Tuesday, January 28, 2014

Minimum wage advocates skirt difficult questions.

The minimum wage is in the news again.  There is a movement on the left to increase in the minimum wage to $ 15/hr.  I am aware of no serious people who believe that is possible without serious negative consequences. While it is certainly true that even $15/hr does not yield a grand income, taking salaries to that level would wipe out much of the operating profit of McDonald's or other fast food chains. While some workers would earn more money (and the price of a Big Mac for everyone would rise), it seems inevitable that there would be substantial job loss as operators cut staff and automation becomes more attractive. We could expect to see a lot fewer new stores.

But what of a smaller increase in the minimum wage ? The Journal Sentinel editorial board endorsed an increase to $ 10, saying that it was not "buying" standard economic doctrine that minimum wage can increases reduce employment.

Let's take a closer look at why a minimum wage increase might not be an unalloyed good for the persons it is intended to help.

Minimum wage increases increase the cost of an employee. In response, one - or a combination - of three things must happen.  The employer's profits must be decreased, its prices must rise or it must reduce its labor costs, by cutting staff, reducing hours or somehow making the same number of workers do more. All of these latter three strategies involve less work for low income workers. (One might speculate that it is possible that an increase will somehow transform the value of a minimum wage worker by increasing the value of such workers - by, in effect, creating a new product - but this requires assuming that minimum wage employers know less than the  government about how to maximize productivity in their own business; an unlikely proposition.)

So ... reduced employment, higher prices or lower profits. That a meaningful minimum wage increase will only cause the latter two effects is extremely unlikely. Excess profits, i.e., returns that are greater than that needed to attract the required capital to a business, tend to be eroded over time by new entrants into the business.  To be sure, barriers to entry and brand loyalty and value can impede that process. But it's unlikely that industries with a great many minimum wage workers are earning above market profits that can readily be sacrificed. While Wal-Mart and McDonalds make a lot of money in the aggregate, their margins are slim.  On a store by store basis, there isn't much profit to erode.

The notion that those who must pay higher wages can simply raise prices assumes that the demand for whatever they sell is not price sensitive (or, as we learned to say in Economics 101, that demand for the product is "inelastic.") But that will rarely be the case. Again, the ability to raise prices may be enhanced by the fact that all competitors must pay the new minimum, but there are very few circumstances in which one can simply raise the price of something and not sell less of it.  This is particularly so where work can be outsourced to regions not subject to American minimum wage laws.

And even where a business cannot substitute foreign workers, it can replace them with automation. Indeed, low skill workers are the most vulnerable to being replaced by automation.  If employing a cashier becomes more expensive, the case for substituting an automated check out station becomes more attractive.

Of course, some workers may benefit from the minimum wage increase but others will be harmed. To the extent that the cost of those benefits are not entirely borne by fellow workers who will lose their jobs, they are unlikely to be visited solely upon the richies who employ them but also by the people - often themselves low income - who buy the goods and services that the affected businesses offer.

So the real question for minimum wage advocates - putting aside the moral and liberty concerns associated with forbidding people from entering into whatever voluntary arrangements they might choose - is whether the value to those who keep their jobs outweighs the harm caused to those who lose them - or are never hired in the first place.

That's an empirical question. As is so often the case in economics, studies go every which way largely dependent on the assumptions with which they begin. It strikes me as highly implausible that a 40% increase in the minimum wage (as an increase to $10 would be) will not have significant employment impacts. Advocates for an increase often note that  minimum wages tended to be higher in the 60s and 70s.  For some of that period, unemployment was low, although the real question is what it would have been had the minimum wage been lower.

More fundamentally, the world was different then, marked by a variety of protectionist and restrictive laws and mores regarding trade, immigration and discrimination on the basis of race and sex that are no longer in place. The ability to replace low income workers with technology is dramatically different.

There are two arguments typically advanced in support of minimum wage increases that don't help us answer that question. The first is that the income generated by the current minimum wage is not "enough."

It is certainly not much. But wages are not determined by what is "enough." They are limited by what an employer can pay, i.e., the value generated by an employee and what it must pay, i.e, the wage required to attract the labor market (i.e., what must you pay to attract the employees that you need.) They are not determined by whether or not the wage paid is sufficient to support a particular standard of living.  What I want from my employer does not determine his or her ability or willingness to pay it.

Saying that you don't like what the market "says" about the value of a particular job doesn't, as we have seen, mean that you can simply change that value by passing a law. To say that someone "should" be paid more does not make his or her employer able or willing to pay it.

The second is rumination about the "1%."

It is true that, over the past thirty years or so, that the earnings of the very wealthy have increased far more quickly that those of the rest of us (although the rate of increase of the latter is often, for a variety of reasons, substantially understated). But that phenomenon - which is global and, therefore, unlikely to be a product of domestic policies -  has not been caused by minimum wage laws. The market for CEOs or baseball players is distinct from the market for baristas and cashiers.  And, even if you could compel McDonald's CEO to work for free and redistribute his salary to cooks and counter workers, the impact would be negligible.  If the income earned by the 1% is a problem, it is largely a different one than the earnings of low paid employees.

Cross posted at Purple Wisconsin.

Thursday, January 23, 2014

On prejudice, politics and prosecution

Here we go again.

In the wake of the tragic death of Corey Stingley and the need to determine whether the men who restrained him are criminally culpable, folks are sorting themselves out on the question of whether charges should have been brought - often based on pre-existing beliefs about things like crime and race.

I don't know if a crime should have been charged. And I am pretty sure that a good number of those who are protesting, marching, declaiming and dismissing don't either.

I understand the concern. This was an awful event that shouldn't have happened. I appreciate that there is a history that causes people to be concerned about disproportionate responses to young black males. While I think, in 2014, that much of that concern is overstated, it is understandable.

But to recognize that is not the same as saying that a crime was committed.

In order to have an intelligent opinion on whether the patrons who restrained Corey should have been charged, you would have had to have done the work that the District Attorney's office did. You would have to have reviewed all the evidence - not some version of it provided to you by people with a position to defend. You would not merely ask yourself "what do I think happened here?" You would also need to decide whether you could prove to someone else that the men to be charged acted with criminal intent beyond a reasonable doubt.

Whatever views you hold about the nature of society or race in America or the nature of the crime problem in Milwaukee won't help you answer those questions.

On the one hand, criminal charges should not be brought to assuage offended communities or send messages of inclusivity. They should not be brought because they fit some narrative we believe about "injustice" or a system that does not work for people "of color."

I understand that some folks believe that no one has a right to restrain a lawbreaker. This is not an accurate statement of the law and strikes me as a sadly empty view of what it means to be a community. It suggests that we are all feckless supplicants who must wait for the authorities to do for us what we might need to do for ourselves.

On the other hand, your belief that crime is out of control and that citizens have a right to defend themselves doesn't get you very far either. The fact that the men in question were restraining a lawbreaker was not a license to do whatever they wanted.

I have heard a few people say that Corey Stingley wouldn't be dead if he hadn't stolen something or fought with the men who tried to restrain him. That's true, but not very helpful. It wasn't wrong for other patrons to restrain Stingley. It would be wrong for them to choke him to death. It would, under the law, be wrong for them to act with intent to harm him or to create an unreasonable and substantial risk of death or great bodily harm of which they were aware.

Being "tough on crime" or in favor of "self defense" won't help you decide whether that happened.

But, being human, our preexisting beliefs will affect how we view the evidence. If you believe that it is "open season" on young African-Americans, you're going to be more likely to view the facts here in a way that supports criminal charges. If you don't believe that - and think that certain communities are plagued by criminal behavior - you will be more sympathetic to the men who retrained Stingley.

The only way that you can counteract your confirmation bias is to be aware that you have it. Rushing to the barricades with cries of "injustice" or "thuggery" won't help.

Cross posted at Purple Wisconsin

Tuesday, January 21, 2014

A word from a killjoy

Purple Wisconsin blogger Jim Rowen is unhappy with "killjoys" who were put off by Richard Sherman's rant at the end of Sunday's NFL title game. Sherman, according to Jim, was just "whooping it up." What's the problem?

Well, allow me to retort.

I'll give Sherman a bit of leeway for three reasons. First, the game was just over and football does require a certain amount of spleen. Second, the 49ers - a team every bit as chippy as Sherman's Seahawks - do bring this type of thing on themselves. Finally, I imagine that Sherman is no fool. He's creating a brand.

But only a little leeway. Maybe Jim has forgotten a world where people were expected to conduct themselves with a bit of decorum and class, but I haven't. One of things that you were supposed to do is be gracious in victory and show your opponent a modicum of respect. This wasn't just antiquated etiquette. It was a way of keeping sports in perspective and reminding ourselves that our games are not war. If you don't respect your opponent; you can't respect the game. We call it sportsmanship.

Now maybe this is out of fashion in a world where "keeping it real" - without regard to whether all that authenticity is worth a fig - is supposedly a higher value.

But it shouldn't be. If that's the real Richard Sherman, he's a bore.

Cross posted at Purple Wisconsin.

Friday, January 03, 2014

No, extending unemployment benefits does have a cost

Every once in a while, I read something on the Purple Wisconsin site that brings me up short; that begs for a response. Recently, it was the following statement made by Kristin Hansen in a column making a "you can have your cake and eat it too" argument for extending unemployment benefits. She wrote:

Republicans love to complain that we can’t “afford” to pay unemployment benefits. But anyone who’s taken Econ 101 can tell you that cash paid out to the unemployed stimulates the economy by more than one and a half times its cost.

I am not an economist, but I went well past Economics 101.  I don't "know" that.

I'll concede, however, if someone took only Economics 101 and had a bad instructor, he or she might be "told" that.  While I understand Ms. Hansen has as little space in a blog post as I do, hers is a statement of a crude form of Keynesianism. But not all economists are Keynesians and even those who are have come to see the proposition as requiring a great deal more nuance. The reality is that what she says "everyone knows" is a highly controverted assertion based on cherry picking certain econometric models that are contradicted by other models.

The theory is this.  At least under certain economic conditions (a qualification that is often overlooked), moving money from one hand to another may result in greater aggregate demand and higher levels of economic activity. In this case, the hypothesis is that, if you give money to lower income people (the unemployed), they'll spend it, while the wealthier folks who you take it from would just put it in the bank. Because this activity reverberates through the economy, a dollar of goverment spending might be subject to a "multiplier" effect and generate more than a dollar in economic activity.

An immediate problem is that money in the bank is presumably used for investment that itself creates economic activity - although the Keynesian story is that, in times of recession, there will be no demand for invested funds. Another level of complexity arises if one one abandons the assumptions that people will react as if they are unaware that whatever is being done to "stimulate" the economy is only temporary and that those who are supposed to spend their newfound wealth or invest in response to such spending will not take into account that, at some point, taxes must be raised to pay for the stimulus. (The latter results in an odd argument about "animal spirits" that I have never been able to take seriously.)

The Keynesian view must establish that there is something wrong with the price system. It must explain why the goverment will know how to allocate resources more efficiently than the market.

Of course, this is a simplified version of the debate and there are others more qualified to elaborate on it than I am.  But what does the evidence show?

Ms. Hansen's observation is based on certain econometric studies (here's one oft-cited example) that claim to have "found" that the Keynesian story is true, The value of econometric models is itself vigorously disputed. Because we can't run really run controlled experiments in economics and the competing explanations for any particular economic state of affairs are multiple and intertwined, you have to make a great many assumptions about the relationship between the policy that you are evaluating and the result that you are "finding."

As a result, these studies tend to go every which way.  Some find that government spending, like extending unemployment benefits have a positive multiplier, while others find that they do not - even concluding that the "multiplier" is less than one. One of the real challenges for the Keynesian view is that there are no clear examples of it ever having worked as advertised in the real world. (The oft-cited example is World War II, but that really goes against the Keynesians.)

The Obama administration has engaged in an extended period of deficit spending - often by fiat - with little to show for it, although Keynesian proponents can always argue that whatever was done was not "enough" or, without it, the economy would have been "worse."

My own view is that, if one wants to make an argument for extending unemployment benefits (and I am not necessarily against it), it ought to be a humanitarian argument. That argument will have to acknowledge the risk that extending benefits may increase unemployment (by reducing the incentive to look for work), but argue that the benefit of helping those who simply can't find work is worth the cost.

But to argue that a positive multiplier effect is as certain as the Second Law of Thermodynamics is to confuse wishful thinking for proof.

Cross posted at Purple Wisconsin