Despite economic conditions being awful, the financial press labels the environment “improving.” Federal Reserve Chairman Ben Bernanke told Congress recently, “The economy … appears to be on track to continue to expand through this year and next.” While economic activity maybe good on the island of politics and bureaucracy that is Washington D.C., everywhere else the policies emanating from D.C. has the economy in a funk.
One in five people are unemployed, but headline statistics say it’s one in ten. Prices are increasing at nearly ten percent a year, but the Bureau of Labor statistics claims prices are flat. Meanwhile, the financial markets gyrate up and down from one day to the next, whether reacting to riots and financial crisis overseas or proposed legislation here at home.
When asked what’s wrong, the average person on the street wants to blame either George W. Bush for running the country into the ground during his eight years, or Barack Obama for ramping up the size of government in record time. With all the focus on party politics and personalities, no discussion is made of actual economic policies. And why should there be, Americans’ knowledge of economics is quite poor.
Zogby International psychologist Zeljka Buturovic and economics instructor Daniel Klein just published a paper entitled “Economic Enlightenment in Relation to College-going, Ideology, and Other Variables: A Zogby Survey of Americans.” Compiling the scores to eight simple economics questions, the authors found that respondents with college degrees had an average of 3 of 8 questions wrong. And with particular questions like, “Minimum wage laws raise unemployment” and “Third-world workers working for American companies overseas are being exploited” half the college educated gave the incorrect answer. Even the group that only finished high school or less did better on the minimum wage question.
When Klein and Buturovic divided the responses by ideology, respondents that described themselves as “Progressive” on average missed five of the questions, while “Very conservative” and “Libertarian” respondents on average gave only one incorrect answer. On the minimum wage question an astounding 92.5 percent of “Progressives” gave the wrong answer.
So just what’s happening on college campuses? First of all, the authors make the point that the majority of the “college professoriate is very preponderantly centrist, center-left, or left.” Second, economics is not required coursework at most universities.
So when the financial media says thank goodness for the Federal Reserve otherwise we’d be in a depression, there are plenty of Americans that believe it. When Congress votes for policies like cash-for-clunkers, increasing the minimum wage, extending unemployment benefits, tax credits for new home buyers and bailing out Wall Street’s big banks, Detroit’s big car companies and nationalizing mortgage companies Fannie Mae and Freddie Mac those with no economics training, sigh and say, “well, I guess they must know what they are doing.”
In this election season, Buturovic and Klein’s work is as scary as it is enlightening, and makes the point for H.L. Mencken who once described democracy as “simply a battle of charlatans for the votes of idiots.”
{ 75 comments }
I seriously wonder how professional economists would do on the minimum wage question!
They would probably do rather better than a lot of people around here, because the correct answer is “it depends”. For instance, when there is an oligopsonistic market failure in the labour market, a slightly raised minimum wage actually increases employment. If the minimum wage is lower than the levels that other things make people have to hold out for, it has no effect. And if a minimum wage isn’t imposed by mandate but through a wage subsidy approach, it increases employment without causing harm elsewhere if it is set at levels that eliminate externalities like unemployment benefit costs or vagrancy costs rather than creating new externalities.
It comes down to whether it adds to or reduces market imperfections, so it depends.
Why do you believe that a situation with a “small” number of buyers and a “large” number of sellers, ie, oligopsony (and I trust you’ll enlighten us as to exactly what qualifies as small and large) is a form of “market imperfection”?
Why do you make up such a charge? If I told you something about Chinese peasants, would you accuse me of thinking all Chinese were peasants? Well, I suppose you would, considering that when I told you something about certain market imperfections that can come up in oligopsonistic conditions, you jumped to the conclusion that I thought oligopsony was ipso facto a market imperfection.
But I won’t enlighten you as to just what sets up these conditions, I’ll just refer you to textbooks like Lippsey’s Positive Economics that cover it.
I’m not charging you with anything. I’ve asked you a simple question, which you are evidently unable to answer.
You asked me ‘Why do you believe that a situation with a “small” number of buyers and a “large” number of sellers, ie, oligopsony (and I trust you’ll enlighten us as to exactly what qualifies as small and large) is a form of “market imperfection”?’
But you made that up. I am under no obligation to explain why I believe something you made up, that I already told you you made up.
Good grief. You wrote:
“For instance, when there is an oligopsonistic market failure in the labour market, a slightly raised minimum wage actually increases employment.”
Do you understand what oligopsony is, and that in the neoclassicist literature it is regarded as a form of “market imperfection?” (I’m assuming you do, and you yourself characterize it as “market failure.”) My question to you (which you refuse to answer) is quite reasonable.
Then again, you’re the same guy who, in discussions of Kevin Carson’s work, insist that the plain meaning of his words are misconstrued by his critics, so I’m probably being naive in dealing with you.
I’ll finish with this quote of yours:
“It comes down to whether it adds to or reduces market imperfections, so it depends.”
I roll my eyes at people who think they know what the “perfect” state of the market is (or more likely, should be), and what policies should be implemented to bring the market closer to that state.
‘Do you understand what oligopsony is, and that in the neoclassicist literature it is regarded as a form of “market imperfection?” (I’m assuming you do, and you yourself characterize it as “market failure.”) My question to you (which you refuse to answer) is quite reasonable.’
Wrong. That assuming is you making it up. If you think it’s reasonable to ask a neoclassicist that, go and ask one but don’t make it up that I need to answer it. It is absolutely unreasonable to ask me why I think oligopsony is inherently a market imperfection, when you made it up that I thought that.
‘I roll my eyes at people who think they know what the “perfect” state of the market is (or more likely, should be), and what policies should be implemented to bring the market closer to that state’.
And where do you get the idea that that has anything to do with me? I don’t claim to know that much, I only know of certain imperfections that are around now. A lot of people know things at that level, e.g. that printing fiat currency mucks things up.
The first problem with that theory is that it’s a static analysis. If there were a localized oligopsony, then those firms could earn higher profits to as strong as their oligopsony was, but profits are a signal to investors.
When there is high profit in cars for example, that is a sign that there is a high demand for cars that is not being met as much as everything else in the economy. Investors will then invest in that industry until they realize (not when it actually occurs, but when they realize) that that industry is as saturated as the rest of the economy they are willing and able to invest in.
When an oligopsony artifically lowers wages, they earn a profit, and that sends a signal – “there is a shortage of jobs in this geographic area and / or industry relative to the rest of the economy you are willing and able to invest in” – which attracts investors. Now of course the extant firms have the capacity to pay higher wages, but the signal is sent out anyway. It’s like a machine, and with populations this large there is little room for “free will” in the economic sense.
That said, a minimum wage may be “appropriate” if there is an oligopsony that is protected from new competition. This is done by making it difficult to enter into an industry through various “regulations” and paying politicians to erect roadblocks. And while rarely absolute oligopsonies, they can become more oligopsonistic because of this, and to the extent they are oligopsonistic they CAN artificially depress wages. And in this environment a minimum wage would be better than not, because the attracting forces of capital to profit are not powerful enough to overcome the guns of the state.
So yes, a minimum wage does make sense if new firms cannot enter, and for now I simply assert that oligopsonies cannot be sustained systematically on a total market.
In what sense can an oligopsony “artificially” lower wage? (Assuming no statist intervention here.) What is your criteria here? The level wages would be at if there were more buyers of labor? If so, so what? Why is that level more real than the one that actual prevails?
Wage subsidy approach? So you are talking about giving people “free” money, taken from other people, which artificially reduces the cost of employment?
This would have similar effects to extending cheap credit. You can’t say it produces no new externalities because by subsidizing one market place there is more consumption of capital taking place due to spending/etc. that otherwise would not have taken place. Instead of free choices now you are taking from everyone via inflation (printing money to pay the subsidies) or taxes (stealing from those who rightfully earned the money).
By artificially inflating the wages in the industry and reducing costs of employment the government would induce these industries to take on more employees than they could support absent the change. Certainly it would result in higher employment in the short term for those industries, but at the expense of others. If the government was to ever take the money out of the system it would not be sustainable. Going down this path of sustaining some industries with additional subsidies like this inevitably leads to special favors in other areas as lobbyists from other industries ask for the same.
Wage subsidies are not a solution because there is no problem. Those who seek employment but can’t obtain it a price can seek it elsewhere or train and learn to take another job. If there are too many workers and not enough employers it’s probably because of malinvestment created by subsidies or injections of cheap credit in the first place. Your cure for market imperfections is the cause of the problem.
“So you are talking about giving people “free” money, taken from other people, which artificially reduces the cost of employment? This would have similar effects to extending cheap credit. You can’t say it produces no new externalities because by subsidizing one market place there is more consumption of capital taking place due to spending/etc. that otherwise would not have taken place.”
What’s so wrong with that? When working people can spend more money in the marketplace, they buy products that lead to profits– for small independent businesses as well as the large corporations. Isn’t that a good thing?
So that even if a bit of money leaves one’s hands through taxation, doesn’t it come back in the form of increased volume? I don’t see that a wage subsidy program is going to lead us down the road to economic collapse. And certainly it’s not the cause of any imbalance between the number of workers and employers available. That’s stretching the theory too thin.
Many small employers have the problem that they can’t operate at a reasonable profit and afford to hire the personnel they need. So they fail to expand. Or they even just go out of business. The numbers don’t add up. But if they had access to a small subsidy to boost their ability to meet payroll, they’d employ more people and lift their own finances, being able in some small part to pay more taxes back into the system.
You apparently believe in Keynesian circular flow. The flaw in this thinking is what I went on to explain. You are diverting these potential employees from otherwise useful careers chosen by desires of the consumers in the market by artificially enhancing this business. You are also creating an environment for special favors in other areas, using taxation (theft) to promote these industries against others that consumers are choosing to use.
In the long run the government ends the program because a new set of politicians gets in town and they want to pay off some other group with the money instead. And this now unsustainable business crashes and burns, leaving employees earning more than they were actually worth who now are going to have to wait to find another job. Because they believe (wrongly) that they are worth the amount they used to get, they will hold out, etc.
This kind of system creates the same intertemporal discoordination that credit expansion does. It’s the same as our prior argument about the railroads. You promoted that because the government was the only one “big enough” to “solve the problem” yet you seem to not understand the nature of government at all. You think they are pure in understanding and always know the effects of their actions. This is clearly not true. The government acts schizophrenically because of elections, lobbyists, etc. They get involved in projects, dump that involvement creating a vacuum, and leave the market to pickup the pieces.
Your claim has always been here that they are just trying to help, but there are so many counter-examples to that. Just look at the article about the FTC and Brick & Mortar rental stores. The FTC prevents mergers that need to happen to allow a declining industry to survive competition, because it wants to “protect competition.” They believed competition only existed in one area (B&M vs B&M) when it was not true. And the government is doing this kind of thing all the time.
The most recent financial issues having a lot to do with the government’s desire to help people obtain affordable housing (and additionally extension of cheap credit by lowering interest rates). I don’t think they are evil, I just think they are stupid. Individual consumers can be stupid for certain, but they can only do what they can afford, and they generally won’t be able to do very much if they stay stupid. Government can unfortunately just choose to tax us more or print more money when it is ineffective.
Theory of circular flow? I’d call it a classic feedback mechanism, as I have described many times here..
The principal sector responsible for new job creation is small businesses– those employing fewer than 25 people. And currently they pay an inordinate proportion of taxes on a state and federal level. They would be well served by returning our largest corporations to the tax rolls– at least so they were paying as much in taxes as individuals. The breaks these giants enjoy shield billions in income from taxation.
So if tax credits were given, instead, to small businesses to assist them in hiring new help it would only be a return to tax parity, in a somewhat different form. Simpler and more open than that would just be to remove those thousands of exceptions embedded within the Tax Code that allow corporations to shield earnings.
And in the same spirit I would insist on parity in the tax rates for earned and unearned income. The current disparity is entirely unjust and without redeeming merit.
You forget that there’s an immense amount of consumer-level spending now that is not taking place– because a significant number of consumers are cash-strapped. Thirty million, for instance, are either out of work or forced to accept temporary and part-time pickup jobs. The money they haven’t been earning over the years, even in the good times, has been diverted into the corporate profit stream because corporations have been able to purchase government and turn its interests away from those of ordinary people. Union strength has nearly ceased to be a factor. Ordinary wages have stayed level while other sectors of the economy have pulled ahead. The biggest gains have been achieved in the financial sector, which does nothing of value but handle and allocate the wealth that the labors of others have created.
Since the 1970′s, famously, American workers have been instrumental in increasing industrial productivity some 19 percent. How have they shared in the bounty they’ve helped create? In constant dollars their gain in wages over that period has been about one percent.
Which leaves much of the remaining 18% to people who’ve had no direct hand in any of this increased productivity: mostly to passive investors. So money has been drained from the cash flow of the people whose actual work helps build America, and diverted to others on the sidelines.
You do give an ingenious reason to never on principle offer subsidies for new hiring: the thought that a business might become dependent on them, and then suffer later on, when the subsidy is cancelled.
I think you should keep in mind that like deficit spending or any other program of income transfer, any hiring assistance program MUST be temporary in nature. When it becomes permanent it does in fact have a very real distorting effect on the economy. A good example in another area, illustrating the corrosive effect of permanent subsidies would be agricultural price supports. They are constructed to give the very largest farmers a permanent advantage over small farmers and foreign producers. They make the fattest hogs fatter at the expense of millions of small family entrepreneurs. And they take our money to reward them for their dominance of the market. Such ag bills are in essence permanent fixtures of our federal system. From one year to the next they only change in the details. When a man is down, you’re supposed to give him help to get on his feet. You’re not supposed to carry him on your back for the rest of his life. Right?
I would hope that a trend be started in some future government that ALL subsidy and cash transfer programs have either a firm expiration date or a trigger that causes the subsidy to lapse, and that future legislators all understand the reason why that must be so. But such an intelligently directed Congress will never happen while we are led by Democrats and Republicans. Both parties have had their values hopelessly corrupted by cash subsidies coming from the other direction– distorting the very possibility of enacting effective and helpful legislation.
Your turn. Let’s hear it for the passive investor, whose mere money makes money. Or for whatever segment of the public whose cause you espouse. I’m for labor because we were the ones who built America. Really. You guys just get to use it as a good place to get rich in.
The principal sector responsible for new job creation is small businesses– those employing fewer than 25 people. And currently they pay an inordinate proportion of taxes on a state and federal level. They would be well served by returning our largest corporations to the tax rolls– at least so they were paying as much in taxes as individuals. The breaks these giants enjoy shield billions in income from taxation.
Or a better solution would be to give generous tax cuts to small businesses(and everybody else for that matter)…In fact we would do best to eleminate income taxes altogether….
Solution to problems that you bring up is simple. Stop theft through income tax. This is fair to everyone, and is also just because we stop stealing. No need for tax credits at all, you just get rid of taxes. Corps get money through capital gains (15 % tax) and they get more now, but Small Business which is primarily paying at a 40% tax rate through income tax has an even bigger cut.
Of course you have to dump a lot of wasteful welfare programs and national “defense” bases abroad but you didn’t need these things anyway, they were actually just agitating the whole world in the first place.
The reason that American workers haven’t been able to get all of the increases in productivity is due to
1) Not all of those increases were due to workers, they were due to machines, computers, etc. Those machines had to be purchased at a cost, and they have to be replaced occasionally too.
2) Inflation causes regular rises in stock market and commodity prices allowing some speculators to make more than they otherwise would. Speculators serve important market functions, but regular inflation tends to benefit them since it makes selling high easier.
It’s impossible to take either of you seriously. No taxes? That means no government. How much better do you think our affairs will be facilitated when we descend to the level of Somalia, or Haiti?
Seriously. Have either of you ever given much thought to what America would look like if there were no government?
Michael,
Taxation is coercive dispossession of property where there was no prior agreement or obligation to pay. There is no exchange of value between the government and the citizen when tax is levied. Such coercive dispossession of property with no concomitant exchange of value is robbery. Hence, taxation is robbery.
Why is it so difficult for you to understand this? Or do you belong to the “Pay taxes or get out of the country” crowd? You must!!!
That apart, what makes you think that the situation in Somalia or Haiti is a result of lack of government? I am somehow prone to thinking that those problems are an outcome of the level of evolution of society out there. Care to lay out the reasoning that goes behind the “If government had been there…..” line of thinking?
Why do people like you predictably make the same mistake of bringing up SOMALIA and HAITI every time anyone at all says (or even implies) Anarchy?
Bala– I’m not married to using Somalia and Haiti as examples of anarchic societies. Give me an example of some post-statist society that formerly (when it was statist) enjoyed an advanced technological way of life. Got any?
Also the following is not so:
“Taxation is coercive dispossession of property where there was no prior agreement or obligation to pay. There is no exchange of value between the government and the citizen when tax is levied.”
Do I really have to go over the framework one enjoys when he puts his base of operations in the USA, as opposed to a place like Fiji, with its rudimentary state, and its road grid built of crushed coral? Don’t you get to work out of the most prosperous economic environment currently in existence? Who do you think puts the infrastructure we use into place? You get a good return on investment when you base your business here.
Or, move to Fiji. Or, whichever place you were going to compare us to, which has no organized government but is incomparably superior?
“Why is it so difficult for you to understand this? Or do you belong to the “Pay taxes or get out of the country” crowd? You must!!!”
Those are your choices. I too believe in free will. And if you persist in staying here, only expecting different results, you adhere to the famous definition of insanity.
The US government is not especially popular. But compared to no government, I think you’ll find it is very popular indeed. Plus, there are a great many reasons to expect that our government, if demanded by a fraction of the electorate, will not go quietly into the night. So don’t wait up for it. What we have, for one thing, is a deeply entrenched national security establishment. And if they failed to cave in to the Soviets, I think they’re highly unlikely to commit harakiri because a gaggle of irate Austrians demand it.
Think of taxation as being protection money. You pay to protect yourself from the things that would happen to you if there were no protections, and you lived in a totally free jungle.
Come to think of it, I can come up with an example of a highly organized system that collapsed, leaving nothing but free market principles. Post-Soviet Russia. Instantly, all the national treasures (oil and gas, coal, minerals, etc) were stolen by gangsters. Then for a period the gangsters battled among themselves until we had a handful of winners and a number of losers, like Mikhail Khodorkovsky. Then the winners joined together to swear fealty to the new government: that of the Federal Security Bureau.
Is Russia’s example to serve as our model? The general public there is demonstrably more impoverished than they ever were under the old czars, the Communist ones.
It’s impossible to take either of you seriously. No taxes? That means no government. How much better do you think our affairs will be facilitated when we descend to the level of Somalia, or Haiti?
Seriously. Have either of you ever given much thought to what America would look like if there were no government?
I’m pretty sure I specified no INCOME tax. I dont consider myself anarcho-capatalist.
Thinkalot– Let’s think about this one. If you posit that we need a government, and you admit that imposes a need for funding, we’re making progress. It just means you don’t like a personal income tax. So if we leave federal and state income taxes off the table, that leaves import duties, excise taxes, property taxes and sales taxes, to fund the various levels of government.
The first raises the prices of all imports, imposing a sharp rise in the cost of living on everyone as so much of what we buy is now imported. The advantage is that it would stimulate job creation here. The disadvantage is that it is a classically regressive tax. It would tax the most, people who spend more than they earn. Next, it would tax those who spend everything they earn. Who gets off lightest? Those of us who have the most money and who could most afford to be taxed… but who spend far less than they earn.
And finally, what makes this approach unfeasible? The fact that conservative Rs and Ds (the people who run the government) have based the nation’s business plan on a neoliberal trade model. And that presupposes that all duties are forbidden under our trade agreements. If we abrogate those, we’re on our way to becoming as poor as all the other nations. Our plan for economic dominance falls apart.
Okay, excise taxes. Could we fund government on sin taxes, and make tobacco and dope smokers, cocaine sniffers and alcoholic drink imbibers pay our freight? Only, IMO, to a very limited extent. Maybe a gasoline tax, or a therm tax on all energy use. But I don’t think that’s going to be very popular with the voters.
Likewise I think extending the lottery and allowing wholesale gambling of every variety to raise funds for the government is only of a limited benefit. That’s a little bit like holding a bake sale. And value-added taxes, also regressive, are something nobody really understands but everyone instinctively distrusts. It’s another kind of sales tax.
All these other forms tax the poorest among us the most. And these are the people who are receiving the least from their government. So as a nation we’ve tacitly accepted the premise that any tax, to be fair, has to be progressive. That is, graduated so that the greatest benefactors pay the most.
Now your turn. Tell me about a fair tax.
‘So you are talking about giving people “free” money, taken from other people, which artificially reduces the cost of employment?’
Actually, there are more ways of skinning the cat, e.g. the one I described here. And it’s not about artificially reducing it but about offsetting the artificial burdens that are already there.
‘You can’t say it produces no new externalities because by subsidizing one market place there is more consumption of capital taking place due to spending/etc. that otherwise would not have taken place” Instead of free choices now you are taking from everyone via inflation (printing money to pay the subsidies) or taxes (stealing from those who rightfully earned the money).’
Wrong – because it’s about undoing the effects of externalities that are already there. The analysis done by Professor Kim Swales of the University of Strathclyde and his colleagues indicates that not only would employment go up, GDP would too (by about half as much in percentage terms).
“By artificially inflating the wages in the industry and reducing costs of employment the government would induce these industries to take on more employees than they could support absent the change”.
Yes – that’s the point of fixing the externality.
“Certainly it would result in higher employment in the short term for those industries, but at the expense of others”.
But, why allow the current artificial bias towards them to continue, when undoing it actually improves GDP as well?
“If the government was to ever take the money out of the system it would not be sustainable.”
That’s incorrect, since there is a GDP gain. The tax break approach doesn’t even have transitional outflows that might kill off a direct subsidy approach before the gains came about.
“Going down this path of sustaining some industries with additional subsidies like this inevitably leads to special favors in other areas as lobbyists from other industries ask for the same”.
Only, they couldn’t argue it on the grounds of being Pigovian subsidies, i.e. of removing imperfections.
“Wage subsidies are not a solution because there is no problem. Those who seek employment but can’t obtain it a price can seek it elsewhere or train and learn to take another job. If there are too many workers and not enough employers it’s probably because of malinvestment created by subsidies or injections of cheap credit in the first place. Your cure for market imperfections is the cause of the problem.”
That is just denial; the matter has been seriously researched. You might also want to read up about the work in this area of Nobel winner Professor Edmund S. Phelps, McVickar Professor of Political Economy at Columbia University.
What externalities were you referring to originally? If this has to do with variable taxation or somesuch my proposal would be end that boost to corps over small business by ending taxes altogether, because my view is that taxation is theft. Same with many regulations that small businesses can’t afford.
Your plan might work for keeping around immoral taxes, but it also may very well create incentives you didn’t plan on. I don’t trust analysis of this style for reasons I’ve already stated elsewhere here. It’s not that it cannot work at all, but that it tends to work to some degree and also produce other unintended consequences. The fair tax for example has analysis that says x, y, and z about increasing investment and growth and is also theoretically more fair to small businesses vs corps.
Either one of these policies sounds great on paper to correct the externalities but there is also another problem. Who is going to pass the policy? Oh… Congress. Gotcha, well, I am pretty sure that they are going to find ways on both sides of the isle to make this serve their own interests. Only unionized small businesses might get funds or those who pay a “living wage” etc. This is a big reason I don’t like this kind of plan at all, even if I were willing to go along with correcting the externality.
Our government is spending too much money. That must end. If China ever wises up to the fact it’s been giving us cheap goods at the expense of it’s own people our consumer prices will increase tremendously. Combine this with the looming debt and it is clear that the government has been trying to pay too many off for too long.
The most important thing we can do is cut spending to the bone, and then taxes can go along with that removing this kind of unfairness. I am doubtful that we will do this willingly in the current environment.
“What externalities were you referring to originally?”
My apologies, I thought you had had the opportunity to follow up the linked material.
The underlying externality is “Vagrancy Costs”, which spread the burden of having unemployed people without enough private resources to fend for themselves onto everybody else, by providing a breeding ground for crimes of necessity if nothing else. Developed countries have been buying this off one way or another since at least the Elizabethan Poor Laws, and more recently the Bismarckian welfare state, but that only rearranges it as the tax burden of funding unemployment benefits that falls on everybody else (details vary from country to country).
“Your plan might work for keeping around immoral taxes, but it also may very well create incentives you didn’t plan on. I don’t trust analysis of this style for reasons I’ve already stated elsewhere here. It’s not that it cannot work at all, but that it tends to work to some degree and also produce other unintended consequences.”
That’s why I’ve tried to get preliminary thorough studies done rather than simply recommending such policies directly, e.g. here.
“Either one of these policies sounds great on paper to correct the externalities but there is also another problem. Who is going to pass the policy? Oh… Congress.”
No, Parliament. Although, of course, politicians are structured never to solve problems but only to keep them simmering so they keep a captive pool of people dependent on them for palliative measures.
“The most important thing we can do is cut spending to the bone, and then taxes can go along with that removing this kind of unfairness. I am doubtful that we will do this willingly in the current environment.”
That wouldn’t be enough to end the externalities that promote unemployment. My own view is that what is described at those links would be a good first transitional step, but an ultimate goal not involving the state could be something rather more Distributist, i.e. with people having enough private resources that they could all price themselves into work at a top up wage rather than a living wage (which wouldn’t let them all get work).
Yes, I’m afraid the only thing we can do at the moment is position ourselves financially so we can weather the storm. Unfortunately, there is very little point in relying on the masses to actually catch on in time. As a student of Austrian economics and as a student currently on a college campus, the one thing I’ve learned is to focus on yourself and don’t worry about others. Once you get past that point of trying to convince others, your focus becomes laser-like.
Boy am I glad I go to George Mason University as an econ major. Odds are if I didn’t I’d be an idiot.
Bonehead Bernanke Acts DUMBfounded!
He wonders: Why is there a gold rally when there is no inflation? The numbers fed to the American public from the national statistic bureau indicate that there is no inflation!!!
Here’s a better question for you to ask, Ben: Isn’t our propaganda working?
In a nutshell there is a gold rally because there is not only inflation but we are on the verge of hyperinflation and the Federal Reserve, under the narcissistic leadership of Helicopter Ben, is about to destroy the dollar.
Here is what it all means Mr. Bonehead Ben Bernanke: more and more people know that you are a liar and a pawn of the unConstitutional coup. Your tenure as the head counterfeiter will make you the laughing stock of the world and surely that won’t be good for your narcissism.
Some others may not laugh but instead seek retribution. Either way, people are despising you more and more. That is what happens when you are a crook and a charlatan.
Today’s howler.
“The Labor Department said new claims for unemployment fell by 3,000 to a seasonally adjusted 456,000. While that figure fell short of economists’ forecast, traders were heartened by numbers showing total claims last week dropped by the largest amount in almost a year. Total unemployment benefit rolls fell by 255,000 to 4.5 million.
On its face, the drop is good news but there it also could indicate that people have run out of their state benefits and are moving to longer-term federal benefits.”
So, if you run out of State benefits and are receiving Federal Benefits (which run 99 weeks), you are no longer considered as being unemployed?
Doug,
…Prices are increasing at nearly ten percent a year, but the Bureau of Labor statistics claims prices are flat….
If you believe that consumer prices are rising at nearly ten percent a year, there needs to be some evidence. It certainly doesn’t seem that way to me. I can buy the same new car model for less in 2010 than I paid in 2004. My medical insurance premium just went up by its largest percentage in years, but it was only a 6% rise. It is likely that many significant commidity price rises can be identified over an appropriate time interval, but that’s often true. In the 80′s high price inflation was accompanied by the availability of income investments bearing double digit interest rates.
Regards, Don
I agree, and I don’t trust the numbers published by shadowstats. I didn’t experience that level of price increase in the last 10 years. @ 10% a year, price would double every 7 years. My rent hasn’t doubled, cost of an automobile hasn’t. My cellphone are the same as it was 10 years ago and I get a lot more minutes and features. I can say the same about all the electronic stuff that I buy, and about clothes and apparel. My utilities haven’t changed that much. Price of Food and gasoline have increased quite a bit, but I don’t think it has doubled over the last 10, may be gasoline, but definitely not food. Salaries have increased but not doubled. Interest rates have been flat to down. Cost of air travel hasn’t gone up that much.
The thrust of this article is that the Austrian answers to these questions are, by definition, “right”. While the progressive answers are, of course, “wrong”. But when you search for the proofs of these assertions, they often end up just being someone’s opinion.
Let’s try one. “Prices are increasing at nearly ten percent a year, but the Bureau of Labor statistics claims prices are flat.”
Your two biggest purchases are your home and your car. The cost of homes nearly everywhere in the country has plummeted over the past several years, which you may have heard about. Cars? About the same as last year. Certainly not ten percent more.
Food prices increased very seriously in 2007-08. Now? Not so much. They’ve leveled off.
How about gasoline? Today? Maybe 5% more than a year ago. But less than the year before, when we had four dollar gas.
http://www.eia.doe.gov/petroleum/data_publications/wrgp/mogas_home_page.html
So what’s left? Which major prices have gone up “nearly ten percent”? Any? Yet we carry that pseudo-information away in our minds, because it appeals to what we want to believe. And it makes sense within our mental construct of how the economy works.
Let’s look at this, and see whether either answer can be said to be “right” or “wrong”:
“Compiling the scores to eight simple economics questions, the authors found that respondents with college degrees had an average of 3 of 8 questions wrong. And with particular questions like, “Minimum wage laws raise unemployment” and “Third-world workers working for American companies overseas are being exploited” half the college educated gave the incorrect answer. Even the group that only finished high school or less did better on the minimum wage question.”
I think it’s a matter of opinion. A very good case can be made (and has been, in many, many scholarly papers) for minimum wage laws raising unemployment. Because when you’re looking at the bottom of the wage scale some of these jobs will in fact disappear. A broom jockey is worth his pay at $4.50. But maybe not at $8.00. So you don’t hire him.
Let’s look at the other end of the scale, though. Identify all the states with the highest minimum wage rates. See how they compare for unemployment.
Washington has the highest minimum wage in the country ($8.55/hr), and an unemployment rate of 9.2%. Whereas Georgia has one of the lowest minimums, $5.15/hr. And Georgia’s unemployment rate stands at 10.4%. Compare these two charts closely and you’ll see there’s not much linkage either way between wage rates and unemployment:
http://www.dol.gov/whd/minwage/america.htm
http://www.bls.gov/web/laus/laumstrk.htm
So there’s really no ‘correct’ answer. We walk away believing the one we want to believe. Now let’s look at this one: “Third-world workers working for American companies overseas are being exploited”.
That’s purely a matter of opinion, and a dumb way to phrase the question to begin with. Third world workers flock to take crappy jobs because there’s no alternative. They know their jobs are crappy but it beats unemployment. So in one sense they’re certainly being exploited. In another sense, they’re doing better than they were before. True and false are both correct.
One thing we do know. The bad jobs of the world are fleeing America and landing at the bottom of the developing world. In fact they’re even leaving China. Increasingly, Chinese wage rates are exceeding a dollar an hour, and jobs are going instead to Myanmar, Vietnam, Botswana and hellholes even more obscure. Because those places still have people desperate enough to take them. And in a sense it’s a very good thing those jobs are migrating there.
So maybe we can just repeal our minimum wage laws. Then we can be the recipient of more jobs, like those people have in Botswana. These are all complicated issues, and not amenable to easy, short answers. And they certainly can’t be encapsulated by true/false responses.
Michael,
I agree with you on the inflation story you just posted. However, your comments on minimum wage is ridiculous.
“Washington has the highest minimum wage in the country ($8.55/hr), and an unemployment rate of 9.2%. Whereas Georgia has one of the lowest minimums, $5.15/hr. And Georgia’s unemployment rate stands at 10.4%. Compare these two charts closely and you’ll see there’s not much linkage either way between wage rates and unemployment:”
The spectrum of wages in different states from the lowest to the highest is very different. The same jobs in Georgia and California will be paid very different wages. So the effect of same nominal minimum wage is not the same in two different places. If they raise the minimum wage to $8.55 in a sub-saharn African country, nearly everyone will be unemployed.
That in fact is an excellent reason not to raise the minimum wage in some sub-Saharan country to $8.55. That would be stupid. As stupid, in fact, as raising the minimum here to $100.
One does not demolish an argument by reducing it to a reductio ad absurdum. That does no use. Instead, if you want to undermine the principle, take it to an area where it works best and see whether it then falls short.
Raising the minimum in places where the economy is relatively healthy to begin with stimulates an increase in consumption. And as our economy is based on consumption, has the effect of raising all ships. The small number of jobs eliminated because an employer can’t afford the new wage is relatively negligible. New jobs are created to take full advantage of the increase in business volume.
And even if that increase were just to take the form of more beer being sold, more cable TV upgrades and an increase in lottery revenues, isn’t that still an increase in business activity? However it goes further than that. You’ll see more vacant rental properties being put on a cash basis, and more cheap furniture being sold to fill those apartments. That’s good stuff.
Let me show you something from the small business man’s point of view. He sees millions being given away at the state level in the form of inducements for major corporations to move there. So they pay little or nothing in the way of taxes. And he sees low wage people also being taxed very little. That leaves him, in the middle, with the burden of paying for everybody.
Poll small business people around here and you won’t find many who say we should hollow out state government so it offers no services. Instead he’ll tell you inducements and breaks to major corporations are depriving us of what would otherwise be our best source of revenue. Then, if he didn’t have the burden of everyone else on his back, he’d be able to hire more help and better help.
He’d also remind you that it’s a demonstrable fact: most new job creation is in companies with fewer than 25 employees. They lie at the heart of our economy, while most tax breaks are given to major corporations with greater clout. And they pass on their advantages to the very small number of people at the top, while employing as few a number of new hires as is possible.
It seems like you think you are arguing with conservative Republicans here, but you are not. Taxation is theft, regardless of whether it’s from corps or from small business. I agree that if states are taxing small business more than corps it’s bad, but that’s not what anyone here is saying.
Your other fault is you equate money with production. You believe that by giving more money to people that they will get more goods, but this is only true for the beneficiaries of the additional funds. Everyone else has less goods to get. All you’ve done by stealing from the rich and giving to the poor is increase prices of goods. You haven’t made new economic activity. Whether the amount of dollars available is 1 trillion or 1 billion it doesn’t make production different based solely on that. Supply creates demand, not the other way around.
Lets say you have a merchant who produces 100 televisions. If the amount of money that the populace has that is willing to buy TVs (the reason you don’t want the rich to have the money is he has what he needs, so he has a lower marginal propensity to spend) is less because they weren’t given higher wages, he simply has to accept a lower price for his TVs. And if he gets less, he pays his laborers less in nominal terms, but in real terms they still get the same amount of goods for the same reason that he sold his TVs for less.
The reason that this is worse than not taking the money is because not everyone receives the extra money. Only the businesses employing people for minimum wage get the extra money through the subsidy initially. It takes time for the inflation of wages and prices to make itself through the entire market, so during this time you have people who get more than they otherwise would have. The long run prices on goods increase because those goods are scarce, and the middle class gets less than it would have because the poor got more. The rich aren’t poorer in real terms (according to you, because they didn’t need to spend anyway), but the ones in the middle are. What you have done is provided incentives for people not to work in the middle.
This is the reason that welfare programs and subsidies encourage people not to try. Why become middle class if you have to work harder to get less, while those who work less get more? By making poverty a comfortable position you ensure poverty continues. It’s the reason the government’s attempts to make a war on poverty have failed miserably. And those attempts are going to make the country bankrupt in the long run.
“You believe that by giving more money to people that they will get more goods, but this is only true for the beneficiaries of the additional funds. Everyone else has less goods to get. All you’ve done by stealing from the rich and giving to the poor is increase prices of goods. You haven’t made new economic activity. Whether the amount of dollars available is 1 trillion or 1 billion it doesn’t make production different based solely on that.”
Although that should be the presumption, it isn’t always so. As I pointed out earlier, it depends (on whether it’s increasing or decreasing market imperfections).
“The reason that this is worse than not taking the money is because not everyone receives the extra money. Only the businesses employing people for minimum wage get the extra money through the subsidy initially. It takes time for the inflation of wages and prices to make itself through the entire market, so during this time you have people who get more than they otherwise would have. The long run prices on goods increase because those goods are scarce, and the middle class gets less than it would have because the poor got more. The rich aren’t poorer in real terms (according to you, because they didn’t need to spend anyway), but the ones in the middle are. What you have done is provided incentives for people not to work in the middle.”
Again, it depends on how things are structured. Granted, they are currently set up in tis distorting way, but they need not be.
“This is the reason that welfare programs and subsidies encourage people not to try. Why become middle class if you have to work harder to get less, while those who work less get more? By making poverty a comfortable position you ensure poverty continues. It’s the reason the government’s attempts to make a war on poverty have failed miserably. And those attempts are going to make the country bankrupt in the long run.”
That’s assuming that only one side of the supply and demand for labour matters. This omits from the discussion those things that are going on at the demand end, i.e. employers.
I responded to this above, and I applaud your goal of removing externalities. My problems are basically
1) It would be distorted by the Congressional process with lobbyists, etc. getting their own way with it especially over time.
2) It has to be done “properly” (right amount of subsidy, etc.) which is almost impossible to calculate accurately in every case
3) It produces incentives for businesses to figure out how they can get the subsidy, but still maintain other advantages this is intended to correct. They can try to do this through lobbying or inventive legal procedures or a combination of both.
If the plan is done and all corps are lobbying against it I’d be inclined to trust it more, but I imagine I’d find a few corps who were mysteriously in support of the new law, knowing they had ways to get their share out of it. This is common with many new regulations.
This also requires an increase in administration cost on the government side, since these tax credits/subsidies would have to be handled. This creates another issue of possible fraud.
Thanks for focusing in on the core issues.
1. “Taxation is theft, regardless of whether it’s from corps or from small business.”
Extrapolating from that beginning, we can have no government without compulsory taxation. People won’t fund it voluntarily, even if they agree they benefit from its services. Ergo, government in principle is not worth the expense.
I can see where this belief is concordant with those people who want to carry their guns everywhere. They’d like to return to the Wild West days, where every man was his own law and none of the intersections had traffic lights.
The only way I can respond is to say I disagree. Totally. A rich land without a government is one that’s soon taken over by the bandits. And the bandit gangs fight one another over possession, until its riches have been utterly destroyed.
Take that classic example of a land without government: Afghanistan. Hard to recall that it used to be the richest entrepot in Central Asia. Kandahar, the old capital, lay at the crossroads of the various silk roads connecting Rome to Cathay. But as a free and lawless land, where no man held dominance over his brother, it soon fell prey to the Kushans, the Indo-Sassanids, the Kabul Shahi, the Saffarids, the Samanids, the Ghaznavids, the Ghurids, the Kartids, the Timurids, the Mughals, the Hotakis and the Durranis. And then, of course, the British, the Soviets, the Islamists and then the Americans. So by now the place is pretty poor, its wealth long spent and the very smithereens of its civilization pounded into smaller dust and the dust into atoms.
So then– who needs a government? Why not just let the big fish fight over our wealth until it no longer remains? Then we can maybe start afresh, as the Afghans will have to do some day, once everyone else has given up and gone home.
Even in the United States there was not always taxation. There were things like tariffs, fees paid for services rendered, etc. that ran the government. It was not until the 20th century that an income tax amendment was passed. So no, you are not correct to say that taxation is an absolute necessity for government.
Many services (police, fire, courts, etc.) can be voluntarily paid for. People want security, they can pay fair rates for their services without taxation. Some of these things are even paid for now voluntarily in some areas. Wherever possible I am for extending this. The government should only be managing what the people decide it is best for it to manage, but the people can only provide to the government the power they are willing to provide.
If all of those people who now say they believe so much in government were as charitable with their own money as they are with the money of other people, we’d already be over this problem. There’d be no question that George Soros and many others have plenty to keep up the efficient government. Obviously, their charity only goes as far as they have to speak words.
If we trimmed our federal budget down to the bone, and did away with our whole project to subdue the world militarily, we might be able to come up with a viable trillion dollar budget.
Q: do you think a fiscal plan would be viable that relied on levying a trillion dollars a year on imports, plus dog licensing fees? I don’t.
Core issue #2:
“Your other fault is you equate money with production. You believe that by giving more money to people that they will get more goods, but this is only true for the beneficiaries of the additional funds. Everyone else has less goods to get. All you’ve done by stealing from the rich and giving to the poor is increase prices of goods.”
This argument assumes there is only a finite amount of consumer goods in existence. That in zero-sum fashion, the more I’m able to buy, the less there are for you.
If that’s your belief, read no further.
The purchase of goods offered for sale stimulates the production of more goods. That’s because the person purveying those goods on sale has been rewarded by profit. And he seeks even more of the stuff, so he tried to reduplicate his success. Sorry if I sound like I’m making this over-simple. I’m talking to someone who tells me that everyone who doesn’t get equal subsidies (in our example the employed person, say, who doesn’t get the subsidy of unemployment insurance payments) can only buy fewer items.
It is a fallacy that any amount of payment to anyone directly leads to price inflation (I use that to distinguish the term from money-supply inflation). Obviously if you give one million dollars to every man, woman and child in the country, prices will go up. There’s no way to increase production so it can absorb such a glut of cash in good time. But that’s a heavy-handed argument, reducing that approach to an absurdity. It would be like the argument that raising the minimum wage to $100 would be a distortion. (Of course it would.)
What modest payments to families temporarily in need does is return to them the ability to be able to buy some of the necessities of life they could afford when they were employed. Such payments should of course be temporary and limited. But the have a practical effect as well as a humanitarian purpose. They keep employment up by keeping purchasing up. That is, unless you do not subscribe to the consumer-based model of our economic engine. If no one needs to buy our stuff, and it’s just sufficient to make it– well, then, I guess I’m wrong.
Money does not “equal” production. Purchasing power stimulates production. Possibly the dumbest theory I’ve ever seen in print on the web has been Say’s Law. If your theoretical framework relies on this in any way I think you’re going to have an uphill struggle convincing me it holds any merit. But if you can make it make sense, please give it a shot.
At any given moment, there is a finite amount of scarce resources. That is how they are defined, there is not enough of them to satisfy everyone’s need. The only way to increase the worth of those resources is to utilise them in production and/or trade.
None of (non-exhaustive list):
- taxation
- legal tender laws
- minimum wage laws
- business regulation
- making some trades illegal
- lending and borrowing
can change this. The only thing those activities cause is to redistribute the outputs and change the prices. They do not “create” anything.
Micheal:
How much do you actually KNOW about Say’s Law? Do you know anything beyond ‘Supply creates its own demand’ ?
I ask, because I agree that little statement by itself isnt the best way of explaning what Say was trying to describe.
What Say’s law actually says(and even this is somewhat simplified) is that in order for an indvidual to be able to ‘demand’ something, he must first supply something that can be traded. The whole purpose of manufactoring, business enterprises, or offering of labor is to create a supply of goods and/or services that can in turn be traded for other goods/services. The use of money slightly complicates this process, but the general principal remains the same: On supplies a good or service in exchange for money which in turn is used to ‘demand’ other goods/services.
If you extrapolate this to the economy as a whole, then it can be seen that the ammount of goods ‘supplied’ will always equal the ammount ‘demanded’. At least in ideal conditions, government actions can(and do) distort the economy.
Heres a few articles on Say’s Law, mostly from right here on Misis.org:
http://mises.org/daily/1042
http://mises.org/daily/1042
http://en.wikipedia.org/wiki/Say's_law#Say.27s_Law_as_a_theoretical_point_of_departure
I’d be curious to hear what you think…
To your core issue #2, the unseen effects of that money not going elsewhere are where you are failing here. And even if the money doesn’t go elsewhere (is horded), it simply results in lower prices of goods.
The only way in which your dollars stimulate production of future goods is they stimulate production in one area over/against another area. There is no positive feedback loop like you imagine. There is a positive feedback loop from where you spend, but a negative feedback loop for where those resources/capital/etc. otherwise would have been used.
“Supply creates demand, not the other way around. Lets say you have a merchant who produces 100 televisions…”
And no one wants to buy them. Or maybe no one can afford to buy them. Then what?
Say’s Law is just plain dumb. No other way to describe it. I am amazed at the amount of crapola otherwise intelligent sounding people can swallow.
Thinkalot helpfully adds this: “What Say’s law actually says(and even this is somewhat simplified) is that in order for an indvidual to be able to ‘demand’ something, he must first supply something that can be traded. The whole purpose of manufactoring, business enterprises, or offering of labor is to create a supply of goods and/or services that can in turn be traded for other goods/services.”
What the customer supplies is cash. Or, if he uses a credit card, his promise to pay. Under your interpretation, a penniless person, or a paraplegic, must starve. Because he cannot work to provide a good or service. He only holds something universally acceptable as an item of exchange in his hand: cash.
And Matthew: Giving someone temporarily fallen on hard times a pittance to tide them over, or giving someone working for an inadequate wage (don’t ask me to describe THAT to you) a small raise is NOT “encouraging people not to try”. People out of work are amply motivated to get back to work, I assure you.
Also, raising the minimum by a dollar will certainly not make manufacturers raise their prices. We have individuals in this country who don’t just own a billion dollars, they PULL IN a billion dollars each year. Have any basic prices risen because of them? I maintain they have not.
I’m thinking you make the error of looking at the world in manichean terms: either one must guarantee to pay ALL someone’s bills for the rest of his natural life, OR one should never give anyone anything, not even a dime. There’s no in between.
Plus, moderate amounts of income shifting toward people with little money does not necessarily imply that prices must ratchet upward, out of control. There’s no need to panic. Your theory of price inflation only works when ridiculous sums of money are added to sectors of the economy– such as the money that has gone toward the defense industry (now THERE’S a serious case of demand run amok, and runaway price inflation). Our pricing scale does not run rampant when you give the bag boy at the grocery $8.55 instead of $6.50. Really it doesn’t.
I’m just not getting the quality of discourse I was looking for here. I came with the assumption that as everyone here was apparently conversant with economic issues, they would be able to explain themselves without having to resort to these sorts of arguments. Come, on, people! Get up to speed.
Michael, you arrive at your conclusions without ever asking if they are correct.
I never said that theoretical small welfare programs destroy the economy, or make growth so much slower as to make us useless. What I do say is that the welfare programs you actually end up getting due to the way the Congressional and Democratic process works are much bigger than what you initially plan on.
Rather than contesting this, you make me out as someone who automatically believes that even the smallest changes in wages will destroy the economy. That’s never what I said. The reason I said I was against it is that those type of incentives lead somewhere, and it’s not somewhere good. It’s the reason Hayek wrote the Road to Serfdom.
Those policies look nice on the cover, but they cause unintended consequences and they almost always move to get bigger over time, not smaller. How fast they get bigger is entirely dependent on a lot of factors, but all you have to do is look at where the country has gone over the last 50 years to find that we started with just minimum wage and ending child labor, to a myriad of other social welfare programs that are now, yes, indeed bankrupting us. If we had stayed with just the minimum wage maybe it’d not be horrible for us, but I don’t see how it makes things truly better like you imagine, so my question is why have it at all?
I get that you don’t like the idea that supply starts before demand, but I don’t understand your “crapola” either. Circular flow is to me fundamentally insane to the same degree. To me it only makes sense if you believe production is based on the amount of money in an economy. I get the theory behind it, that someone can “trick” the economy into continuing production before the bust levels, but this assumes that the bust happened for no good reason, and that the inflation doesn’t cause malinvestment, which to me is abundantly clear just looking at recent history.
Thanks for clarifying. I’d half made up my mind you had just lost your wits.
“I never said that theoretical small welfare programs destroy the economy, or make growth so much slower as to make us useless. What I do say is that the welfare programs you actually end up getting due to the way the Congressional and Democratic process works are much bigger than what you initially plan on.”
The open-ended welfare program we had began in 1965– and ended under Clinton in 1995. Since then, programs like TANF have been both limited and effective. In most states programs to mothers in need lapse after two years. And there has never been welfare for single males.
Food stamps have one goal: to allow families without enough money to eat properly to eat properly. The best administered food stamp programs entail compulsory courses in nutrition.
Unemployment insurance is just that. Everyone I meet in places like this has some apocryphal horror tale about bums living off UI all their lives. But in my experience people use the money to tide them over, during periods when it normally takes months of pounding the pavement to find another job. It’s just like that welfare mom driving a Cadillac. Somewhere in America there probably is one. But if so, she’s not an effective refutation of the fact that for the most part, temporary assistance works as designed.
I’ve also noticed that most of the attitudes people in such places carry around inside their heads were formed back in the 1960s and 70s. You know, life is change. We all need to move forward and update our view of the world every few years. What might have been true then isn’t necessarily the case now.
But in short, if a program isn’t perfect you perfect it. And when it’s no longer needed, you discontinue it. Having come from private industry, I share your low opinion of government efficiency. But I don’t share the view that therefore we should not have a government. What we should do is work to make a better one.
More later. I have to go now.
The problem Michael is that you are comparing apples and oranges here on minimum wage rates. Sure, some states may have lower unemployment but a higher minimum wage, but that’s not the argument. The argument is that their unemployment is higher than it would otherwise be absent the minimum wage, not that their unemployment is higher than some other state where many fundamentals are different (cost of living, local jobs, unions). There is also the fact that long-term discouraged workers aren’t included in the figures as well. So there could be many people who aren’t showing up in states or are choosing not to work.
Ex: The minimum wage affects teenagers and those trying to find their first job the most. It isn’t something people tend to stay doing their whole lives, and so most of those finding their first job didn’t need it to live but to gain experience.
I agree with you about the inflation rate here. That isn’t what is happening right now, but I do think it’s going to go up quite a bit in the future.
“The argument is that their unemployment is higher than it would otherwise be absent the minimum wage.”
That’s an untested thesis, Matthew. Whereas a close look at the charts for wage minima and for unemployment, by state, shows us there’s really no link at all. I’ll go with the demonstrable evidence over the untested thesis.
Want to test it? Find some states where unemployment was at U. Then there was an increase in the minimum. Following that, the unemployment rate grew to >U, while adjacent states with no increase stayed the same or dropped.
Then I’ll listen to you. I like data over theory, every time.
Empiricism is not a method that can be used to understand truth in social sciences like economics because there are so many things taking place that no human could keep up with all of them to explain every change in statistics (even the gathering of those statistics is based on methodologies that make assumptions).
Even if we were to conduct such an experiment with the minimum wage the economy in a state now vs what it is 2 or 3 years later is not the same. Maybe new technology was discovered allowing a new industry which increases productivity and wages in keeping with the new minimum rise?
Empiricism is useful when you can have a control group but you can never have this in economics.
Now, you might look at multiple states (like Scott did) and on average it’s true that those with higher minimum wages have higher unemployment. But this is not entirely fair, because just as I mentioned there are all kinds of reasons that that could be the case. Michigan, for example, is the home of the US auto industry. That doesn’t necessarily have anything to do with the minimum wage (but with the minimum wage-like unions).
The weight of the stats appears to show a connection, but this may or may not be true. It’s the reason you are replying to me rather than to Scott I assume. You think the one contradiction to the numbers (Washington) is reason enough deny the connection. That’s fair in my view, but I’m not sure if it is in yours, given your desire to prove things empirically.
“Empiricism is not a method that can be used to understand truth in social sciences like economics because there are so many things taking place that no human could keep up with all of them to explain every change in statistics (even the gathering of those statistics is based on methodologies that make assumptions).
Empirical methods work fine. Sure, we live in an n-factorial world, with complexities and repercussions everywhere. But if you change one input and there’s a direct result, that’s telling you something.
An analogy. Understanding the process of internal combustion calls for some study. But even if you know nothing, you can still step on the gas pedal and see whether this changes the state of the mechanism. Lots of people can drive just fine without knowing anything about torque, compression ratios, etc.
There is one experiment though, that HAS been conducted on an empirical basis, many times. And that is to do nothing. When the lower fraction on the intelligence scale has no viable future but to hold down unsatisfying jobs that don’t give them enough to live on, they turn to petty crime and drugs to fill the income gap. They have no other option. And that produces not only a social cost but a financial burden on the community at large. So as a practical matter (my experience has been in the practical realm, not the theoretical) I would bring up their incomes. It’s cheaper in the long run to go that route.
And I have worked with these people for years. The working bottom class individual keeps his nose clean whenever he holds down a job that can support him. But when he can’t live on its income he has to do something less socially useful than spending his life getting broker with each passing week. Because he is still a rational individual.
Our prisons are full of people only fit for menial work. If they could have afforded to live on menial salaries, most would not have found themselves there. And the cost of keeping someone incarcerated far exceeds any hike we might consider in the minimum wage.
BTW I liked Scott’s comment, and his approach to analysis. See my response, below.
Please provide examples for your empirical “nothing being done” experiments.
“Sure, we live in an n-factorial world, with complexities and repercussions everywhere. But if you change one input and there’s a direct result, that’s telling you something.”
You might just change one input, but other inputs or internal factors change that had nothing to do with you at all.
Your other words on this seem to have a lot to do with people’s situations who live on the minimum wage. I lived with a minimum wage myself, when it was $5.15 In my case I was able to do this because of family, but others could do it because of friends or fellow workers, etc. There are ways to make living and personal arrangements where costs can be met even at the minimum wage level. And yes, I believe that remains true even at the market-chosen minimum wage level.
There are a lot of artificial costs/burdens placed on the system by government taxation and regulation, repeal these and wages could rise naturally, without the need for government price floors.
I think I see the problem. If I give you real-life examples of economic activities and their consequences from my own experience, you won’t accept Them. They’re from outside your own experience.
Whereas if you read something theoretical from a source you consider trustworthy, and the formulation makes sense according to its internal logic, you don’t need any examples. It’s ‘true’.
So I’ll say it again. One lives in a stable situation, where none of the variables change. And one gets to know how that world works in some fine detail. So one then introduces a single change. And all of a sudden, other things change in that world. The way they change is a direct consequence of the one change you introduced.
This is pretty simple stuff for non-theoretical types. But the logic of theoretically based economics doesn’t always hold true out in the world. It works best when kept in the classroom.
Marxism also made an incredible amount of sense if you just followed the logic and didn’t try to apply it in real life.
“There are a lot of artificial costs/burdens placed on the system by government taxation and regulation, repeal these and wages could rise naturally, without the need for government price floors.”
Minimum wage recipients are below income taxation. What they pay is in payroll and sales taxes. Their employers can deduct their wages from gross profits. And what’s left of any cost increase can be passed through to customers.
Whereas if we remove the minimum wage laws, you and I both know the wages won’t rise. They’ll drop. Leaving people without any adequate means of support. So yes, we do need minimum wage laws. Just like we need workplace safety laws. And all the other laws we require to protect powerless workers from their powerful bosses.
The reason being is that a man who only has his own labor to trade can’t just refuse work because he can’t live on the two bucks an hour he’s being offered. Without that work he’s making zero dollars an hour. So some will take these jobs– and their bosses will enjoy the proceeds that come from raking off income from their paychecks. And others, depending on their leanings, will turn away from lawful work and toward crime.
I will return to the feudal argument, which you dislike because it applies. In the total absence of regulation, the lord of the manor will tell the peasant how much he’s going to get for his work. It will not be a negotiation. And he will set the rate just above the level where the peasant physically starves. The lord gets the rest.
We’ve come a long way since then. And if we have to fight that battle all over again, I believe that people with nothing to lose will do so.
The problem with your real life examples are that they represent only a subset of the reality and based on that you infer fallacious theories. Intentionally or not, you ignore a significant amount of causes and effects.
michael,
“Let’s look at the other end of the scale, though. Identify all the states with the highest minimum wage rates. See how they compare for unemployment.”
I don’t know if you are purposely lying or are just so set in your biases that you’ll find evidence where there is none. Let’s look at the state with the highest unemployment. Michigan, as of May, had the highest unemployment rate, at 14%. The minimum wage is $7.40. Nevada, the next state down, stands at 13.7%, with a minimum wage of $7.55, depending upon whether or not health insurance is provided. Both are above average. North Dakota, with an amazingly low 3.8%, and South Dakota at 4.7%, both have wage rates set to the federal minimum of $7.25. Most of the states with the highest minimum wages ($8 or more): Oregon, California, Masechussetts and DC, have unemployment higher than the national average. Washington state is the only one that I could see that was slightly below the average.
Please explain.
Hi, Scott– No, I’m not lying. That would be counterproductive– what I’m doing is trying to figure out how the machine works, not convince anyone of some false theory.
But I do like actual observations, and you’ve made some good ones. Michigan, of course, lies at the center of the Rust Belt. And so we wouldn’t be surprised to see it’s U rate as being the highest in the nation. In fact we’d assume the same was true in Pennsylvania and Ohio, regardless of any wage bottom.
Likewise I believe Nevada (really just Las Vegas, plus a handful of very small towns) crashed during the real estate collapse. Like Arizona, its economy was very heavily dependent on the Big Bubble. Which popped. So the boom towns of LV and Phoenix hit the skids.
The Dakotas have average wage minima and very low unemployment levels. I don’t know what to make of that other than that there are no new jobs up there, so their young people all move to Wyoming, to work in the oil and gas booms. That leaves only the people who already have jobs, and want to keep them.
In the interest of impartiality, I’ll join you in a search for states where the wages are high and jobs are disappearing. I do know that in the South, wages tend to stay below the national average and there are still few jobs in the poorer zip codes. While areas like Charlotte, Atlanta, Research Triangle, Huntsville and one or two others are characterised by low unemployment, high wages at the upper end, an increase in population as job seekers crowd in and educational levels that are well above average.
Fine tuning of the hypothesis we’re looking at would involve finding statistics for low-income workers and job seekers. Are they finding work in states like Washington? Or are they going to Wyoming, where just about everyone who wants to work can work?
I’d also look at why it happens that Oklahoma (#6) and Louisiana (#7) have such low unemployment rates. Both are conservative backwaters with a low wage structure, and Louisiana even has a lower minimum than the national average. Those two states would ostensibly support your thesis of a link. All the po’ folk have apparently found work.
So then, let’s give both of them to you, while I keep states like Washington and Massachusetts, with their higher MW’s and employment right around the national average. That’s why I didn’t say that states with high wage minima have demonstrably higher employment rates. I said there was no observable link one way or the other between the two phenomena.
Michael, you clearly equate empiricism and statistics with observability, but for the reasons I stated you can’t do that. There are more factors in these things than anyone can know on the aggregate side.
Honestly, simple anecdotes are more than useful enough to prove this is a fact. All you need is employers who have to raise wages due to the minimum going up and any layoffs that occur due to this reason. http://www.epionline.org/news_detail.cfm?rid=251 is a single example related to recent increases. Or you can talk to people who hire at the minimum wage and find out what that does for their business. It certainly doesn’t help them run. They have to increase prices on all of their goods to sustain it, and if they can’t do that due to consumer expectations or consumer incomes not going up, they are going to have to try to do more with less.
The simplest way to see this is imagine an increase in the minimum wage to 20$. Do you really say here that there is no link? You still are going to wait for an empirical analysis to make a decision on that? If you don’t wait, I think the principle you are holding out on is how much the minimum wage has to be to cause observable changes in the aggregate unemployment figure. However, as I said small changes aren’t observable in the figure because they are displayed primarily among long term discouraged workers (teenagers and others who don’t even try to enter the workplace).
All you have to do is look at the teenage or minority unemployment rates on the unskilled worker end to see that the minimum wage is destructive at it’s current level.
Sir while your arguments are impassioned they are none-the-less ostensibly flawed and seem to be based in a Marxian belief in the infallibility of untested, and therefore unstable, theory on which to build a working social model upon.
1.” you clearly equate empiricism and statistics with observability” ???
Yes, as a matter of fact we call that quaint phenomenon science. As economists it is the demonstrated and demonstratively repeatable link between cause and effect that drives the sustainability of economic models. To do otherwise would be to give equal credence to the “world is flat” gang. “Sure all the data points to an elliptical Earth, but who are you going to believe? My hunch based on a gut feeling that the world might be flat, or all those so called scientists and their math that proves empirically that the Earth must be closer to a sphere in shape in order to maintain its orbit”? I doubt tomorrow’s headlines will read “Fed says #@!% it and prints 10 trillion dollars”. They won’t do that because empirical observability shows what can happen if you flood the market with liquidity. The fact that you divorce yourself of the need for data to substantiate your proceeding hypothesis bodes ill for its success in real world economics. What is most troubling is you seem to boomerang back to the scientific model only a few short rambling sentences later.
2.”small changes aren’t observable in the figure because they are displayed primarily among long term discouraged workers (teenagers and others who don’t even try to enter the workplace).”?????
What? If small changes aren’t observable in the figure (sic) how are they displayed among long term discouraged workers? Do you really mean to infer that these changes in work force structure simply fall off into a statistical black hole for some unknown period of time only to reemerge at some hither to undisclosed future date that you call the “long term”? So while the data does not support your theory it is “unobservable”, but if and or when it does it is proof of your economic model?
Just for fun let’s take a look at some of that pesky data you seem to shun.
Ten Poorest countries in the world based on GDP per capita vs World Rank in Percent of Population below poverty line. (after all if low wages drive employment, at least in almost every case by your argument, we should find a direct connection between countries were the people’s real wages falling below subsistence levels drive higher than average GDP).
10. Afghanistan percent below poverty world rank 21/145 reported
9. Central African Republic n/a
8. Eritrea 22/145 reported
7. Niger 13/145 reported
6. Guinea-Bissau 32/145 reported
5. Somalia n/a
4. Liberia 4/145
3. Burundi 12/145
2. Congo n/a
1. Zimbabwe 11/145
Countries rated as n/a are known to have such futile government structures that data collection is virtually impossible (at least by CIA world fact book standards). Seems to be a little snag. If low wages drive economic growth why are the poorest countries (low GDP) in the world also among the highest percentile group with citizens living below even basic needs levels? What is more the US is rated as 125/145 with 12% below the poverty line. India has 205% more people by percentage below the poverty line for a rank of 89/145. With 379% more total people than the United States and more than twice as many people by percent below the poverty line, it would seem to reason by your argument that its wages are more “competitive” than America’s and thus free up more resources for investment. However, with a GDP per capita of a paltry 1,017 US Dollars it can muster only a 2% share when compared to the United States 2009 estimate of just under $48,000. If low wages are the main driver of job creation(and thus economic growth and by default increased GDP) why can’t we find it in the data? Afghanistan, ranked at number ten, is literally THOUSANDS of years older than the United States. Alexander the Great himself passed through this land, and yet with 3 times as many people below the poverty line it manages a meager 0.7% GDP of the US per capita. Thousands of years head start, low wages, advantageous trade routes, strong allocation of natural resources (esp. copper) and it produces virtually zero GDP. Could something else be at play when rating domestic growth/unemployment instead of just minimum wage and cash supply economics? Could a lack of transparent business practices, unstable government structure, military conquest, and a lack of national cohesion also play a role in your economic model Matthew? Your “all things being equal” approach runs into the same problem that Mr. Marx did when suggesting a workers Utopia, all things are never equal. Raising minimum wage in and of itself neither raises or lowers unemployment, a myriad of other factors MUST be accounted for. As Michael as eloquently pseudo eluded to economics is the practice of applying science to the wholly unscientific animal that is human. Your argument is best left for the fifteen second attention span of the average voter and the world of politics you claim to avoid in prior posts. Devoid of statistical truth and straight for the heart strings.
“…they are none-the-less ostensibly flawed and seem to be based in a Marxian belief in the infallibility of untested…”
Your view is that empirical data can be used in every situation to prove things, supposedly. I never said that my views were infallible either, but I do expect their fallibility to be proved with reason, not empirical evidence. I also never stated empiricism isn’t useful elsewhere, so some of what you said about the flat world was just silly frankly. The reason empirical evidence is problematic with economics is you can’t know everything about the economy in a given state/city/etc. There are many factors in human interactions.
“Yes, as a matter of fact we call that quaint phenomenon science. As economists it is the demonstrated and demonstratively repeatable link between cause and effect that drives the sustainability of economic models.”
Economics is a human phenomenon, not driven by repeatable links because humans take actions based on free will, choices, etc. No person can repeat their exact mood, knowledge, etc. over and over again to reproduce even the most basic market experiment. Knowledge gained later has effects on what decisions are made as well as changes in preferences. You today are not you yesterday. Economics is not and cannot be an empirical science no matter how much you claim that it is. You go on to talk about normal science and the world being flat, but this is a strawman and analogy that holds no weight.
You mention that the reason 10 trillion dollars isn’t printed is due to empirical evidence about liquidity. Your claim seems to be that no one could know that this was problematic until after they had actually done the experiment. That’s ridiculous! How could they not know that printing 10 trillion is bad before that? And then there is the entire question of what it would mean to print a lesser figure. I suppose we can’t really know what effects that will cause until we do the experiment.
“What is most troubling is you seem to boomerang back to the scientific model” “So while the data does not support your theory it is “unobservable”, but if and or when it does it is proof of your economic model?” The statement you were referring to was an explanation for why teenagers and other discouraged workers don’t show up on the unemployment figures (a reason for rejecting the empirical data). Unemployment is only designed to capture those who are actively looking for work, not those who have given up.
“Ten Poorest countries in the world based on GDP per capita vs World Rank in Percent of Population below poverty line. (after all if low wages drive employment, at least in almost every case by your argument, we should find a direct connection between countries were the people’s real wages falling below subsistence levels drive higher than average GDP).”
This is not an argument I made. I am making an argument against a minimum wage for it’s effects on unemployment. I am not making an argument that a minimum wage causes a lower GDP or that the lack of one causes a higher GDP.
Your argument is ridiculous, because it’s based on countries that have numerous other problems. This is exactly the reason I reject the empiricism, and yet you give me the worst examples you possibly could.
Aside from that, Michael is not talking about increasing “real wages” but “nominal wages.” Surely he believes some increase in nominal dollar amounts result in real increases in the goods and services provided even over the long term (he’s a big advocate of circular flow after all).
“Could something else be at play when rating domestic growth/unemployment instead of just minimum wage and cash supply economics? Could a lack of transparent business practices, unstable government structure, military conquest, and a lack of national cohesion also play a role in your economic model Matthew?”When did I say imply these other things weren’t in play??? This is exactly the type of reason I reject the use of empirical data for proving things in economics.”
Raising minimum wage in and of itself neither raises or lowers unemployment, a myriad of other factors MUST be accounted for.”
I don’t disagree with this. I never said that raising the minimum wage raises the unemployment rate, but simply that it raises it above what it otherwise would have been. There are many other factors that could cause reductions in unemployment and counteract the effect of the rise in the minimum wage. There are also reasons that people might not show up on the unemployment figure.
“Your argument is best left for the fifteen second attention span of the average voter and the world of politics you claim to avoid in prior posts. Devoid of statistical truth and straight for the heart strings.”
Trite statements like this don’t move discussions anywhere good. Can you avoid sillyness like this?
After reading your retort I finally understand. My God you actually equate minimum wage with real wage. At first I assumed (yeah ASS out of U and ME) that as an economist you proposed that a raise in MINIMUM wage regardless of monetary supply would have a detrimental effect on future growth of GDP, but you actually mean that a rise in minimum wage ALWAYS equals a rise in real wage. wow. where to start.”We won’t know if printing 10 trillion dollars in today’s money would be bad until we run the experiment.”So I guess… Germany circa 1924 Hungary circa ’46 Bolivia ’85 Yugoslavia ’93-94 Zimbabwe Current (by the way I bought 100 billion ZWD dollars for 20 US as a joke gift for a friend a while back and I over paid)all of these along with over a dozen more other examples of the destructive power of a too rapid introduction of liquidity into the marketplace are what? NOT empirical data to suggest that a US increase of money supply by a factor of more than 10 over night might be a bad thing? Yeah I think that “experiment” has already be run sir.When I first read your original post and came across the “increase in the minimum wage to 20$” (MINIMUM WAGE your words, not mine) I thought you must mean, wait for it, “All things being equal”, but you never eluded to this. In 1937, the last year before the Fair Labor and Standards Act the average annual income was approx 1780.00 us. Unfortunately this predated the 40 hour work week and from publications of the time we can infer that many, many people worked over 40 hour work weeks. However, in the interest of your Einsteinian data less thought experiment we will proceed with a 40 hr figure. This equates to an average hourly wage of $0.86. At $10.36 San Francisco’s minimum wage is currently the highest, at least as far as I can find. This represents a 1104% increase over 1937 levels (as a matter of scientific fact I concede that minimum wage and average wage are not the same. if average wage in 2010 US dollars in San Francisco was used the discrepancy would be much higher). If in an increase in MINIMUM WAGE (your words not mine) to $20 from say San Francisco’s $10.36 would surely have a negative effect on economic growth at a whopping 93% increase why didn’t a 1104% bump crush the US economy? Unemployment in 1937 was 14 percent, I’ll let you look up what unemployment in San Fran is right know (here’s a hint, it ain’t 14). During this same general period the price of an average car rose 3678% from $760.00 to $28,715 in 2008. That would be more than tripling the rise in minimum wage. So I guess no one can possibly afford a car right? Wait a sec, as a matter of percentage more American households own a car now than in 1937 (89% today best guessed at low teens by ’39), hmm. Soooooo, no”All you need is employers who have to raise wages due to the minimum going up and any layoffs that occur due to this reason.”Depending on the inflationary model you use one dollar in 1937 buys between $14 to just south of $15 US today. If your blanket statement that a raise in minimum wage negatively effects employment than shouldn’t we see a direct near dollar for dollar causality between unemployment rate (whether reported or under/non reported in the “discouraged” worker who stops looking) and consumer prices? After all if people are being forced out of work as minimum wage rises the average buying power of the median unskilled worker must drop for though these unemployed workers may not show up on state unemployment roles they still consume, even if to a diminished degree . So why has the average price of a house risen 6192% from $4100 in ’37 to $258,000 today while wages only climbed a little over 1/6th of this? Shouldn’t it be dropping as the rise in minimum wage (once again your words) drives out future investment? What is more average wage to average wage buying power of some consumer staples has actually increased. In today’s inflated money you can actually buy MORE gallons of gasoline with your average annual income than you could in 1937. So on the one hand inflation outstrips real wage increases, yet on the other real wage increases outpace inflation, or at least cost. Could the 16 fold increase in monetary supply from 1970 to present as the Fed tries to inflate our way out of debt be playing a role, maybe? I guess not. The fact is (or at least the data strongly suggests) that the current inflationary model suggests that at some not too distant date a minimum wage of $20 for unskilled labor (yet another point of contention you do not delineate between a base wage for unskilled vs. skilled so I must assume you mean unskilled worker, but I digress) may be not only warranted but actually a wage that would cause a worker to fall below the poverty line. Of coarse a student of economics reading your post 40 years from now wouldn’t know which wage you meant, but he could rest assured in telling his fellow colleagues “We can’t raise minimum wage to $20 it will crush the economy it says so right here in the history books”.In closing all is not for not (sorry literature majors). I come away from this experience with a bird in hand, a quote for the ages, “unobservable” data -simply awesome.I take my leave of you sir.
Steven, I made an agreement with myself that I’d not read someone’s post if it was a wall of text. You might try making paragraphs or something at some point
.I did try, reading so far as “you actually mean that a rise in minimum wage ALWAYS equals a rise in real wage” which I didn’t ever say, so I’m not going to go further. We aren’t going to understand one another because you make up what you think I’m saying rather than reading it. This is the 2nd time that’s happened. On the last one you’d gone on a rant about how there might be other factors, which is exactly what I was saying. That makes me think we are talking around each other, not to each other.
I’ll take the possibility that could be my fault, but… I don’t think so.
The Starkist situation is one I’ve looked at. And the reason Starkist was there in the first place was the race to the wage bottom. Obviously if there are other nearby islands with high unemployment, Starkist can threaten to or actually move their canneries to a new location.
One hundred years ago, do you suppose we threw our immigration doors wide open because of feelings of largesse toward the poor workers of the world? No. It was so we’d have a constant stream of unacculturated immigrants used to working hard for wages approaching zero. If the Swedes wouldn’t work for peanuts, fire them! Get the Bohunks. And when the Bohunks started putting on airs there was always the Litvaks. Or the Hungarians. It was another race to the wage bottom.
Minimum wage in a small town’s not like that. You’re not going to import Vietnamese because the local teens won’t work for $5.15. Nor will you if the minimum is raised to $7.25, or $8.55. Nor will you move your pizza operation to Bosnia. Instead you’re going to cope with the new conditions by raising the price of your pizza.
I think this discussion would probably be taking a greatly different tack if you’d had much practical experience with low-wage management issues. It seems theoretical in precisely those areas where I’ve worked in the shop-floor dust.
I have no problem with the scenario posed concerning workers. Each one of these groups was used to a lower wage and felt they benefit (indeed, they did benefit!) from the higher wage, even if it was lower than you think it should have been.
This is a core problem with the minimum wage. It is another attempt to protect people from themselves. They just don’t know good enough to take care of themselves. They might let themselves get ripped off.
Let people make their own decisions, and yes, their own mistakes. In many cases people won’t even see these things as a mistake at all, and it’s not up to you to decide what is and is not a mistake.
If you felt bad about providing people low wages because you couldn’t afford higher ones I understand your concern, but this is why I’m for eliminating government’s stealing of money. Then businesses could provide more to the workers at all levels.
“Or you can talk to people who hire at the minimum wage and find out what that does for their business. It certainly doesn’t help them run. They have to increase prices on all of their goods to sustain it, and if they can’t do that due to consumer expectations or consumer incomes not going up, they are going to have to try to do more with less.”
I don’t have to talk to such people. I was one, for sixteen years or so. I hired people for minimum wage work, and can tell you how that works.
First, the minimum has always been too low. Whatever the level, and it was around $4-4.50 when I was working crews, it’s not enough to live on. Hire someone for that and you breed resentments. Work slows down, people walk off the job and you have to hire and train new ones, people steal from you… it works very badly. What I did was hire people for well above the minimum. And make them work harder, smarter and faster. I got good enthusiasm and good results. Otherwise you’re trying to force someone to work whose output isn’t even worth two dollars.
But most bosses I saw were too dumb to figure that out. So for them, the kindest thing to do would be to have the government raise the wage– so you didn’t have to wait for the dumb boss to puzzle it out by himself.
The actual effect of raising such a person’s hourly income is precisely the same whether the decision is taken by the owner of a small business or by the government, acting in his best interest. And my experience is that it doesn’t even raise payroll costs. What you’ve done is made your hiree a more productive worker, by providing more carrot and by educating him as to the worth of his decently paying job. If he doesn’t work out at the higher rate of pay, you can always let him go and find someone else.
Naturally, to use your exaggerated example, raising a janitor’s wage to $20 will be hard to justify in terms of how much value he would be able to add to your operation. And I’m actually surprised you don’t say this the way dozens of others say it: “Why don’t you just raise his wage to $100?”
There are those among us who would not be surprised at the thesis that a well paid, well instructed work force is a motivated and efficient work force. And that they can accomplish more than a poorly paid contingent of surly workers. I readily paid those under me a couple of dollars above the minimum without the slightest fear I’d be stretching our entire price structure askew. And in return I made them produce for me.
I don’t actually disagree with most of your answer here, insofar as you thought the wage too low and believed it lead to theft (a cost that could be greater than the benefit of paying a lower wage). This seems to be a result of straightforward analysis in your case.
Where that be the case I’d agree paying a higher wage for the given job is probably warranted. Sometimes business does make an improper estimation of the costs & effects of paying less.
However, those businesses that do this will fail in my view in any real free market where they can’t get loans and credit too cheaply. Their inefficient models will prevent them from earning the necessary profits for investment, and they will not be in business long if they didn’t make their calculations properly.
What I will not say is that because some businesses should pay more that all others have to do so. They may be able to get laborers who aren’t as likely to steal, or to need a “living wage” because their circumstances afford them cheaper living expenses (teenagers, room mates, interns, etc.)
There are also some businesses that offer a lot of experience to workers (like interns in news agencies or political office, etc.) who may offer enough in that way to make any wage unnecessary since the person will get experience that will get them a better job in the long run.
We really do live in different worlds. Sure, there are people who don’t need even a minimum wage. Their families are well heeled, and they can afford to accept nonpaying internships. This is recommended in the prep schools as a good way to begin networking.
There are lots of people who even work in pay-cations. That’s a job that’s so much fun you pay them to work there. College kids in the summer get these jobs, and pay quite a lot of money to work in archeological digs, biologic reserves and so forth.
But that’s not what I’m talking about. I’m talking about people who need the work to support their families. Mostly people of color, but also poorly educated and rural white folks. They live culturally and materially stunted lives due to nothing but lack of money. They do not have the luxury of the full range of choices more fortunately born people have.
Employ people like this and you need to get them over on your side. One does that by treating them as human beings. And that means paying them fairly… a word that has no meaning in some quarters. What it initiates is a pattern of reciprocity, where your employee makes the decision to treat you fairly as well by giving you good work.
Not everyone is attuned to performing this kind of work. Performed correctly, it transforms members of society’s most vulnerable sector from being net drains on the economy to being positive assets.
where did you work if you dont mind ?
It’s not really relevant, but Washington, DC. Throughout the 70s, 80s and 90s.
“Prices are increasing at nearly ten percent a year”
where is your source for this Doug?
It’s quoted text from the article.
Chris, seriously? Everyone knows I quoted it from the article, I wanted to know where Doug got it from.
Averaged over the last 7 years,
Gasoline has increased by 9% per year
Gold has increased in price by 19% per year
Silver has increased in price by 21% per year
Copper has increased by 20% per year
Platinum has increased by 13% per year
You raise a very interesting point. Every one of those commodities you mention is something in a limited supply. Something where demand is high but supplies are stuck close to current levels.
Meanwhile the population of earth expands, and more poor people in the developing world ascend to moneyed status. Look at those 350-400 million new Chinese and Indian consumers we have now, compared to 15-20 years ago. Will this additional demand not drive prices up for consumer goods whose supply is inelastic?
This includes food. There’s only so much room on the planet to grow the stuff, and there’s much talk of devoting more of those crops and croplands to biofuels such as corn ethanol. So prices for many commodities are certain to go way up, whether or not the world converts to a new form of currency or not. Whatever you use, many of the prices for the most basic necessities will have to increase.
In nonrenewables, like metal ores, costs will be going up as we exhaust our subsurface supplies and come to rely totally on recycling. Extraction costs will go up as we have to dig deeper and deeper, looking for the earth’s remaining tin, copper, col-tan ore… even surprising materials, like phosphorus. In the long run, prices have nowhere to go but up.
Dr. Acula,
Averaged over the last 7 years,
Gasoline has increased by 9% per year
Gold has increased in price by 19% per year
Silver has increased in price by 21% per year
Copper has increased by 20% per year
Platinum has increased by 13% per year
Thank you for these calculations.
These numbers demonstrate that the prices of commodities cannot serve as a good substitute for consumer prices or the purchasing power of money.
Regards, Don
This is some of the funniest “smartest guy in the room” banter I’ve read in a long time. Kudos.
I’m not sure what part is funny, but I’ll make it clear here that I don’t consider myself “smartest guy in the room” at all. On the contrary, I am just learning here as well. I only recently started contributing to the comments in the blog and forums here after reading for quite awhile after coming here a few months ago.
Even though I think I have a stronger opinion on these topics than I did before, I certainly am not an expert in any sense.
I certainly am not done learning by any means.
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