Welfare is not an Immigration Magnet

The easy way out of a being ambushed by a pro-immigration argument is to point out that the mere existence of welfare will attract immigrants, thus creating havoc in our dear country. Of course, this is said by partisan anti-immigrant groups. As well, such an argument was made by well known economists of the 70s and 80s. Mostly because they lacked the data and their assumption was based on arguing that non-natives react differently to welfare. As if American’s reaction to different state-based benefits were never of concern. This is mostly a native bias that occurs in most people.

First, ignore the immigration problem and focus on for instance American interstate migration. America is a developed nation, a nation that has within most states a substantial welfare base besides existing federal benefits. States not only control their own benefits but also the allocation of some federally determined benefits. So, this makes the data perfect for analyzing and determining if welfare can induce poor people to move among states for more benefits in a developed country.

Using the National Longitudinal Survey of Youth (NLSY) from 1979-1992 Phillip B. Levine and David J. Zimmerman found little evidence that welfare benefit differences among states in the US caused migration among states. They specifically looked at:


The pattern of cross-state moves among poor single women with children, who are likely to be eligible for benefits is compared to the pattern among other poor households

What occurred is the little evidence can be seen of families who qualify for Aid for Dependent children moving versus other poor individuals. And they go further to note:

The are no more likely to move from low versus high benefit states than other poor individuals not eligible for AFDC. Neither are they more likely to move to a higher benefit state. This suggests that either other factors dominate their decision to move or that the perceived costs associated with moving exceed any potential gain from increased benefits.

Levine and Zimmerman produced this paper in 1999 as a answer to debates during this period concerning the failure of the “Great Society” programs. They were addressing the issues when states start retaking federal tasks in welfare and found that this didn’t create the issues predicted by some during this period, particularly the welfare magnet theory.

If one can conclude that welfare magnet theory is unfounded amongst states then I don’t think its hard to apply the same to international immigrants. Considering that for many immigrants the cost of moving is even greater and their living conditions may have become worse with lower incomes, coming to America or Europe for welfare is not exactly a good deal (almost always in the short run).

A survey of various research (section 5.1) on “welfare magnet theory” leads to the conclusion that for different countries at different times the balance of usage of welfare between natives and immigrants changes. Its not really significant and when significant differences occur they can be explained by the changes in welfare systems or changes in labor structure as a result of law or recessions. However, in the survey issues are noted that explain this discrepancy:

One issue with many of the welfare assimilation studies is the lack of separation between welfare eligibility and usage. In particular, most studies do not evaluate the extent to which various immigrant groups are eligible to work and/or to receive welfare benefits in the host country. Changes in work eligibility over time might offer interesting insights in the reasons for the greater reliance on welfare by the immigrants. Similar to the wage and employment assimilation studies, welfare assimilation studies also suffer from the issue of selective re-migration that generally has not been accounted for. In addition, none of the studies have estimated the extent to which welfare dependence is related to the “welfare magnet” effects versus employment obstacles such as discrimination, insufficient language skills, transferability of educational degrees and lack of work permits.

One of the papers, Borjas (1999), makes a case that since immigrants are clustered in high benefit states they are more sensitive to welfare compared to natives. However, this study falls for the criticism set out in the survey above. The issue is that arguing that a state like California, which has many immigrants and  provides high levels of benefits attracts immigrants towards welfare is inconclusive. The research seems to fall short to mean anything. Too many variables could affect decisions. Various research came along and noted this, particularly Zacodny (1997) and Kaushal (2005).

What both papers address is the issues in finding proper experimentation parameters. This is because as mentioned before sometimes immigrants incentives and choices are large and expansive and reasoning from large but constricted samples can lead to inconclusive answers and sadly inconclusive answers have been applied to some policy in the US.

What is discovered from Zacodny and Kuashal is that immigrants location choices inside a particular country is related to work (or particular goals) and most importantly the number of immigrants in the city. This actually paints a clearer picture. And explains why New York and Los Angels are still attracting immigrants till today. Both were homes for immigrants of various generations for a long time. The issue with previous research is in my opinion the lacking grasp of determinants of immigration, as well as a the lack of depth in the variables that are overseen. The papers I mentioned that noted the lack of magnet theory both clearly looked at data in the US that looked at the changes following policy that limited benefits to immigrants in some states and while remaining in others.

I think going past this and addressing causes for changes in welfare uses (or more specifically the reaction to discrepancies in welfare benefits among nations) in Europe or Canada is even more helpful in understanding “magnet theory” but still the importance of understanding the various determinants, as well as outside macro reasons for use of welfare are important. Sadly some research overstated the existence of the magnet theory by not understanding this. Many overstated the possibility of stress by immigration on public finances mostly by using the magnet theory. Especially many politicians who till today still wield the magnet theory as the ultimate anti-immigrant tool.

PS I will follow up on Scandinavian/Canadian immigration, and possibly more in depth into pro magnet theory papers. I just had to get this out because this argument still gets used by politicians and even some of my peers.

I should note that some of econometrics in the research particularly Borjas and Kaushal/Zacodny I had trouble comparing just because my experience with econometrics is only beginning since I am only an undergraduate student. But for the most part I attempted to compare the research, even the quantitative parts. Overall, Borjas (1999) and others, in much of their work, seem weak and inconclusive.If you’re an econometrician or know more about labor economics I would appreciate your response.

Musings on my visit to Libya

It has been four years since I visited Libya. In those four years the country has changed. I have changed. But I can’t help but feel like the country has instilled a new and unidentifiable level of depression in me. Middle Eastern politics has always been frustrating, with its complicated history with intervention, colonialism, and fundamentalism. What I saw in Libya for some reason felt more disheartening.

Imagine for instance that you dreamed of driving a DeLorean all your life, as I have. You researched day and night about its ride, its aluminum panels, its electrical issues, etc. You knew what the car felt like before you entered. You knew it had no power steering, knew it had unique ride feel, and you knew that its faults made it important to you. You like the car for its pop cultural significance and love it as it’s a symbol of your youth. But then you buy the car and discover that its spirit, the one you read about, the one in the movies is not there. Even its faults are not unique and natural. An unidentifiable feeling of failure overshadows them. If you slaved and saved away from your teenage years to now to see this car, only to find yourself feeling depressed. This is essentially what I saw in Libya.

The live and spirited revolutionaries of Libya that the media spoke highly of, the ones my parents spoke highly of were not here. They have become walking corpses. Every face I see is darkened, every face lacking emotion and reason. It is as if all their efforts were gone into the war. This is the unidentifiable aspect of Libya. I can’t identify the cause of complacency for violence.

But why slave away for a country if one is to be complacent with the criminals to rule it. Why do many Libyans, whether commentators or random civilians, manufacture ethnic tension. Is this their sophistication, their ode to everything democratic? I spent the first 10 years of my life in Libya and never learnt of any Wershifanna or Zawiyah history even though I lived in the area. They were places not ethnicities. And the tribes never really ruled like many thought. Not since the modern era at least, not since the World Wars.

Basic services like electricity gets cut continuously, sometimes by hooligans wrecking stations or sometimes because of wear and tear. However, the culprit is the Libyans who refuse to pay electricity bills. Talk to any of them and tell them this and they will wave you away telling you they can’t do anything about that. But they can. Basic rule of economics: there is no such thing as a free lunch.

All of this and much more (including the excessive littering, corruption in oil industry, disrespect for the goal of liberal democracy) are activities many Libyans including my own family members are complacent with. This is my depression. Seeing people who were bright and resilient in the civil war become okay with violence and low standards. Some people say they want security but push them more and they will change minds once their manufactured ethnic tensions come up or their memory of a cousin who is a carjacking criminal return. Everyone is selfish. No one will accept a centrality of force and law, as long each Libyan doesn’t truly desire it. And when they do it will be too late. There are too many desiring to be their own Gaddafi’s, hating on good people successes.

Libya much like the rest of the post-Arab Spring countries is flirting with the idea that autocratic leadership wasn’t so bad. It’s as if the last 50 years never happened. As if Arab nationalism, Arab socialism, religious fundamentalism, or other flavorings of dictatorships are okay to the alternative. The paradigm is much simpler. It’s an Autocratic/Fundamentalist versus Liberal.


Thoughts on the adequacy of undergrad economics

Introductory economics courses are the scorn of bloggers. Mostly because they are blamed for an apparent epidemic economic misunderstanding, especially by heterodox schools that see them as the breathing ground for economists they don’t like.

Now the link between econ 101 and bad economists is really weak. We have to consider that to become an economist an advanced degree is required, as well as research experience. This means that scholarly standards and focus on empirical analysis are important. Thus, the “bias” of economists is formed most likely through their research efforts not by a 101 textbook.

Furthermore, the intro courses are themselves very clearly simple. Demand and supply models are introduced properly. As well, the limitations are mentioned. It is true some people become extremist when they couple this with political views but those types of people don’t become prominent economists. They may affect politics but really that’s a stretch that should be blamed on the political discourse not Mankiew’s textbook.

The focus on strict marginal analysis is also helpful not hurtful. Most of it results in the introduction of math into economics. This leads to a tradition of empirical analysis that results in quantifiable research. Teaching economics students, whether they are econ majors or not, in a full literary fashion is not conducive to increasing productivity the field. I doubt that the field could have moved on past the debates of free markets versus socialism of the mid 20th century.

Today, the left over of “principles” courses that focus on marginal analysis has resulted in a greater diversity of economics student. Its no longer the 60s, quantifiable and theoretical work has blended well to have a wider diversity of economists. Noah Smith points this out excellently:

I have the vague sense that if you were an idealistic, brilliant young libertarian in the 1960s and ’70s, you might naturally dream of growing up to be an economist. You might watch a rousing speech by Milton Friedman, and you might imagine that one day you, too, would use the power of logic and rationality and mathematics to ward off the insanity of socialism. Well, America still has some idealistic, brilliant young libertarians, and some of them probably still dream of becoming economists. But now they will be in the minority. They will be joined by quite a few—maybe more—idealistic brilliant young liberals, who recognize the power of markets but also want to figure out how to fix things when markets go wrong. And they will also be joined by quite a few brilliant engineers, for whom political ideals take a back seat to the solving of practical, real-world problems. 


Socialism and centrally planned economies failed, free trade and markets won but now with quantifiable economics we can focus on nuances and really improve society. In many ways principles courses help the field of economics but noting to students that externalities exist and introduces, much like the courses’ titles note, economics in the modern world. This economics is nuanced, expansive, and while not an exact science it’s not its 19th century version any longer.

Thoughts on Price Discrimination and Public Healthcare Insurance

I recently came across an article by Uwe Reinhardt in Economix on equalizing payments. He addresses the price discrimination in healthcare costs and the cost shifting among public and private payers.

 While there evidently is pervasive price discrimination within the private health-care sector, there are also sizeable price differentials between public payers on the one hand and private payers on the other.



The article is really great and the discussion of other multi-insurance regimes in Germany and Switzerland is really insightful, considering the recent question of the right structure of healthcare.

I do think that it’s important to analyze the more positive or interesting effects of price discrimination. For instance people with access to certain governmental benefits (Medicaid/Medicare) tend to have less price elasticity in healthcare expenditure. Once one can differentiate consumer based on elasticity, that is those on benefits and those not on benefits and moreover, between those that are wealth and those who aren’t, its more efficient (profit wise) to shift output from the consumer’s with low elasticity to those with higher elasticity. Resulting in higher costs for the inelastic consumer and lower costs for the elastic consumer.

Now since price discrimination in healthcare can occur between the rich and poor, then the effect of benefits on such discrimination should be acknowledged. Reinhardt mentions that the concept of cost shifting in healthcare because of price discrimination is really not of concern to the debate. However, I argue that if one looks at price discrimination and elasticity of various consumer sectors then one may explain certain effects caused by Medicare/Medicaid and how price discrimination itself helps avoid some of their negative fallout.

For instance, assuming that no benefits exist and two different consumers exist in the market then output will shift to the elastic one and price will rise to the inelastic one. Depending on severity the price increase could be very large; one has to remember that the hospital is assumed to be profit maximizing.


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Now from this point imagine that the poorer customer has a less elastic demand. This would mean that the shift of prices and output would be smaller. This may explain why Reinhardt doesn’t care much for cost shifting in this sector as the benefits make it so the hospitals have difficulty differentiating between consumers. And in most cases can force them to lower operating costs versus shifting output. This is because the price discrimination analysis focuses mainly on changes in elasticity, not changes in costs between different segments.

Now, recent research (as recent as 2013) has shown that Medicaid has actually possibly reduced private insurance costs instead of shifted.

Using regression analyses, I found that a 10 percent reduction in Medicare payment rates led to an estimated reduction in private payment rates of 3 percent or 8 percent, depending on the statistical model used. These payment rate spillovers may reflect an effort by hospitals to rein in their operating costs in the face of lower Medicare payment rates. Alternatively, hospitals facing cuts in Medicare payment rates may also cut the payment rates they seek from private payers to attract more privately insured patients. My findings indicate that repealing cuts in Medicare payment rates would not slow the growth in spending on hospital care by private insurers and would in fact be likely to accelerate the growth in private insurers’ costs and premiums.

Now, like I mentioned Reinhardt probably ignores this (or at least doesn’t put as much weight on it) because just basic price discrimination analysis doesn’t reflect cost shifting. However, as prices for the private insurers (generally more wealthy) fall (realistically increase slower) in response to more Medicaid I could argue that it’s because of the changing elasticity of the other consumers. They become less elastic and thus the shift in price discrimination is not large and maybe sometimes non-existent.

In reality, the explanation of the pressures of Medicaid on operating costs, at least in the short-run makes more sense (lack of direct of cash subsidy). In the long-run programs like Medicaid generally don’t help costs for the general market. In that case price discrimination by doctors may explain why possibly costs haven’t sky rocketed similarly to what some pundits claim. Costs may generally rise under government subsidization of certain people’s incomes but its more nuanced than that. And like Reinhardt says, in general price discrimination doesn’t mean cost shifting and even if Medicaid reduces price discrimination effects it certainly doesn’t remove it completely.

To conclude his piece, Reinhardt advocates for “All Payer” system. A system in which costs are negotiated by all insurers and hospitals as a whole and thus same rate is applied to public and private consumers. This system in my opinion has one large benefit and that is less administrative costs, and thus makes it incredibly attractive. However, allocation arguable is not more efficient but possibly more equal, more charitable. For instance, Maryland introduced this system and these were the results for uncompensated costs:

In Maryland, the “reasonable costs” of uncompensated care are recognized in payment rates, and all payers contribute equitably to covering these expenses. Hospitals therefore have a financial incentive to treat all patients. Between 1978 and 2007, uncompensated care in Maryland rose from 4.0 percent of revenue to more than 8.1 percent of revenue (from $36 million in 1977 to $927 million in 2007).13 The uninsured have access to all hospitals, including private community facilities and the state’s two well-known academic medical centers.

This is a relatively important thing to consider, as the low administrative costs possibly could have helped Maryland cover costs for the low-income patients. However, possibly it could be because in general public insurers don’t skip out on costs by getting lower prices because of their relative elasticity. This means that some people maybe be able to get care when needed, but it’s mostly likely not allocativily efficient and the poor who can just afford to pay will be most effected. Not sure what the possibly consequences on the public funding is.

If the aim of American healthcare policy is just to increase uncompensated care access then possibly an All Payer system like Germany of Switzerland works, but to have an efficient and arguably one that is more allocative then price discrimination ought to continue. However, when people are given public insurance and price discrimination occurs arguably to cover for costs access doesn’t increase. Because only private insurers (generally wealthier) can cover costs, so their prices are dropped (relatively)or operating costs are dropped. Either way uncompensated care decreases. This shows possibly an explanation of public provision’s negative effect on uncompensated care. But still All Payer theoretically offers more “charitable care” from generally profit seeking hospitals.

Personally, I think instead of looking at Maryland alone one should look at the European states. Macroeconomic pressures are much more prevalent in Germany than Maryland for instance and thus the general reality of such an All Payer system may be more allocative than imagined as it could limit the oligopoly power of insurers. This is possible but can’t be proven without strict analysis of market structure of insurers in Germany, a subject I am not familiar with at all.

P.S. I just realized I have the most scattered thoughts ever, but if you can’t be scattered on the internet where else.

Libya Exists Outside Reality


I try to talk almost exclusively about economics. This is because this blog if anything is my educational tool. Even when I talk about Libya I talk purely about economics. Something about Libya is so complicated, and so incredibly backwards that solutions for Libya seem to be useless. It seems that the only solution is to cry for an army. But how do you build one when no central authority exists. It seems that one can find the route cause of why property rights are not protected, why Sufi shrines are desecrated and why a Kingpin look a like in the east is selling oil to North Koreans.

What made the Europe or for that matter the West surpass China and the Islamic Empire after the dark ages is a combination of state autonomy and private property. Now the private property facilitated trade and the state autonomy lead to a level of protection and a level of freedom. Of course we can debate to what extent a nation state must intrude to fix people’s lives. But to large extent the state wasn’t an institution to which gave you permission to do a handful of things but rather an institution that worked towards protecting you from transgressions. This principle of course wasn’t followed fully in Europe during 1600-1700. But in the places it did occur the lack of full border autonomy among the various connected kingdoms and states allowed trade to occur and with private property rights it provided incentives for innovation and meaning for trade. In the Islamic Republic no property protection occurred or at least it came and went and especially went away when wars occurred or political infighting occurred. In China the same occurred. Therefore, people traded and for that matter knowledge was traded. And this knowledge challenged current structured and this caused innovation and ideas to accelerate. Of course the latter growth, especially as France and Britain developed into full on nations can be attributed to colonialism. When Europe could no longer have anything to gain from invasion as property was not beholden to states but to people they looked for squalor in other worlds. But that initial structure lead to a consumer society and lead to a large and expansive civil society. Why can’t Libya have this? Is it rooted in national defence?

I don’t think so. I don’t think that all Libya needs is some patriotic men and women in uniform and then some how the special interest ideologues that want to get their militias high paying salaries will disappear. Such a thing doesn’t happen and there is proof of it. Whether it’s Afghanistan or a variety of post-war/post-colonial African nations. You achieve growth and development through trade and openness. The government will need an army as a requirement for governance but you can’t have Libya at pause just to wait for the government to deal with adversarial groups. Their power lies in their ability to delay pre war institutions from returning to work. This includes public works, international trade, etc. What needs to happen is for the government to assert that they are in charge of international trade and that they welcome outsiders to come to Libya. Actually completing work rather than empty gestures could do this. Like for example working oil refineries in Zawiyah could be sold or operated fully and competitively. Drive Ibrahim “Kingpin” Jathran out, so much so his hissy fit could be put on display in a courthouse and soon made into a made-for-TV drama on some Libyan version Lifetime.

They idea of competing for legitimacy from Militias is ridiculous but I am not proposing the government say they are better. I am trying to say that fears of federalism are exaggerated. This is not because its going to happen, rather its because its already here. Any Libyan can see this. Different militias with the claim to “work for the people” rule even parts of cities, so really I would love to have just three provinces. But in Libya you have a hundred. All with attempts at economic policy and religious policy. Its crazy to think the government is struggling to pass bills when all that is needed is a framework to suggest that it’s the governing body. But no framework exists and no constitution exists. No framework exists to say that ever city has a municipal body with said role. Rather it seems militias take a city block and rule it like a nation state, saying that the GNC is corrupt. Of course the GNC is corrupt, but really the GNC isn’t even supposed to have a serious role. Its role is supposed to be dealing with governmental framework, but till now all they have done is sends their “injured” children to Europe to be treated for claimed injuries during the war. As well as pay high salaries for workers who never show up to work. While still not paying workers, most of who are immigrants for work that they actually do. I can’t tell you how poorly the Libyan government treats street sweepers and garbage men, most of which are immigrants that aren’t hired in capable jobs because of racial intolerance in Libya. This issue could be dealt with if public servants did their job but why would day if no framework existed and if the boys club of ignorance continued to try to be some fake congress when their job is to allow a constitution to be created so that there is no excuse for militias to be the “people’s representatives”.

The recent constitutional council is a little weak. Only 30% of eligible voters voted. But you don’t get two chances to create a real government. One that will be recognized as in charge of the border, one that will protect property rights and one that is looked at to get rid of militias. One that people may want to volunteer in to protect.

So, while my thoughts have been scrambled I think there is a central message there. Previous ways to form order aren’t the only answer to Libya. Just having an army is not enough. It’s the effort to be the prime institution and crafting rules for governance, and at least attempting at defining a new constitution that make others absolutely illegitimate. Until then the country will be divided and even though everyone hates militias and the GNC they will never be able to recognize a central authority. One that only exists as more than just a collection of empty gestures. Government must be one that creates an example for Libyans and tells them that their property is theirs, their lives are theirs and that a framework exists that protects them. Weapons are not how you protect people, its institutions. If they create an army they can’t take on every militia head on, they have to make them useless, almost run them out of business.

Cynical Infrastructure Spending

It seems that if the government is ever going to spend money on something it’s going to over pay. It just seems that too often rent seeking occurs rather than actually production or services served for each dollar spent. Now I don’t care much for most fiscal stimulus. Current effects have been minimal with little to no fiscal multiplier effect. But I will give one concession concerning spending that should be done now.

Currently a lot of American infrastructure is deteriorating. This includes roads, highways, waterways, bridges, etc. The public works of the nation are not in a good state. And since the government is the sole party responsible for this structure then it is necessary that elected officials complete the duty. Now some people argue that this is good because you are paying for someone to work on the roads and thus giving them an income, from which the recovery can ensue. Such statements are inaccurate and the magnitude to which they claim the government’s infrastructure spending can spur short-term recovery is incredibly ridiculous. However, I have a better reason.

Currently there is a slump, wages are down and infrastructure sucks. This is provides a great opportunity to invest in infrastructure spending as wages will be low. It will comparatively cost less to higher workers. Now, I am not sure to what extent Obama’s minimum wage to federal workers effects all contracts but even so the labor could be cheaper now, especially if the project is done during the spring and summer months when theoretically the manual labor supply is greatest.

I understand the cynical nature behind such a project. I am obviously supportive because labor is so cheap and to some it doesn’t seem to be so egalitarian. But the other choice is a deteriorating infrastructure that could effect overall production in the long term. As well as deficits when there is a boom that will be more costly then one now considering rising costs.

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Subsidizing Wal-Mart & McDonalds

As more people take sides on the minimum wage debate, and as the antibusiness and progressive movements restart from their occupy disaster it may not surprise many that generally low skill and low paying employees in retail and fast food are angry. Wal-Mart and McDonalds are generally seen by protesters and supporters of minimum wage as the enemy. The argument by many of these people is that Wal-Mart and McDonalds have the ability to increase costs so as to satisfy a $15 per hour pay as a minimum, even more they want legislatures to pass laws to make this the minimum wage federally. Now the idea that Wal-Mart could afford it or not is not principled. In both the fast-food and retail industry a variety of companies exist, all of whom generally pay the similar wages. However, not all have high profit margins and not all preform at the same level all the time. So, the question of asking executives at Wal-Mart to forgo some money so that some employees can get paid a little more is not at all applicable under current mechanisms and also such an argument makes wrong assumptions about labor markets and Wal-Mart financing itself.

Now here is where things get interesting. For me minimum is generally a dumb idea. If the economy is not in a boom and wages aren’t increasing at the historic rate then minimum wage causes unemployment (above equilibrium). If the economy is improving the minimum wage does nothing to effect the well being of individuals and in fact may discriminate against individuals that want to sell their labor at a low price, such people could be disabled individuals, minorities, immigrants, etc. Anyways back to what I found interesting, since the arguments for minimum wage have hardly improved. Recently it was discovered that McDonalds recommends to its employees to take advantage of welfare benefits. Similarly Wal-Mart has many employees that use Medicaid heavily. Unlike McDonalds however they didn’t have a service phone line that told people how to live off of welfare.

If one were to analyze what was occurring correctly it would seem that McDonalds was being subsidized by the government. Of course welfare is available to a wide range of people and anyone in a variety of jobs can apply for some welfare in some form. But McDonalds actively promoting it to employees makes it relatively more direct. In fact, I think it acts the same way as a basic wage subsidy program. Many people have suggested wage subsidy programs as an alternative to many forms of welfare and unemployment insurance. Personally, I don’t think its as bad as current programs, however it would require heavy regulation and administration to actually get wages to increase, and in that case it doesn’t help to keep the firm’s profitability at the rate they want and keep the wages high enough so people don’t complain that they don’t have a “living wage”. The results I fear in the long run will be similar to the ones sounded off today about $8/hr wage for flipping burgers at McDonalds, in the end certain market situations will never allow the person living off of McDonalds alone to be able to afford a comfortable life. Now I understand that we have yet to recover from the recession fully and thus wages haven’t grown (at the rate they should). Thus, the application of wage subsidies could be slightly more effective. But as we have seen with McDonalds, the welfare that employees were pushed into getting so that they can “put up with” minimum wage has not solved their frustration.

Its important to know that I am just making some observations and really the issue is not that this shows that wage subsidies are useless. Personally, it will be very expensive to regulate and administer, and the issues with what sector to apply subsidies too is very difficult. For this and other various reasons I usually support basic income.

Now there have been some attempts at resolving the issue of poor living standards of fast food employees, especially with the advent of the McDonalds revelation. Barry Ritholtz suggests some solutions:

The simplest solution is to raise the minimum wage. If full-time employees are living below the poverty level — especially those with children — its no surprise they are going to need public assistance. Raising the minimum wage over a period of time will eliminate much of this corporate welfare. The costs will be slightly higher prices at fast food restaurants and low end retailers.

The next proposal is more severe: Charge back the amount of public assistance any employee receives to the company he or she works for. It would be separate from tax filings, and simply be a direct penalty charged to the firm. I doubt there is much political will for this proposal, but I can see some people — especially on the Left — supporting it.

I kind of like one or two things but then the rest  is useless. Minimum wage doesn’t stop it really. Most of these individuals may end up paying for the higher prices later as lower income individuals comprise a large portion of the consumers of fast food restaurants and low end retailers. So, really it doesn’t improve their real income (not to forget the other long term side effects of raising minimum wage, especially in a slow economy). This may decrease the amount of individuals on welfare, but thats assuming none are let go.

The second proposal is a little more ridiculous. Charging McDonalds for an employees welfare benefits is a little like triple taxing them. There are corporate taxes, income taxes, and now penalties for the choices of other individuals. I understand that what McDonalds did was not exactly PR friendly or ethical in some cases but really doing this is supposed to be an economically good option. If minimum wage was supposed to increase prices slightly first in most cases then could you imagine what this will do to prices. Effectively McDonalds for example could be paying far above minimum wage or the market price. And if its above the market price it will act like a minimum wage so many desire. One above the general equilibrium and thus unemployment occurs. In this case it may be far more sever than minimum wage in a slowly growing economy.

If you want to stop the abuse of welfare you cut it or means test it. Or just convert basic income or wage subsidies as a full (and only) program already, the can be more fiscal and market friendly.

The last suggestion though is may favourite for good reasons:

The most radical idea is bit of pure fantasy: Guarantee every person in America a minimum salary. That is a proposal under discussion today in Switzerland. Its hard to even imagine such a concept gaining traction in the U.S. outside of the Great Depression era.

I don’t think its as radical as he may believe it is. I think its just that many politicians don’t believe in policy but rather symbology. So, the GOP will say “what government giving you basic income, what next weed and gay marriage” and the democrats will say “its not enough we need to make the corporations pay, this is our America and everyone has the right to [INSERT SERVICE] and a good living” or something flashy. Basic income for me is knowledge neutral (for the most part), meaning that since its a base it doesn’t interfere with the cycle of consumption and production, both of which are driven by the knowledge created through the pricing mechanism.

PS  Another possibility is that welfare gets means tested federally and in most states and McDonalds has to fire employees as really they couldn’t afford them. They could raise prices, but a fall in revenue will cause there to be lay offs. Then maybe McDonalds will invest in automated service and with that there will be a variety of good and bad. Largley good but some economist seem scared of automation. To me bring it on, just make sure the market bares the risks not the government.