Tuesday, June 26, 2012

What stimulus bill are democrats talking about?

In a recent WSJ oped Alan Blinder implicitly calls for supporting Obama's American Jobs Act. Democratic strategist Donna Brazile does the same in an opinion piece for CNN.com. Both declare that all Obama is trying to do is make sure that firefighters, police officers, and teachers stay on the job and that America invests in its own crumbling infrastructure.

If that was truly the case perhaps more people would be behind the Obama's plan. I probably would not be, mostly because I think that there are more than enough policeman (and teachers) where I am from, hence why we can afford to have so many policeman sitting beside the highway trying to catch the oh so dangerous "speeder". But some republicans might like the sound of Obama's plan.

There is a problem though. Obama's jobs act is so much more than infrastructure spending and firefighter hiring. He also wants to implement/create:

1. A “Returning Heroes” hiring tax credit for veterans
2. A $4,000 tax credit to employers for hiring long-term unemployed workers.
3. Prohibiting employers from discriminating against unemployed workers
4. Allowing more Americans to refinance their mortgages at today’s near 4 percent interest rates
5. Create a National Infrastructure bank

 amongst other things, including additional temporary tax breaks that won't have any real effect on the economy.

Now maybe some of these other things are good. I don't think they are, but some people might. Regardless, Obama's plan is a lot more comprehensive than just building roads and bridges and hiring policemen. It would be nice if democrats and Obama supporters put their money where their mouth is and actually offer up a bill that only calls for investing in infrastructure and hiring teachers, policemen, and firemen, instead of calling for that stuff publicly and then throwing in a bunch of other crap, only to cry when republicans don't "support teachers". It may or may not pass, but at least democrats would be telling the truth when they whine to the media.

Sunday, June 24, 2012

The minimum wage is bad for the unskilled and unemployed, period.

Yesterday I responded to the claims that Huffington Post Blogger Elizabeth Parisian made supporting increases in the minimum wage. Hopefully it is clear that there is no sound theory or evidence showing that increasing the minimum wage, all else equal, lead to gains in employment.

And because there is no way to carry out an experiment to see if raising the minimum wage lowers employment, empirical evidence often concludes that increases in the minimum wage have only a small or negligible effect on employment.

But what the empirical evidence never takes into account is the unseen unemployed. That is, it is not how many people are let go when the min. wage is increased, but how many people who are never hired because of it. If a small business owner would like to hire another person or two but can't afford it at $9.00/hr while they could afford it at $6.00/hr, those two people without jobs willing to work at $6.00/hr are not counted as casualties of the min. wage. But they should be.

It is the unseen unemployed that get screwed by the min. wage, not the people who already have jobs. And it is precisely those without the jobs, the lowest skilled among us, who are the most vulnerable. Why should someone with no skills be prohibited from offering their less skilled labor for a wage that is agreeable to both them and their employer? If my labor is not worth $9.00/hr because I have never had a job and thus have not proven capable of holding one yet, why can't I agree to work for a lower wage in the hopes that my skills will develop and then I will be able to earn that higher wage?

Liberals think they are protecting workers with their calls for a higher min. wage, but all they are really doing is preventing the unskilled from gaining skills. Why hire some 16 yr. old kid from the ghetto at $9.00/hr when I can hire a high school graduate at that same rate? Perhaps I would be willing to hire that kid at $6.50/hr to see how they could handle the job and they would be willing to work at that rate to get their foot in the door. But people like Ms. Parisian say that the kind of bargaining needs to be outlawed. Screw that kid. If he can't find a job at $9.00/hr he is better off running the streets and collecting gov't handouts. With the increases in the min. wage is it any wonder that youth unemployment is at an all time high? From the U.S. Youth Chamber of Commerce "The percentages of American 16- to 19-year-olds who are employed have fallen to below 26 percent, a record low.”

This is what raising the min. wage to above market levels does. It creates a dead weight loss and prevents potential employees from successfully agreeing to a wage with employers that allows them to get their foot in the door and gain skills. The min. wage cannot ever be a living wage because not every person who works needs a living wage, nor is worth one. Kids living at home with their parents, retired people looking for part time work, housewives looking for part time work while the husband is the primary earner, or vice-verse, do not need a living wage and they are being forced out of the workforce by liberals looking down on them from their cozy jobs, "protecting" them.

So Ms. Parisian, Nancy Pelosi, Senator Harkin, and everyone else crying about the min. wage, where is your sympathy for them?
Also, this quote by Chris Rock that Ms. Parisian finds so amusing "I used to work at McDonald's making minimum wage. You know what that means when someone pays you minimum wage? You know what your boss is trying to say? It's like, 'Hey, [if] I could pay you less, I would, but it's against the law."  is stupid. Of course they want to pay you less. They would like you to work for free. And you want to earn as much as possible. That is how markets work. But if Mr. Rock really felt like he was being underpaid he could have quit and found a different job. My guess is that he was very unskilled at the time and if anything he was being overpaid.

Saturday, June 23, 2012

Another bad article about how great the minimum wage is

Elizabeth Parisian blogging on the Huffington Post writes that people who want to decrease the minimum wage are "out of touch".

After complaining about the fact that some states are trying to lower their minimum wage, Ms. Parisian lists "some of the biggest falsehoods that are going around, along with facts you can use to discredit them".

As usual from the pro minimum wage crowd, Ms. Parisian's facts are no facts at all, and the sound bites she provides from others defy logic. I will debunk each one of her "truths" in turn.

1. Ms. Parisian provides "Rigorous research" saying that raising the minimum wage has been shown to increase employment. While this assertion is absurd on its face (how can forcing people to pay employees more lead them to hire more employees?) the research she provides a link to shows only correlation, not causation. It is simply a graph (below) that shows employment increasing faster in Illinois, which raised the minimum wage, than in Indiana, which didn't.

Figure 2: Monthly and Annual Percent Change in Private Employment, 2003 to 2005

But in no way does this show causation, as not everything else other than minimum wage was held constant. Some might argue that this is a natural experiment meaning that Indian and Illinois are similar enough in almost every way that the min. wage change is the only explanatory variable, but that is an  opinion at best and is far from a fact. Without any theory as to why raising the min. wage would increase employment data showing correlation is only that, correlation. I am reminded of the great Milton Friedman who said to reject "both theory without evidence and evidence without theory." This is certainly a case of the latter.

2. Ms. Parisian's myth #2 is nearly identical to myth #1 and claims that " a 2006 study found that small businesses experienced higher rates of growth in states where the minimum wage was higher than the federal minimum." The link she provides goes to an assortment of papers, all of which I do not have time to read right now. But I assume she is talking about something like this quote from economist Joseph Stiglitz found on her link:

“We saw no ripple effect at all in the unemployment rate. Unemployment just continued to go down.” The minimum wage increase, he said, “was totally swamped by other factors going on in the economy”

Again, notice that Dr. Stiglitz says that the min. wage increase was "swamped" by other factors. That is, other stuff was going on at the time so we think the effect of raising the min. wage is not that big after all. Maybe. But the reason Dr. Stiglitz mentions the other factors is because it defies logic to say that forcing employers to pay employees more leads to more employment. How can that even work? Does the substitution effect between capital and labor not apply when it comes to the min. wage? Is labor the elusive giffen good i.e. when the relative price rises we want more of it? Ms. Parisian seems to think so.

3. Ms. Parisian's next fact is " Raising the minimum wage would provide the stimulus we need to speed economic recovery. A 2011 study by the Federal Reserve Bank of Chicago found that every dollar increase for a minimum wage worker results in $2,800 in new consumer spending by his or her household over the following year." It is probably true that increasing the min. wage leads to more spending by those receiving the wage, but it is not "new" spending. It is just transferring purchasing power from the owner to the worker, or from the capitalist to the laborer. No "new" wealth is being created. Like other people Ms. Parisian provides the simplistic reason that "low wage workers have a desperate need for any increased income and spend it quickly, often on the local level, which provides a huge boost to the economy". 

 I guess I am just confused about what business owners do with their money, but I assume that they invest it in their business, in other businesses through stocks, bonds, etc., put it in banks where it can be loaned out to those needing capital, etc. For some reason all of these things are never as good as just spending the money right away, and I am not sure why that is. I understand why spending the money is good for the worker who gets the forced raise, but to argue that it is somehow more beneficial to the macro economy than leaving it in the owner's/capitalist's hands is far from clear.

In conclusion, until someone can come up with a sound theory as to how it is possible that forced raises increase employment, I am going to continue to believe the obvious, sound, and indisputable fact that when you raise the relative price of something people purchase less of it. I see no reason why the law of demand fails to apply to labor the same way it applies to all other goods.

Tuesday, June 19, 2012

Are American families really poorer now than in 1989?

A recent article by Businessweek's economics editor Peter Coy claims that American families were poorer in 2010 than in 1989. Mr. Coy crunches the numbers and gets the following results, in 2010 dollars:

Median family net worth in 2010 dollars:
1989: $79,600
1992: $75,400
1995: $81,200
1998: $95,500
2001: $106,100
2004: $107,200
2007: $126,400
2010: $77,300
As you can see, the median net worth was $79,600 in 1989 vs. $77,300 in 2010. So in nominal terms, I guess you could say that the median family is poorer. But who cares about money? Money is only worth what it can buy. I doubt that there are too many people in the world who value money for money's sake, except perhaps Uncle Scrooge. People want money because it helps them consume goods and services.

When you think about goods and services, a lot has changed since 1989. There was no Internet. No smart phones. No Facebook, or Twitter, or flat screen TVs. Heck, personal computers were only for the super rich. Central air was much more of a luxury. So were airbags in cars and anti-lock brakes. So even if you can make the dollars equivalent to each other using price indices, it is very difficult to equalize the goods and services available, especially when some didn't even exist! I think the real question is: how many 2010 families making $77,300 real dollars would trade places with a 1989 family making $79,600 real dollars? My guess is not many.

Mr. Coy's numbers are interesting, but I don't think a comparison between 1989 and 2010 really means much, even if you do use real dollars. The world has changed too much. It is like comparing a 2010 Ford Focus to a 1989 Mercedes. Even if a brand new 1989 Mercedes was worth/cost more in 2010 dollars, would anybody want to drive it?

I think that the more important takeaway from these numbers is how far median net worth has fallen since the financial crisis started. 2007  to 2010 is a much move valid comparison, and those numbers are terribly bad. There is no need to drag the comparison back to 1989 to demonstrate how awful the economy is right now.

Monday, June 18, 2012

Do you want to invest in a college student?

Interesting idea from Luigi Zingales of the University of Chicago.

My friends at Clemson and I have talked about this a few times and I think it is an idea that has some potential. I would definitely like to see it explored more. Investing in students is like investing in other forms of capital. It is just human capital rather than physical capital. As long as the returns are competitive I think investors will be willing to partake.

Wednesday, June 13, 2012

Do you want to mooch off others or earn your success?

Obama has recently come out with a new ad showing off all the great programs his administration has created/supported. It is called The Life of Julia. Click the link to follow Julia's life of mooching off of others.

After you're done watching Obama's ideal life, watch Emily O'Neill of the Center of Freedom and Prosperity propose a different lifestyle. Unlike Julia, Emily's life revolves around hard work and merit.

I think I'll choose the latter route.

Thursday, June 7, 2012

Best country in the EU? Estonia of course.

Here is a good article from Dan Mitchell of the Cato institute about Estonia. I have been a fan of Estonia for a while now and a visit is definitely on my bucket list. Maybe even a move.

Wednesday, June 6, 2012

If biodiesel is so good, mandate not needed

Here is a letter to the Columbus Dispatch from Bill Davis, President of the Ohio Soybean Association, arguing for the ODOT biodiesel mandate.

Auditor of State Dave Yost’s recent recommendation that the Ohio Department of Transportation eliminate its legislatively mandated use of biodiesel and switch back to 100 percent petroleum diesel to save money is shortsighted (“ Auditor: State vehicles’ biodiesel too costly,” Capital Notes item, May 22). It does not consider the many benefits biodiesel provides to Ohio.
In addition, my group believes that an evaluation of biodiesel purchasing practices could yield more-efficient purchasing and a reduction on the price differential. While we agree that the state must enact cost-effective practices, the full range of biodiesel’s benefits — economic, energy-security and environmental — more than make up for the minimal cost difference identified by the auditor.
Biodiesel creates hundreds of Ohio jobs on farms and production facilities, and at fuel distributors. These are good, local jobs. In these tough economic times, can we afford to throw them away?
Something else that we can’t afford is compromising our energy security. Every gallon of biodiesel we use in Ohio displaces a gallon of petroleum. If there is one thing we can all agree on today, surely, it is the need to reduce our dependence on foreign oil. Every time we use biodiesel, we move closer to achieving that goal, while also keeping Ohio dollars in Ohio.
We cannot ignore biodiesel’s significant environmental benefits. After extensive review, the Environmental Protection Agency determined that biodiesel reduces greenhouse-gas emissions by 50 percent as compared with petroleum diesel, and it decreases particulate matter, a serious health hazard, by 47 percent. It also reduces cancer-causing emissions by more than 80 percent compared with regular diesel.
Biodiesel also enhances engine lubricity, which extends engine life by preventing premature wear and tear. All of these factors must be taken into consideration in response to Yost’s recommendation, which is a short-term fix for long-term economic, energy-security and environmental challenges.
Revising the state mandate would be counterproductive. Let’s maintain our commitment to a fuel that will take Ohio forward, not back.
Ohio Soybean Association

And here is a letter from myself, published in the 6/6 edition of the Dispatch.

In his Saturday letter “Biodiesel's benefits make it worth the extra cost,” Bret Davis made the case for maintaining Ohio’s biodiesel mandate. Lauding benefits such as Ohio jobs, energy independence, environmental benefits and enhanced engine lubricity, Davis made it seem like using biodiesel to power the state’s vehicles is a no-brainer.
But if using biodiesel is so much better than regular gasoline, why does it need a mandate? Is State Auditor Dave Yost undervaluing the supposed benefits of biodiesel?
If Davis’ description of the benefits is accurate, a cost-benefit analysis should include them, as appropriate. But arguing for an accurate cost-benefit analysis is not the same thing as pleading for a mandate.
Someone who has confidence in his product’s benefits would not rely on a government mandate to sell it. Perhaps we now know how confident Davis is when it comes to biodiesel.


Monday, June 4, 2012

Paycheck fairness?

 Obama urges Congress to pass Paycheck Fairness Act

The same tired (uninformed) argument continues to be put forth by those arguing for paycheck "fairness" for women. From the article:

"Advocates for the legislation underline that full-time working women make about 77 cents for every dollar made by men with similar jobs."

But that is not the whole story. Watch this video from Dr. Steven Horwitz to see why, and then you can help educate others who rely on this misleading statistic to further paycheck "fairness".