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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

Minimum wages

(book excerpt)

When consumers go to the market, prices matter.  When tomatoes are on sale, they disappear quickly, as many decide they would like to eat more tomatoes when the price is that cheap.  When gas prices go down, it is a well-known phenomenon that people buy more gas guzzlers, because they can afford to buy more gas.  When gas prices go up, suddenly economy cars are back in style.[1]

Wages, the price employers pay for workers, work the same way.  If anything, the effect of wages on employers’ usage of labor follows closer to the classical economic rule of higher prices driving of lower quantity purchased.  Many firms have analysts with full time jobs to maximize profits, so businesses are less likely to pay too much for emotional reasons.

Those arguing for higher minimum wages often argue that this effect doesn’t affect wage levels.  They often bring up studies showing that this is the case.  This is easy to do, because there are studies out there of minimum wages that show all results: that they decrease employment, have no effect, or even increase employment.[2] [3]  It is easy for the advocates to ignore the studies that have the wrong result.

The problem with all these studies is that they study the effect of employment over only the next few months, up to perhaps half a year after the change.  It is easy to understand why the studies do this, because it is very hard to break out the effects of only the change in minimum wage.  There are always so many other things going on at the same time, how do they know that the change in employment (or lack thereof) related to the change in minimum wage?  That’s probably why the results all seem to have different results.  But these are the difficulties with keeping the change in minimum wages separate from other effects over the course of a few months.  The effects over the course of a few years are insurmountable.  Any such study would probably be worthless, because of all the compounding effects that happened at the same time.

But the largest effects of a minimum wage hike will happen over the course of years, not months.  Think of it from the point of view of the business person who employs a few minimum wage workers.  It is difficult for the employer to make many changes immediately.  He probably doesn’t want to let anyone go, because the work still has to get done, and decreasing the workforce could imperil the business.  It is also very hard emotionally for many employers to fire workers, especially if they haven’t done anything wrong.  The employer might cut hours a bit to save some cost.  This is the main employment effect in the short run.  This effect would get picked up by those studies that look at hours worked, but not by studies that just look at the number of employees.

Over the longer term, the employer would try to get his workers to work harder, so that when one worker leaves, he won’t have to replace him.  The employer might look for labor saving devices, since they are more valuable to him than they were at a lower wage.  The business will likely need to rise prices a bit to survive, and of course his competitors are in the same boat, so he can probably get away with that.  But higher prices will mean fewer customers over time, because customers will use fewer of his pricier services.  Thus the price increase will eventually mean a smaller business, so the employer is less likely to replace workers when they leave.  Some businesses won’t make it at all in the higher priced environment, so they will go out of business after a while.  These larger effects will mostly take a few years to occur.

So the studies that count unemployment changes a few months after a minimum wage increase are mostly worthless.  Without viable studies, we only have logic left.  When the price of something goes up, we use less of it.  If it goes up a lot, much less will be used.   The workers that lose their jobs (or don’t get hired in the first place because of the higher wage) will be those at the lowest skill level.  Certain low skill workers will never develop the skills needed and so will be unemployable for life.  It would be very difficult for those just out of high school to get their first job, since they aren’t worth very much before their first employment.  Many of the minimum wage studies indicate a “small” increase in unemployment, stating that the increased wages more than make up for the employment losses.  But while a 1% overall increase in unemployment doesn’t sound too bad, this percentage is much higher at the level of the unskilled workers where all the job losses occur.

The unemployment rate for 16 to 24 year olds was 12.2% in July 2015, and 14.3% the summer before that.[4]  For those over 24, unemployment of those without a high school degree has been 10% or greater since 2008.[5]  These are the groups that will have even higher unemployment rates if minimum wages increased.

Even those that keep their jobs will be in no bed of roses.  They will be making more money than before, but will probably receive no raises for a while.  What is worse is that their jobs will be much more precarious, since it would be easy for their employers to find other workers for the same pay.  Workers are more subject to abuse from unethical employers, since employers have more power under a higher minimum wage.

Paying workers more than they would be paid in a free marketplace is essentially welfare.  They aren’t earning that wage; it is a legal requirement that employers pay that much.  Paying welfare directly to people is a much more honest use of welfare than forcing employers to do so.  If we had a simpler welfare system that paid each person enough to bring them out of poverty, as I have suggested elsewhere, such a program would work as a minimum wage program itself, without the disadvantages of involuntary unemployment. Very few people would work for fewer wages than they would receive for welfare, so employers couldn’t price themselves under this amount of payment.  The downside to this is that there would still be the problem of low skill workers getting their first job to learn job skills, if the value of these workers was below the amount they would receive on welfare.  However, absent a legal minimum wage, some workers might apprentice themselves to employers for less than they would receive in welfare, as long as the employer also agreed to train them to become higher value employees.  Thus at least the ambitious low skill workers would have a way out of the poverty trap.

 

 

[1] Rick Newman, “5 Things That Change When Gas Prices Spike,” http://www.usnews.com/news/blogs/rick-newman/2012/03/16/5-things-that-change-when-gas-prices-spike

[2] T. William Lester, David MadlandNick Bunker, “An Increased Minimum Wage Is Good Policy Even During Hard Times,” https://www.americanprogressaction.org/issues/labor/news/2011/06/07/9747/an-increased-minimum-wage-is-good-policy-even-during-hard-times/

[3] David Neumark, “The Economic Effects of Minimum Wages: What Might Missouri Expect from Passage of Proposition B?,” http://showmeinstitute.org/publication/taxes-income-earnings/economic-effects-minimum-wages-what-might-missouri-expect-passage

[4] Bureau of Labor Statistics, “Employment and Unemployment Among Youth Summary,” http://www.bls.gov/news.release/youth.nr0.htm

[5] National Center for Education Statistics, “Employment Rates and Unemployment Rates by Educational Attainment,” http://nces.ed.gov/programs/coe/indicator_cbc.asp, Figure 3