Economics

Economists on the Welfare State and the Regulatory State Symposium

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The latest issue of Econ Journal Watch has papers from the Mercatus-sponsored symposium “Economists on the Welfare State and the Regulatory State: Why Don’t Any Argue in Favor of One and Against the Other?” The issue features articles from economists like Robert Higgs, Arnold Kling, and Scott Sumner. However, the two that seem the most interesting to me are the articles by Swedish economist Andreas Bergh and social psychologist Jonathan Haidt. I’ve referenced Bergh’s work elsewhere due to his dispelling of several of myths regarding the Swedish welfare state (from both the Right and Left). His symposium contribution argues that a Hayekian welfare state can exist in theory by combining “low regulation with social insurance schemes that are not terribly vulnerable to the knowledge problem.”

In Haidt’s paper (with co-author Anthony Randazzo), the two surveyed economists and “found a relationship between views on empirical economic propositions and moral judgments.” Furthermore, in footnote #3, it says that Haidt is working on a book on capitalism and moral psychology. I imagine it will look something like his Zurich.Minds presentation.

Definitely worth checking out.

More on the Minimum Wage: Recession Edition

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Nathaniel recently pointed to a new study that reported the drop in unemployment benefit duration in 2014 led to an increase in job creation. An NBER study toward the end of 2014 on minimum wage hikes complements this research.

The abstract reads as follows.

We estimate the minimum wage’s effects on low-skilled workers’ employment and income trajectories. Our approach exploits two dimensions of the data we analyze. First, we compare workers in states that were bound by recent increases in the federal minimum wage to workers in states that were not. Second, we use 12 months of baseline data to divide low-skilled workers into a “target” group, whose baseline wage rates were directly affected, and a “within-state control” group with slightly higher baseline wage rates. Over three subsequent years, we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an “internship” effect), and lost wage growth associated with reductions in experience accumulation. Methodologically, we show that our approach identifies targeted workers more precisely than the demographic and industrial proxies used regularly in the literature. Additionally, because we identify targeted workers on a population-wide basis, our approach is relatively well suited for extrapolating to estimates of the minimum wage’s effects on aggregate employment. Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.

As shown above, the study found that minimum wage hikes “significantly reduced the employment of low-skill workers” as well as their “average monthly incomes.” Furthermore, low-skilled workers (especially those without a college degree) experienced “significant declines in economic mobility” over time. As entry-level jobs decreased, so did the chance for low-skill workers to gain the work experience and skills to move up the economic ladder. As economist Arthur Brooks put it, there are no dead-end jobs: each one brings more experience, more skills, and consequently, more economic mobility. We should stop promoting policies that make entry into the job market that much harder.

 

Unemployment, Kindness, and Policy

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976 - Unemployment

As a general rule, I am very sympathetic to liberal arguments about protection of the poor and vulnerable, especially from a Christian perspective. That is why, for example, I am pro-life. For me the really tricky question is never, “Should we care about the poor?” We should. And in some cases, as with Utah’s revolutionary approach to homelessness, the policy and our ideals fall into perfect, sweet alignment. Utah has started just giving homes to the homeless (literally) and has found that not only is it more human, but it’s also cheaper. For maximum enjoyment, you can watch The Daily Show cover it.

Unfortunately, however, things don’t always work out this way. Take the example of unemployment insurance. Nothing seems more reasonable than extending unemployment insurance during a recession, right? Except that conservatives argue it actually causes people to remain unemployed longer. This is bad for the country, and it’s also bad for the people who remain unemployed. So, if conservative are right on the empirical question, it seems like we’ve got a situation where good policy and ideals (or at least sentiment) do not align. So, are they? New research suggests they are:

We measure the effect of unemployment benefit duration on employment… We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

So, unemployment benefits were cut in 2014, and as a result 1.8 million new jobs were created (or, I supposed, filled) and of those a full 1 million were people who would not have re-entered the labor force if their benefits had not lapsed.

This is where policy gets hard, and it’s questions like this that make me the most frustrated with polarization in politics. Balancing the desire to help in the short-run with the desire to have healthy systemic incentives is the kind of work that can best be accomplished in an atmosphere of mutual good will. Issues like this are issues where compromise works and solutions should strive to be non-partisan.

Is There Really a Wedge Between Production and Wages?

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The above chart has been a talking point for the past couple years. Economic theory posits that an increase in capital per worker leads to increase output per worker which leads to increased income per worker. However, there has been a supposed wedge between productivity and worker compensation since the 1970s. Yet the Manhattan Institute’s Scott Winship argues otherwise. He lists 6 keys to properly analyzing production and wages:

  1. Look at hourly pay, not annual household or family income.
  2. Look at hourly compensation, not hourly wages.
  3. Look at the mean, not the median.
  4. Compare the pay and productivity of the same group of workers.
  5. Use the same price adjustment for productivity and for compensation.
  6. Exclude forms of income that obscure the fundamental question of whether workers receive higher pay when they produce more value.

Number four is especially important:

[The chart above] compares the compensation of production and nonsupervisory workers in the private sector to productivity in the overall economy. The twenty percent of the workforce that falls outside “production and nonsupervisory workers” are excluded from the compensation trend—a group that includes supervisors, who are higher-paid than non-supervisors. Meanwhile, the productivity trend includes them. If productivity has increased primarily among supervisory workers, then we wouldn’t expect compensation among other workers to track productivity growth.

In number six, he states, “Technically, if one is interested in whether workers are being fairly compensated, it probably makes the most sense to compare the growth of compensation to the growth of compensation plus profits. More broadly, one might be interested in whether compensation is growing in line with the income going to owners of capital generally (including those who receive rent or interest).”

He produces a new chart that looks at “hourly compensation and compare[s] it to “net” productivity (excluding depreciation and also proprietors’ income). Both apply to the “nonfarm business sector,” which excludes the parts of GDP produced from the farm, government, non-profit, and housing sectors, thereby avoiding the issues of homeowners renting to themselves and of indirect taxes (along with other measurement issues in the government sector).” Furthermore, it “use[s] the same price adjustment for both compensation and productivity.” Finally, it excludes proprietors’ income (income from one’s business), “as it is not at all clear how to allocate that category into income from labor and income from capital”:

Winship clarifies that ““labor” includes extremely well-paid executives as well as minimum-wage workers, so the fact that labor’s piece of the pie hasn’t shrunk does not mean that inequality between workers hasn’t grown. But it does complicate unified theories of rising inequality.”

Why Oil Prices Are Dropping

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OilThe fact that I was able to fill my car’s gas tank for less than $17 yesterday made me want to post about dropping oil prices. The Economist has a nice summary, stating that four major things are affecting the price:

  1. “Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels.”
  2. “[T]urmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk.”
  3. “America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply.”
  4. “[T]he Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price.”

Check it out.

Thomas Sowell on Uncommon Knowledge

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The 5th edition of economist Thomas Sowell’s classic work Basic Economics was recently released. In honor of this new edition, the Hoover Institution’s (where Sowell is a fellow) Uncommon Knowledge featured a lengthy interview with him. Sowell is a popular and fairly regular guest on the show, much to my glee. Sowell was my main introduction to economics and demonstrated why an economic outlook was important and vital for human well-being. I don’t always agree with his views, but whatever those views are, I take them seriously. Check out the interview below.

Abolish the Corporate Income Tax

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A recent online debate involving Nathaniel (and me to a much, much lesser extent) brought up corporate income tax. It reminded me of this recent article in the Wall Street Journal. The author lists ten reasons to abolish it altogether:

  1. The “engine of tax complexity disappears. And with it disappears an army of lobbyists in Washington working to get favorable tax treatment for corporations.”
  2. “With no corporate income tax, management would concentrate on what is now pretax profits, an artifact of actual wealth creation.”
  3. “[T]here would be no reason to tax dividends at lower rates to compensate for the fact that they now are paid out of after-tax profits.”
  4. Due to increased profits, “corporations would increase both dividends and investment in plant and equipment, with very positive effects for the economy as a whole and increased revenue to the government through the personal income tax.”
  5. The “stock prices…would rise substantially, inducing a wealth effect as people see their 401(k)s and mutual funds rising in value.”
  6. “[T]he distinction between for-profit and nonprofit corporations would disappear.”
  7. “[M]uch of the $2 trillion of foreign earnings, now kept abroad to avoid being taxed when repatriated, would flow into this country.”
  8. With no corporate income tax, “foreign corporations would flock to invest here…”
  9. In order to compete, foreign countries “would be forced to lower or eliminate their own corporate income taxes, increasing domestic corporate profits and thus domestic investment and personal income…”
  10. Finally, “eliminating the corporate income tax would deal a blow to crony capitalism.”

Check out the full article.

The Capitalist Cure for Terrorism

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As the U.S. moves into a new theater of the war on terror, it will miss its best chance to beat back Islamic State and other radical groups in the Middle East if it doesn’t deploy a crucial but little-used weapon: an aggressive agenda for economic empowerment. Right now, all we hear about are airstrikes and military maneuvers—which is to be expected when facing down thugs bent on mayhem and destruction.

But if the goal is not only to degrade what President Barack Obama rightly calls Islamic State’s “network of death” but to make it impossible for radical leaders to recruit terrorists in the first place, the West must learn a simple lesson: Economic hope is the only way to win the battle for the constituencies on which terrorist groups feed.

So begins Hernando de Soto’s WSJ piece on economic freedom as a way to combat terrorism. He tells the fascinating story of his home country Peru and how it defeated the terrorist group Shining Path through a “new, more accessible legal framework in which to run businesses, make contracts and borrow—spurring an unprecedented rise in living standards.”

Worth the read.

Household Demographics

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I’ve relied on economist Mark Perry before regarding inequality and demographics. Not much has changed since last year. As Perry summarizes,

Specifically, high-income households have a greater average number of income-earners than households in lower-income quintiles, and individuals in high income households are far more likely than individuals in low-income households to be well-educated, married, working full-time, and in their prime earning years. In contrast, individuals in lower-income households are far more likely than their counterparts in higher-income households to be less-educated, working part-time, either very young (under 35 years) or very old (over 65 years), and living in single-parent households.

The good news is that the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g. staying in school and graduating, getting and staying married, etc.), which means that individuals and households are not destined to remain in a single income quintile forever. Fortunately, studies that track people over time indicate that individuals and households move up and down the income quintiles over their lifetimes, as the key demographic variables highlighted above change…

See Perry’s post for a more in-depth look at the numbers.

 

McCloskey on Piketty

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Earlier this year, The Spectator ran a great article contrasting the worldviews of French economist Thomas Piketty and Chicago-style economist Deirdre McCloskey. “Piketty (for those who have not followed the story so far) worries about capital and, in particular, the tendency for those who already have it to get more,” the article proclaims. “…McCloskey, by contrast, has long argued that economists are far too preoccupied by capital and saving…Th[e] jump in incomes [in the 19th century] came about not through thrift, she says, but through a shift to liberal bourgeois values that put an emphasis on the business of innovation. In place of capitalism, she talks of ‘market-tested innovation and supply’ as the active ingredient of our economic system. It is incidentally a system ‘drenched’ in values and ethics overlooked by economists.” And it is this that gets to the heart of the matter: “whether capital — past accumulation of savings — gets to devour the future, or whether the future is created afresh by each generation. This argument is a struggle between those who think riches are created from riches, and those who think riches are created from rags. Are big profits best viewed as a generous return on capital, in the way that worries Piketty? Or as coming from innovation that ultimately benefits us all?”

Well, McCloskey now has a full response to Piketty’s Capital in the Twenty-First Century forthcoming in the Erasmus Journal of Philosophy and Economics and available on her website. The title? “Measured, Unmeasured, Mismeasured, and Unjustified Pessimism: A Review Essay of Thomas Piketty’s Capital in the Twenty-First Century.” From demonstrating Piketty’s misunderstanding of supply and demand curves (“He is in short not qualified to sneer at self-regulated markets…because he has no idea how they work”) to noting the strange obsession with inequality (“…and [apparently] we care ethically only about the Gini coefficient, not the condition of the working class”), McCloskey does a fine job in her 50 pages painting a very different picture of the world. However, my favorite portion has to be the following:

Righteous, if inexpensive, indignation inspired by survivor’s guilt about alleged “victims” of something called “capitalism,” and envious anger at the silly consumption by the rich, do not invariably yield betterment for the poor. Remarks such as “there are still poor people” or “some people have more power than others,” though claiming the moral high-ground for the speaker, are not deep or clever. Repeating them, or nodding wisely at their repetition, or buying Piketty’s book to display on your coffee table, does not make you a good person. You are a good person if you actually help the poor. Open a business. Arrange mortgages that poor people can afford. Invent a new battery. Vote for better schools. Adopt a Pakistani orphan. Volunteer to feed people at Grace Church on Saturday mornings. Argue for a minimum income and against a minimum wage. The offering of faux, counterproductive policies that in their actual effects reduce opportunities for employment, or the making of indignant declarations to your husband after finishing the Sunday New York Times Magazine, does not actually help the poor (pg. 34).

What she said.