January 13, 2007

January 13, 2007 | Commentary on

Democratic Agenda Running on Empty

Several weeks ago, I addressed the shrinking Democratic policy agenda. Two developments last week reinforce the growing sense that the vaunted "100 hour" legislative freight train is running on empty.

First, the nonpartisan Congressional Budget Office (CBO) examined the effects of increasing the minimum wage from $5.15 to $7.25 per hour. It confirmed that the overwhelming majority of minimum-wage workers live in households with incomes too high to qualify for welfare programs such as the Earned Income Tax Credit, Food Stamps or Medicaid. In fact, CBO estimated that only 18% of these workers had total cash incomes below the federal poverty threshold.

More importantly, CBO found that, for these low-wage workers, the Democrats' proposal is, at best, a mixed blessing. If the proponents of a higher minimum wage are correct, the working poor would enjoy an immediate 40% wage increase--but these higher wages would liberate them from their dependence on federal welfare programs. Dropping the working poor from the welfare rolls would, in theory, generate big budget savings for the taxpayers.

But, CBO says, while this form of government intervention in the labor markets liberates some, it enslaves others. According to the analysis, these victims would "see their work hours and earnings decline (or sometimes eliminated completely) as employers responded to the increase in the minimum wage." These victims of the higher minimum wage would find themselves stuck anew in the briar patch of dependency. Moreover, their "increased participation in assistance [i.e., welfare] programs would generate significant additional costs on a per-case basis. . . ."

Employers, the report noted, could respond to a minimum wage increase in several ways, all of them negative. They could:

  • Fire some workers or cut back on their hours.
  • Screen job applicants more closely to select employees from whom they would expect higher productivity, thus limiting opportunities for the least skilled job seekers.
  • Reduce employee fringe benefits (such as health coverage).
  • Pass along at least a portion of the additional payroll costs to their customers by raising prices.

Because these negative effects cancel out whatever gains might accrue from this policy change, CBO concluded that, on balance, "the potential revenue effects are ... small and of indeterminate direction." Translation: Increasing the minimum wage does not, on balance, help the working poor transcend poverty.

Explain again why we're raising the minimum wage?

Speaking of much-ballyhooed legislation falling short of expectations, CBO also assessed the Democrats' proposal to give federal bureaucrats a dominate role in negotiating drug prices in the Medicare Part D program. This is the most overt attempt to impose price controls on the health sector since Hillary Clinton proposed a government takeover of our health system.

Liberals insist that drug plans are incapable of negotiating the best prices on behalf of enrolled seniors and believe only benevolent government negotiators can fill that role. The Democrats' hope is that these government-led price negotiations will lower drug prices, save billions and allow the new Democratic majority to apply these savings to additional expansions of drug coverage.

But the CBO threw cold water on these hopes. "The secretary," the report concluded, "would be unable to negotiate prices across the broad range of covered ... drugs that are more favorable than those obtained by [the private plans]." Thus, the Democratic plan "would have a negligible effect on federal spending."

Translation: Private negotiators do at least as good a job on behalf of their customers as government bureaucrats do. Private plans "bear substantial financial risk and therefore have strong incentives to control their costs and offer coverage that attracts enrollees through features such as low premiums and cost-sharing requirements."

Indeed, the latest estimate of how much the benefit will cost over the next decade has fallen dramatically (from $926 billion to $640 billion) largely because of this competition among prescription plans. "If it's working," Medicare's top official asked, "why would you want the government to interfere with these negotiations?"

My colleague Ed Haislmaier agrees. "The competitive private market in Medicare Part D," he observes, "is significantly reducing total program costs below the levels achieved by a system of government-mandated price discounts" and warned that "introducing into the program some new mechanism of government negotiation might actually result in an increase in total program costs, and not the widely assumed further reduction."

The Democrats' new mantra soon could be: Reality bites.

Michael Franc is vice president of government relations for The Heritage Foundation (heritage.org).

About the Author

Michael Franc Distinguished Fellow
Government Studies

First appeared in Human Events