Friday, August 30, 2013

Jared Bernstein is a bad, and dangerous, economist

No serious academic economist considers economics a science on par with physics. At best it is comparable to biology; there are some clear, predictable outcomes but because the objects that are studied are constantly adapting and changing extrapolating the results of any particular study to a species of animal as a whole in the case of biology or humans as a whole in the case of economics can lead to erroneous predictions. Many studies need to be done on many different samples under various conditions before economists reach a consensus on anything, and often a consensus is not reached even then. 

Jared Bernstein, a man with no formal economic training but who somehow became VP Joe Biden’s main economic adviser, recently wrote a piece for the Huffington Post acknowledging that economics is not a hard science. Good for him. Yet despite his statement that economics “cannot tell you what will happen, nor will it ever be able to do so”, he basically calls for economists to pretend that they are physicists in a never ending quest to identify and correct market failures. Mr. Bernstein says that “A key component … is the part of economics that I think is the most important: identifying market failures. The best and most useful economists these days are the ones who spot ways in which markets are working badly or not at all.”

I could not disagree more. The government is so involved in markets today that finding a true market failure that is not in reality government induced is like finding a needle in a hay stack. But even if market failures were abundant (they are not), would we really want someone like Mr. Bernstein, a man who admits that even correctly predicting what happens when prices change is beyond the scope of economics, creating and implementing policy? He cannot possibly know what will come of his policies if he thinks that the law of demand is suspect sometimes.

I think economics and the economic way of thinking can correctly predict a lot more than Mr. Bernstein acknowledges. The field of public choice can often predict a politician’s behavior with stunning accuracy. It is often correctly predicted that price ceilings and price floors will lead to shortages and surpluses respectively. The simple supply and demand model can qualitatively predict all kinds of scenarios, even if getting an actual magnitude of the effect proves difficult.

Economics is far more useful than Mr. Bernstein recognizes; not only for its ability to predict behavior but as a way of viewing the world. Unfortunately Mr. Bernstein doesn’t really understand economics and wants to use the economic concept of externalities along with taxes and subsidies to embark on social engineering projects under the guise of “correcting” markets. This is a dangerous endeavor for even an expertly trained economist but for someone holding only a PhD in social welfare like Mr. Bernstein it is absolutely frightening.

Good economics is studying social interactions, voluntary exchange, and analyzing how and why people make choices in a marketplace. Good economics is not some bureaucrat restricting those choices for individuals in a faulty effort to save them from themselves or the “evil” marketplace. Good economics is also about analyzing the secondary consequences of policies. It is not enough to impose a tax on carbon and then say “hey look, we will have less carbon now.” What else will happen? The effects do not stop at the carbon market; they will ripple throughout the economy. A good economist will trace them all out and weigh the costs vs. the benefits. This is something that social engineers like Mr. Bernstein often fail to do. And this is why he is a bad economist.

Monday, August 26, 2013

I really dislike Sherrod Brown

In my most recently received Sen. Sherrod Brown email I read this gem:

"Sometimes, there are Ohio companies who want to expand operations and hire new workers, but federal bureaucracy stands in their way. Recently, a Lorain County small business owner contacted my office because he was having difficulty with a certification required by the federal government. To help cut through red tape, my office sent a letter to the agency. The agency promptly responded and provided the small business owner with the information he needed to move forward and grow his business."

That's right Sherrod. That annoying federal red tape is always getting in the way. This coming from a man who supports "buy American" laws, living wages, Obamacare, the Consumer Financial Protection Bureau, etc. etc. etc. I am nearly certain that Sen. Brown has never seen a regulation that didn't make him giggle with delight.

Instead of supporting less regulation he encourages Ohioans to waste time calling his office so that he can look like a hero for getting around a problem that he fosters everyday. His time in office cannot come to an end soon enough.

Friday, August 16, 2013

Evidence that increases in the minimum wage increase unemployment

A few days ago I published a post about how increasing the minimum wage leads to more unemployment among unskilled workers, especially urban youth who are disproportionately black. Rather than take my word for it I used BLS unemployment data and minimum wage data since 1972 to create two charts.

The first (click graphs to enlarge) shows that decreases in the real minimum wage (in this case the wage is in constant 1996 dollars to show the real purchasing power over time) coincides with decreases in unemployment for both white and black youth between the ages of 16 - 19. (Min. wage scale is on the right axis, unemployment is on the left axis.)

The data only goes back to 1972 so the big divergence between the two rates is not shown, as this had already happened. But you can see that both rates fell on average when the real minimum wage decreased. This is not a ceteris paribus analysis and you can see some increases in unemployment despite a falling min. wage and vice versa, especially in the recessions of the early 80's and early 2000's and the dot com bubble during the late Clinton presidency. But the overall trend is there.

A more convincing graph is below; this graph plots the real minimum wage and the difference in the unemployment rates of black and white youth.

Again the increases and decreases in the real minimum wage closely align with the increases and decreases in the gap between the unemployment rates of white and black youth. As the real min. wage increases the more unemployed black workers there are relative to white workers. This chart, while not completely ceteris paribus, is still more informative since both white workers and black workers were facing the same macroeconomic conditions i.e. recessions, expansions, etc. and yet on average the black unemployment rate increased more than the white unemployment rate when the real min. wage increased and vice versa.

Just to repeat, this is not a statistical, causal analysis. But it does provide evidence for a very sound theory that when wages are increased workers who cannot produce enough to justify the higher wage are left without employment. A better graph would plot unskilled workers between the ages of 16 - 19 vs. skilled or workers by education levels since race is only a proxy for these more informative measures.

That being said, in my opinion the burden of proof is on those who say that increasing the min. wage does not harm low skilled workers, and in particular urban, often black, workers. And if they have no evidence for this, they need to show that the benefits from a min. wage hike outweigh these costs. This does not even take into account the moral argument that people who are willing to work for a low wage should not be denied the opportunity to do so, but that is for another post.

Wednesday, August 14, 2013

The wheels on the bus many not go 'round in Beavercreek

The Greater Dayton RTA has been trying to establish 3 bus stops in my hometown of Beaverceek, OH near the Mall at Fairfield Commons since 2010. The RTA’s proposal for the bus stops has been denied by Beavercreek’s city council for not meeting the council’s design specifications, which include having heating, air-conditioning, and security cameras. Many outlets, including this piece by ThinkProgess, think that the real cause is racism i.e. the mostly white residents of Beavercreek do not want mostly minority bus riders to come into their city. The federal government agrees and has ordered Beavercreek to work with the RTA to build the bus stops or lose federal highway funds.

While I am not sure if racism is occurring since I do not know nor have spoken with any of the current city council members, I do find it interesting that outlets like ThinkProgress and the Huffington Post get all riled up when regulations are used to potentially harm minorities in this case, but not when they are used to do a very similar thing in the cases of the minimum wage, business regulations on food trucks, taxi regulations, or hair braider regulations, to name a few.

In the same way that the Beavercreek city council says that air conditioning and heating are for the comfort of the bus riders and not to keep buses out, the proponents of these other, similar regulations acknowledge the benefits and ignore the costs. The minimum wage gives more money to some poor workers yet decreases employment for the unskilled and prices for consumers. Food truck regulations help brick and mortar stores compete, but drive some trucks out of business. A taxi medallion system might make the taxi system better, but it also would drive out many independent operators who are often minorities. And hair-braiding licenses protect consumers (and established businesses) while driving out startups or keeping them from forming altogether.

I know that a little consistency in the liberal thought process is a lot to ask, but without it it’s hard for me to take their concerns seriously. That being said it would not surprise me if some city council members are uneasy about low-income people coming into their suburban, relatively crime free area. The fact that minorities make up a disproportionate amount of low-income people is what I think leads to the cries of racism; a charge that is very serious and should be made with care, especially by people who have never met the individuals they are charging.

Changing gears away from the logical somersaults of the average liberal, it is discouraging from a federalism point of view that cities and states can be essentially blackmailed by the federal government to do things that they don’t want to do. In this case the federal government is threatening to withhold millions of dollars in highway funds if Beavercreek does not comply with their ruling to work with the RTA to build the bus stops. Cities and states that latch on to Washington’s purse strings often realize too late that it is hard to bite the hand that feeds you.

I personally don't see a problem with having a few bus stops in Beaverceek. And I am fairly certain they will end up being built considering the funding that is at stake. I also wish liberals would argue just as passionately against other harmful regulations as they do for subsidized government programs like public transportation. Maybe some of them will surprise me one day.

Monday, August 12, 2013

More on the living wage debate

I wrote a piece for doublethink online about the living wage. A snippet:

"Common economic arguments in support of a “living wage” fail under scrutiny. In fact a “living wage” would do real harm to low skilled workers since it forces them out of the labor market. There are better ways to help low-wage workers than artificially increasing their wage: better schools, affordable training programs, and private charity to name a few. As a society, we are better off focusing our attention on these solutions rather than continually rehashing the “living wage” debate."

Fast-food restaurants could run food programs more efficiently

The Washington Post published my letter to the editor about a lunch program for poor kids in rural Tennessee. A commenter did not like it.

Wednesday, August 7, 2013

Living wage supporters miss the point

Recently news sites, and subsequently my Facebook newsfeed, have been pointing out that many companies like Costco, Whole Foods, Trader Joes, and an obscure fast food restaurant called Moo Cluck Moo in Detroit can afford to pay their workers a “living wage” and still make a profit. “If they can do it,” many ask, “why can’t Wal-Mart, Wendy’s, and McDonald’s?” The short answer is yes, they could. But the short, easy answer is not the whole story. Nothing is win-win (or despite what Michael Scott thinks, a win-win-win).

Every action has a cost; there are always tradeoffs. In the case of a “living wage”, the stories supporting it often speak of the increased productivity and less employee turnover of the workers at places like Costco, which helps the company make more money. They believe that if Wal-Mart paid their workers more they would receive the same benefits of increased productivity and less turnover and thus they could be a Costco success story as well. This may be true, but the cost is that it would likely not be with the same workforce Wal-Mart currently has.

Wages, like all prices, reflect value; they do not set value. The reason that employees at Wal-Mart and McDonald’s make what they make is that they contribute that much value to the company. If Wal-Mart paid their workers $12 per hour it would be because they hired workers that contributed $12 per hour of value to the company. This is what all of those living wage companies do. They hire workers that contribute $15 or $20 per hour worth of value and pay them accordingly.

The problem with mandating a living wage is that not every worker is capable of contributing $12, $15, or $20 worth of value per hour. Some of the really unskilled, inexperienced workers may be only able to contribute $6 worth of value, some only $8 or $10. If the legal minimum is $12 who is going to hire these workers? The answer is no one. If you think this is far fetched, consider these numbers from economist Walter Williams.

“In 1948, the unemployment rate for white 16-17 year olds was 10.2 percent while that for blacks was 9.4 percent. Among white 18-19 year-olds, unemployment was 9.4 percent and for blacks it was 10.5 percent. During that period, not only were the unemployment rates similar, black teenagers were either equally as active as whites in the labor force or more so.”

The most recent unemployment rate for blacks between the ages of 16-19, 41.6%; for whites, 20.3%.

For those of you who are thinking, “Well, we live in a racist country” (a silly stance in my opinion but hey) Mr. Williams adds:

"Let's investigate. Was racial discrimination in 1948 greater or less than racial discrimination today?”

The health of the economy and the changing priorities of youth and parents explains some of the overall increase in both rates but the huge gap between the two is largely a product of the fact that urban youth who are low skilled due to poor schools and high drop out rates are disproportionally black and low skilled people do not get hired at relatively high minimum wages.

In the same way that gentrification often forces poor minorities out from up and coming neighborhoods the minimum wage forces these same people out of the labor market. People are hurt by the minimum wage. This is a fact. It is reasonable to take the stance that the benefits of higher wages for some outweigh the costs of unemployment for others. But what is not acceptable is to deny that this cost exists and that real life people are harmed by the “living wage”. People who put themselves in a “living wage” cocoon of a win for employers, workers, and customers are na├»ve.

Today there is a generation of young people who are not working. They have not learned basic workplace skills like punctuality, dependability, proper workplace hygiene, and customer service. Many of us take these simple skills for granted, but if you never had that high school job at Burger King or Bob Evans or the local grocery store (all jobs that I had before graduating college) you would be surprised at how unprepared you would be for that first post high school or college job.

I encourage everyone to think about the real costs and benefits of a “living wage” before blindly accepting the easy answer. The debate is more complex than it first appears and there are reasonable people on both sides.

Monday, August 5, 2013

If Cities Want More Affordable Housing, Let the Market Work

See my most recent commentary on about gentrification and affordable housing.

Development Subsidies Waste Resources

Tax breaks and subsidies for new development are common ploys used by cities across the country to attract businesses. In Baltimore, the $1 billion Harbor Point project is scheduled to receive $107 million in public financing for things such as parks and a promenade among other handouts. While private development is badly needed in Baltimore, taxpayer dollars should not be subsidizing these narrow private interests.
            Ronald Kreitner, Maryland’s planning director from 1989 to 2000 and current head of non-profit Westside Renaissance, estimates that Baltimore has provided Harbor Point developer Michael Beatty and his partner John Paterakis more than $1 billion in taxpayer assistance for the Harbor Point project and another nearby development, Harbor East. These handouts were granted despite the fact that the city estimates that the Harbor Point project would earn a $124 million profit for its investors without city financing; city financing increases the profit to $174 million. Apparently cronyism has become so ingrained in Baltimore’s culture that even projects that would be profitable without subsidies receive them.
            Of course local politicians who support the project, such as city council president Jack Young, tout the jobs aspect of the project.  Young claims that the development will create “union jobs” and that a “significant amount of minority contractors” would get jobs. Estimates done by the Baltimore Development Corp. claim that 7,000 construction jobs and 3,300 permanent jobs would be created by the project.  Baltimore’s 10% unemployment rate is evidence that jobs are sorely needed in the area but putting taxpayers on the hook for $107 million dollars is not the best way to create them. Cities like Baltimore need to create better business environments overall by reducing regulation, lowering taxes, and making the process of development clear and straightforward. This will attract employers along with their new products and services and leave taxpayers free to spend their money as consumers, not investors.
Developers and businesses want to go where they can make money. Cities that incentivize developers to meet with politicians and union officials in order to acquire subsidies or circumvent zoning restrictions, burdensome regulations, taxes, and local/minority hiring laws distort the market for urban development in favor of developers who are best at playing the political game rather than the best developers. Simplifying the process by removing regulations and politics and lowering taxes is a better way to encourage good development that does not put the taxpayer at risk.