Reserve to immediately stop hiking rates—let alone begin to cut them—until inflation falls below the 2% threshold and stays there for a while. The Federal Reserve has signaled this much in its recent communications.

Of course, the timeline for finally taming high inflation could be significantly accelerated with a pro-growth, supply-side agenda that unleashed the productive capacity of the U.S. economy whereby businesses could meet demand without raising prices. If we conceptualize inflation as too much money chasing too few goods, one approach to reducing inflation is to take money out of the economy—exactly what the Fed is doing right now—while the other approach is to ramp up the amount of goods and services the economy produces. In light of divided government, substantial tax and regulatory reform is unlikely, but on the positive side, massive partisan tax hikes and spending bills are unlikely too. Inflation relief is (likely) on the way, but it is important to understand how we got here so we don’t end up making the same mistakes again.

The post Inflation and the Dangers of False Narratives appeared first on Show-Me Institute.

As more than a year has passed since the first bill’s passage, and almost nine months have passed since the second, we can start to figure out how the money is being spent. A new report from the American Enterprise Institute crunches the numbers and tells us the answer: it isn’t.

The first relief bill—the CARES Act passed in March of 2020—allocated $13.2 billion for K-12 schools. The Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA), the second bill, was signed into law in December of 2020 and allocated another $54.3 billion. The third bill, the American Rescue Plan (ARP), was passed in March of 2021 and allocated $122 billion.

According to the AEI report, to date only 70 percent of CARES Act dollars have been spent, and a mere 7 percent of CRRSA dollars have been spent. (Not enough time has passed to know how the ARP dollars have been spent.)

Missouri has spent 84 percent of its CARES Act dollars but 0 percent of its CRRSAA dollars. If we combine the total dollars, it means that Missouri has only spent 16 percent of the money it received in the first two relief bills.

As it turns out, reopening schools was not nearly as expensive as some school advocates said it would be. State and local tax coffers were not hurt nearly as much as some had predicted. Some money was necessary, but it was a fraction of what Congress allocated.

And here comes the kicker: The real money is in the ARP, and it is just starting to show up. If schools haven’t spent down the funds from the first two bills, and schools start back up without the need for any additional pandemic-mitigation measures, the money from the ARP is just going to start piling up. Ultimately, the report estimates that between $78 and $123 billion of the coronavirus education funds will be spent on non-pandemic related expenses. And it isn’t just AEI making these predictions—the Congressional Budget Office (quoted in the report) predicted that only $6.4 billion of ARP dollars will be spent in 2021, and the rest will be spent over the next seven years.

The bottom line: If we hear from K-12 school leaders about underfunding at any time in the near future, we should know that they are misrepresenting reality.

The post So about that Coronavirus Money . . . appeared first on Show-Me Institute.

Moving from a system . . . [that has] 1000 of something to one of something sounds a lot like a monopoly, and monopolies don’t always work in consumer interests.

The sheer cost of a Medicare for All program would dwarf our current federal spending levels and require massive new taxes on Americans. The Atlantic reports:

The Urban Institute, a center-left think tank highly respected among Democrats, is projecting that a plan similar to what [two candidates] are pushing would require $34 trillion in additional federal spending over its first decade in operation. That’s more than the federal government’s total cost over the coming decade for Social Security, Medicare, and Medicaid combined, according to the most recent Congressional Budget Office projections.

In recent history, only during the height of World War II has the federal government tried to increase taxes, as a share of the economy, as fast as would be required to offset the cost of a single-payer plan, federal figures show. There are “no analogous peacetime tax increases,” says Leonard Burman, a public-administration professor at Syracuse University and a former top tax official in both the Bill Clinton administration and at the CBO. Raising that much more tax revenue “is plausible in the sense that it is theoretically possible,” Burman told me. “But the revolution that would come along with it would get in the way.”

Health care providers, health insurers and pharmaceutical companies are not always “good guys” in our health care system, but they compete with one another, which serves consumer interests. Policymakers should go much further in compelling such competition and preventing these industries from leveraging government for their own interests. But Medicare for All goes in the very opposite direction—monopolizing control of our health care system, reducing choice and trusting government to provide these services instead.

It was a bad idea last year. And it is still a bad idea this year.

The post “Medicare for All” Remains a Terrible, Terrible Idea appeared first on Show-Me Institute.

                Economists across the political spectrum have been recommending this for years. The Congressional Budget Office, David Neumark, and even Christina Romer  find the EITC is a better policy option than the minimum wage for helping low-income households.

                There a couple of reasons why the EITC is a better policy option than the minimum wage. First, it is specifically targeted to help low-income households. The minimum wage isn’t as well targeted. For example, a teen flipping burgers and making the minimum wage would benefit from a higher minimum wage even if both of her parents are surgeons. The EITC only goes to households making below a certain amount. Secondly, the EITC doesn’t increase labor costs. Increasing the minimum wage means employers will have to pay their employees more per hour. The EITC is a direct government benefit, so businesses won’t have those increased costs.

                The EITC is not a perfect program. It makes a lot of improper payments , costing taxpayers billions. Also, its complicated nature makes it necessary for many people to hire professional tax preparers so that they can receive the credit.

                Despite these drawbacks, the EITC is still a superior alternative to the minimum wage    

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It seems that there are those in the city who want to get some type of minimum wage increase passed before the Legislature has a chance to override Governor Nixon’s veto of HB 722, which would forbid municipalities from raising their minimum wages after August 28. What’s interesting to note is that even if the Board of Aldermen passes a bill before the August 28 deadline or the Legislature fails to override the Governor’s veto, Saint Louis probably lacks the legal authority to raise its minimum wage above the state minimum wage. Regardless, a $13 per hour minimum wage would be disastrous for the city and its workers.

The Congressional Budget Office studied the effects of increasing the federal minimum wage to “just” $10.10 an hour and found that it would cost 500,000 jobs. Now this 500,000 figure is a national number, but the effect on jobs would be especially pronounced if the wage went up at the local level, because companies forced to pay the higher wage can just hop across the city border to escape the mandate. Even the liberal Vox.com thinks that $13 per hour (never mind $15) would be too high a minimum wage for Saint Louis.

What about the other cities that have raised their minimum wages? If the recent evidence from Seattle is any indicator, things aren’t looking good.There are also some signs out of Los Angeles that might give policymakers in Saint Louis pause.

                Momentum is building in some parts of Saint Louis City government to increase the city’s minimum wage, as evidenced by the convening of a special session to debate the issue. However, that doesn’t mean that such a move would be good policy. A large increase (and going from $7.65 to $13 or $15 per hour would certainly qualify as large), will end up costing jobs  and failing to help the working poor. 

The post The Idea That Would Not Die appeared first on Show-Me Institute.

On Thursday, Mayor Slay announced his support for a compromise proposal. This new proposal would raise the minimum wage to $11 per hour by 2020 instead of $15. Like the original proposal, it exempts small businesses, but it also exempts in-home health care workers and nursing home workers whose services are paid for by Medicare and Medicaid.

While $11 an hour is less than $15 an hour, it will still cost jobs. The Congressional Budget Office (CBO) studied the effects of an increase in the federal minimum wage to $9.00 an hour and $10.10 an hour. In both scenarios, the CBO found that increasing the minimum wage would cost jobs. An $11 minimum wage in 2020 is slightly less harmful than a $10.10 minimum wage today and more harmful than what $9.00 an hour is now. That means this proposal will still harm employment. This harm especially would be felt in Saint Louis City, since businesses can hop across the county line to avoid having to pay the higher wage.

Seeking higher wages for low-income workers is a noble sentiment, but government mandates are not the way to go about it. This proposal, while less harmful than before, will still EXTERMINATE jobs and hurt those it means to help.

The post An $11 Minimum Wage Will Still Cost Jobs appeared first on Show-Me Institute.

Read the full testimony:

The post On Increasing The Minimum Wage In Saint Louis appeared first on Show-Me Institute.

Despite intentions, increases to the minimum wage do not necessarily help the poor. Even Christina Romer, who led President Obama’s Council of Economic Advisors, openly conceded there were questions about “whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty.”

The reasons why are simple. First, most minimum wage earners don’t actually live in poverty. Two-thirds come from households making at or above 150 percent of the poverty line; 44 percent live in households whose income is three times the poverty level. From the viewpoint of earners, raising the minimum wage is a clumsy tool and is more likely to benefit the non-poor than the poor.

Second, the number of people paid the minimum is not especially high. Today, less than 5 percent of hourly workers are paid minimum wage. Among all U.S. workers, minimum wage employees constitute just 3 percent of the American workforce. Not only are relatively few people being paid the minimum technically living in poverty, but relatively few people are being paid the minimum at all. Targeting low-wage workers is not the same as helping low-income families.

Third, and most important, there is a wealth of economic analysis that shows minimum wage laws punish the very people they are supposed to help—making it harder for people with few skills or work experience to find entry-level jobs. The Congressional Budget Office estimated that a national minimum wage increase to $10 per hour would reduce available jobs by 500,000. Doubling the minimum wage in Kansas City from $7.50 to $15 would have even more dramatic results here. The reason for this is simple: As labor costs rise, employers may turn to cheaper technological substitutes, cut employees, or have employees work fewer hours. This trend is already occurring in grocery stores and restaurants.

As workers have to compete for fewer entry-level jobs, those with the fewest skills are left behind. A study by the University of California, San Diego found that increasing the minimum wage reduced the earnings potential of low-skilled workers whom the higher minimum wage was meant to help by limiting job opportunities. These workers need entry-level jobs that enable them to develop skills and gain experience.

As a compassionate people, we are eager to promote policies that help alleviate poverty. We do not succeed by making jobs more scarce, which is what would happen if Kansas City enacted a “living wage.”

The post Minimum Wage Increases Not Effective at Fighting Poverty appeared first on Show-Me Institute.

In their study, Clemens and Wither examined the impact of the federal minimum wage increases during the Great Recession (2007-2009). They found that not only would low-skilled workers be less likely to have jobs after the minimum wage hikes went into effect (a finding also supported by the CBO), but the hikes also would lead to an overall decline in these workers’ incomes even after accounting for the increased wages of those workers still employed.

This leads to another problem with increasing the minimum wage: decreased economic mobility. The study’s authors found that increasing the minimum wage reduced the chances of low-skilled workers eventually reaching salaries of $1,500 a month (they determined that $1,500 a month was the threshold for lower-middle-class salaries). Clemens and Wither believe that this reduction in mobility occurs because an increased minimum wage results in fewer jobs being available for poorer workers. According to the authors, this lack of job opportunities means that there are fewer chances for these people to accumulate the skills and experience necessary in order to earn higher wages in the future. This is conjecture on the authors’ part, but it makes sense if one thinks about it.

At a cursory glance, the minimum wage is a good thing. Unfortunately, there are two sides to the minimum wage, and when you take the other side into account you see that it hurts more than it helps. This study’s review of the academic literature finds that increasing the Earned Income Tax Credit (EITC) would be a better alternative for low-income families than raising the minimum wage, something that we have been saying for a while now.

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If proponents are successful in raising the minimum wage to $15 an hour, there will be a lot of pain. First, such an increase will cause job losses. A Congressional Budget Office (CBO) report estimated that if the minimum wage went up to $9 an hour, 100,000 jobs would be lost. If the wage went up to $10.10 an hour, the number of jobs lost would increase to 500,000. If the CBO is correct about job losses, one shudders to think about how many jobs would be lost if the minimum wage went up to $15.

Is the loss of so many jobs worth the increase in wages for those workers who manage to keep their jobs? That’s a question for proponents to consider. They also should consider the fact that many people who work for minimum wage are not poor. Why mandate raises for them while risking job losses for the same people wage-hike proponents are trying to help?

There is a better way to help poor families. Both the CBO report and Professor David Neumark’s 2012 study on the minimum wage find that the Earned Income Tax Credit (EITC) is a better alternative for helping poor families than increasing the minimum wage.

The EITC is a refundable tax credit that provides direct cash assistance to low-income families. The tax credit is more effective at helping poor families because it is specifically targeted toward them. The minimum wage is not. For example, a teenager working a minimum-wage job whose father is a corporate attorney and whose mother is a surgeon would receive the same monetary benefit as a single mother of two working at McDonalds. That would not be the case with the EITC. If Missouri and other states really wanted to help poor families, expanding the EITC would be a more effective tool than increasing the minimum wage.

The post On a Scale of 1-10, It’s 15 appeared first on Show-Me Institute.

In an open letter released March 12, 2014, more than 500 economists voiced their agreement that increasing the federal minimum wage to $10.10 would not reduce poverty. The letter’s release coincided with hearings in the U.S. Senate’s Health, Education, Labor and Pensions (HELP) Committee to debate raising the federal minimum wage. The letter notes that poverty is a complex issue and simply raising the minimum wage is not “a silver bullet solution.” The letter’s signatories include Nobel laureates Eugene Fama, Edward Prescott, and Vernon Smith along with a number of previous administration officials, among them Glenn Hubbard, Greg Mankiw, and Harvey Rosen, all past chairs of the Council of Economic Advisors. (The full letter and list of signatories is available here.)

Raising the minimum wage costs jobs for the very workers it is supposed to help. A recent study by the Congressional Budget Office (CBO) found that the proposed increase would cost the economy 500,000 jobs by 2016. This outcome from raising the minimum wage agrees with previous work, including analysis that David Neumark and I wrote for the Show-Me Institute.

Missouri policymakers must consider the full impact of raising the minimum wage. It simply is not good public policy to raise wages for some individuals at the expense of other workers who are made even worse off than they are now. The minimum wage simply is not a viable policy tool to fight poverty.

The post More Than 500 Economists Oppose Minimum Wage Hike appeared first on Show-Me Institute.

Except for Illinois, where the minimum wage is $8.25 an hour, the states surrounding Missouri have a minimum wage of $7.25 an hour. Many current and future businesses in Missouri, especially those near the state’s borders, would have a large incentive to relocate to surrounding states if Missouri raises its minimum wage all the way up to $10 an hour.

One reader who responded to the letter on the Post-Dispatch website asked what the effect on jobs was when Missouri increased its minimum wage in January from $7.35 to $7.50 an hour. First, it is too early to start making judgments about the effect of the recent minimum wage hike because it is only early March. Second, even if there isn’t much of an impact with this minimum wage hike, we must consider the degree of the increase. Going from $7.35 to $7.50 an hour represents a 2 percent increase in the minimum wage. A business might be able to absorb that increased cost and not feel compelled to move. However, the proposal in question would raise the minimum wage by 33 percent.

There are only so many additional costs a business can absorb before going out of business. Do we really want to risk these businesses leaving the state and taking the jobs they provide with them for something that even proponents say is a “blunt instrument” for helping poor people?

We all want to help the poor and truly disadvantaged, but there are better ways to do it. One thing to consider would be to follow the lead of 20 other states and establish a state Earned Income Tax Credit (EITC) to supplement the federal one. Both David Neumark, in his Show-Me Institute policy study examining the effects of the minimum wage, and the Congressional Budget Office’s analysis of federal minimum wage proposals acknowledge the EITC as a more cost-efficient way to help the working poor.

The post The Effects Of A Minimum Wage Increase appeared first on Show-Me Institute.

That’s what makes support for a minimum wage increase from unions and big business seem so odd at first glance. Why would unions such as the American Federation of State, County and Municipal Employees (AFSCME) support a change of policy that would hurt hundreds of thousands of Americans? Why would some businesses want to increase the cost of labor?

A few reasons stand out.

For starters, artificially raising the cost of non-union labor can make union labor more attractive. As the Cato Institute noted more than a decade ago:

Unions are labor cartels that attempt to restrict the supply of workers entering given occupations. Since non-union labor is priced below the cartelized price of union labor, it is an attractive substitute for union workers. Because unionization of all potential competition to the cartel is impossible due to the high policing costs that would be involved, unions resort to the minimum wage. By artificially increasing the wage rate of lower skilled workers — who could substitute for union workers — the minimum wage increase the demand for union workers and hence their wage rates.

Hypothetically speaking, if the labor of an entry-level employee with no experience is worth $7.50 per hour in the open market but the law requires he be paid $15 per hour, trained union labor costing $20 per hour looks considerably more attractive. By harming non-union labor, unions are able to help themselves.

Moreover, some large businesses have supported increasing the minimum wage because it would harm their competition. Costco, for instance, supports raising the minimum wage today at least in part because the entry-level wage for a Costco employee is $11.50, more than $4 per hour above the federal minimum. At a minimum wage of $10.10 per hour, Costco’s business model would remain largely unaffected.

But you know who would be affected by the change in the law? Businesses, large and small, whose profit margins are far narrower. That’s especially true of small businesses in our communities already suffering under a mountain of tax and regulatory burdens in a difficult economy.

Yes, there are, no doubt, some in both the business and labor camps who in good faith might think a minimum wage increase won’t hurt our vulnerable poor. But labor and business leadership know better, and the economics are as clear as the incentives.

The post Why Would Unions And Some Big Businesses Support Raising the Minimum Wage? Some Reasons appeared first on Show-Me Institute.

I discussed those policy problems in a KCPT interview broadcast last week, which can be viewed below.

The post Left Wages War On Poor With Minimum Wage Push appeared first on Show-Me Institute.

Helping people get out of poverty is a good thing and if these estimates are correct, an increase in the minimum wage could help do that. However, the question is, does this fact compensate for the large number of people who would lose their jobs? Possibly, but raising the minimum wage is not the only way to help combat poverty. In fact, while it might help some poor families, it also would give a pay increase to many suburban teenagers and students while costing jobs for the very people it is designed to help.

In his 2012 policy study, Neumark mentioned the Earned Income Tax Credit (EITC) as a possible tool to increase the incomes of low-wage workers. The CBO report found that, “To achieve any given increase in the resources of lower-income families would require a greater shift of resources in the economy if done by increasing the minimum wage than if done by increasing the EITC.” In other words, the costs associated with raising the minimum wage greatly exceed the costs of expanding the EITC. This is true because many minimum wage workers are not from low-income families. On the other hand, the EITC only goes to low-income families. Even proponents of raising the minimum wage admit that the minimum wage is a “blunt instrument” for helping low-income families. Missouri should consider establishing a state EITC alongside the federal one.

The new CBO report projects that raising the minimum wage could help some people get out of poverty at the cost of hundreds of thousands of people losing their jobs. If policymakers want a way to combat poverty, there are more effective means to doing so, including expanding the EITC.

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