Are Walmart and McDonald's Welfare Queens?

Barry Ritholtz, the man behind the Big Picture trading blog, has a column on Bloomberg View where he chastises Walmart and McDonald's for their large number of workers on welfare.  It's titled, How McDonald's and Wal-Mart Became Welfare Queens. He gets right to the point.

"According to one study, American fast food workers receive more than $7 billion dollars in public assistance. As it turns out, McDonald's has a “McResource” line that helps employees and their families enroll in various state and local assistance programs. It exploded into the public when a recording of the McResource line advocated that full-time employees sign up for food stamps and welfare.

Wal-Mart, the nation’s largest private sector employer, is also the biggest consumer of taxpayer supported aid. According to Florida Congressman Alan Grayson, in many states, Wal-Mart employees are the largest groupof Medicaid recipients. They are also the single biggest group of food stamp recipients. Wal-mart’s "associates" are paid so little, according to Grayson, that they receive $1,000 on average in public assistance. These amount to massive taxpayer subsidies for private companies."

Ritholtz highlights three different possible solutions to the scenario that highlight the extent to which McDonalds and Walmart are abusing the system.

1. Raising the minimum wage.

2. Taxing companies for any public assistance their employees need.

3. Implement a guaranteed basic income for all adults like is currently proposed in Switzerland.  

(It seems appropriate to note that while basic income replacing welfare is an interesting theory, the proposal on Switzerland's ballot is absurdly high, as they are attempting to guarantee income equivalent to $67,000 a year for a married couple.)

The first solution references a long running debate among economists. If wages are forced significantly higher, it's likely that some current employees will be better off and a lot of potential future employees will be never be hired. Automated cashiers are basically a solved problem, and it's no coincidence that McDonalds are rolling them out in Europe where labor costs are higher before we see them here in the United States. Walmart also has cashiers that could be replaced if costs were higher.  It's a little ironic that people complain more about Walmart and McDonalds hiring cheap workers than they do about Amazon, which bought the robotic company Kiva Systems in order to reduce their need for human workers. If labor costs get high enough, Walmart might start to look at this type of automation more seriously.

The second solution jumps out as being immediately farcical. Before jumping to tax companies that employ anyone needing assistance we should stop and think about what that would mean for the hiring prospects of anyone that looks like they require this assistance. This is an example of the type of regulation that actively hurts those who it is designed to protect.

The third solution, which Ritholtz acknowledge as extreme, is interesting in theory. A guaranteed basic income, properly designed, is not very different from a negative income tax or our current Earned Income Tax Credit.  Negative income taxes theoretically work quite well, their main downside being that they lead to high marginal tax rates and reduce the ability of a society to be open to poor immigrants. The main problem with guaranteed income plans comes with the exceptions - the income is designed to replace welfare but there are always some groups that are seen as slightly more deserving and the process will inevitably allocate them a little more than others. This turns what was supposed to be a simple catch all program into one that merely magnifies the current problems of the welfare state. 

Thinking about whether or not Walmart and McDonald's are abusing the current system is an interesting question. But when we look at proposals to fix the problems it becomes apparent that the alternative to paying a lot of workers a bit of money could lead to these companies investing more in capital and paying fewer workers. 

Without employment opportunities at Walmart and McDonald's and other similar work places, many of these workers would have no jobs at all. The government would then have to pay out even more benefits to support people with no other incomes. It's not like they are perfect corporate citizens, McDonald's and Walmart have lobbied federal, state and local government for various rules that help them and hurt their competitors while they take advantage of every tax break they can. 

It's reasonable to think that many of the tax loopholes used by these companies should be closed and the various laws their lobbyists helped tweak before passage should be repealed. But the fact that McDonald's and Walmart employ low skill labor and pay them at the levels dictated by supply and demand is not something that should be held against them. 

Addressing Prosecutorial Overreach and Intimidation

In the US, the justice system relies on plea bargains and summary judgements to keep the gears of justice working. If every arrest required a jury trial the costs would be significantly higher.

From the prospective of the suspect, whether or not to suspect a plea deal depends on the following equation that compares the cost of both options:
P = Probability of conviction
S(trial) = Trial sentence
S(plea) = Plea sentence
V = Psychic value of being found innocent rather than guilty
C = Cost of mounting defense

1. P*(S(trial)) + C - (1-P)*V > S(plea)

2. P*(S(trial)) + C - (1-P)*V < S(plea)
In scenario 1, it makes sense to take a plea deal. In scenario 2, it makes sense to fight the plea deal. In theory, the probability of conviction should vary with the defendant's knowledge of whether or not they actually committed the crime and many unnecessary trials can be avoided.

The issue comes because prosecutors realize early in their careers that they can make their time much easier by massively inflating the sentencing that defendants would face if the case went to a trial. Accepting a 2 year prison term can make more sense when the other option is a chance at being sentenced 30 years to life if the case goes to trial. This can be the case even if the defendant thinks they are actually innocent. This was famously done in the case of Aaron Schwartz (Who was actually guilty, but of a relatively minor crime with a poorly written statute that allowed for multiple felony charges), in which the stress induced from this overreach helped drive a young programmer and activist to suicide.

As Orin Kerr notes:
"Yes, the prosecutors insisted on jail time and a felony conviction as part of a plea. But it is not particularly surprising for federal prosecutors to use those tactics. What’s unusual about the Swartz case is that it involved a highly charismatic defendant with very powerful friends in a position to object to these common practices."
The ability of prosecutors to bully defendants into plea deals doesn't mean the whole system needs to be revamped, but ways to reduce this imbalance of power should be addressed.

Some potential methods to prevent this:

1. Reduce maximum sentences for various crimes. This would be a very labor intensive process and would be difficult for politicians to back more reasonable sentencing guidelines without getting accused of being soft on crime. But there is a potential for the political environment to turn against the government in security matters. If proponents properly the frame the issue as one of preventing government misconduct there is a slim hope that this can be addressed.

2. Rather than fix individual measures, adopt a broad method such as forcing concurrent sentencing to be adopted over sequential sentencing for crimes of specific type would mean that prosecutors wouldn't be able to threaten quite as much prison time in order to force innocents to plead guilty.

California has a rule like this for single offenses where a single act or omission can only be punished in one manner.  Broadening this rule to include many individually committed crimes would prevent prosecutors from being able to throw the book at suspects. The caution would be in preventing scenarios where a criminal can commit one significant crime and then feels safe the they can commit any number of less significant crimes without many consequences. 

3. Have plea deals cap the maximum potential time served. If a plea deal is offered by the prosecution, the maximum prison time sought by the state (or equivalent punishment) can only be 5 times the time of the offenses mentioned in the plea deal offered. If significant cooperation in other investigations is involved as a condition this cooperation can be made equivalent to X years served for the purpose of the calculation.

This way, people like Michael Milken might not have been incentivized to agree to the charges which led to him serving 22 months in prison because the prosecutor was trying to use RICO to put him in prison for life*. Once the 22 months are on the table the size of the stick the prosecutor is using changes from life to under 10 years.  Because judges determine the sentencing they would have to be involved in signing off on plea agreements with pre-determined sentences, which might cause some additional complications. Maybe this should be reserved for cases defined as "high profile" when the prosecutor is also facing political pressure for a successful resolution.

There are probably other ways to make prosecutors more accountable. The path of a high profile victory against a public enemy towards a career in politics is an unfortunate one. But it isn't just the high profile cases that matter, it's the potential abuse of anyone who is being charged with trumped up charges in order to make them more pliable to a plea deal. Right now the United States has a system where if there is a target on your back, there will be laws that you violated and the prosecutor can add them up until you agree to a plea deal. 

It's a less than optimal system that badly needs to be addressed.

*Guiliani was the overreaching prosecutor in the Michael Milken case. Milken only agreed to the charges which he thought would not lead to prison time after prosecutors threatened to go after his brother.

More wasted money

The House recently passed a party line vote to spend more money on education and Medicaid. The $10 billion dollars to the states comes with many strings attached, notably that they do not get the money if they decided to cut spending on education as a share of total revenues. I’ve touched on the irrelevance of medical spending past a certain level before, so let’s look at the effectiveness of education spending.

Source: “Does Spending More on Education Improve Academic Achievement?” by Dan Lips, Shanea Watkins and John Fleming

Of course, the chart is somewhat misleading.  Education scores are range bound while spending is not, but it is notable that they often seem to be going in opposite directions*. 

Using additional cross country data from NationMaster, we see that government spending on education beyond a certain point doesn’t seem help very much anywhere in the world:


Total education spending as a percent of GDP isn’t any more correlated with scientific literacy, but at least the correlation isn’t negative.


So the government may be wasting money here, which just gives us more evidence that  α is very high.

*At younger ages there is some evidence of improved math scores, but these improvements are negligible by age 17. Click through the article for more charts.

CBO's Long Term Budget Outlook: Revenue will be less than spending

The CBO released their Long-Term Budget Outlook for 2010! This may be a weird thing to get excited about, but I was looking through their 2009 outlook and wishing that I could work with an updated version.

Key quote:

Keeping deficits and debt from growing to unsustainable levels would require raising revenues as a percentage of GDP significantly above past levels, reducing outlays sharply relative to CBO’s projections, or some combination of those approaches. Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery. However, the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them.”

Key chart:

In order to make sense of the above chart, the difference between the extended-baseline scenario and the alternative fiscal scenario needs to be understood.  The extended base-line scenario assumes that taxes and revenue change as is expected in the current law.  The alternative fiscal scenario assumes things that are likely but are not scheduled under the current law, such as no Medicare physician payment cuts and the AMT tax relief (See Table 1-1 in the report for more details).

My main complaint about this approach is that the least likely aspect of alternative fiscal scenario is also one of the most important: that it assumes that the tax cuts from 2001 and 2003 are not going to be allowed to sunset. This can be partially corrected for by using the revenue from the extended baseline-scenario and spending from the alternative fiscal scenario.  We find that the primary deficit (Deficit before including interest payments) will be -1.4% in 2020 and -3.1% of GDP in 2035.  Incorporating in the interest payments from the alternative baseline scenario (The actual interest payments will be higher due to a larger debt build up), that means that the total deficit will be -4.5% in 2020 and -7% in 2035.

I’ll end with a CBO table that informs us that the sooner the deficit is brought under control, the better:

Bull and bear markets in Government

One interesting way of thinking about time periods in American history is by looking at the extent to which government control (measured in the below chart as spending as a percent of GDP) of the economy is going up or down.



In bull markets, government is getting more important in people’s lives. In bear markets, concerns about government are pushed to the side and markets thrive. Considering the entitlement spending shift has yet to hit, it is unlikely that we will be going back to bear market anytime soon.

Forecasting Wisdom from Scott Adams

Scott Adams, the creator of Dilbert, draws on his past experience with budget projections to give us valuable insight into what they guys at the CBO are really doing. His two rules of budget forecasting are:

1. You must assume that trends will continue
2. Trends never continue

While this isn't as true for demographic trends that involve the aging of a large portion of the population, point number two is generally correct. He also has some valuable insight about certain components of government spending.

The budget estimates for defense spending are obviously complete nonsense too. I can't imagine that the guy who handles that part of the forecast for the CBO includes, for example, an assumption that we'll invade at least two smaller countries per decade. I think there would be a lot of pressure on that guy to remove those assumptions, no matter how right he is.

In order to be nonpartisan the CBO has to follow some pretty explicit rules, so they can only forecast what bills say and not what it likely to happen. When it comes to partisan forecasting the bias is much more obvious, as even just forecasting a higher cost for a project can get a person kicked off the team, as Lawrence Lindsey realized in 2002.

Underestimating Exponential Growth

"The greatest shortcoming of the human race is our inability to understand the exponential function." 
-Albert A. Bartlett

Exponential growth is often widely underestimated. Here are a few issues where many people make mistakes because they don’t understand the simple math of exponential growth.

  1. Economic Growth: When there are trade offs between efficiency and equality, many people today think that the taxes, regulation and redistribution are worth a slightly lower growth rate.  However, when this trade off is applied over a long time period, the results can be staggering. If the choice was made in 1870 to have more equality at a cost of 1 percentage point of growth a year, America in 1990 would be no richer than Mexico.
  2. Entitlement Spending and National Debt: As I have pointed out previously, the United States is headed for very high debt levels if entitlement spending is not reformed.  One very simple way to fix this is to index entitlement benefits to inflation and not income. The growth of the economy would make it easy to pay for a safety net at today’s living standards. Unfortunately, this would only work for Social Security and not Medicare as the medical system is structured in a way that leads to health care inflation greater than that of the real economy.  Additionally, there is another problem when the net national debt reaches 100% of GDP. If the market perception of the debt turns negative and nominal interest rates remain higher than nominal GDP growth, then there is no way for the economy to grow itself out of debt.  This is the current situation with Greece, and Japan isn’t doing too much better.
  3. Personal Finance and Pension Plans: If a prudent investor can make 10% real returns in a year, then they can turn 50 thousand dollars into over 1.6 million dollars after 35 years. This simple math explains how many of the rich people today consist of those who have saved and invested prudently. On the other hand, a supposedly fully funded pension fund planning on a world of 8% real returns that finds itself in a world of 4% real returns will find itself underfunded by over 75% 35 years later (In this case, the people making pension return assumptions are underestimating how much they matter, they just know that their books look better if they assume a higher return). Robin Hanson has been proposing that people don't give to the future because they don't care about it, but it may also be that they do not fully understand the impact of exponential growth*.
  4. Overpopulation and increasing Resource Consumption: Overpopulation does not seem to be the exponential problem that we once thought it was. Once become rich enough, their population growth rate slows down. The UK’s Ministry of Defense 2008 Strategic Trends report expects the population to level out at around 9 billion people between 2050 and 2100 (page 25).  While overpopulation is itself not a problem, the exponential economic growth of these emerging economies are coincident with an exponential increase in demand for resources and these limited resources present constraints on growth.

Having established that exponential growth rates are important, here is a handy rule of thumb that will give an intuitive understanding of exponential growth. To calculate the doubling time of an exponentially growing series, take 70 (or 69.3 to be exact) and divide it by the growth rate. This means that a 10% growth rate leads to a doubling every 7 years, a 7% growth rate is a doubling every 10 years and a 3.5% growth rate is a doubling every 20 years.

*It is also possible that someone who both cares about the future and understands exponential growth might think that there were existential problems for the current society that are significant enough to reduce the probability of a far future donation from ever paying off.

Political Nonsense from Scott Sumner

Scott Sumner prefaces a very interesting overview of the German Crisis of 1931 with a political non sequitur:

First I’d like to make a few comments on this amusing video.  My favorite line is when Joe Biden prays to God.   I didn’t know that politicians talk to God in the same dishonest way they talk to voters.  Bloggers on the right and on the left who think the other party is a bunch of lying weasels are half right.  They are a bunch of lying weasels.  But so is their own party, which they somehow overlook.  Above the fray independents have the right attitude toward most politicians of both parties—contempt.  

BTW, in my view Bush was right and the Dems were wrong in 2005, and Obama is right and the GOP is wrong today.   The filibuster makes no sense.  Indeed I’d like to see a parliamentary system in this country, where something like the German Free Democrats was in the center, determining what got done.  Some people seem to believe the filibuster favors small government, but I find that unlikely.  Size of government is just as likely to shrink as to grow, otherwise government would head toward 100% of the economy in the long run.  So in the steady state there will be equal number of proposals to shrink government as to expand government. 

When 59 people disagree with 41, the 59 are more likely to be right.  If they were more likely to be wrong, we ought not have democracy at all.

OK, enough political nonsense.  On to 1931:

His first paragraph is actually spot on. Most partisan squabbles consist of pots calling kettles black. People fail to recognize this for various reasons, perhaps because politics is a mind killer. The second paragraph where he asserts that the size of government is just as likely to shrink as grow is where he goes wrong.  While federal government expenditures have remained at a pretty constant percent of GDP, there is a pretty clear upward trend when the outliers of the world wars are excluded.

The conservative revolution that started with Reagan in the 1980’s is interesting not because government shrank (Bill Clinton and his republican congress did see total government spending shrink by about 3% of GDP), but because throughout that time period government remained pretty constant as a percent of GDP.


While federal government spending as a percent of GDP might have been more constant than total government spending, their partial funding of joint programs with the states has encouraged the large increases in state level spending.  Furthermore, a steady state government wouldn’t be growing at the same rate as the general economy. Assuming zero efficient gains, it would grow with population and with wages.  If the government took care of the same tasks and had even slight productivity gains, its size relative to GDP would shrink as the rest of the economy grew so the mere fact that it is keeping track with GDP spending suggests that government has a tendency to grow instead of shrink.

Outside of pointing out the empirical trend of increases in government spending, there are very clear public choice reasons as to why new programs will generally lead to more spending. In this regard, Bryan Caplan asks a very interesting leading “extra credit” question that almost answers itself.

Suppose you had a billion dollars to spend in Washington to advance liberty.  What's the biggest libertarian policy reform your billion could buy?  How precisely should you spread your money around?

Remember: Many obvious strategies would lead to bad publicity and serious pushback.  Your answer should take account of this feedback.

Extra credit: Suppose you had a billion dollars to spend in Washington to advance statism.   How does the optimal strategy change?  If there's a big asymmetry, explain its source.

As for wondering why a straight up majoritarian approach isn’t always the best legislative approach, Will Wilkinson has a good post on how simple head counting systems excludes any measure of the intensity of the voter’s preferences.

The government isn't trying to create more unemployment, but...

Alex Tabarrok makes a very important point about some of Obama’s plans to help the middle class. 

From today's NYTimes  

The Obama administration is planning to use the government’s enormous buying power to prod private companies to improve wages and benefits for millions of workers, according to White House officials and several interest groups briefed on the plan....

Because nearly one in four workers is employed by companies that have contracts with the federal government, administration officials see the plan as a way to shape social policy and lift more families into the middle class.

At a time of 10% unemployment when real wages need to fall this is bad business cycle policy.  I am more worried, however, about the long term consequences of creating a dual labor market in which insiders with government or government-connected jobs are highly paid and secure while outsiders face high unemployment rates, low wages and part-time work without a career path.

Long-term unemployment is at shockingly high levels which in itself creates a dynamic of persistence because the longer a worker is unemployed the less employable they become (in part due to loss of human capital and signaling problems). Thus, getting these workers back to work is going to be hard enough as it is.  Labor regulations which raise wages and make hiring and firing workers even more costly will make re-employing the long-term unemployed even more difficult.

Moreover, once an economy is in the insider-outsider equilibrium it's very difficult to get out because insiders fear that they will lose their privileges with a deregulated labor market and outsiders focus their political energy not on deregulating the labor market but on becoming insiders--see Blanchard and Summers on hysteresis in unemployment and more recently Larry Ball here.  Many European economies found themselves stuck in the insider-outsider equilibrium and as a result unemployment levels in places like France and Italy hovered at 9% or more for decades.  

This is a neat explanation of the type of second order effects that people who are only trying to help usually tend to ignore.  Surprisingly, even Brad Delong agrees that creating an insider-outsider dynamic is bad.  The insider-outsider dynamic is even worse when it is the outsiders who are doing jobs that are the most productive.  Garett Jones points out that the effect of workers queuing for the higher paying insider jobs also exacerbates unemployment.

Don't be stupid and misinformed, chocolate is way better than vanilla

Michael Kinsley, commenting on disagreement in political discourse:

It's a free country, and people can believe whatever they want. If evidence or reason persuades them that some opinion they hold is wrong, they are free to change it. So at any given moment, we all believe that our own beliefs are correct and anyone who disagrees with us has some explaining to do. Furthermore, if I believe that evidence and reason support my own views, then I also must believe that they do not support the views of those who disagree with me.  

Three possible answers are that they are misinformed, they are thinking poorly, or they are blinded by self-interest.   

This completely misses the idea of differing values, which is among the most common reasons for political disagreement.  Jonathan Haidt has done some interesting work on this issue, which is highlighted in his 2008 TED talk.  He found five foundations of morality across cultures.

  1. Harm/care
  2. Fairness/reciprocity
  3. Ingroup/loyalty
  4. Authority/respect
  5. Purity/sanctity

Liberals care much more about Harm and Fairness a lot more than Authority, Ingroup and Purity while conservatives care about all 5 channels equally.  These are fundamental differences and bipartisanship or even political discourse in general is very difficult as long as people pretend that everyone wants the same thing and the only disagreement is on how to get there.  Politicians playing to the median voter can pretend that they care equally about every moral value, but responsible commenters should be less biased.  At the very least, pretending that the only possible way their values differ from others is that they are less selfish is not constructive discourse. 

An example of another major value premise difference is time preference, where two parties can reasonably disagree on the proper discount rate.  For this premise, it can be a little bit funny watching the debate shift, because liberals discount the future benefits to economic growth but don’t discount the damage to the environment while conservatives do the opposite.  If pressed, liberals might say they don’t believe that their regulatory or redistributive policies will slow economic growth while conservatives against environmental policies believe that environmental protection done incorrectly hampers growth and as long as there is economic growth their descendents will be rich enough to deal with any issues that come up. 

Of course, it is also true that voters from both sides of the political spectrum are drastically misinformed.

Hat tip: Arnold Kling