Thursday, March 05, 2015

Minnesota Mythbusting : Blog : Foundation for Economic Education

Minnesota Mythbusting : Blog : Foundation for Economic Education

His heroic battle with facts continued last week in his column at the Huffington Post. This time he’s managed to single-handedly disprove “trickle-down economics,” a school of thought that doesn’t actually exist. In his words, “It’s official — trickle-down economics is bunk. Minnesota has proven it once and for all.”

Gibson attributes Minnesota’s recovery to three of Governor Dayton’s policies: raising the minimum wage, raising taxes on the wealthy, and guaranteeing equal pay for women. But these changes were all quite small, and none corresponded with the turnaround in Minnesota’s employment, suggesting that they could not have been the cause.

Considering that the federal minimum wage (which covers almost all hourly workers) is already at $7.25 per hour, a $0.75 increase in Minnesota’s minimum wage, applicable only to workers earning less than $8 an hour at businesses grossing more than $500,000 a year, isn’t exactly a radical move, nor would its effects be visible in raw employment data. Moreover, the minimum wage increase only went into effect in the summer of 2014, almost four years after Minnesota's job market began to recover.

Similarly, the Women’s Economic Security Act, which guarantees equal pay for women working for state contractors (not businesses in general) by certifying that they are in compliance with non-discrimination laws that already exist, wasn’t put into effect until May 2014.

And Dayton’s tax hike, which increased the top marginal tax rate by 2 percent? That didn’t occur until 2013, and it only increased state revenues by $1.1 billion (or 0.35% of Minnesota GDP).

In fact, all of the policies Gibson praises were implemented well after Minnesota started experiencing its impressive job growth, and they weren’t especially ambitious in the first place.

As for the supposed benefits of higher taxes, Gibson states that “even though Minnesota's top income tax rate is the 4th-highest in the country, it has the 5th-lowest unemployment rate in the country at 3.6 percent.” But this is the definition of a cherry-picked statistic. If you want to establish a correlation between top marginal tax rates and unemployment, you really have to use more than one data point and control for more than zero variables. (Speaking of cherry-picked statistics, among Midwestern states ranked by job creation from March 2013–2014, Minnesota ranked dead last).

In addition, an international study found that in industrialized countries, such as the United States, higher top marginal tax rates are associated with higher rates of unemployment. This suggests that higher top marginal tax rates may lead to less job creation than would otherwise occur.

Regarding the minimum wage, the empirical literature is mixed, but recent research by Jeffrey Clemens of the University of California raises some serious concerns. His analysis involved tracking thousands of real individuals across the country, comparing the experiences of low-skilled workers in states that increased their minimum wages to that of low-skilled workers in states that did not. Clemens and his co-author used a number of controls to ensure that their findings represented the actual effects of the minimum wage increase, rather than the effects of other variables. The results? Minimum wage increases had “significant, negative effects on the employment and income growth of targeted workers.”

Similarly, a study on economic freedom and income inequality in the states found that “reductions in both state minimum wages and tax burdens would be the most helpful in promoting higher levels, growth rates, and shares of income for the lowest quintile [that is, the poorest households].”

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