PETHOKOUKIS: That Senate parliamentarian did Democrats a favor


More trouble ahead for President Biden’s $1.9 trillion COVID-19 relief/stimulus bill? Last week, the Senate parliamentarian told lawmakers that the plan’s proposed increase in the federal minimum wage to $15 an hour violated Senate budget rules. Then Democrats abandoned a back-up plan that would’ve attempted to boost worker pay through the workaround of tax penalties on big business. And now this, via the Financial Times: “Some centrist Democrats have been pushing to slim down the legislation by limiting emergency unemployment benefits and the eligibility for $1,400-a-person direct payments, while others have pushed changes to funding for state and local governments to divert more money into broadband access.”

Democrats are going to pass a big, expensive bill — one bigger and more expensive than almost anyone expected not long ago. JPMorgan currently has the passage of a $1.7 trillion bill baked into its 2021 GDP forecast (and would not be shocked by the full $1.9 trillion), Goldman Sachs thinks the package “looks likely to exceed our standing assumption of $1.5 trillion in additional fiscal measures” and could come close to that nearly $2 trillion number, and Barclays has incorporated nearly $1.5 trillion into its baseline. So there’s some room here for upside GDP revisions from Wall Street if the bill comes in at the high end of estimates. (But what happens after the spending splurge?)

Democrats should be happy with this, of course. But more left-leaning folks shouldn’t be unhappy if the centrists also get their way here. It would hardly be the worst outcome, for instance, if that proposed $400-a-week supplemental unemployment benefit got trimmed back in amount and duration. If included in the final legislation, it would mean around 60 percent of unemployed workers would receive more income from their unemployment benefits than they would from working, notes my AEI colleague Michael Strain (based on this paper) in recent congressional testimony. Is it really that hard to imagine the bad incentives generated from such a scenario?

Moreover, the parliamentarian nixing the $15 federal minimum wage is also a blessing in disguise, at least if you care about returning the economy to full employment as fast as possible. (Sorry, econ Twitter.) Again, Strain:

In 2019, before the onset of the pandemic, at least one-quarter of all workers in 47 states earned less than $15 per hour. In 20 states, half of all workers earn less than $18 per hour. These simple statistics illustrate how high $15 per hour would be as a wage floor. In Mississippi, Arkansas, and West Virginia — each of which had a median wage below $16.50 in 2019 — a $15 minimum wage would be devastating to low-wage workers. This would be the case in many other states, as well. … The Congressional Budget Office estimates that joblessness would increase by 1.3 million if Congress increased the minimum wage to $15. This is a reasonable estimate, but in my view, it is too low. … Even in high-wage states, the available evidence suggests that $15 is too high. Economists found that when Seattle raised its minimum wage to $13 in 2016 (on its way to $15), hours worked in the low-wage labor market dropped by 9 percent. Wages increased by less than hours decreased, so the earnings of low-wage workers fell by $125 per month.

Incentives and trade-offs mattered before the pandemic, and they matter today. Policymakers need to keep both in mind as they rush to fulfill some long-term policy goals.

Learn more: Wealth taxes come with a wealth of worrisome potential trade-offs | Economic growth shouldn’t need a defense. But here you go, again. | Don’t assume the coming Biden Boom means a shift to rapid and sustainable growth

James Pethokoukis is the editor of AEIdeas and is the DeWitt Wallace Fellow at the American Enterprise Institute.

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