24 Feb 2014

Bryan Caplan vs. Peter Thiel

Bryan Caplan, Economics 30 Comments

Peter Thiel recently gave a qualified endorsement to raising the minimum wage, arguing that in the presence of generous welfare benefits it was a second-best solution (not his terminology). The argument made no sense to me, and I was going to write it up but Bryan Caplan beat me to the punch.

My question: Is Bryan overlooking something? This isn’t just about Thiel. There are some people making a “conservative” case for raising the minimum wage, and in that Daily Show hit piece on Schiff, they repeated a claim I’ve been hearing that employers of minimum wage workers benefit from the existence of the welfare state.

I think all of this is, if anything, totally backwards. So: Is Bryan overlooking something in his critique of Thiel?

30 Responses to “Bryan Caplan vs. Peter Thiel”

  1. joe says:

    Correct. It’s totally backwards. Poor people need more money, rich people need less money. Not the other way around.

    • Andrew' says:

      Hmmm. This is interesting. I wonder if poor people got a helicopter drop if they would build some factories. Or are you talking about a liquidity trap or something?

    • Hank says:

      Joe is the new Robin Hood!

    • Dyspeptic says:

      Hey Joe, still standing by your prediction of gold at $800/oz. by the end of this year? The current trend doesn’t look good for you.

  2. Major_Freedom says:

    Caplan I think did a great job, but I think I know what you might be referring to by missing something.

    He’s missing Thiel’s insistence that it’s better for the government to compel workers to be unemployed and on the dole through minimum wage hikes, than to compel workers to be unemployed through more generous welfare.

    Theil is probably just thinking that if welfare goes up, he’ll have to pay more taxes. Of course, he overlooks the fact that raising the minimum wage will cause unemployment and hence more welfare but not higher per capita welfare, and Caplan handled that particular issue.

    I think you’re thinking that it’s pretty silly to want to avoid paying taxes to pay for welfare by advocating an increase in the minimum wage, because doing so will have the unintended effect of causing more unmeployment and hence more welfare payments!

    • Major_Freedom says:

      “He’s missing Thiel’s insistence that it’s better for the government to compel workers to be unemployed and on the dole through minimum wage hikes, than to compel workers to be unemployed through more generous welfare.”

      I mean that sardonically, not that Thiel actually consciously thinks this.

  3. Raja says:

    Bryan is overlooking that Bob is smarter than him.

  4. Matt M (Dude Where's My Freedom) says:

    ” they repeated a claim I’ve been hearing that employers of minimum wage workers benefit from the existence of the welfare state.”

    I believe the premise of this argument is that, in absence of the welfare state, no employee would ever agree to sell their labor for as low as $7.50 an hour, because at that point, you wouldn’t be making enough money to meet your basic “needs” and would rather just remain unemployed and enjoy your labor, or be a starving artist/economics blogger, etc.

    The notion is that the existence of the welfare state therefore decreases the minimum amount of wages that workers would accept in exchange for their labor, because if you’re getting food stamps, health care, cell phones, housing, etc. for free, at that point, you’re basically only working to increase your disposable income, and it doesn’t really “matter” if your wages are low.

    The idea is that without the welfare state, Wal-Mart would HAVE to raise its wages (which would eat into company profits and would absolutely NOT result in higher prices!), or nobody would be willing to work for them at all.

  5. Transformer says:

    Thiel is quotes as saying “it would make workers less reliant on taxpayer-supported benefits like welfare and food stamps. “.

    Here an example where that would work:

    You have 10 people on the minimum wage getting $2 each in benefits. Total benefits = $20

    You increase the minimum wage and one person loses their job and starts to get the equivalent of $7 an hour in benefits , but the 9 who keep their jobs go down to $1 per hour in benefits each. Total benefits = $16

    Overall workers get less benefits than before (though unemployment actually has gone up).

    If you increase the minimum wage by another $2 and one more person loses their job (and starts to get equivalent of $7 an hour) but the remaining 9 workers now get $0 per hour in benefits then you have both reduced total benefits and the number of people on benefits from 10 to 2 (though unemployment has gone up even more).

    • Yancey Ward says:

      That is some interesting math. All resting on the assumption that the unemployed guy only gets $7.

      • Transformer says:

        Benefits equivalent to $7 an hour not $7 in total

        Obviously I just made the numbers up but my point was that its not hard to see how the minimum wage could (in theory) reduce transfer payments even with normal shaped supply and demand curves.

        This would (allegedly) minimize the extent to which companies like WalMart milk the benefit system


        • andrew' says:

          Im fine with sincere hypotheticals. And how do these affect the shapes of the supply and demand curves?

          Needless to say I also don’t take at face value that I should fault people who hire the barely employable.

        • Yancey Ward says:

          Part of myy point, badly made I guess, is that you not only made up the numbers, you ignored some of the ones you made up to reach the conclusion.

          Total benefits also includes the mandated and increased wage.

          Redoing the math: Before increased wage, total benefits were $20, after the mandated wage, $9/hr worker + $9/hr worker (the increased wage of $1/hr for each of the nine) + $7/hr for the unemployed guy= $25.

          Sure, the incidence of the wage increase and the taxes are different (see Major above), but that increased wage comes from the society minus the 10 workers, just like the benefits.

          • Transformer says:

            I’m not following how you derive the $25 dollars (where does the $9/h come in ?).

            Transfers payments (measured hourly) after the first min wage increase are $7 for the unemployed guys plus $1 for 9 the working guys = $16.

            I not saying this justifies the min wage – I’m just pointing out that depending upon how benefits are structured and how many people , lose their jobs as a result of a min wage that it could (in theory) reduce state handouts (which is one reason why right-wingers might support it).

  6. noiselull says:

    Employers benefit because the economic incidence of the subsidy is not the same as the legal incidence.

    • Andrew' says:

      This is my guess at what Thiel is getting at. I still don’t get it. This may be a job for actual economics analysis man!

      • noiselull says:

        Take the case of wage subsidies/EITC. Assuming upward sloping supply curves, the supply of labor increases relative to the counterfactual, allowing employers to get labor more cheaply. The reverse, high implicit marginal tax rates, gets a similar effect assuming downward sloping labor supply.

        • andrew' says:

          Yes. I wonder where we actually are on those curves. The eitc may be one of those 2nd bests to ameliorate a lump of regulations that add yo the fixed cost of labor.

          The problem is I fear sober analysis loses to a simply stated, highly marketed, and wrong idea. A minimum wage seems a blunt instrument for dealing with slopes and cliffs we may not even understand- making them even more complicated. We wouldn’t even be talking about it if it weren’t such an easy (and wrong) idea to sell to a crowd. But since we have to talk about it maybe we can get something for it.

  7. Bogart says:

    Peter Thiel should have stopped on principal instead of tossing micro-economics and any rational system of morality to the curb. The core issue here is not economic but moral. We have a bunch of self-righteous do-gooders trying to interject themselves into the lives of people at the bottom of the social structure and all they do is use anecdotal evidence about all the happy people and happy employers who won but never get around to talking about the losers.

    Anecdotally, my evidence against the Minimum Wage is from a recent hiring of the evil company Wal-Mart who received 20,000 applications for 600 positions. Now had the Minimum Wage been 10 or 12 or 15, those applicants could have easily been submitting their 20,000 applications for ZERO positions.

  8. andrew' says:

    Thiel said it should be looked at. Caplan looked at it. I suspect the qualitative supply and demand curves can be adjusted for various sensitivities .

    I also wonder if thiel was proposing to reduce welfare benefits in exchange for a min wage hike. That starts to sound interesting. Remember compromise?

  9. Smiling Dave says:

    Bryan Caplan hit a home run. His idea is so simple anyone can understand it.

    Theil’s argument is that a potential worker would rather get welfare checks than a job that pays less than the welfare checks. Makes sense, right? Result: the worker stays home and gets paid for doing nothing.

    Theil’s solution: Find him a high paying job, one higher than the welfare check brings him. And how do you find him such a job? By making all jobs high paying, i.e. by raising the minimum wage.

    Caplan points out the obvious, that if the high paying job did not exist before the minimum wage law, it won’t exist afterwards either. Reason: because no job can last that pays a worker more than he is worth.

    So all the calculations here about one guy only getting fired are absurd. They will all get fired. Because the rule is that ceteris parebis, a worker is already getting paid the maximum possible for the employer to pay him and still turn a profit.

  10. tom says:

    Caplan does a decent job, but misses a very obvious point, all minimum wage recipients aren’t on welfare. A large number of them are second or third household jobs (spouses picking up a part time job, teens with their first jobs ect). Estimates of ~22% of minimum wage workers live below the poverty line so you have to claim an EXTREMELY large benefit per person under the poverty line to make up for the fact you are distorting the market for almost 4x as many people above the poverty line.

    You also then have to assume that the higher wages for jobs that remain don’t pull more workers into the work force, those workers are more likely to be from above poverty line families (if they can afford to discriminate between working and not working based on a few dollars an hour) and could, conversely end up sending more people onto welfare roles without even the job experience of the minimum wage job they had (or would have had).

    • andrew' says:

      He also doesn’t change the welfare benefit as wage increases thus changing the work disincentive.

      Help, Bob, save us!!!

  11. Innocent says:

    Okay, sometimes we forget that economics is

    “the branch of knowledge concerned with the production, consumption, and transfer of wealth.”
    “Economics is the social science that studies the behavior of individuals, groups, and organizations, when they manage or use scarce resources, which have alternative uses, to achieve desired ends”

    All ‘economic’ thought is in one way shape or form ‘valid’ this is of course highly frustrating. For instance an economy in which everyone was given the same amount of money each and every day and then had those people toss that money into a fire pit at the end of the night is just as valid as anything else that has been brought to bear in ‘reasoned’ economics such as Keynes and Mises.

    All economies ‘work’. What is really questionable is how do we WANT people to think about ‘production’, ‘consumption’, and ‘the transfer of wealth’

    For instance I would suggest that a welfare state creates a disincentive to ‘produce’ however it increases ‘consumption’ ergo it is a valid system that will EVENTUALLY hit equilibrium ( including fluctuation due to outside and internal pressures )

    So here is the thing about raising Minimum Wage. It depends on what kind of economy you are trying to build. Increasing minimum wage is a foolish solution if for instance you are attempting to increase employment as an increased cost per unit of good is going to go up, by definition that what you have done. To ‘fix’ this the cost of goods will have to rise. But the cost of goods is in my mind typically more ‘sticky’ than even wages are. This will mean a time of adjustment followed by inflation. This then creates the whole ruddy mess again since there will be an equilibrium between demand, cost, and labor.

    Anyway I feel like I am babbling now.

    Economics is ridiculous because everything turns into a null hypothesis debate.

    • Smiling Dave says:

      You haven’t taken any science courses, have you?

      • andrew' says:

        Huh? He’s basically describing positive economics- the scientific version of economics.

        • Smiling Dave says:

          Let’s ask a theoretical physicist what he thinks of “positive economics”.


          Short answer. It’s as scientific as tarot cards.

          You haven’t taken any science courses either, have you?

  12. Esa J says:

    Caplan didn’t take account the demand curve. The logic for minimum wage goes so, that raise in minimum wage gives the workers more money, which they can use to buy stuff. That generates more demand and more jobs will be created.

    • Smiling Dave says:

      “raise in minimum wage gives the workers more money, which they can use to buy stuff.”

      Does the “more money” come flying down from the moon? From the Twilight Zone? Or does someone have to give up some of his money for the workers to get more? So that for every penny that the workers have to spend, the employer has a penny less to spend.

      “That generates more demand”
      That’s like saying if A has to give B his slice of pizza, that generates more eating. No. What B eats more is exactly negated by A eating less.

      “and more jobs will be created.”
      Actually, less jobs will be created. Because as Caplan pointed out, plenty of people will be fired who are not worth the minimum wage.

      Also, “more jobs” need more capital, and I’m not sure how you will get more capital by frittering away profits on unearned higher wages.

      You’ve studied mainly Keynesian economics, haven’t you?

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