This article first appeared in the December 8, 2014 edition of Tax Notes Today.
Diana Furchtgott-Roth, former chief economist at the Labor Department, is senior fellow and director of Economics21 at the Manhattan Institute for Policy Research.
Furchtgott-Roth argues that with the expiration of the term of Congressional Budget Office Director Douglas Elmendorf, Republicans should choose a new director, even though The Washington Post and some Republicans are calling for Elmendorf's reappointment.
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The Washington Post editorial page is calling for the reappointment of Congressional Budget Office Director Douglas Elmendorf, whom Democrats chose to lead the CBO in 2009.1 Elmendorf's term expires on January 3, 2015.
The Post trumpets a handful of Republicans who support Elmendorf, all part of an organized campaign to get him reappointed. Harvard professor Greg Mankiw, former Council of Economic Advisers chair under President George W. Bush, is one supporter.2 His support dates back to their friendship at Harvard, where, as students, Elmendorf and his wife, Treasury Assistant Secretary Karen Dynan, helped compose questions for Mankiw's textbook.3 American Enterprise Institute scholar Alan Viard, a classmate at Harvard, endorses him.4 No doubt Elmendorf has a few Republican friends, but this does not qualify him to be the Republican choice to head the CBO.
Elmendorf has also been endorsed by Citigroup Senior Vice President Peter Orszag, formerly President Obama's Office of Management and Budget director and head of the CBO from 2007 to 2009, who warns that Republicans should not appoint a "party hack."5
Elmendorf's Republican friends argue that he is "nonpartisan" and should be reappointed. They claim the only way for Republicans to maintain credibility is to keep Elmendorf because in that way, the revenue estimates will be taken seriously. But that is like saying that the next Republican presidential candidate should choose Joe Biden as vice president to maintain credibility. Republicans just won a wave election, picking up nine seats in the Senate and 10 in the House. Voters signaled their desire for change.
The head of the CBO, despite the office's obscurity, is a key position in Washington because the office is responsible for calculating budgetary effects of tax and spending proposals. If the CBO estimates that a piece of legislation would lose money, that proposal is blocked under congressional procedural rules until other funds can be found to make up the difference.
Republicans would be foolish to lose their opportunity to appoint a new CBO director. Unlike most powerful positions in Washington, the CBO director does not require a presidential appointment or Senate confirmation. The confirmation of an executive branch agency head, a judge, or a governor of the Federal Reserve can be stopped by a filibuster; the appointment of the CBO director cannot. With Republicans in charge of both the House and Senate, the choice is up to Republicans alone. No compromise is necessary. The new director will hold the position for a four-year term, through 2018, which includes the first two years of the next presidency.
The choice of CBO director alternates between the chairs of the House and Senate Budget committees. The House Budget Committee chair is Tom Price, R-Ga., and the Senate Budget Committee chair will be selected by committee vote on December 8 or 9. The two candidates are committee ranking minority member Jeff Sessions, R-Ala., and Sen. Michael B. Enzi, R-Wyo.
This year, both the House and Senate claim it is their turn to pick the new director. The dispute arises because Elmendorf's predecessor, Orszag, left to become OMB director in 2008 after only two years at the CBO, instead of the usual four years. The House appointed Elmendorf for the remainder of Orszag's term. Then, in 2010, the Senate reappointed him, with the approval of former House Budget Committee Chair Paul Ryan, R-Wis. The Senate maintains that because it was a reappointment, it is the Senate's turn to pick the next director. The House's view is that the Senate reappointed Elmendorf when it could have picked someone else, so it is the House's turn to pick. Regardless of which chamber chooses the new director, that person should be one of the many qualified economists available.
Elmendorf is no doubt a competent economist and a likable person. However, under Elmendorf, the CBO has consistently supported Democratic Party objectives. The CBO director, by statute, is not selected based on party. Instead, the director is appointed "without regard to political affiliation and solely on the basis of his fitness to perform his duties."6 Many individuals, regardless of their political affiliation, are fit to perform the duties of the CBO director. Many of them would likely not make the mistakes that Elmendorf has made in areas such as calculating the budgetary effects of the Affordable Care Act or the costs of increasing the minimum wage.
Although he initially questioned the financial viability of the ACA, Elmendorf ultimately said it would reduce the deficit, paving the way for it to pass. Yet, former CBO Director Douglas Holtz-Eakin, a Republican appointee, used a different method and calculated that the ACA would increase the deficit.7 To help it pass, the CBO gave the ACA a favorable score, essentially finding no budget effect.8
Rating Obamacare is not the only area in which the CBO has erred. Lending support to increases in the minimum wage, the CBO found negligible effects of higher minimum wage levels in a February report.9
The important number in the CBO analysis is the "elasticity of demand for labor." Economists use elasticity to measure the sensitivity of demand to a change in price. Thus, if the price of tomatoes increased by 20 percent, the demand would decrease by some percentage.
If elasticity is between -1 and zero, some percentage increase in price would lead to a smaller percentage decrease in quantity demanded. That obviously cannot hold forever because buyers run out of money. Elasticity measures that are closer to zero indicate that demand for the good being measured is not sensitive to price increases. The CBO measured the elasticity of demand for labor at a low -0.1. The net result is that for any wage increase, the CBO would find workers making more money and few workers losing their jobs.
With that assumption, it is not surprising that the CBO found that tens of millions of people would be better off if the minimum wage were raised by 39 percent, to $10.10 an hour. Employers in the CBO's world would hire 96 percent of workers formerly making $7.25 an hour, even when their new wage rises to $10.10. Consumers would face higher prices, but they would not substantially decrease spending.
The CBO concluded that real income in the economy would increase by $2 billion if the minimum wage were raised to $10.10 an hour. The report states that "raising the minimum wage would increase demand for goods and services because, taken together, the second, third, and fourth direct effects would shift income from business owners and consumers (as a whole) to low-wage workers."10
The report continues, "Low-wage workers generally spend a larger share of each dollar they receive than the average business owner or consumer does; thus, when a dollar from business owners or consumers is shifted to low-wage workers, overall spending increases."
But spending by upper-income consumers helps to employ low-wage workers. The Labor Department's consumer expenditure data for 2013 show that the highest fifth of income earners were responsible for 57 percent of spending on personal household services and 57 percent of spending on fees and admission to entertainment.11 Those are all local businesses that employ low-wage workers. Reducing the incomes of the top fifth will result in less spending in those categories and less domestic employment. The savings and investment of upper-income earners also benefit the economy.
In contrast, the lowest fifth of income earners spend a higher-than-average percentage of their income on apparel and household supplies, which are more likely to be imported. A substantial percentage of goods sold at superstores -- where low-income individuals tend to shop -- are made overseas.
The CBO stated that "the agency's estimation approach was similar to the one that it used to assess the effects of the American Recovery and Reinvestment Act of 2009 (ARRA)."12 But that estimation did not result in an accurate prediction of the state of the economy.
After passage of the stimulus bill, in a March 2009 letter to Senate Finance Committee member Chuck Grassley, R-Iowa, the CBO estimated that the unemployment rate in the last quarter of 2009 would increase to 9 percent without the stimulus package from its then-current level of 8.2 percent. With the stimulus, the unemployment rate would range from 7.8 percent to 8.5 percent, the CBO said.13 The actual rate in December, 11 months after enactment of the stimulus, was 9.9 percent -- far higher than the CBO said it would be absent the stimulus.
The CBO predicted that in the fourth quarter of 2010, the unemployment rate would be 8.7 percent without the stimulus and between 6.8 percent and 8.1 percent with it. But the unemployment rate in the fourth quarter of 2010 was 9.6 percent. So much for the CBO's estimation approach for ARRA under Elmendorf.
Transfers of income from one group to another do not succeed in creating economic growth. If they did, why stop at raising the minimum wage to $10.10? Why not go to $15 an hour, as union activists were demanding on Black Friday? Or $24.57, the average wage in the economy? The CBO minimum wage report does not mention the relationship between wages and marginal productivity, the contribution of the worker to the creation of a product. Conventional economic analysis holds that wages will not exceed the economic contribution of workers to the product.
The CBO's conclusion that about 96 percent of workers would keep their jobs, even with substantial increases in their wages, suggests that those workers have been underpaid. The only way that could be the case is if labor markets in the United States were profoundly off balance. But the CBO presented no evidence of that. Indeed, the CBO did not address the millions of unemployed Americans who are seeking work, especially teens and low-skill workers. That is evidence that entry-level wages are too high, not too low.
The United States has excellent economists who could lead the CBO. Just because they are sympathetic to reducing spending and taxes does not mean they are party hacks. Those economists can provide the CBO with true independence. As Obama once said, "Elections have consequences." One of those consequences is that the election's winners, the Republicans, can choose the CBO director this time.
1 "Douglas Elmendorf Has Been the Type of CBO Leader Congress Needs," The Washington Post, Nov. 21, 2014, http://www.washingtonpost.com/opinions/douglas-elmendorf-has-been-the-type-of-cbo-leader-congress-needs/2014/11/21/30309f38-70f3-11e4-8808-afaa1e3a33ef_story.html.
2 "Elmendorf for CBO Director," available at http://gregmankiw.blogspot.com/2014/11/elmendorf-for-cbo-director.html (Nov. 15, 2014).
3 "Elmendorf to CBO," available at http://gregmankiw.blogspot.com/2008/12/elmendorrf-to-cbo.html (Dec. 30, 2008).
4 Viard, "The Right Choice for CBO Director: Doug Elmendorf," AEIdeas, available at http://www.aei.org/publication/right-choice-cbo-director-doug-elmendorf/ (Nov. 18, 2014).
5 Orszag, "A Party Hack Would Ruin the CBO," Bloomberg View, Nov. 11, 2014, available at http://www.bloombergview.com/articles/2014-11-11/a-party-hack-would-ruin-the-cbo.
6 2 U.S.C. section 601.
7 Holtz-Eakin, "The Real Arithmetic of Health Care Reform," The New York Times, Mar. 20, 2014, http://www.nytimes.com/2010/03/21/opinion/21holtz-eakin.html?_r=0.
8 CBO, "Cost Estimate: H.R. 4872, Reconciliation Act of 2010," available at http://www.cbo.gov/publication/21327 (Mar. 18, 2014).
9 CBO, "The Effects of a Minimum-Wage Increase on Employment and Family Income," available at http://www.cbo.gov/sites/default/files/cbofiles/attachments/44995-MinimumWage.pdf (Feb. 2014).
10Id. at 27.
11 Consumer Expenditure Survey, "Quintiles of Income Before Taxes," Bureau of Labor Statistics, available at http://www.bls.gov/cex/2013/combined/quintile.pdf (Sept. 9, 2014).
12 CBO, "The Effects of a Minimum-Wage Increase on Employment and Family Income," available at http://www.cbo.gov/sites/default/files/cbofiles/attachments/44995-MinimumWage.pdf (Feb. 2014), at 7.
13 CBO, "Letter to Honorable Charles E. Grassley," available at https://www.cbo.gov/sites/default/files/03-02-macro_effects_of_arra.pdf (Mar. 2, 2009).
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