Known Unknowns


Welcome to Known Unknowns, a newsletter that sees more risks to the upside, as long as we don’t mess it up. And a special welcome this week to all of the new subscribers from the Compound!

We’re not even Keynesian anymore

Because this is a newsletter about risk, I have mixed feelings about Biden’s new relief package, because while it aims to reduce risk, it also poses some new ones in the process.

There are some good things in there, like money for vaccines and testing (a no-brainer), expanding the Earned Income Tax credit (not sure what this has to do with the pandemic, but it’s a good idea anyway), money for states (I have more mixed feelings about this, but I would like them to start collecting trash again, so fine), and more child tax credits and food stamps (also good things).

But two things about the relief package bother me. One is increasing the federal minimum wage to $15 an hour and eliminating the tipped wage. $15 is the median wage in Mississippi, so I guess everyone will now be average there. But I don’t know what this has to do with the pandemic, though, since actual unemployment, and not the hourly wage, is really the current problem. And the timing is unfortunate. Businesses that offer services, especially small businesses, are facing an existential crisis. They will be paying off debts for years, if they even survive. And contrary to conventional wisdom, there are costs to increasing the minimum wage, mostly borne by marginal workers and businesses. And those studies were done in boom times—not the worst time for businesses in recent memory.

The whole intellectual evolution of the fight for $15 is troubling. About ten years ago, when I was at The Economist, I remember a narrative emerging that you could increase minimum wages with no costs. No one could explain why demand for labor is not downward-sloping after all—or if the costs came out of profits, increases in prices, or what. There was just a lot of hand-waving, talk of a theoretical monopsony, and insistence that Economics 101 (or basic economic logic) was totally wrong. Keep in mind that the no-cost argument was based on small studies with small increases during strong economic times. Somehow the take-away became that we can double the minimum wage no matter the economic conditions.

Now, low pay is a problem. But is a higher minimum wage the answer? Sometimes, sure, but it depends on the wage and where it’s implemented. When you increase wages by law, some people will cost more than the value that they produce. But it’s still important to keep them employed. Personally, I’m a bigger fan of increasing the EITC, because that means that we all share the burden of increasing wages, rather than expecting low-margin franchise owners to subsidize labor. The EITC can also target families who live on minimum wage incomes, rather than teenagers who live with their parents.

But such logic doesn’t matter anymore. Once we get a big round number in our heads, it seems like it becomes policy, evidence and logic be damned. The same goes for $2000 checks for almost everyone—which is also in the Biden plan.

I am not against redistribution, and I actually think we need more, too. But why can’t we target the people who really need it? I believe that how we spend is just as important as how much we spend.

Another thing that bothers me about the $2000 checks is that it’s not UBI. UBI is a guarantee, paying you a consistent predictable amount every month (or year, or week, or whatever) for the foreseeable future. Guarantees are not only expensive, but they also have big implications for our behavior. You might quit your job if you have a guarantee, or maybe just work less, because you know you have something else that you can count on.

But a big check during a pandemic is not that at all. It’s insurance, a one-time payout tied to a particular event. The Alaska permanent fund is also not UBI, because the payouts are tied to oil revenue, and are therefore unpredictable. Keep this in mind over the next few years when we see a gazillion studies claiming that the stimulus checks prove that a UBI would be a great policy.

Looking ahead

I’m still optimistic for 2021 and beyond. Check out this picture I made.

Saving rates haven’t been this high since the 1970s! Granted, there is nowhere to spend money right now, and we’re giving people lots of it. But it suggests that household balance sheets may be stronger than they’ve been since before the Great Recession, and maybe even better. Jason Furman thinks that once we get back to normal, it will unleash lots of spending. And who knows—now that the Fed has promised to never increase interest rates, maybe we’ll even have inflation.

The economy hasn’t experienced a big supply shock since the 1970s, but if history is any guide, we may be in for a big boom this year. But I’m a little cautious about that. Some households are in dire shape. Businesses will be lost, even though many are also being formed at the same time. And I expect an acceleration of economic trends that will displace many marginal workers. We’ll probably have lots of growth, but also inequality and people feeling shut out of the boom.

This is all the more reason for more thoughtful policy, rather than just big numbers that sound good in the moment.

Until next time, Pension Geeks!