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11 political myths

I wrote these 11 myths in 2011. They are mostly from a libertarian point of view. Few of these ideas are new, but I think they need to be stated.

Myth # 1: That politicians and government act on behalf of the public more than businesses do. In order to survive, businesses must make a profit. In order to do this, they must create a service or product that customers will buy, at a higher price than the total of all their costs. They must also have sufficiently good relationships with employees and vendors so that their output has high enough quality and low enough cost that it is below their revenues. The business must organize the firm so they have the financial prowess to ensure that they will make money, legal knowledge sufficient to keep the government from shutting them down, and planning capability to stay ahead of changes in the business environment.

For politicians to survive, they must be elected and then re-elected. To do this they must maintain a good image with the general public, and thus keep good relationships with the media, campaign donors, and image shapers within their jurisdiction.

There is no reason to think that those who are successful at being elected act more in the public interest than those who are successful at selling products and services. To be elected, the politician must convince the majority of his constituents that he agrees on most of the issues and that the politician will be successful at implementing these policies. Since most issues aren’t just two sided but have a range of possible answers (for example, how progressive should the tax system be?), it is unlikely that anyone can possibly be in agreement with the majority of his constituents. A successful politician will thus hedge his opinions to make it appear that he agrees with most of the voters, regardless of his true opinions. If the politician is too idealistic to spin his opinions in that manner, there will likely be an opponent who will do this spinning, and thus the opponent will win the election.

It is true that there are many idealists out to fix the world that run for office to improve the world, and not for their own personal fulfillment (or not just for their own fulfillment, at least). But if they maintain their idealism strictly and transparently, many voters will disagree and vote against them. Only those politicians that hedge their opinions to appeal to the majority will be successfully elected. Our elected officials are not those people who are strong idealists out to change the world; they are pragmatists who say what they need to in order to be elected.

Not that the public would be well served if governed by idealists. Hitler had many ideals, and was successful in bringing many of them to fruition. Most idealists aren’t as evil as Hitler, but their ideals don’t necessarily match up with the public’s wishes. In practice, we get pragmatists in office who tell the voters what they want to hear. But it is very hard to tell what these politicians really believe, so we sometimes get officials whose actions don’t match the public’s ideals. If the differences are great, then the official will eventually be voted out, but that doesn’t happen too often, since the public is pretty ignorant of opaque government functions.

On the other hand, businesses provide products and services that consumers want. If they weren’t wanted, consumers wouldn’t buy them and the businesses would fail. It is true that businesses can fool consumers as to the quality of the products / services provided, at least for a while. But politicians have a much easier time of fooling voters than businesses have of fooling consumers, because the consumers use the products /services directly.

Myth #2. That the government is “us,” that in the U.S. the government is the same as the aggregate of all its citizens. Most officials run for two year, four year, or six year terms. Thus voters get a choice every two, four or six years. At these times to vote, citizens get the chance to vote for one of two candidates, or if it is a primary, the choice expands to perhaps half a dozen candidates. Once these candidates are elected, they will likely make hundreds or thousands of decisions during their term as elected officials. So the voters get one chance every few years to pick one of the two potential candidates to make hundreds or thousands of future decisions. Voters really have little influence over the government.

It is true that citizens also have the right to get together to choose their own candidates, or to join an established party to help pick one of their candidates. However, to be successful at having influence in picking these candidates, one must have political skills and the time to spend at long political meetings and conventions. Also one must have an ideological make-up that falls close to the middle range of the political jurisdiction one lives in, or the candidate one supports will never become elected, and probably not even become one of the candidates on the ballot. In practice, a small political elite determines which candidates run for office and thus which officials run the government.

Another major attribute of the political elite is an inclination for politics. Most citizens are content to let the elite pick the government, because few people have the interest in getting so involved in politics. That a political elite runs the government does not mean this elite is malevolent or conspiring against the citizenry. The people are letting them do it. But it is also not true that the government is being run by the aggregate of the citizens.

In broad scope, the government is in step ideologically with the citizens. As the citizens become more tolerant, or more warlike, or more individualistic, so the government usually follows. This is largely because the political elite is subject to the same influences as the rest of the citizens. Therefore the elite change with the rest of the citizens, and thus the government.

The voters can have some influence on the ideological mode of the government, but only amongst the issues in which the Republican and Democratic elites differ. Thus voters can make a difference on the warlike face of the country, or the tax rates of poor versus rich, or policies friendly to businesses or unions, by voting for the Republican or Democrat. But the voter will have no influence in those areas in which the Republican and Democratic elites agree, such as the roughly 50-50 mix of free market versus government, the U.S. as strong military and diplomatic power, and the many regulations on business and substances.

Myth #3. That big business is in favor of the free market. All businesses want more customers, higher prices, lower costs, lower wages, less competition from its competitors, and more competition between its vendors and workers. Businesses will favor the free market when it favors these factors. But in most cases regulation will favor existing businesses over start-ups, and so established businesses will usually favor government control.

Big business in particular often favors regulations because it gives them an advantage over their smaller competitors. The big companies can afford to pay for the experts to abide by the regulations, but smaller firms might be run out of business. From the large business point of view, the higher costs of more regulations are offset by a decrease in competition, which in turn allows the large business to raise prices.

These are undoubtedly personal differences in ideology of business executives around the country, with some believing strongly in the free enterprise system, and others that believe in a high level of government intervention. But most businesses will favor those policies that benefit themselves, which means subsidies and regulations for their own industries, but competition and free markets for their vendors and employees.

Myth #4. That regulating occupations keeps them from exploiting consumers. Regulating occupations benefit those established in those occupations at the expense of consumers and those trying to enter the occupation.

When the government sets up occupational regulations, they need to have experts on the occupation to tell them what rules make sense. Also experts are needed to administer those laws for the government. Where do they find these experts? Obviously it has to be people who have worked in the occupation. These experts will look at issues from the point of view of those in the occupation and so will naturally favor that occupation.

Also, after the initial flurry of legislation to regulate an occupation, it is usually those in the occupation itself that have the most interest in the rules. Ultimately, it is those in the occupation that end up writing and enforcing the laws. As a result, the main effect of the regulations is to keep competitors out and prices up. (See Licensing Occupations, Morris M. Kleiner, 2006, Table 7.3, for findings that show price increases but few quality increases of licensed occupations).

Myth #5. That the tax system is regressive. According to the usual lexicon, taxes are regressive if taxes as a percentage of incomes earned are higher for lower paid taxpayers than for higher paid ones. Taxes are progressive if taxes as a percentage of income are higher for higher paid taxpayers.

See http://www.irs.gov/pub/irs-soi/08inreturnsbul.pdf, in which the IRS gives many statistics relating to the 142 million Form 1040’s filed for 2008. These statistics include the taxes paid by various income groups. Adding up the taxes paid by the half of taxpayers with the lowest income indicates an aggregate tax paid of less than zero (a net refund of about $32 million). The top 50% of taxpayers paid all $996 million of taxes paid, plus the $32 million refunded to the bottom half. Taxes as a percentage of taxable income at various levels are:

Taxable income Percentage of tax to income
$10-15,000 -8.8%
$25-30,000 0.8%
$40-50,000 6.1%
$75-100,000 9.5%
$200-500,000 20.2%
Over $500,000 23.8%

Not only is the Federal individual tax system very highly progressive, but it could be considered dangerously top-loaded, with 3.1% of taxpayers paying over 50% of the total individual income taxes. With the rich paying such a high proportion of income taxes, it makes it very easy for politicians to convince voters to accept higher taxes, since few of the voters pay most of the load. Considering this imbalance, it is surprising that politicians have had so much difficulty raising taxes. It could be that the rich have a rather disparate effect on government behavior, or perhaps that voters are not quite as money-grubbing for themselves as is sometimes portrayed.

There are some mitigating factors to the enormous progressivity of the Federal income tax. Most of the states have regressive tax systems as a whole, largely because of states’ emphasis on sales taxes and property taxes, which are almost always slightly regressive. State taxes in 2008 totaled $782 billion, see http://www.census.gov/govs/state/historical_data_2008.html. But that number does not include local taxes. Probably state and local taxes total to a little more than the individual income tax receipts. But most states are only slightly regressive, and in no way offset the tremendously progressive Federal income taxes. Also much of the state and local taxes consist of gasoline taxes, which pay for highways, license fees, which pay for licenses, and sin taxes, which are essentially penalties for indulging in activities the states would prefer you didn’t do. All of these latter revenue items are really fees and not taxes, and so they shouldn’t be included in the calculation. And all those fee items are very regressive if you do consider them taxes, since they are charged without regard to the payer’s level of income. So the state tax systems aren’t really as regressive as reported.

Another mitigating factor that is often brought up is FICA and Medicare. Every employee must pay 6.2% of their gross pay (up to $102,000 in 2008) for FICA, and 1.45% of their gross pay (no limit) for Medicare. The employer also pays a matching amount. The matching employer amount is presumably a deduction to the employee’s gross pay, since every employer will consider their matching amount as a cost just like wages. Therefore employees pay in addition to income tax this payroll tax of 12.4% up to $102,000 per year, and an additional 2.9% for an unlimited amount. Many people consider this to be an additional regressive tax, since there is a wage limit above which employees don’t pay FICA, and there are no FICA or Medicare taxes at all on those who receive only investment income. Investment income earners are generally richer than the average wage earner.

However, it is a bit of a stretch calling FICA tax and Medicare tax a true tax, since it works more like a pension plan than a general fund tax. All the funds received through the FICA and Medicare programs are accounted for separately, and these separate funds are used to pay retired and disabled employees for Social Security and for Medicare payments. It is true that payments into FICA and Medicare will not be sufficient to cover all the costs of Social Security and Medicare in future periods unless there are changes, at which time the government will need to raid the general fund to pay for the promised costs. But that doesn’t mean that the “taxes” that are paid into the funds are true taxes that should be subject to the calculation of progressive versus regressive taxes. These are more like fees to employees that will later be returned in retirement. Investment earners who don’t pay into FICA or Medicare will not receive Social Security or Medicare in retirement.

Even if FICA and Medicare were included with income taxes, the Federal individual income tax system would still be very progressive. So it still doesn’t prove that our tax system is regressive.

Not all Federal taxes are from individual income taxes. According to the IRS, they collected the following taxes in 2009: Individual taxes, $1.175 trillion, corporate income taxes, $275 billion, employment taxes, $858 billion, and excise, gift and estate taxes, $71 billion. (See http://www.irs.gov/taxstats/article/0,,id=102886,00.html) Employment taxes were discussed above; they are not really taxes. The excise, gift, and estate taxes don’t amount to enough to make much difference. It is true that corporate taxes are pretty regressive taxes, but I don’t think those are the taxes that advocates of more progressive taxes are complaining about. And even the corporate taxes are not large enough to offset the highly progressive individual taxes.

Even the far left group “Citizens for Tax Justice “ agree that the tax system is progressive. See http://www.ctj.org/pdf/taxday2010.pdf.

There is also the issue of why progressive / regressive taxes are measured based on income instead of consumption. A major cause of the Great Recession was the large amount of debt held by individuals, businesses (especially banks), and governments. As a society, we should be encouraging people at all levels of income to save money, instead of the usual modus operandi of borrowing more than they save. An individual’s standard of living should be measured at the level of consumption, not at the level of income. Therefore, it makes more sense to measure progressivity as a function of consumption, not income. If that were done, then sales taxes would no longer be considered regressive taxes, and maybe the same for property taxes. Using consumption as the denominator instead of income would result in our tax system being even more progressive.

Myth #6. That the rich have more influence over the free market than over the government. What determines the products for sale in the supermarket? It is the consumer who buys the products. If consumers in America all get cravings for apples, the stores will soon be sold out of apples. The stores will all clamor to get more apples, more apples will be imported, and as many as possible will make it to the stores. If this apple craving lasts for years, then more farmers will change over to apples, and the stores will have more apples on a permanent basis.

It is not the rich who determine what is being sold in the stores. It is the mass quantity of consumers. For almost all consumer goods, the rich buy only a small portion of the goods for sale, and so have only a small influence on what is in the marketplace. Only for luxury goods do the rich have a disproportionate impact on what is for sale.

Some will object that it is the rich who own the businesses that determine the structure of the free enterprise system. It is true that the rich own the businesses (for the most part. There are large investments in the corporations in this country by mutual funds and pension plans, which are mostly composed of investments of the middle class). But each business will only remain successful if they sell products that are desired by consumers. So these businesses are at the mercy of the large body of consumers.

It is clear that consumers determine what is sold. How about the prices? Any economist will tell you that an individual business cannot set its own prices. In order to sell its goods, it cannot sell above a range dictated by the market or it won’t be successful in selling its goods and will go bankrupt. This price will be only a little above cost, or else competitors will lower their prices to grab more business. There is a market price for investment returns, just like other parts of the market. If an industry provides more return than other industries, then companies will enter the industry to grab the extra profit while they can. Some of these new companies will grab business by lowering prices, which will eventually result in that industry making the same return as other industries. So all industries end up with similar returns on their investments. Therefore, margins (prices above costs) in all industries are dictated by the market of investors, and no industry can charge prices much above their costs.

Of course this is only the case where industries are competitive, and when other companies can enter the industry at will. So consumers don’t have as much effect on highly regulated industries such as utilities and banking. But almost all markets in which the middle class spends money are competitive. Consumers can easily switch to other companies if they are paying too much for food, clothing, apartment rentals, autos, or hardware. You may think these items are all too expensive, but they are sold for as little as they can be, compatible with an average profit margin. It is not the rich who decide what is sold or for how much.

However, the rich do have a disproportionate effect on the government. The rich own the media corporations that provide information to everyone in the country, and also provide most of the opinions that we all see. There are millions of news feeds and opinions available that don’t make the cut by the media, so the media definitely controls what the public sees. Some of the media owners claim that they don’t get involved in the media content, but overall, it appears that the rich have quite a bit more influence over the media than the rest of us. And even the rich that don’t own media companies often have a disproportionate effect on information disseminated to the public, because advertisements and other information outlets are expensive.

The rich also have more direct access to politicians through lobbying. It takes money to create lobbying groups. Also of course politicians need money to run campaigns, and they may easily become beholden to those rich people that provide most of their funding.

One solution to the problem of the political power of the rich may be to nationalize media companies and provide public funding of political campaigns. Unfortunately, that would cause even more problems by increasing the power of the political elite. If all the money for the media and political races came from the government, the government would be regulating itself. Such a situation always results in bad results. Better to have the rich holding the government accountable than nobody. At least in our current situation, the rich and government elite jostle for power. Having the government fund its own watchdogs and political races subtracts power from the rich, but does not add power to anyone but the government elite. That would create even more imbalance of power. At least now the rich can sometimes topple the political elite.

Myth #7. That money should be included in the total amount of wealth in the United States. Money has no inherent value. Money is used as a medium of exchange to facilitate transfers of property and services. We also use money as a method of measuring wealth, so disparate items of value can be judged at to their relative worth. But money has no value in of itself.

When measuring the total wealth in this country, we need to include the following:
1) Individual assets, such as cars, clothes and houses,
2) Tangible business assets such equipment, real estate, and motor vehicles,
3) Intangible business assets such as accounts receivables (less debts), technology, and the organizational value of the business structure as it stands,
4) Not-for-profit organizations and governments assets in the same manner as business assets.

Accounts receivable less debts is only an asset in the U.S. to the extent these receivables and debts are from outside the country; all other receivables and debts will cancel out as U.S. assets.

Cash itself is not an asset. It is an asset to individuals and organizations who hold it, because it can be exchanged for useful items. But is much like debt between organizations – it cancels out when everyone’s assets are added together.

When the government creates money, it is not creating wealth. The U.S. government sometimes creates money as a monetary stimulus to get the economy going. They are not creating wealth; they are trying to fool the economy into thinking there is more wealth than there is, so that more products will be created for sale.

Myth #8: That Republicans support the free market. Most politicians believe they can run things better than others, including private businesses. It’s because they believe the government to be the most important institution in America that they became professional politicians in the first place. Oh sure, there is the occasional official who runs for office just to keep the government out of everyone’s affairs. But such amateurs rarely succeed at being elected, and when they do, usually get tired of it after one term.

Republicans do often make claims of being for small government, but those are tactics for getting elected, not deeply held beliefs. How many people would make a living at something they were trying to minimize and make less relevant in the lives of people? Very few could devote their entire professional lives to such a thankless task. Some Republicans may believe government should be slightly smaller in some aspects (less business regulation perhaps), but it makes no sense to believe more than a tiny proportion of politicians are for radically shrinking it. And experience bears that out, since government has continued to increase in size, whether under Democratic or Republican administrations.

Myth #9: That the free market helps the rich but hurts the poor. Many of the rich do better under government regulation than under free markets. The government likes to have business partners of those businesses that are considered to be “good” companies. That way politicians can claim they support free enterprise without actually giving up control. Some of these firms receive lots of business from the government and others thrive due to restrictions placed on their competitors. Large companies can often make lots of profits in highly regulated environments.

Of course these highly regulated industries will result in higher prices, because of costly regulations and lack of competition. This will hurt all consumers, including the poor. Often these regulations are intended to protect consumers, but it is the industry that usually controls the regulations, so it is only high prices and little competition that is ensured in such markets.

Other regulations are intended to protect workers. Regulations such as minimum wage and safety regulations make some jobs better for the poor. But it also takes away poor people’s decision-making powers. If a poor person is willing to work for wages lower than minimum wages, or for a firm with a less than stellar safety record, they cannot. As a result, many of those that have difficulty getting a job, such as minorities, or those with a lower than average intelligence or lack of social skills, may never be able to get a job. If they could take a lower paying position to start with, they might be able to build up their skills so that other firms would hire them. It is always the hardest for the worker trying to get his first job out of high school or college, as employers are very suspicious of those who have never previously held a job. Minimum wages sometimes result in the marginally employable never successfully obtaining that first job, and thus becoming permanently unemployed.

One effect of keeping a permanent class of unemployed by forcing a minimum standard of employment is to shift the balance of power between employer and employee. If there are always unemployed available to take a job, it gives the employer the power to force the employee to do things they wouldn’t otherwise agree to. When firms have to compete for workers just as workers compete for jobs, then the balance of power is much more equal between worker and firm. A more even balance makes life much easier for the worker. A worker may rather have an employer that treats him well for fear of losing him, than one that pays him a little more, but he doesn’t have this choice under government regulations.

Other common regulations are zoning, occupation, and business statutes that control business at the local level. This makes it much more difficult for the poor to start up their own business. The main entrepreneurs in the ghetto are those that sell illegal drugs or sex. There would be many more entrepreneurs amongst the poor if they were allowed to have retail establishments, service businesses, or even small manufacturing out of their homes. Why can’t poor people sell products to compete with the over-priced stores in their area, do taxes or bookkeeping, provide haircuts or nail work, or do plumbing? All these are skills that exist in any poor community. There are zoning issues in almost all cases, but also most of those vocations are regulated, and so hard to get approval from the state or locality. It is usually rather difficult starting up a business in the ghetto because of all the regulations to finesse, much less the problems of getting customers and making a profit. The government makes it much more difficult to start a business.

If all a poor person wants to do is to live off of welfare all his life, then government is better for the poor than the free market. But even then, it can be difficult to get through all the regulations to receive welfare. If a poor person wants to pull himself out of poverty and create a better life, fewer regulations are always better than more. It’s the free market that will more likely save the poor than the government.

Myth #10: That free market proponents believe in no government. Only a small minority of free market advocates are anarchists. Free market anarchists do include members of the Libertarian Party (LP). All members of the LP must sign a pledge to oppose all coercion, which in turn means that any government is verboten. Per Wikipedia, only 115,000 people have ever signed this pledge. Only once has an LP candidate for President received over 1% of the vote. These are examples of the very few people in the United States that advocate no government whatsoever.

Yet in a Pew Research Center poll, 18% labeled themselves as libertarian (http://people-press.org/2010/09/12/americans-spending-more-time-following-the-news/). Since a major tenet of libertarianism is the advocacy of free markets and limited government, it is clear that a substantial minority of Americans are free market advocates, and desires to decrease the size of government. But few of these people are anarchists, such as those that belong to the Libertarian Party.

What does it mean to be for free markets but not against government altogether? Most of those for limited government are in favor of a military to protect the country against outside aggressors. They are also for an internal police force to maintain security inside the country, and a court system to rule on disputes and to punish offenders. Also, regulating of business externalities that hurt others (pollution) are thought by most free marketers to be a valid government function. All of these are very difficult functions to maintain without a government, but are necessary for civilization.

Some free market advocates even support a government safety net for those down on their luck. It is hard to know what percentage of such advocates support a safety net, but there is nothing inherently incompatible with supporting an unrestricted market and also supporting government support for the poor. Also some free marketers support building common infrastructure like roads and railroads on the grounds that the free rider problem prevents such investment by the private market.

What free market advocates do not support are economic development programs, subsidies for business, regulation of business beyond externalities, or “partnerships” with businesses. The private market works much better unencumbered by government control, and the government works better unencumbered by corrupting influences of rent-seeking businesses.

Myth #11: That any weakness in the free market implies that the market should be regulated in that area. It is clear that completely free markets would result in some businesses raising armies or police to force customers and employees to do their bidding if there was no party (such as government) to stop them. Also, some businesses would freely dump pollutants into the commonly used air or water if the business had no constraints. Just because we have a free market doesn’t mean that all the businesses that arise will follow the rules of a free market of not imposing on others. Laws are necessary.

And even when laws to prevent coercion and pollution exist, there will still be some defects in the market. For example, the market does have a tendency to behave cyclically. Businesses overbuild when times are good, then may over-react and shrink too fast when the economy goes sour. Market players in a multi-year boom may be forced to continue the boom to survive, even when they understand that the fundamentals are out of whack.

As another example, there is sometimes an information imbalance between the buyer and the seller, with one party knowing much more about the product or service being transacted than the other, giving them a great advantage when negotiating terms. A third example is that in a completely free banking environment, there will be periodic runs on banks, because depositors will be concerned that the bank doesn’t have enough currency available to cover their account. This may cause banks to fail for lack of liquidity, even if they are perfectly solvent when looking at total assets and liabilities.

But all these defects of the private market do NOT mean that the economy would improve with regulation. Many of the problems with the private markets are because of the defects of people, and people run the government as well as businesses. Governments have at least as much tendency as businesses to avoid planning for the next downturn, and to then panic when the downturn does arrive. Government itself often doesn’t have the information needed to understand transactions, and they often do a very poor job of transmitting the information they do have to the people.

For government to successfully fix the market it needs to know what is wrong with the market, know how to fix it, and have the incentives to do the fix. If the government is missing the “what,” the “how,” or the incentives, the fix is doomed to failure. And yet the government is missing each of these three possibilities frequently.

Take the banking industry as an example. The United States has been trying to regulate this industry for at least 100 years. The free market problem is that there will be runs on banks absent regulation. If markets were totally free, then there would be some and probably many fractional-reserve banks, because many depositors would agree to this in return for higher interest rates. In fractional-reserve banking, more money is invested or lent out as loans than is taken in as deposits. This sometimes results in runs on banks, as depositors worry that banks will be run out of business due to a liquidity crisis, that is, not enough currency to cover depositors’ withdrawals. If the bank goes out of business, then the depositors who get to the bank too late may lose all their deposits in the bank. So when depositors lose confidence in a bank, it is a self-fulfilling prophecy that the bank will lose its liquidity and go out of business.

In 1914, the United States set up the Federal Reserve Bank (the Fed). One of the intents of this central bank was to provide liquidity in the event of bank panics to avoid runs on banks. Fifteen years after the Fed was set up, the United States had its worst bank panic ever, including a number of bank runs. The Fed did not do the job that it was set up to do. In fact, it is an accepted fact amongst economists that the Fed actually worsened the Great Depression, at least during the first years of the banking panic from 1929 to 1933.

The government did not disband the Fed because it didn’t work. Instead they decided to add another layer of regulation. They set up the FDIC, which insured every depositor for accounts up to $2500, as well as a new set of regulations, resulting in regular audits of every bank in the country. The amount insured has increased regularly, so now the amount insured is $250,000 per account. The depositor insurance created “moral hazard,” that is the depositors no longer cared if the banks were reckless with their investments because they were covered even if their bank failed. In later years, it became clear that the government would bail out any large bank with liquidity problems because it was “too big to fail.” This then resulted in moral hazard for the owners of the banks, because they also didn’t have to worry about their bank failing. With both the depositors and the owners of the large banks being insured against large losses, the banks were free to make riskier investments than banks normally take on. If the investments succeeded, then the owners and executives of the bank would make fabulous profits, but if they failed, neither the owners nor the depositors would be hurt. It was only the government audits of these large banks that could hold back these irresponsible investments, and audits can only find so much. The Great Recession is an indication of the limitations of government regulation in preventing (or not) risky investments. The moral hazard of the owners and depositors of the large banks was a major factor causing the Great Recession. The government was successful at stopping bank runs with FDIC insurance, but the insurance ended up causing as much trouble as the bank runs themselves.

Banking regulations didn’t work very well mostly because the government doesn’t know how to fix the problem. An example of where the government doesn’t have the incentives to fix the problems is occupational licensing. The usual rationale for licensing occupations is the asymmetry of information between the seller and the buyer. Thus the government licenses doctors because patients don’t know as much as doctors and so are presumably taken advantage of by many physicians. The medical license is supposed to ensure that all practicing doctors are competent. However, in practice, it is doctors who run the licensing operation for the government. Of course it has to be a doctor in charge; who else has the expertise to understand who is competent to be a physician? It is also doctors who have the most interest in the process, and so will lobby politicians to change the regulations to their liking. In effect, the medical profession runs the licensing of doctors.

Because of this, medical regulations mostly achieve the objectives of the medical profession, which is to keep fees high and limit competition. This is exactly what has happened in the medical profession. Doctors were not known for making large salaries until they became regulated. And one constantly hears about the shortage of doctors. Medical licensing has had exactly the effects that a private organization of doctors would have, if they have the legal rights to control all medical care. It is questionable whether present day doctors are more competent than in the days before regulations, but it is certain that their fees have risen enormously.

This effect of state licensing boards being run by the profession they are putatively regulating is even clearer in professions less in the public eye than medicine. How many non-architects have a vested interest in architectural regulations? And this effect isn’t true just of occupational licensing; it is true also for any industrial regulations. Any time regulations apply to just one industry, that industry will inevitably provide the expertise, and that industry will have more interest in the regulations than anyone else. The incentives to protect the consumer just aren’t there. Therefore the incentives of the industry to protect itself will come to the fore.

Before the government succeeds in writing regulations to fix suspected defects in the private market, it should be determined if the government fix isn’t going to be worse than the original problem. Also it must be determined if government will have the incentives to continually work on the original problem, or will the regulations just end up benefiting the industry it is regulating? Government regulations seldom improve the market, because the legislators rarely consider the possibility that their laws could be counter-productive. They usually feel that any action is better than none. They are almost always incorrect.

Keynesian fiscal stimulus and why it’s a bad idea

Keynesian fiscal stimulus is often advocated as a way to pump up aggregate demand (Keynesian Stimulus, Tejvan Pettinger, http://www.economicshelp.org/blog/1368/economics/keynesian-stimulus/). I will be arguing here that fiscal stimulus or any other type of government stimulus is very rarely a good idea. In recessions, the economy needs to adjust to account for the economic changes that caused the recession. By artificially juicing the economy, it doesn’t have a chance to fix what is wrong. This will result in a weaker recovery and makes the economy more vulnerable to the next recession.

But before I talk about economic stimulus I need to explain some of my assumptions.

Recessions are caused by bottlenecks, or at least mis-matches of too many resources of one kind and too few of others. As the economy grows, or simply changes, certain resources become in short supply. A classic example of this was the 1973-1975 recession. I believe that recession was caused by two main bottlenecks. The more obvious and immediate cause was the OPEC oil embargo, resulting in a shortage of energy for businesses and transportation. But in the mid 70’s there was a less acute but ultimately larger problem, which was too many inexperienced workers, as baby boomers came of age and poured into the labor market. Industry had a difficult time absorbing them without a corresponding increase of experienced workers.

It can be very difficult to determine the exact shortages that cause each recession. But see the web site in this footnote which makes an attempt to do this for the post WWII era (The History of Recessions in the United States, Kimberly Amadeo, https://www.thebalance.com/the-history-of-recessions-in-the-united-states-3306011). Each recession occurred because of bottlenecks in the economy. Economies remain in recessions until business, labor, and capital re-arrange themselves well enough to resolve these shortages and mis-matches.

The Great Recession appeared to be a shortage of capital, but what does that mean? What resource was society short of that so many couldn’t pay their debts, whether it was individuals paying for mortgages, or giant banking firms paying back the millions of interlocking loans they had made? The problem was that too many promises were made. The shortage was that weren’t enough resources held by the right people to fulfill those promises.

A shortage of resources says nothing about money in the economy. Money is not an asset of society as a whole. It is simply a medium of exchange. To each individual it may be valuable, but it really consists of claims on the government, not real resources. Practically speaking, money isn’t used just to claim resources from the government, but is used to buy resources from everyone. Since money is not a resource but simply a manner of obtaining resources, someone keeping their money in a sock under their cushion makes no difference to the economy. It is resources that matter.

Macro-economists often speak of aggregate supply and demand. I’ve always had a hard time understanding what aggregate demand means. I was taught in school that this means that consumers are saving rather than spending their money. But when consumers save their money, they normally put it in an investment account like a mutual fund. The mutual fund in turn invests the money in real resources, so how is that less demand than when the spending is on consumer goods? Aggregate demand does fall in recessions, but this is because more resources are left idle, not because of consumers saving their money.

Keynesians say that aggregate demand must be raised in recessions, at least when recessions are caused by too little demand. Usually they speak of activating idle resources. When politicians talk of companies holding cash being idle resources, they are incorrect, because cash isn’t a resource. However, in a recession, there may truly be idle resources, such as vacant land, unoccupied buildings, or unused machinery. The owners of these assets surely could make some money from these assets, but are holding them back because the options available aren’t sufficient to be worth the risk. Also there may be idle labor, because workers are holding out for better jobs than are offered, or they feel that leisure is a better option than the amount of wages offered. Of course in our current society that has minimum wages, mandated benefits, and other non-wage employer costs, some workers may not have the option of any work at all, so they are not idle voluntarily.

Fiscal stimulus is where the government borrows money so they can spend money on the economy that presumably wouldn’t have been spent otherwise. Cash isn’t a true resource, so the government isn’t using or creating a resource by borrowing. They are re-arranging who has the cash so that those who do have idle resources see more profit in using those resources. The owners of these idle resources will receive more cash for using them than they would have absent the stimulus, so they are more likely to use the resources. It is kind of a trick with mirrors to convince economic actors that the economy has more resources than it really has. Thus it then appears to these actors that using the idle resources has less risk and more benefits than appeared to be so before the stimulus. Because the stimulus is more a trick by the government than an actual usage of more resources, the stimulus doesn’t always work, and it seems to work less often as more stimulus is used.

But beyond effectiveness of stimulus, the more important question is whether it should be used even when it does work. I think the answer is no. Absent the stimulus, more land, building, and machinery are kept idle. With the stimulus, the government confuses the issue by re-arranging the cash, which results in these assets being used, at least assuming the stimulus works. But who says the government is right that it is better for the economy for the assets to be used? Sometimes it is better for society when assets are kept idle, so they are available for a better opportunity when it arises. This is all the more true in a recession when the economy is adjusting its resources to get around the bottlenecks that caused the recession. By pushing the economy to use up all idle resources, the government may be preventing some of the adjustments that are needed to clear up the mis-matches that caused the recession. Stimulus may cause a temporary bump in growth, but at the cost of weakening the economy’s resilience. Unresolved adjustments make the next recession happen sooner and more harshly.

A similar argument could be made for labor resources. The fiscal stimulus trick fools workers to use their labor when they previously decided that leisure was more valuable. The government always seems to believe that labor is more valuable than leisure, since only labor increases the Gross Domestic Product. But the laborers themselves have more knowledge as to whether labor or leisure is more valuable to themselves, so the government should not interfere. It is true that involuntarily unemployed workers might prefer to work when they can, but in that case the government is just working against itself. It requires minimum standards for workers such as minimum wages, and then effectively lowers those standards by pouring more money into the economy for the same amount of resources.

I do think the government should maintain its safety net in recessions, so that people can survive while the economy is adjusting. In effect, this safety net itself will provide a stimulus to the economy in recessions, since more people will avail themselves of welfare when times are bad. This stimulus will have the effect putting some resources to work that wouldn’t otherwise be used, which may prevent some healing of the economy, as discussed above. But the short-term survival of those injured in the recession is the price we pay for having a civilized society, in my opinion, despite also weakening the economy.

This discussion has been about fiscal stimulus, which is borrowing by the government to increase spending. But the same arguments could be made against monetary stimulus. Monetary stimulus is where the government “prints” more money so that consumers have more cash to buy goods and services. These days monetary growth isn’t created by literally printing more currency, because currency is only about 10% of total M2, the most commonly used definition of money (Federal Reserve Bank of San Francisco, “How much currency is circulating in the economy, and how much of it is counterfeit? Is currency included in the money supply statistics?,”
http://www.frbsf.org/education/publications/doctor-econ/2004/april/money-supply-currency-counterfeit, [see Table 1 (666.7/6156.2 =10.8%)]
). M2 includes the outstanding value in checking accounts, savings accounts, and other cash accounts. The Federal Reserve can increase the amount of money in the economy by buying financial instruments, amongst other methods (Wikipedia, “Monetary Policy,” https://en.wikipedia.org/wiki/Monetary_policy). In my opinion, the volume of money in the economy should increase at the same rate as economic growth, so the economy has neither a shortage nor a surplus of money. Juicing the economy in a recession with more money is a mistake, for the same reasons as it is for fiscal stimulus.

In conclusion, a fiscal stimulus is the attempt by the government to avoid slowdowns. But these periodic slowdowns are necessary for economies. Working out new allocations of business activity, labor, and capital require holding back resources for a time as the components in the economy work out better the most optimal combinations. A Keynesian stimulus inhibits the adjustments and increases risk. I believe that the only stimulus to be used is that needed to allow the short-term survival of the injured.

Sports stadiums subsidies

(book excerpt)

This is a classic example of politicians spending boatloads of taxpayer money, supposedly for the public interest. It is claimed that the jobs or the development that it brings to the city or state is worth the amount the government spends for the stadium. It is inevitably claimed that the sports team will be lost if no stadium is built, which would cause a tremendous economic loss. Stadium advocates claim that large firms would lose many recruits if these teams left because new employees won’t be interested in relocating to cities with a deficiency of professional sports teams. Also that if teams leave then all the taxes they generate from payroll tax, sales tax, and income taxes would evaporate. Yet many of the offsets are never mentioned:

 Most of the jobs for these stadiums are temporary (construction), and the few long-term jobs are mostly low paying (hot dog vendors).

 Never is it discussed what development would occur if the city left those subsidy funds in the hands of the taxpayers for private spending and development.

 It is never mentioned that all the taxes paid by the sports team originates from the city residents themselves. Without the sports team, the spending would be on something else, which would likely generate just as many taxes.

 One never hears that if large firms have such a detriment from recruiting if the team is lost, then these firms should be subsidizing the stadiums, not the taxpayers. Since the firms don’t offer to subsidize, it seems that the benefits of the team aren’t as large as implied.

 Why should the city be subsidizing some people’s entertainment? If anything could be considered non-essential and not worthy of public finding, it is entertainment.

Almost every economist that has studied public investment in stadiums has shown that the public always spends more money than it receives in return. (Federal Reserve Bank of St. Louis, “Should Cities Pay for Sports Facilities?,” https://www.stlouisfed.org/Publications/Regional-Economist/April-2001/Should-Cities-Pay-for-Sports-Facilities) Politicians always respond that this doesn’t prove that their deal is bad. What it really means is the politicians do get benefits for the deal, because their city is taken more seriously because of these subsidized stadiums, giving the politicians cachet. But the taxpayers pay for these politicians’ ambitions.

EVIL pipelines

Footnotes don’t work on this blog, so my citations are parenthetical.

The fight against oil pipelines is surely one of the more irrational movements today. Surfing the Internet I found many many sites protesting various pipelines such as the Keystone pipeline and more recently the Dakota Access pipeline. But nowhere is it discussed the alternatives to pipeline transport, that is, rail, truck, or tankers. When these protesters speak of the bigger picture at all, they talk of their glorious war against fossil fuels, although they never explain how forcing oil to be transported by other methods will decrease the use of fossil fuels.

At best, some of them make feeble arguments that shutting down pipelines will result in less oil production, such as item #8 on this item in Huffington Post. (Rose Ann DeMoro, “10 Reasons to Oppose the Keystone XL Pipeline,” http://www.huffingtonpost.com/rose-ann-demoro/10-reasons-to-oppose-the-_1_b_4791713.html) But the price of transporting oil in the US ranges from $1 to $13 per barrel (42 US gallons),(Elena Holodny, “This map shows how much it costs to transport oil across the US,” http://www.businessinsider.com/map-oil-cost-shipping-2016-6) or from 2.5 cents per gallon to 30 cents per gallon, not enough to make much difference in sales. At most raising the price of fossil fuel will slightly decrease the use of fuel on the margin, although there are much better ways to increase prices than by making transport less safe.

It is true that measuring the safety of oil transport depends on how you measure it. Rail and trucking clearly have a higher risk of explosion than pipelines. But the risk of leaks and contamination of water is higher for pipelines than it is for rail (although trucking leaks are higher than even those of pipelines).

However, the cost to transport oil by pipeline is probably 2 to 3 times cheaper than by rail. (Ibid) If the true goal is increasing safety, then it makes sense that we allow oil companies to transport oil by the cheapest method, but trade that off with requirements that the pipeline companies spend a lot more money on preventing leaks, especially around bodies of water, which are the most dangerous types of leaks.

Decreasing leaks should be enforced with massive penalties for major leaks. The massive oil spill in the Kalamazoo River in 2010 was made much worse because the pipeline operators at first thought the alarms were due to air bubbles, and so actually increased the pressure to get rid of these bubbles. (Wikipedia, “Kalamazoo River oil spill,” https://en.wikipedia.org/wiki/Kalamazoo_River_oil_spill) If the pipeline company was subject to billions of dollars of penalties on such spills, we wouldn’t see this kind of action. We should have more penalties for the smaller spills also.

However, if the intent of protesting the pipelines is to show one’s progressive bona fides against the fossil fuel system, then there is no point bringing up the difficult question of the relative safety of alternative transport methods. You should instead celebrate the rights of indigenous people, and denigrate billionaires, climate deniers, and the arch enemy Donald Trump. (Ali Reza Naraghi, “Direct Action Against Pipelines Is More Important Than Ever,” http://www.huffingtonpost.ca/ali-reza-naraghi/north-american-pipelines_b_15085312.html)

This post is pretty snarky, maybe too much. If I attacked you, please feel free to respond just as snarkily. But also please let me know of any rational reasons to oppose oil pipelines.

Economic Development

(book excerpt)

It is very common for economic development to be the main campaign focus of political candidates. Often candidates declare their candidacy about creating jobs. Voters also buy into this, as shown by the fact that Presidential incumbent re-elections correlate highly with a favorable economy in the year of the election.
Private companies do a much better job of providing goods and services that do governments, as discussed below. But private companies do not do a good job with public goods, and will not re-distribute to the poor at all. Therefore governments should create public goods and re-distribute income, and not complicate their mission by trying to do more.

There are several reasons that private firms satisfy citizens’ demands for goods and services much better then governments:

1) Consumers can buy goods or services from any private firm, but if the government produces them, the consumers have to pay for them via taxes. Because of this, the private firm is more sensitive to buyer demand. If consumers stop buying from a firm, it will lose all its revenues, but this is not true of a government.
In the rare situation of a natural monopoly, then a democratic government is a preferable producer than a non-accountable private monopoly. However, when the government believes a monopoly exists, usually the best solution would be to encourage more competition, instead of immediately jumping to more regulations or the government producing the goods or services itself.

2) Consumers can buy just the quantity of the goods or services desired, whereas the government normally decides the amount of the services to provide, and usually it is the same for everyone.

3) Businesses that fail to provide what the consumer wants lose their revenues and go out of business. Government offices may be shut down if their services aren’t desired, but more often their budget is increased so they can improve their services to make them more desirable. Thus in the private sector, unwanted services are phased out of the economy, but in the government sector such services often increase in scope.

4) The government usually gives away its services, so the pricing mechanism cannot be used to gauge the proper amount of services to be provided. When services are free, many consumers will use the services, even when they don’t value them enough to have paid the cost to produce them. Sometimes governments try to mimic the private market by charging the users a market price. This improves the government services, but it doesn’t fix the other problems of government services.

5) The easiest way for a consumer to register his dissatisfaction with a private goods or services is to simply stop doing business with that firm. To fix the problem with a government good or service is a much more difficult task:
a) The consumer could complain to the civil servant’s boss. Usually this does not help because the boss has little more incentive to help than the worker.
b) Complain to the elected representative. These representatives are professionals at placating voters, so he may be able to calm down the voter. But he may not be able to fix the problem, because of lack of authority over the civil servant, or maybe he doesn’t really care, if the voter isn’t in a critical group that is needed to win the next election.
c) The consumer can vote for a different representative in the next election. But one person’s vote will have little effect, and usually a candidate has a large quantity of issues that are important, so the voter has to really care about this one issue to change his vote. And since the voter usually has only one other choice in the election, he better hope that the other candidate will be on the correct side of the pertinent issue.
d) If this issue is really important to this consumer, perhaps he will become an activist to try to put up new candidates for election that are on the right side of the issue in question. But then he must get many other activists to agree with this opinion.

So to solve an issue with government goods or services may require an enormous amount of effort, and still not be successful. While he could simply switch to another firm if it is a private good.

Complaints about arrogant private firms are usually concerned with highly regulated industries such as banking, telecommunications, or cable TV. More competition is usually the solution to poor customer service. More firms in the industry allow the consumer to pick the best one available, and it usually makes the firm more agreeable to customers when they have to compete for their customers. Unfortunately, governments do not have to compete for customers.

There are many who agree that yes, it is a good idea for private firms to create most goods and services because they are the most effective and efficient. But still, they say, the government can nudge these firms in a direction that is better for the citizens, since the firms will naturally do what is in their interest, not that of the community. Thus they believe it is a good thing to subsidize this business over here, penalize that business over there, or require this business to do whatever. This would be a good point if the government’s actions were more favorable to consumers than private firms, but that is the rare case, not the common one.

There are several reasons that government interventions in the economy are more often detriments to the average consumer instead of benefits:

1) Government officials often don’t know the best actions to benefit the economy. Governments often subsidize a business or industry thinking they will provide jobs. These officials often don’t seem to realize that providing more resources to one business inevitably requires a decrease of the resources to some other business. Politicians and civil servants, most of whom have little experience in business, believe their vision of the economy superior to the capitalists that have spent their careers in business.

2) Government officials’ incentives quite often correspond less with the good of society than those of business owners. Politicians often arrange for some of these subsidies to go to themselves or their friends. It is amazingly easy to rationalize that they are helping their constituents as well as themselves. Even if the financial subsidies don’t directly benefit anyone they know, they will surely benefit those who can help them get re-elected. A politician will always look for subsidies into his own district, and also to allies that agree with him politically. Subsidizing a company to bring jobs to one’s own district is a no-brainer to any politician, even if it results in fewer jobs from non-subsidized firms, depressed economic results of neighboring districts, and fewer jobs everywhere in the long run. A business owner cannot afford to ignore less visible consequences to the business, because it the health of the business that affects the owner’s prosperity, not simply the obvious changes at the surface.

3) The incentives of the private firms also change for the worse when they spend more of their time and money looking for subsidies. This is why highly regulated industries usually have worse customer service than those businesses neglected by the government. Regulated and subsidized businesses start to see the government as their customer. Therefore politicians and civil servants get good service, but the consumers of their products are less important and are treated poorly.

A common method of economic development by the federal government is to use either fiscal or monetary stimulus. Fiscal stimulus is where the government borrows money, so spending can increase without an increase in taxes, or taxes can be lowered without a decrease in spending. Monetary stimulus is where the government “prints” more money so that consumers have more cash to buy goods and services. These days monetary stimulus isn’t created by literally printing more currency, because currency is only about 10% of total M2, the most commonly used definition of money. M2 includes the outstanding value in checking accounts, savings accounts, and other cash accounts. The Federal Reserve can increase the amount of money in the economy by buying financial instruments, amongst other methods.

The federal government cannot increase the amount of resources available in the economy. Both fiscal and monetary stimulus merely moves resources around. Currency and other money components are really claims against the US Treasury, so increasing the money supply amounts to increasing the US debt, just like fiscal stimulus. Both kinds of stimulus are essentially intended to fool consumers into thinking they have more resources so they are less cautious and spend more money. Stimulating the economy is done to revive the economy during a recession, when business and consumer spending has decreased. In reality, politicians seem to always think that there are unused resources in the economy that can be shaken loose if the economy is stimulated, so it is a rare time when some sort of federal stimulus is not used. With the increasing economic literacy of the largest spenders in the economy (such as large corporations), it is questionable if stimulus actually works to fool anyone, so it is unclear that it ever works.

It is also questionable if stimulus should be used even if it does work. Spenders cut back on spending when they feel that it is dangerous to spend all their resources. Perhaps the mass of spenders in the economy are correct, and the constant drumbeat from the federal politicians to spend more simply leads us to unhealthy and risky spending, causing another round of overspending and a new crash. It could be that the government stimulus spending is just resulting in steeper business cycles.

For example, one of the causes of the Great Recession was all the interlocking debt between banks, large corporations, governments, and residential housing. The concept of “too big to fail” occurs because it is thought that this interlocking debt might cause the whole structure to collapse if a large firm with a lot of this debt goes into bankruptcy. The way out of this minefield is to decrease the vast quantities of debt in the economy. In the aftermath of the Great Recession, when unemployment was still high, but the economy was growing, it was found that many large corporations were holding back on spending their cash holdings. These companies were being conservative because they had been burned badly in the last crash. This was also a safety measure for the economy, because it decreased the amount of net corporate debt, making it less likely for these firms to fail in the event of another bank panic. But politicians everywhere greatly criticized these firms for not spending their money, “because the economy needs those funds for more jobs.” But it might be that the business leaders know more about the risks than the politicians.

Change in Minimum Wage to $15 per Hour

All my previous posts have been excerpts of my book Simplify Government. But now I am expanding to the current topic of the proposed $15 minimum wage.

It is a very progressive “Bernie Sanders” type thing to be in favor of the $15 minimum wage in 2017. All the cool states and cities have it by now. In my city of Minneapolis, it is all but inevitable, probably this year. In any Democratic controlled city or state, being against the $15 minimum means you are against poor people. Any discussion of increased unemployment is dismissed as right-wing propaganda and not given a thought by the faithful. Since the $15 advocates see themselves as strongly favoring the poor, one would think they would be concerned about a possible disaster with millions of the poor losing their jobs, but wishful thinking is extremely strong in this group.

Where will the money come from? To pay every employee $15 per hour, someone has to pay for this. Most companies that pay minimum wage are small firms. For example, many low wage workers are at small restaurants. Few of these companies have enough profits to pay any more wages than they pay now. The only way they will survive is if they increase their prices enough to pay the higher wages. Perhaps they can indeed raise their prices, as long as the competition to these small restaurants is other small restaurants in the same boat.

However, restaurants raising their prices don’t eliminate the problem of someone having to pay for the increases; it just moves them on to the customer. The customers don’t have any more money than they had before. Everyone spends or saves their income in some manner. Each person will spend some amount: for example on housing, groceries, supplies, transportation, eating out, and charity. The difference between spending and income goes to savings or debt. When the prices for eating out increase, one of these categories needs to change. Maybe their savings/debt change, their charity spending goes down, but most likely they will just go out to eat less often.

Any of these changes on an aggregate level will have unfavorable effects on the economy, but I will focus now on the most likely – they will eat out less. The restaurants will thus lose business, and the restaurant workers will have less work. This is where the unemployment comes in. With a large increase in wages to $15, there will need to be a large increase in prices, and thus many employees will be let go. This probably won’t happen immediately, because it will take some time for all these adjustments to take place: the restaurants raising their prices, the consumers learning they can’t eat out as often and cutting back, and then the restaurants cutting back on workers, and not hiring new employees. Restaurant meals will be seen as more of a luxury item, and restaurants will become much choosier about the employees they do hire at the higher rate. This kind of work will no longer be something that someone just out of high school can use to get job experience, unless they have a sparkling personality that restaurants want to have in front of their customers.

A similar process will occur in all other low wage jobs. When $15 is the lowest wage that exists, the firms that previously paid a lower wage will inevitably lose business as they need to raise prices to pay for their more pricey employees. There will be fewer jobs at the lowest skill levels, so that kids coming out of high school and other workers with low skills won’t find any jobs. These are the workers that already have the highest jobless rates. There will be a lot more structural unemployment. Workers with jobs will be making more, but those without will be more desperate than the unemployed now. Even those with jobs will be in a more precarious state, since their employers would have the pick of all those unemployed workers. Those making the new $15 minimum wage would be at great risk for exploitation.

Of course it is true that the higher wages of those earning $15 per hour would partially mitigate these effects. These higher paid workers would spend more than previously on say rent, cars, clothes, bars, and eating out, and have more left over for savings. To the extent that they spend more money on businesses that employ minimum wage workers, this will offset the damage from the decreased business discussed above. But according to the Bureau of Labor Statistics, a large minority of spending by the poor is for housing, and after transportation, and then food. At most some of the food spending will go back to minimum wage workers, so there will be little mitigation.

I was a little surprised that Bernie Sanders found 208 economists that advocate for a $15 minimum wage. Looking over the list of economists, I see there are several outside the US, so the pool to pick from is bigger than I first expected. I also noticed that many self-identify as being in a department other than economics, so I’m not sure what it means that they are all “economists.”

The letter states that phasing in the increase over four years will result in overall business costs for fast-food restaurants of 2.8% per year. That is an 11.7% increase over four years, which the restaurant will no doubt attempt to make up with price increases. An increase of that magnitude, which would be in addition to any other inflationary increases that happen in the restaurant industry, will definitely have a downsizing effect on eating out. Actually the increase will be larger than 11.7%, because many small restaurants are not fast food and so have a significantly higher proportion of labor costs than calculated in the letter. Non-fast food restaurants have labor costs more in the 33% range, vs 25% for fast food. This would be a 30% higher cost, requiring a proportionate increase in prices.

In a survey of 555 prominent economists (with 30% reply rate), 72% of them oppose a $15 minimum wage, 83% believe it would have negative effects on youth employment, and 67% believe it will make it more difficult for small firms to stay in business. These respondents appear to be real economists . Even these economists are mostly of the leftist persuasion, given that only 7% of them identify as Republicans and 59% as Democrats (with the remainder being other). No one knows exactly how much unemployment will increase with a $15 minimum wage, especially considering unknown confounding events such as general inflation and the strength of the economy, but it is clear that it would be a very risky step.

I have read a number of commentaries that say that the benefit or detriment of a minimum wage should be based on the elasticity of demand for low skill labor. Thus if few jobs are lost with a higher minimum wage it is a good deal because the total increased wages received by the low skilled outweighs the few who no longer work. I agree with this on a theoretical basis, but I don’t think anyone has come up with a good mathematical calculation of the elasticity of low skill labor (and in fact it is likely quite variable between different localities and different industries). Regardless of these unknown mathematics, I believe there are many reasons to be wary of a $15 minimum wage.
1) Increase of minimum wages to $15 is a very large increase for those making only $8-9 per hour now. I find it unlikely that many of those workers will find work that pays $15 per hour.
2) I believe that a worker that cannot find a job is much worse for himself and for society than it is good for several workers making more wages than before, even if the total wages are higher than before. Thus if one person loses his $8 per hour job and two more go from $10 to $15, that is a bad result, even though the total wages earned are $2 per hour higher. There are those who say the $8 or $10 per are not living wages, and yet people are living off of them. But how many can live off $0 per hour?
3) The $8 per hour worker that loses his job because he isn’t worth $15 may never find a job again in his life. How will he get experience that will increase his value when no one will hire him now at the lowest possible wage?
4) Most of those who will get raises to $15 are just getting these wages a little early. The ones that are still employed after the minimum wage goes into effect are the most skilled of the low skill workers, and are probably moving up the ladder anyway. Their employers will pay them $15 early, and then they won’t get raises for a few years until they would have gone above $15 anyway.
5) The raise to $15 is over-stated, because employers will cut benefits as much as they can to offset the increased wages. This includes traditionally cited benefits such as health care, paid holidays, and paid vacation, although it is true that few low paid workers get such benefits. But there are also benefits that are common to low skill workers, but are not normally counted as part of a “benefit package.” These include flexibility in working hours, implicit training time where the worker isn’t expected to be very productive but instead is learning the job, and “goof-off” time when the worker isn’t working very hard. Employers will become more strict as to when and how the workers do their job, since it will vital to the continued existence of the business that the worker is worth $15 per hour.
6) The new minimum wage workers will be in a much more precarious position, since there will be many other workers in the marketplace willing to take that spot. With a higher unemployment rate amongst the low skilled workers, it will be much easier for employers to play the game of forcing the employees to do exactly what the boss wants them to do. It will be much easier for firms to exploit their workers when there is a willing supply of new employees waiting to get the job. High minimum wages give power to companies and take it away from workers.

Welfare as I Think it Should be Done

(Book excerpt, with minor changes to allow it to stand on its own)

Government services that are public goods are usually best paid through a user fee, but welfare is obviously the one service that cannot be paid for by users.  Welfare is not a public good in the sense that it is a natural monopoly.  It simply doesn’t provide profits to private firms, so can only be done on a charitable basis.  I believe that our society is rich enough to provide guaranteed basic economic security to every person.  Since there is no guarantee that private charity would be sufficient, we should re-distribute resources to provide a low but sufficient standard of living to each person.

Welfare is best distributed at the state level.  There are simply too many municipalities and counties that are too poor themselves to provide a decent level of welfare to their poor.  The county level would understand the needs of the people better because they are closer, but the poorest counties with the most poor would also likely be unable to provide these poor with minimal subsistence.  Even the poorest states have the resources to keep their poor out of poverty.  Since welfare would be at the state level, that is the level that would determine how much assistance to provide the poor.  This is as it should be.  If a person believes welfare benefits are too low or too high, they should be able to make their argument locally, instead of having to go to Washington, DC to make their case.  Local rule is much more democratic.  Welfare from the Feds is much more likely to be either too low, because the faraway bureaucrats don’t understand the local needs and prices, or too high, so there is little incentive to work.

Welfare is hellishly complex as it is currently administered.  One often hears that welfare spending has costs that are several times higher than the amounts actually received by welfare recipients. This is highly controversial.  Responses such as the 2012 response by Robert Greenstein of the CBPP state that this isn’t true and give evidence of less than 10% administrative costs of several welfare programs.[1]  My analysis of his evidence agrees pretty closely to his numbers:  Medicaid 2008 state admin costs of 4.9%,[2] SNAP 2011 admin costs of  6.0%,[3] housing vouchers 2010 admin costs of 8.5%,[4] SSI 2008 admin costs of 6.3%,[5] child nutrition program 2011 state admin costs of 1.2%.[6]  (Greenstein’s EITC method of analysis is excluded from here because it incorrectly excludes IRS audit costs).  But this is only five programs; what of the dozens of other programs?  Elsewhere I’ve noted from one source that there are 78 different federal welfare programs.[7]  The smaller and more complex programs are also likely to have higher administrative costs. This is one more case where the complexity of the programs leaves us guessing as to the real cost of welfare.

All these different programs may maximize the services received by those who know how to play the welfare system, and so incentivize the recipients to spend their time and effort getting more benefits instead of finding gainful employment.  One welfare system at the state level would save large amounts of funds, and the greater control would result in more recipients graduating out of the welfare system.  But most importantly, being closer to the recipients would mean the ones who need help would be more likely receive what they need, and those who don’t would be out of luck.

The best welfare would be cash benefits that bring each resident of the state up to the economic level that the residents of the state consider to be a minimum standard of living.  Creating dozens of programs in each state with all the in-kind benefits now provided by federal programs would be only a slight improvement over the many programs currently run by the Feds.  There are two kinds of programs that have proliferated over the years: 1) those that provide specific types of benefits, such as housing vouchers or food stamps, and 2) those that attempt to lead or coerce the recipients out of government supported welfare.  Both of these have more detriments than benefits.

  • Specific types. This is the sort of program that eats up administrative costs and creates over and under spending for welfare recipients.  Section 8 housing has long waiting lists.[8]  How is it fair for recipients to receive benefits based only on how long they’ve waited for them?  How many administrators does it take to qualify the applicants, maintain the waiting lists, and ensure that all current beneficiaries are still eligible?  I suspect that even the 8.5% administrative costs for the housing program stated above is understated, considering all the different jurisdictions the record keepers would need to check to come up with the figures.  Food stamps are not as administrative heavy nor as unfair as housing vouchers, but also not as simple and fair as simple cash funds used to pull recipients out of poverty.

 

  • Aid and inducements to get recipients off of welfare. Fifty years after the war on poverty was declared in 1964, the proportion of those who need help is still about the same.  Poverty had been falling dramatically before the war was declared, but the drop stopped a few years after the war was declared.[9]  All these programs don’t seem to have had any beneficial effect on eliminating poverty.  In fact, the lack of change probably indicates a negative effect, because the country is quite a bit wealthier than it was in 1964, and many aspects of life that are traditionally associated with poverty have noticeably improved, such as a large drop in crime, drops in lead-infested water and soil, and much better child nutrition.  Just looking at how fast the poverty rate was falling before the great push was launched, there certainly appears to be evidence that these programs themselves have worsened the level of poverty.

There is also the loss of independence to the recipients themselves.  There is a great push to get more training, more education, or any job that looks good to the social worker.  It would certainly be much easier on the recipients to just hand them the cash they need to live at a minimal economic standard, instead of forcing them to do this thing, then the other, jumping through each hoop to maintain their welfare payments.  Perhaps one shouldn’t feel particularly bad about forcing recipients of welfare to jump through hoops to maintain their public subsidy, but it does seem a bit cruel to do this when it doesn’t seem to have many good effects, especially when it costs the public more to be this cruel than it would be to just hand out the cash.

Perhaps eliminating the hoops would result in fewer welfare recipients finding jobs, because they would have less incentive to do so.  That isn’t all bad.  The unemployment rate is rather high for those on the bottom of the scale; it is probably better for the jobs to go to those that truly want to work instead of the ones that would just as soon stay home and collect welfare.  This would result in an effective minimum wage, as few would be willing to work for a wage that didn’t pay more than welfare.  That is okay too.  That is a better minimum wage than one that disallows an employment contract that is desired by both the firm and the worker.  It also avoids the worst effect of statutory minimum wages as currently enacted, which is to increase the unemployment rate and the precariousness of anyone’s employment at the lowest levels.  Minimum wages caused by welfare gives more power to the low skill worker, instead of giving more power to the employer, as do our current minimum wage laws.

There is one complication of welfare that is unavoidable, that of medical welfare for the chronically sick.  Those that have ongoing large costs because of a medical condition won’t survive by simply receiving the cash that brings the recipient out of poverty.  Many of these with such chronic medical conditions might not even need welfare except for the extra-ordinary costs of medical care.  Therefore there does need to be a separate department of welfare that handles these cases of exceptional medical care.  The ordinary medical costs that everyone incurs could be part of normal welfare coverage, but abnormally high medical cost must be handled by a separate group of medically knowledgeable bureaucrats.  The United States has created the extremely complicated Affordable Care Act, which covers almost everyone in the country, ostensibly to cover the needs of those who are not covered by normal welfare and medical insurance.  A separate program to cover just such cases would be a much simpler and more effective method of taking care of this problem.

Many believe that as well as providing welfare payments to the indigent, that government should re-distribute on a wider level, to mitigate income inequality.  Usually there are moral arguments made, that those with much more income don’t deserve the higher income.  It is true that those which are naturally more skilled or have inherited money have no higher moral worth than those without these advantages, and yet will usually have a higher income.  On the other hand, more income also comes to those who work longer hours, study in school, save their earnings, take business risks, or take higher paying but more difficult jobs than others.  Such workers do deserve more income than others.  Re-distributing wealth would likely take from the deserving as well as the undeserving.  I don’t have enough faith in the political process to believe that any government re-distributing to decrease inequality would succeed at taking excess funds only from the undeserving or lucky.

But if a state does decide to re-distribute on a general basis and not just to the destitute, this too should be done through just one department.  Similar to welfare, there are many different areas of the government that purposefully charge more to the rich than to the middle class for the same services.  This is most obvious for tax payments, but other subsides to the middle class are more prevalent all the time, for example the Affordable Care Act, college scholarships, and subsidized “affordable” housing.  If this re-distribution was handled by one department, then it would be clear how much re-distribution was occurring, so each voter would be able to judge if they agreed that it was correct.

 

[1] Robert Greenstein and CBPP Staff, ‘Romney’s Charge That Most Federal Low-Income Spending Goes for Overhead” and “Bureaucrats” Is False,’

http://www.cbpp.org/research/romneys-charge-that-most-federal-low-income-spending-goes-for-overhead-and-bureaucrats-is

 

[2]  Department of Health and Human Services, “ADVANCING THE HEALTH, SAFETY, AND WELL-BEING OF OUR PEOPLE,” http://wayback.archive-it.org/3920/20130927185643/http://archive.hhs.gov/budget/08budget/2008budgetinbrief.pdf, pg 58 (10,015/203,886=4.9%)

 

[3] obpa, “FOOD AND NUTRITION SERVICE,” http://www.obpa.usda.gov/30fns2012notes.pdf, pg 30-43 (4,119,226/68,889,475=6.0%)

 

[4] DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, “PUBLIC AND INDIAN HOUSING PROGRAMS,” https://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hud.pdf, pg 557 (1539/18,071=8.5%)

 

[5] Social Security Administration, “Annual Report of the Supplemental Security Income Program,” https://www.ssa.gov/OACT/ssir/SSI11/ssi2011.pdf, pgs 45, 52 (2820/[42040+2820]=6.3%)

 

[6] obpa, “FOOD AND NUTRITION SERVICE,” http://www.obpa.usda.gov/30fns2012notes.pdf, pg 30-11 (208,651/17293542=1.2%)

 

[7] Robert Rector, “Uncovering the Hidden Welfare State: 69 Means-tested Programs and $940 Billion in Annual Spending,” http://www.heritage.org/research/testimony/2012/06/welfare-state-69-means-tested-programs-and-940-billion-in-annual-spending

[8] Affordable Housing Online, “Section 8 Waiting Lists,”

http://affordablehousingonline.com/open-section-8-waiting-lists#always

[9] Robert Rector and Rachel Sheffield, “The War on Poverty After 50 Years,”

http://www.heritage.org/research/reports/2014/09/the-war-on-poverty-after-50-years