“Gruber Effect” may explain inconsistencies with Economics

“Gruber Effect” may explain inconsistencies with Economics

WASHINGTON, November 25, 2014 — It has recently been revealed that economist Jonathon Gruber presented an analysis of the impact of Obamacare to the American people that he knew was not correct. He then used those inaccurate findings when providing advice to both the federal government and many state governments who relied on him for cost estimates.

It now appears that not only were his findings not accurate, but they were part of an intentional deception.

Likely because he perceives that there is a great social injustice that must be rectified, Gruber presented as unbiased results that could not possibly be accurate. He convinced himself that the public must be deceived into thinking that the ACA would result in no tax increases for the middle class, no reduction in the quality of healthcare, and no additional cost for health insurance.

He must have reasoned that his deception was necessary so that the majority of Americans, whom he believes are not intelligent enough to understand what is happening, would support the ACA. If they knew the truth — that the middle class will pay more in higher taxes and higher insurance premiums, and ultimately receive lower quality care — he didn’t believe the ACA would be implemented. Since the goal was to correct a perceived social injustice, the biased results were justified.

Perhaps this “Gruber Effect” applies to other conclusions by economists. Take, for example, some findings of studies examining the effect of an increase in the minimum wage.

Most economists and most logical people know that when the price of a good or service increases, all else constant, people will buy less. So when the price (wage) of labor increases businesses employ less. When we look at the unemployment rate for every group effected by the minimum wage, it is always at least three times greater than the overall unemployment rate. Today, for instance, the overall unemployment rate is 5.8 percent while the teenage unemployment rate is about 19 percent, mostly due to the minimum wage.

Yet some economists from the most prestigious universities, and even some Nobel Prize winners, cite studies that show a time period when an increase in the minimum wage occurred at the same time that there was an increase in unskilled labor employment. Therefore, they argue, raising the minimum wage does not create unemployment. Perhaps this inconsistency is a result of the “Gruber Effect”

There was a time period when an increase in the minimum wage occurred while the economy was significantly expanding so that the economic growth led to more jobs. The effect of an increase in the minimum wage just reduced the number of new jobs that could have been created.

In other words, the economists wanted to find at least one time period when raising the minimum wage had no negative effect on job creation. This is clearly the “Gruber Effect.”

Other economists who argue for raising the minimum wage say that their studies suggest a raise to $10 or $12 or even $15 per hour would greatly stimulate the economy. They say that the increased wages could add up to $100 billion to annual consumption and the economy could take off. This biased view follows the same logic as someone who argues that since he can lift 150 pounds off the ground and since he weighs 150 pounds, he can lift himself off the ground.

Because employers must have sufficient profit margins to attract needed capital, the $100 billion increase in wages will ultimately result in the same $100 billion increase in prices which completely negates the positive impact of the minimum wage. Again the economists are victims of the “Gruber Effect.”

The same logic also applies to recent analysis regarding the President’s executive order on immigration that will legalize undocumented workers. His order will result in higher wages for these workers which will add $6.8 billion annually in new spending. This, the economists claim, will stimulate the economy and add to economic growth.  The complete analysis would say that the $6.8 billion in increased wages to these illegal workers will result in a $6.8 billion increase in prices from employers who will protect their profit margins, so the net effect is again zero. And considering the impact of taxes on the additional wages, the net impact would be negative. Another example of the “Gruber Effect.”

When listening to John Gruber insult the American public and present analysis that is biased because he perceives a greater good, our stomachs churn. But perhaps we should be thankful that he gave us an explanation for interpreting economic findings that seem inconsistent with prior knowledge and logic. The explanation may be forever known as the “Gruber Effect.”

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