Social welfare programs have been a topic of considerable controversy in the United States, and continues to be the subject of extensive in American politics. While this issue as a whole is certainly one with many economic implications, it is entirely too broad to do justice for in its entirety in a single post. Instead I will be focusing on a more specific tenant of the national welfare controversy, and one that is often under examined or contemplated. The idea of administering mandatory drug tests to welfare recipients is one that has often been thrown around or suggested, but less often analyzed more thoroughly. This post will assess what mandated drug tests would look like and what some of the results and consequences of such a policy would entail. The goal is to look a bit beyond the surface, putting impulsive, emotional reactions aside and looking more at the objective economic implications of this issue.

When considering this issue, people often react in one of two primary ways. The first general opinion is to think “That sounds cruel and hypocritical”. People who feel this way tend to believe that such a policy is too harsh and is designed to hurt those who are already struggling with poverty. They often cite that politicians who support this have no compassion for the poor and are just trying to further contribute to their struggle. On the other hand, others who consider such a policy often think “that sounds totally fair, if you’re going to receive our hard earned tax money, you should at least be able to pass a drug test”. People of these beliefs tend to suggest that it is already unfair that people on welfare use the money they receive for unnecessary or detrimental purposes. They claim that welfare recipients may even use the money to purchase drugs or other illegal goods. Both of these sentiments are very legitimate when it comes to morals and values; however, neither of these alone addresses the actual practicality or the direct costs and benefits of such policies.

According to the National Conference of State Legislatures, at least 15 states have passed legislation that requires recipients of public assistance to pass a drug test. Similar regulations were passed in many other states, but were never passed into law. When it comes to designing new legislation, it is important not only to consider the normative values that the law will seek to uphold, but also the actual positive effects that will occur as its result. The issue of prerequisite drug testing seems to be an instance where perhaps the quantitative results are not reflective of the values behind the legislation. When analyzing any decision, it is first necessary to analyze the costs, and then compare them to the benefits in order to determine the logical course of action. The intended benefits of these proposals are of course to prevent welfare recipients from using government money to purchase drugs, and to save taxpayers money by reducing the number of people on welfare programs. For this to be effective in an economic sense, the welfare payments being received by active drug users would have to be greater than the cost of testing all of the recipients. The data generally seems to indicate that these drug testing programs are actually quite expensive, and that, in practice, they actually seem to indicate that far fewer welfare recipients are active drug users than was previously imagined. Think Progress found that states requiring drug testing for welfare applicants spent a combined total of nearly $1 million in order to conduct testing. It was also found that, though the national drug use rate was 9.4 percent, positive tests occurred at a rate ranging from 0.002 percent to 8.3 percent, and it should be noted that all states but one (Oklahoma) found rates below one percent. These high costs coupled with low success rates indicate that these programs are almost certainly more expensive to carry out than they are beneficial in terms of saving taxpayers money.

To be fair to those who support mandatory testing, their position is often accompanied by more than this stance alone. Those supporting testing often feel that funding to welfare programs in general should be cut, which would indeed save considerable amounts of taxpayer money if implemented. However, that is a complex debate of its own with too many intricacies to elaborate on in this post. Supporters also have argued that even though it is a pricey endeavor, it is still worth it. They feel as though it is very important to prevent the spread of drug use and find it fundamentally unacceptable for the possibility to exist that taxpayer money could be used for the purchase of illicit drugs. Though this is a fair viewpoint that holds merits in its own sense, it does not align with economic rationality. Applying certain morals to the situation may allow for such points to be recognized as legitimate, but from a purely economic standpoint the regulations simply do not prove efficient.

It is always important to consider every aspect of an issue before passing judgement, especially when you are a representative of the people contemplating spending taxpayers’ hard earned dollars. Considering the economic costs and benefits is a crucial step in thoughtful consideration, although it is all too often overlooked or under researched. This past May, the “Drug Testing for Welfare Recipients Act” was introduced to the US House of Representatives. I only hope that our representatives thoroughly consider the costs and benefits of this proposed legislation, and make decisions that will reduce the cost to the American people rather than increase it.

 

 

 

Update: If you read the previous post on the minimum wage, I recommend you take a moment to reflect on the comments of California Governor Jerry Brown as he signs a statewide raise in the minimum wage.

 

Over the past several years, American politics has seen the rise of several movements which have been gaining more and more notoriety. Protesters have, on occasion, taken to the streets wielding signs reading “fight for 15” or “living wage now”. Of course, the movements are rallying around the goal of passing regulations that would mandate a national increase in the minimum wage. Currently, the national minimum wage is set at $7.25 per hour, although 29 states have introduced their own minimum wages that surpass the federal minimum. This controversy has been subject to relentless debate, with voices on both sides strongly asserting a variety of stances. Like many other issues, people often get tied up in the frenzy of emotion and passion that surrounds such a topic. Many a time, logical analysis of the issue is shrouded by the mainstream madness, and is ignored by far too many of those who decided to take a stance on the issue. In this post I will attempt to present some of the underlying theory and data that proves consequential in deciding the debate between the two schools of thought. Ideally, introducing basic logical concepts to this controversy will aid in moving towards achieving some state of stasis between opposing proponents. Such an achievement would be crucial to furthering the development of a plausible solution to this problem.

First, it is essential to lay out what exactly raising the minimum wage is, and what exactly the mechanics of such a move would look like. Many supporters of a minimum wage increase call for and increase from the current $7.25 to $15.00 per hour. If this were to occur, it would take place in the form of federal legislation being passed, mandating an increase in the national minimum hourly wage employers are allowed to pay their employees. In economics, this type of regulation would be categorized as a price floor. A price floor is simply a government imposed minimum price on certain market for a good. Typically these regulations are designed to aid firms by artificially raising the prices of their products, which in theory generates more revenue for the firm. However, the increased price of the good causes consumers’ demand for the product to decrease, and since the firm can only sell as many goods as are demanded, less goods will have been sold than would have been without the price floor. This decrease in the quantity of transactions is know as “dead weight loss” and illustrates the opportunity cost, or loss, that society incurs as a result of the regulation.

In the minimum wage scenario, the market in question is the market for labor. Firms demand labor from potential employees and people looking for jobs supply the labor. In this case, the price floor changes slightly in intuition since it is meant to help the employees who act as suppliers of labor as opposed to firms who make up the demand. As I mentioned, dead weight loss caused by a price floor involves the number of transactions that are prevented from happening by the floor. The important thing to note is that in this situation each lost transaction represents a person becoming unemployed due to the unwillingness or inability of employers to pay for those employees as a result in the increase in price. Those who argue against a minimum wage increase often site these applications of the laws of supply and demand as hard evidence of the dangers of imposing such regulation. Additionally, they argue that due to the natural competitive nature of the market, many firms already pay wages above the minimum wage and offer raises to employees in order to remain competitive in the labor market. Following this logic, raising the minimum wage at the federal level would have overall detrimental effects and should be avoided.

On the contrary, it should be noted that the previously noted theory and logic is a very simplified model of reality and likely overlooks various variables that are difficult to measure. Proponents of a higher minimum wage have raised several legitimate points that are worth noting. A common argument is that the current minimum wage has failed to retain its purchasing power due to inflation. This seems to hold some truth as the Pew Research Center notes that the current wage has lost approximately 9.6% of its value to inflation. Another legitimate argument is that raising the wage would theoretically put more money into the hands of employees, which in turn would spend that extra money, leading to increased economic activity and production overall.

When it comes to numbers, there is generally little consensus on producing a forecast for the results of raising the wage. Chicago Federal Reserve economists estimated that raising the federal minimum wage by $1.75 would result in an increase in overall household spending by $48 billion, boosting the GDP and contributing to economic growth. Contrarily, the Congressional Budget Office predicted that increasing the minimum from $7.25 to $10.10  would result in the loss of 500,000 jobs. The numbers are clearly contradictory and that is likely a testament to the complexity of this issue. It is very difficult to predict exact outcomes of wage increases, however it is possible to make logical and informed decisions based on data and theory rather than emotion and impulse. The around 100% increase from $7.25 to $15.00 an hour would likely the create problems of dead weight loss and unemployment, particularly due to the drastic nature of the shift. However, it is also quite possible that a more modest wage increase could have beneficial effects. Overall, it is best to get past the emotional, impulsive form of advocacy and really get down to realistic options.

All too often, particularly in the field of economics, the question of “what is the morally right thing to do?” can become a bit more complex than one might first imagine. As humans, we often tend to make assessments based on our gut reaction and on our initial perception of the way a certain issue sounds. Let’s take for instance the phenomenon know as “price gouging” which, due to the excessive number of natural disasters experienced, has been a relevant topic over the past year. Price gouging typically refers to the practice of selling goods at drastically increased prices than they would normally be sold at. This often occurs during natural disasters that leave people stranded in their homes with decreased access to usual resources such as electricity or the ability to purchase food at a grocery store. A person or firm practicing price gouging would deliberately charge excessive prices for goods that people in the area need, such as bottled water or electrical generators, knowing that afflicted people will be more willing to pay these prices in order to get the goods they need. Many people find this to be inherently unethical and many are opposed to the practice. Government officials often empathize with this public sentiment as many ordinances have been passed outright banning the practice. In the wake of Hurricane Harvey, Texas attorney general Ken Paxton issued a stern warning that price gougers would face fines of $20,000 per offense and up to $250,000 if the victim were to be older than 65 years of age. To the average person it seems perfectly intuitive that the practice should be met with scrutiny, just as it has been by officials like Paxton. But it may be more likely that this is a situation in which the truth may lay beyond the intuition. With a bit of basic economic analysis, the effects of price gouging may begin to present themselves in an entirely different light than the conventional wisdom may suggest.

 

At first, it may sound that such laws banning price gouging are well justified. After all, it is just taking advantage of people who have been afflicted by terrible misfortune, right? That may be how it appears at first, but it turns out that the situation involves a bit more than what first meets the eye. In analyzing the situation we must first ask, “If we refuse to tolerate price gouging, what is the alternative that will take place instead?” You may not find the answer very surprising, take, for instance, this supermarket aisle in Texas prior to Hurricane Harvey.

The problem arises when news of the impending storm causes consumers to panic, and demand for essential goods such as water or backup generators skyrocket to levels greatly beyond its normal level. Because of this, the average consumer’s willingness to pay (WTP) for these goods also increases dramatically. Consequently, consumers will tend to buy far more of a certain resource than they may have truly needed, leaving stores entirely sold out. Once stores are sold out, there will be consumers left who still need to purchase these goods, but have been prevented from doing so because of a shortage.

The above graph indicates an increase in demand for generators shown by the demand curve shifting to the right (towards higher quantities). Without restriction, the market price of generators would naturally increase from $530 to $900; however, it is prevented from doing so by price gouging restrictions that act as a price ceiling. What results is that the quantity of consumers that are even able to purchase the good at all is reduced, meaning that less people have access to generators than would have in an unrestricted market. Individual consumers buying excessive quantities of a good further contributes to the shortage that is created in this situation.

Aside from firms that increase prices of their goods as a storm draws near, price gouging can take other forms. Sometimes people that live in areas unaffected by the disaster will stock up on goods with the intent to travel to the affected area to resell the goods at a higher price. This is often seen as highly immoral since these people are “profiting” off of people who are vulnerable and in need. But is the existence of profit inherently wrong? In this case, profit provides a motive for people to bring essential goods into affected areas in the first place. Say, for instance, Larry decides to buy 100 generators for $200 dollars and bring them to a flooded suburb of Houston to resell for $400. Many people would scrutinize Larry as being heartless, but it is important to note that without Larry, there would be 100 less generators available to the residents of the suburb. Allowing people to earn profits on reselling goods in these situations provides an incentive for essential goods to be brought into the area that would otherwise have not been made available. John Stossel provides an excellent overview of this issue in his video which I highly recommend watching, accessible via this link. Put yourself in this situation: you and your family are stranded in your home during a major flooding event. You had been unable to buy any bottled water because all of the stores had been sold out for weeks. In the aftermath you have two options, would you prefer to have the option of purchasing a case of the water you desperately need from a gouger for $40, or would you prefer to have no water available to you at all?

The practice of price gouging may sound bad at first, but as Tom Mullen from the Foundation for Economic Education puts it “Price gougers actually help solve the problem of scarcity”. During disasters price gouging generally tends to better allocate resources, putting more of the goods people need into the hands that need them. It is also critical to preventing mass shortages in grocery stores and discount stores like Walmart. Overall, the practice results in more people acquiring what they need, and banning it results in just the opposite. Though it may be counter intuitive, I think it is time that Americans, and public officials such as Ken Paxton take time to fully evaluate and reconsider their stances on price gouging regulation.