Tuesday, July 14, 2015

Is your state in poor fiscal health?

Here is a link to my recent op-ed in US News and World Report about the fiscal health of the 50 states. Here is a snippet:

"States that mishandle their finances over a long period of time are often forced to make tough choices about their budget: Should they contribute to the state pension fund or spend more on infrastructure such as bridges and roads? Often these debates take place in local newspaper op-eds and news interviews, but without a frame of reference, the average taxpayers don't know if the problem is unique to their state or if it is something that all states are going through. The Mercatus Center's fiscal rankings allow taxpayers, business owners and local politicians to see how their state is doing relative to the other states along several different dimensions."

Tuesday, July 7, 2015

Obama's new overtime rule will hurt some workers but I don't think he cares

President Obama recently announced plants to issue an executive order that will require employers to pay salaried employees who earn up to $50K/year overtime pay. This rule encroaches on the fundamental right of a person to negotiate the terms of their labor with an employer. And just like the minimum wage and other restrictive labor laws, this new regulation will make it harder for relatively low-skill workers to climb up the income ladder.

As an example, when I worked at Chase Bank after college I earned a salary of $45K/year. I was not subject to overtime pay rules and this gave my boss and I the freedom to create a schedule that worked for the both of us. During the busy times, such as enterprise IT releases, I would work 50 hrs a week in order to make sure the job got done. When the work slowed down, I would leave early on a few days. Over the course of a year I am sure my work week averaged 40 hrs, but it would have been unnecessarily burdensome to both me and my boss to make sure that I only worked 40 hours exactly every week (or 80 hours every two weeks if that is how the rule is designed) or else be subjected to overtime rules. Why should the government intrude on a voluntarily reached agreement such as the one my boss and I made?

Also, the workers who are less productive and who make up for that by working harder and longer will be unable to differentiate themselves along this dimension. It is ironic that some of the same people who praise the "gym rat" - the less talented athlete that puts in the extra work in order to be better on game day - want to deny this same opportunity to people who earn less than 50K/year based on their elitist idea about what a "fair" salary is. If Obama's supporters think that overtime pay for work over 40 hours is such a good idea, I see no reason why it shouldn't apply to athletes, presidents, CEOs, etc. Why should people making less than $50K/year be the only ones who have to deal with this burdensome regulation?

It is important to remember that overtime pay only affects the cost of labor, not the output. What I mean is that a worker who produces $20/hr of output and earns $40K/year for that output does not suddenly start producing $30/hr of output when overtime kicks in. Companies will be reluctant to let workers work more than 40 hours per week even if the worker wants to, since the additional output of the worker will not be worth the additional cost. Thus workers who enjoy their job, such as myself at Chase, and who want to keep working on a day when they happen to be right in the middle of something will be forced to leave so that the firm does not have to pay them overtime. This also applies to the "gym rat". It does not appear to me that either the worker or the employer benefit in either case.

Obama is an interventionist; he thinks that his view of the world is the correct one and thus everyone should conform to that view. He doesn't appreciate the many differences that shape individual lives, nor does he appreciate the individual freedom that is required to deal with such differences. He hears one story about a hotel manager who worked 55 hours one week and only made their (voluntarily agreed to) salary and he immediately thinks that the situation calls for the heavy hand of government. I don't think he believes that people are capable of making their own decisions, or that people have different preferences about their work/life balance. In The Theory of Moral Sentiments, Adam Smith referred to someone who thinks this way as "the man of system":

     "The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder."

Obama is the man of system: To him we are all just chess pieces, to be moved around as he sees fit. Our own principle of motion is of little concern to him. This causes disorder but Obama does not see it because he is blinded by his own arrogance.

Monday, June 22, 2015

Labor force participation rate still down and that's bad for all of us

The U.S. unemployment rate is down to 5.5% but the labor force participation rate for prime age workers (age 25 - 54) is also still down: In 2002 it was 83.3% and in May, 2015 it was only 81%. But what does this mean in terms of actual workers?

A decline of 2.3 percentage points doesn't seem like a lot, but when the eligible working population is over 100 million people it makes a big difference as the chart below shows (click to enlarge). (2015 data here, other data here)

The first line in the chart is the age 25 - 54 labor force participation rate. The second line is the 25 -54 civilian non-institutionalized population. This population number excludes people who are incarcerated or on active duty in the armed forces and is the one used by the Bureau of Labor statistics to calculate the labor force participation rate. The third row is the population in the labor force in that year e.g. in the 1992 column row 3 is the population in the labor force in 1992. The 4th row is the population in the labor force for all years using the 1992 rate e.g. in the 2012 column, if the labor force participation rate had been 83.6% instead of 81.4%, 103,960,780 people would have been in the labor force instead of 101,224,970 (2012 column, row 3). The 5th row does the same thing as the fourth only it uses the 2002 rate for all years and the last row takes the difference between the potential amount of workers at the 2002 rate and the actual amount of workers (5th row minus 3rd row for all columns, which is why it is 0 in the 2002 column).

What this chart shows is that if the labor force participation rate had been 83.3% in May, 2015 instead of 81% there would have been an additional 2,875,345 people in the labor force. Now perhaps not all of these people would have been employed since the labor force includes both employed and unemployed people who are looking for work. But if even 75% of them had a job that would be an additional 2,156,508 workers!

Those additional workers would be making cars, making airplanes, making hamburgers, serving food, driving trucks, cleaning houses, teaching kids, working at a bank or any number of other things. They would be actively engaged in the economy, producing stuff for others and earning a paycheck. So where are they?

Hopefully they are working in the underground economy. Perhaps they are being paid under the table to do yard work, freelance construction work, business consulting, or some other job that allows them to earn a living but keeps them out of the official statistics. This is still not good for the rest of us, since in the underground economy workers don't pay taxes, which means they don't contribute to the goods and services provided by the government, which means a higher tax burden for the rest of us.

In an even worse scenario those workers are not working at all. Instead they are relying on family members or friends to support them or they are receiving government aid in the form of food-stamps and other benefits. Either way, they are not supporting themselves but instead relying on other productive people to support them.

This makes us all worse off. The people who aren't working don't get the satisfaction of feeling useful and contributing to society while the rest of us not only have to support them, but we also miss out on the opportunity to purchase the goods and services that they could have produced. It's a lose-lose situation.

Now if some of these people left the labor force for private reasons e.g. they won the lottery and simply retired there is nothing wrong with that. But remember that this is the prime working age labor force participation rate, people age 25 - 54, so widespread early retirement should not be a big factor. If instead there are too many regulations and taxes and just general economic uncertainty, hindering entrepreneurs ability to create and produce their products which drags down job growth, then that is a serious problem that is hidden by low unemployment numbers. I think that this latter explanation is what is happening and I think it is a problem for the economy and will continue to be going forward, despite what the unemployment figure suggests.

Wednesday, June 17, 2015

Eugenics and the minimum wage

One of the more tragic ideas to catch on during the progressive era (late 19th and early 20th century) was eugenics. According to Diane Paul (2001) “Eugenics” describes a movement to improve human heredity by the social control of human breeding, based on the assumption that differences in human intelligence, character and temperament are largely due to differences in heredity.

Many prominent economists were supporters of eugenics. Thomas C. Leonard wrote an article that was published in the Journal of Economic Perspectives in 2005 that re-introduced some of the most prominent economists who supported eugenics. For example:

     “If we could leave out of account the question of race and eugenics,” Irving Fisher (1921, pp. 226–227) said in his presidential address to the Eugenics Research Association, “I should, as an economist,be inclined to the view that unrestricted immigration . . . is economically advantageous to the country as a whole . . . .” But, cautioned Fisher, “the core of the problem of immigration is . . . one of race and eugenics,” the problem of the Anglo-Saxon racial stock being overwhelmed by racially inferior “defectives, delinquents and dependents.”


     “Social progress is a higher law than equality,” said Simon Patten, economist at the Wharton School and American Economics Association (AEA) president in 1908, and the only way to progress was the “eradication of the vicious and inefficient.” Frank Fetter (1899, p. 237), who was to serve as president of the AEA in 1912, also worried that “the benefits of social progress are being neutralized by race degeneration” owing to the “suspension of the selective process.”

And even though the moral character of these economists was dubious, their understanding of economic theory was sound. In fact, it was better than many of the progressive economists of today. For though their ends were detestable, they recognized the appropriate means for getting there; make the lower classes unemployable. After all, if a person can't work they can't afford to raise a family. What is a good way to ensure that the least productive, lowest class of people are unemployable and can thus be recognized by society as such? Increase the lowest wage at which people are allowed to be hired. From the article:

     Sidney and Beatrice Webb (1897 [1920], p. 785) put it plainly: “With regard to certain sections of the population [the “unemployable”], this unemployment is not a mark of social disease, but actually of social health.” “[O]f all ways of dealing with these unfortunate parasites,” Sidney Webb (1912, p. 992) opined in the Journal of Political Economy, “the most ruinous to the community is to allow them to unrestrainedly compete as wage earners.” A minimum wage was seen to operate eugenically through two channels: by deterring prospective immigrants (Henderson, 1900) and also by removing from employment the “unemployable,” who, thus identified, could be, for example, segregated in rural communities or sterilized.


     Columbia’s Henry Rogers Seager, a leading progressive economist who served as president of the AEA in 1922, provides an example. Worthy wage-earners, Seager (1913a, p. 12) argued, need protection from the “wearing competition of the casual worker and the drifter” and from the other “unemployable” who unfairly drag down the wages of more deserving workers (1913b, pp. 82–83).

I encourage you to read the whole article. It is an informative read.

It would be wise of the modern progressives to remember the roots of the minimum wage. It is not a tool to lift people out of poverty; rather it is a tool to keep people in it. The effects of a minimum wage are the same today as they were back then: It makes the least educated, lowest skilled people unemployable by raising the cost of their labor above the value it produces. If you want to ensure that those types of people remain in poverty, a high minimum wage is a good place to start.

Wednesday, May 27, 2015

A higher minimum wage in one area may harm low-skill workers in other areas

The Los Angeles' city council recently passed a anti low-skill worker bill minimum wage increase that will increase the city's minimum wage from $9/hour to $15/hour. This ill-advised, and I would argue cruel, increase in the minimum wage will banish the least productive workers of LA - teens, the undereducated, the elderly - from the labor market. For LA teenagers in particular it will now be more difficult to find their first job. In light of LA's actions, Don Boudreaux at Cafe Hayek asks all minimum wage supporters a very appropriate question: if the minimum wage was enforced by fining and arresting employees who voluntarily work for less than the government mandated wage rather than the employers who pay them, would you still support it? He states that:

"If a minimum-wage policy is both economically justified and morally acceptable, you should have no problem with this manner of enforcement."

I agree with him. And when the question is phrased in the way he poses it a minimum wage sounds even worse.

And if punishing LA's low-skill workers by preventing them from negotiating their own wage with employers isn't bad enough, there is reason to believe that a higher minimum wage in places like LA, Seattle, and San Francisco will also eventually affect the employment opportunities of low-skill workers in other areas of the country.

Profit maximizing firms are always on the lookout for ways to reduce costs holding quality constant (or in the best case scenario to reduce costs and increase quality). Since there are many different ways to produce the same good, if one of the factors of production, say labor, increases, firms will have an incentive to use less of that factor and more of something else in their production process. For example, if the price of low-skill workers increases relative to the cost of a machine that can do the same job firms will have an incentive to switch to the machine. It is easier to demonstrate this using some simple math.

To set the stage for this post, lets think about a real life example; touch screen ordering. McDonald's is currently installing some touch screens for patrons to order their meals and at Clemson University one of the food courts also has a touch screen ordering system for the grill portion of the restaurant. The choice facing a restaurant is touch screen or cashier. If a restaurant is currently using a cashier and paying them a wage, they will only switch to the touch screen if the cost of switching and the future discounted costs of operating and maintaining the touch screen device are less than the future discounted costs of using workers and paying them a wage. We can write this as

D + K + I + RK  < WL

Where D represents the development costs of creating and perfecting the device, K represents the costs of working out the kinks/the trial run/adjustment costs, I represents the installation costs, and RK represents the net present value of the operating and maintenance costs. On the other side of the inequality WL represents the net present value of the labor costs. (In math terms RK and WL are: RK = [ (rk) / (1+i)^n from n=0 to N ] where r is the rental rare of a unit of capital, k is the number of units of capital, and i is the interest rate and WL = [ (wl) / (1+i)^n from n=0 to N ] where w is the wage and l is the amount of labor hours. But if this looks messy and confusing to you don't worry about it as it's not crucial for the example.)

The owner of a restaurant will only switch to a touch screen device rather than a cashier if the left side of the above inequality is less than the right side, since in that case the owner's costs will be lower and they will earn a larger profit.

If the cashier is earning the minimum wage or something close to it and the minimum wage is increased, say from $9 to $15, the right side of the above inequality will increase while the left side will stay the same (the w part of WL is going up).  If the increase in the wage is enough to make the right side larger than the left side the firm will switch from a cashier to a touch screen. Suppose that an increase from $9 to $15 does induce a switch to touch screen devices in LA McDonald's restaurants. Can this impact McDonald's restaurants in areas where the minimum wage doesn't increase? In theory yes.

Once some McDonald's restaurants make the switch, the costs for other McDonald's to switch will be lower. The reason for this is that the McDonald's who switch later will not have to pay the D or K costs: the development or kinks/trial run/adjustment costs. Once the technology is developed and perfected the late-adopting McDonald's can just copy what has already been done. So after the McDonald's restaurants in high wage areas install and perfect touch screen devices for ordering, the other McDonald's face the decision of

I + RK < WL

This means that it may make sense to adopt the technology once it has been developed and perfected even if the wage in the lower wage areas does not change. In this scenario the left side decreases as D and K go to 0 while the right side stays the same. In fact, one could argue that the RK will decline for late-adopting restaurants as well as the maintenance costs decline over time as more technicians are trained and the reliability and performance of the software and hardware increase over time.

What this means is that higher minimum wages in areas like Seattle, LA, and San Francisco can lead to a decline in low-skill employment opportunities in places like Greenville, SC and Dayton, OH as the technology employed to offset the higher labor costs in the former cities spread to the latter.

Also, firm owners and operators live in the real world. They see other cities and local governments raising their minimum wage and they start to think that it could happen in their area too. This also gives them an incentive to switch since in expectation labor costs are going up. If more cities make the same bad policy choice as LA and Seattle firm owners around the country may start to think that resistance is futile and that it is best just to adapt in advance of a minimum wage increase by preemptively switching to more capital.

And if you think that touch screen ordering machines aren't a good example, here is a link to an article about an automated burger-making machine. The company that created it plans on starting a chain of restaurants that use the machine. Once all of the bugs are worked out how high does the minimum wage need to be before other companies license the technology or create their own by copying what has already been done?

This is just one more way that a higher minimum wage negatively impacts low-skill workers, even if the workers don't live in an area that has a relatively high minimum wage.

Wednesday, May 20, 2015

60 years of urban change

The Institute for Quality Communities at the University of Oklahoma has a neat collection of maps that allow you to view cities from all over the country both before and after highways were constructed. It is troubling to see how many people were displaced by eminent domain and the highway system. Atlanta in particular was heavily impacted by I-85.