500+ Economists Against Raising Labor Costs

Over 500 economists (including three Nobel laureates) have signed a letter to “Federal Policy Makers” arguing that hiking the minimum wage would be damaging to job creation and the economy:*

As economists, we understand the fragile nature of this recovery and the dire financial realities of the nearly 50 million Americans living in poverty. To alleviate these burdens for families and improve our local, regional, and national economies, we need a mix of solutions that encourage employment, business creation, and boost earnings rather than across-the-board mandates that raise the cost of labor. One of the serious consequences of raising the minimum wage is that business owners saddled with a higher cost of labor will need to cut costs, or pass the increase to their consumers in order to make ends meet. Many of the businesses that pay their workers minimum wage operate on extremely tight profit margins, with any increase in the cost of labor threatening this delicate balance…For these reasons, we encourage federal policymakers to examine creative, comprehensive policy solutions that truly help address poverty, boost incomes from work, and increase upward mobility by fostering growth in our nation’s economy.

Check it out.

*Pic from Mark Perry

The Great Enrichment

Economist Deirdre McCloskey presented a paper entitled “The Great Enrichment Came and Comes From Ethics and Rhetoric” at a New Delhi conference for the Centre for Civil Society in January. The following excerpt is, in large part, why I support markets:

Free markets, that is, have not been bad for the poor of the world. The sole reliable good for the poor, on the contrary, has been the liberating and the honoring of market-tested improvement and supply. Private charity and public works, socialism and central planning, by contrast, have often made people worse off. Yet economic growth since 1800 has almost always made them better off, by enormous factors of increase. The enrichment of the poor, that is, has not come from charity or planning or protection or regulation or trade unions, all of which, despite their undoubted first-act popularity among our good friends on the left, merely redistribute a constant or a shrunken pie. The mere arithmetic shows why. If all profits in the American economy were forthwith handed over to the workers, the workers (including some amazingly highly paid “workers,” such as sports and singing stars and big-company CEOs) would be 20 percent or so better off, right now. One time only. The 20 percent is to be compared with a rise in real wages 1800 to the present by a factor of 10 or 30 or (allowing for improved quality of goods) 100, which is to say 900 or 2,900 or 9,900 percent. If we want to make the non-bosses or the poor better off by a significant amount, 9,900 percent beats 20 percent every time. At 5 percent per year market-tested improvement and supply goes beyond the one-time 20 percent in a scant four years, and then cumulates to a quadrupling.

Check it out. The third volume of her trilogy on the Bourgeois Era- (the 2nd of which is pictured above)-The Treasured Bourgeoisie: How Markets and Innovation Became Virtuous, 1600-1848, and Then Suspect–will be out in 2015.

The Dalai Lama and…Capitalism?

The American Enterprise Institute hosted His Holiness the Dalai Lama for an event titled “Happiness, Free Enterprise, and Human Flourishing.” The two panels were “Moral Free Enterprise: Economic Perspectives in Business and Politics” and “Unlocking the Mind and Human Happiness.” The speakers (besides the Dalai Lama) included Arthur C. Brooks (AEI), Jonathan Haidt (New York University), Glenn Hubbard (Columbia University), Daniel S. Loeb (Third Point LLC), Diana Chapman Walsh (MIT), Richard Davidson (University of Wisconsin), Otto Scharmer (MIT), and Arthur Zajonc (Mind & Life Institute). “This is such a wonderful day when a religious leader particularly loved on the left comes to a free market think tank,” said Jonathan Haidt (as quoted in a Yahoo News piece). “It makes me think we can break out of the rut we’ve been in for so many years in our arguments about business and government.”

Check it out.

The Economics of Sex

Controversial sociologist Mark Regnerus had a Slate article a couple years back entitled “Sex Is Cheap,” which argues that the “market price” of sex is currently very low. The Austin Institute for the Study of Family and Culture (where Regnerus is a senior fellow) recently put out a short video called “The Economics of Sex,” which seems to cover a lot of the same material. Check it out below.

Economist Jeff Smith Won’t Sign Minimum Wage Petition

I’ve written about my criticisms of minimum wage a couple of times already. (Walker has weighed in as well.) Here’s a good article, posted by Michigan economist Miles Kimball but quoting fellow professor Jeff Smith, on reasons why Jeff Smith refuses to sign a petition supporting a raise in the minimum wage. His concerns are:

1. It is poorly targeted relative to alternative policies such as the Earned Income Tax Credit (EITC). And, yes, I am familiar with the argument that the minimum wage and the EITC are complements; what is thin on the ground, so far as I am aware, is evidence of the empirical importance of this argument.

2. As pointed out recently by Greg Mankiw, it distributes the costs of the increased minimum wage in a less attractive way than alternative policies such as the EITC, which implicitly come out of general tax revenue.

3. Most importantly, raising the minimum wage fails to address the underlying issue, which is that many workers do not bring very much in the way of skills to the labor market. Rather than having a discussion about raising the minimum wage, we should be having a discussion about how to decrease the number of minimum wage workers by increasing skills at the low-skill end of the labor market. This would, of course, mean challenging important interest groups. It is also a bigger challenge more broadly because it is less obvious how to do it. But that is the discussion we should be having because that is the one that will really help the poor in the long run, in contrast to a policy that feels good in the short run but only speeds the pace of capital-labor substitution in the long run.

None of these arguments are novel, and I’ve cited all of them in the past, but they are worth repeating. Minimum wage: the best you can say is that it’s a really inept and obsolete policy.

Rivalry and Marriage

Bryan Caplan
Bryan Caplan

Not that kind of rivalry, but the kind spoken of in economics. GMU economist Bryan Caplan has a fascinating blog post in which he examines how rivalrous a married couple’s consumption bundle typically is with some aid from equivalence scales. Caplan takes an imaginary couple with the high earner making $60,000 and the low earner making $40,000 annually. Using four distinct empirical strategies, he finds that “the low-earning spouse makes out like a bandit.  The surprise: The high-earning spouse gains as well – for all four ways to estimate real-world rivalry…[I]f one partner outearns the other by 50%, share-and-share-alike marriage raises the high-earner’s effective consumption by about 30%, and the low-earner’s effective consumption by about 100%.  To quote Keanu, “Woh.””

He concludes,

These calculations deliberately ignore all the evidence that marriage makes family income go up via the large male marriage premium minus the small female marriage penalty.  So the true effect of marriage on economic well-being is probably even more massive than mere arithmetic suggests.  Why then are economists – not to mention poverty activistsso apathetic?

See the full post for the calculations.



Giving Back to Society

Drawing on data from the Congressional Budget Office, economist Mark Perry provides the following two charts:

“As the data show in the top chart,” writes Perry,

the shares of pre-tax income for the four lower income groups was greater than their shares of federal taxes paid in 2010. In contrast, the highest quintile earned about half (51.9%) of all income in 2010 but paid more than two-third (68.8%) of all federal taxes collected. The top 1% earned 14.9% of pre-tax income in 2010 but paid 24.2% of all federal taxes collected…The federal tax system is highly progressive (higher income households shoulder an increasingly greater tax burden), especially for federal income taxes, as the bottom chart shows. The top income quintile paid almost all federal income taxes in 2010 (94.1%), and the top 1% paid almost 39% of all income taxes. In contrast, the bottom two income quintiles actually had negative shares of income taxes in 2010 and were in fact “net tax receivers” because their refundable tax credits exceeded the income tax otherwise owed.

Not only do the top earners pay the highest amount of taxes, but it tends to be their innovations that benefit society as a whole. Yale economist William Nordhaus’ 2004 paper “Schumpeterian Profits in the American Economy: Theory and Measurement” found that innovators only capture 2.2% of the total present value of social returns. As GMU economist Don Boudreaux pointed out, “The smallness of this figure is astounding. If it is anywhere close to being an accurate estimate, the implication is that “society” pays a paltry $2.20 for every $100 worth of welfare it enjoys from innovating activities.”

The rich may be evil and all that, but they sure do pay for it.

Minimum Wage Hikes: Still (Possibly) Dumb

Nathaniel recently argued that minimum wage hikes were dumb, largely due to the policy harming those it intends to help. New research (2012 working paper version here) examines turnover rates in relation to minimum wage increases. The researchers

find that when the minimum wage is higher, all low educated workers face jobs that are more stable (in the sense that they are less likely to end in a lay-off) but harder to get. This shifts the debate over the usefulness of minimum wages to the question of whether workers are better off with improved job stability or improved chances of finding a job when unemployed. It also means that minimum wages affect a much larger part of the labour market than is usually recognised and potentially raises the stakes in the policy debatesThus, the policy debate should not just be about the employment rate effects of minimum wage increases but about the trade-off between good jobs with higher wages and more job stability versus easier access to jobs. And the debate is relevant for all of the low educated labour market, not just teenagers.

A New Supply-Side Economics

This article at Business Insider is one of those articles for political moderates who want to know about practical, non-ideological, expert-approved policies we can do to grow our economy. The premise of the article is that demand-side economics (think: government intervention and redistribution) has been the right response to the fiscal crisis, but that in the long run sustainable growth depends on supply-side economics (think: deregulation). Rather than a return to the supply-side theories of prior decades, however, the article lists 8 new supply-side policies, and a lot of them are exactly the sane, sensible policies that could make our country better.

This pic has nothing to do with the article, really, but BI used it so I did, too.
This pic has nothing to do with the article, really, but BI used it so I did, too.

Precisely because they are sane, sensible, and not easily classifiable as left or right, they will probably be totally ignored. Don’t let my cynicism get you down, though! At a minimum, if you read the article you can trot them out whenever you feel the need to browbeat your partisan friends (from either end of the spectrum) into submission the next time they explain why it is that their particular political ideology is the One True Way for America.

And that’s…. something, right?

War on Poverty: The Results – Part Deux

Yesterday, I posted “War on Poverty: The Results” with a rather depressing graph from economist Lawrence McQuillan. However, the post may have struck readers as odd, given that I tend to actually be optimistic about the rise of living standards all over the world (including the U.S.). I’ve also mentioned before that there is a difference between statistical categories and flesh-and-blood people (i.e. “the poor” in 1970 are likely not “the poor” of 2014). But frankly, the U.S. Census data (which McQuillan’s graph was based on) is, as Washington Post columnist Robert Samuelson writes, “a lousy indicator of people’s material well-being. It misses all that the poor get — their total consumption. It counts cash transfers from government but not non-cash transfers (food stamps, school lunches) and tax refunds under the EITC. Some income is underreported; also, the official poverty line overstates price increases and, therefore, understates purchasing power.” In fact, one could argue that “the poor will always be with you” if we take the U.S. Census Bureau’s approach to measuring poverty:

The current poverty thresholds do not adjust for rising levels and standards of living that have occurred since 1965. The official thresholds were approximately equal to half of median income in 1963-64. By 1992, one half median income had increased to more than 120 percent of the official threshold (pg. 1).

Due to rising standards of living, poverty must become relative to the surrounding standards:

Adjustments to thresholds should be made over time to reflect real change in expenditures on this basic bundle of goods at the 33rd percentile of the expenditure distribution (pg. 2).

While the U.S. Census data can be useful (hence my original post), it is woefully inadequate. As a mentioned above, a major thing it misses is the material well-being of the poor. As science writer Matt Ridley explains,

Yet looking back now, another fifty years later, the middle class of 1955, luxuriating in their cars, comforts and gadgets, would today be describe as ‘below the poverty line’…Today, of Americans officially designated as ‘poor’, 99 per cent have electricity, running water, flush toilets, and a refrigerator; 95 per cent have a television, 88 per cent a telephone, 71 per cent a car and 70 per cent air conditioning. Cornelius Vanderbilt had none of these. Even in 1970 only 36 per cent of all Americans had air conditioning: in 2005 79 per cent of poor households did. Even in urban China 90 per cent of people now have electric light, refrigerators and running water. Many of them also have mobile phones, inter net access and satellite television, not to mention all sorts of improved and cheaper versions of everything from cars and toys to vaccines and restaurants.

Amenities in Poor Households

(From the Heritage Foundation)

While poverty by certain standards may not have budged, the literal material well-being of the underprivileged in America has increased dramatically. The safety net has played (and should arguably continue playing) a role in protecting the poor from some of the most brutal blows poverty has to offer. But when you consider the many life-easing materials mentioned above, I think you’ll find that LBJ had little to do with the market forces that brought them about.