Relevant and even prescient commentary on news, politics and the economy.

New York’s City Council passed a living wage ordinance

by Kenneth Thomas

New York’s City Council passed a living wage ordinance

On Monday, New York’s City Council passed a living wage ordinance, reports Good Jobs New York’s Bettina Damiani. The 45-5 vote means the Council can easily override a threatened veto by Mayor Michael Bloomberg (New York Post, May 1, via Nexis subscription service).

As I analyzed in Competing for Capital, the Living Wage movement attempts to reform, rather than abolish, economic development subsidies. The basic idea is the same as performance requirements in international investment negotiations, i.e., that a company that receives subsidies has to provide additional benefits to the city providing those incentives. As its name suggest, the most common demand is that subsidized firms have to pay a specified wage that is higher than the usual minimum wage. According to Living Wage NYC, over 140 cities in the U.S. have living wage ordinances, and the idea has spread to the U.K., Canada, and New Zealand.

In New York’s case, the law specifies that companies receiving at least $1 million in subsidies must pay $10/hour if they provide health benefits, or $11.50/hour otherwise. This is not a lot of money in New York City, yet a study by the Fiscal Policy Institute, Good Jobs New York, and the National Employment Law Project found multiple cases where subsidized projects paid even less, such as the Bronx Gateway Mall, which the study found had starting wages of $8.80 per hour. According to the study, the city spends over $2 billion annually on economic development incentives.


Mayor Bloomberg blasted the measure as a “jobs killer,” language reminiscent of minimum wage critics. We should remember that, according to Paul Krugman (Conscience of a Liberal) recent studies of the minimum wage do not uphold the long-claimed negative effects of the minimum wage on jobs. In fact, work beginning with that of David Card and Alan Krueger (now the chair of the Council of Economic Advisers) deftly picked apart previous studies in a process known as meta-analysis.

The biggest drawback to the New York law is that it was narrowly drawn by Council Speaker (and probable mayoral candidate) Christine Quinn in order to appease business interests. In fact, according to the Post story, it would affect “at least 600 employees a year,” which is hardly a big number in New York. But we can count on advocates to try to expand its scope in the next few years.

crossposted with Middle Class Political Economist

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Taxes and Economic Growth: Real World & Simulations

by Mike Kimel

Taxes and Economic Growth: Real World & Simulations

Over the past few years, I’ve posted many times on an unpleasant reality: despite the fact that so many people believe otherwise, in general, lower taxes do not result in faster economic growth. It is really too bad, because we could all be better off if only lower tax rates led to faster economic growth. However, the association between slower econoimc growth and lower tax rates is something we can see in data from the US, whether we use national level data, state and local data, or anything in between.

Here’s a post I wrote not that long ago noting that when top marginal tax rates are below about 65% or so, cutting taxes is associated with slower economic growth and raising taxes is associated with faster economic growth. Here’s something a bit more academic showing the same thing.

As I’ve noted before, there’s a logical reason why lowering top marginal rates slows economic growth (except when top marginal rates are very high), and it should be obvious to anyone who has ever run a business: the easiest way to avoid, or at least postpone paying taxes for is not to show taxable income. If your business looks like it will show a profit, reinvest the revenues, pushing up costs and voila, you don’t have any profits for the IRS to tax. But, by doing so, you are also strengthening the company, which means setting the stage for faster growth in later years. And you’re more likely to follow this strategy, rather than consume your profits, the higher the tax rate.
Notice that this little story depends entirely on the self-interest of people in the economy. Money collected in taxes could be put in a big hole and burned, and the story would still work. (Of course, the story works better if whatever is collected in taxes is actually used productively, but that isn’t a requirement.)

The response I’ve gotten via e-mail and commentary comes overwhelmingly in two flavors: a. You lie about the data and you don’t understand how people react to changes in tax rates. b. That may be what the data shows, but it can’t possibly work in theory so it must be wrong.

I can’t help the group folks in group a – I’ve offered up my spreadsheets, and frankly, anyone should be able to replicate it – this stuff ain’t rocket science. But this post is for the folks in the second group.

For grins and giggles, yesterday I made a simple little simulation tool in Excel which is intended to look at the behavior of a very wealthy person reacting to changes in tax rates. In any given period, the person consumes some percentage of the wealth they happen to have. The remainder, the savings, are allowed to grow. Individuals get a benefit from both consumption and holding wealth.

 Their goal is, given the tax rate, to maximize the discounted weighted consumption & wealth over all the periods of their working life. I set tax rates at 0%, 10%, 20%, … 90%, and used Excel’s solver tool to determine the percentage of wealth they will select under each tax rate.

Results are as follows:

Figure 1

Given the parameters selected, here’s what we find: the higher the tax rates, the lower the less of their wealth people consume in any given period and overall. However, the greater the wealth they accumulate… which is essentially the story I’ve been telling to explain the data. As noted previously, in general, higher taxes lead to faster economic growth.

A few additional comments:
a. The simulation is simplistic, and it does not show the quadratic relationship between taxation and growth we see in the real world data. I believe that this can be resolved simply by taking into account satiation resulting from consumption.
b. The simulation indicates that increasing tax rates makes people worse off (the discounted sum of the weighted wealth and consumption tends to be lower for higher tax rates).
b. i. However, they leave behind more wealth. Put another way – individuals in any given period are made worse off, but their descendants are made better off.
b. ii. A more realistic scenario probably shows increased returns as wealth increases. (Mr. Romney, to use one example, has investment options available to him that you and I do not, and Mr. Buffett has options available to him that Mr. Romney does not.) Higher taxes might very well make a person worse off today but better off in the long run. Its great to live during the Gilded Age, a period during which tax rates fell from 75% to 24%… provided you die before the effect of the Gilded Age spits out the Great Depression.
c. Because of the way taxes are defined in this model, they play a similar role to compulsory savings. Put another way: this model can also explain countries with relatively low taxes but compulsory savings, such as Singapore.
d. The model also explains Tyler Cowen’s Great Stagnation.
e. Government spending does produce a benefit, though that is ignored by this model.

I haven’t decided whether I want to spend time improving the simulation tool, but, as usual, if anyone wants my spreadsheet, drop me a line. I’m at my first name (mike), my last name (kime), at gmail.

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Robbery at the Saving and Loan… a reminder

As I wait for the roofers to fix a leak in a flat part of the roof I pass along this comment and link:

Lifted from comments at Naked Capitalism, reader Mary  points us to some history: Martin Mayer C-Span link in full: The Greatest Ever Bank Robbery” 1990.   Even as Wells Fargo bank remains on a precarious path, life goes on and you just hope this time it works better.

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Who Determines Short Term Interest Rates?

Do you think it’s the Fed?

It’s not.

The market determines short term interest rates.

Really.

The Federal Funds Rate, which is set by the Fed, FOLLOWS 3 month T-Bill rates.  It does not lead the economy.  Here are some looks.  First the whole data set, going back to 1954, presented in Graph 1.

Federal Funds data from FRED.

T-Bill rates from a different Federal Reserve site

These are tabulated monthly values.  But the T-Bill rate is set in a weekly auction, and the Fed Funds rate is set by the Fed Open Market Committee, on an arbitrary schedule, at their discretion. 

Graph 1  Fed Funds and 3 Mo. T Bill Rates, 1954-2011

Not exactly lock step, but they are a couple of clinging vines.  At this scale, it’s pretty hard to tell who leads and who follows.  Let’s look closer at the last few decades.  First, the all-time highs of the early 80’s, in Graph 2.

Graph 2  Fed Funds and 3 Mo. T Bill Rates, 1978-84

Here, the Fed Funds are in green and the T-Bill rate in orange, with the moves off of tops and bottoms highlighted in other colors.  Fed Funds tend to run a bit above T-Bills.  From this data, T-Bill rates generally change direction in the same month or the month prior to a Fed Funds change.

Graph 3  Fed Funds and 3 Mo. T Bill Rates, 1978-84

Same story in Graph 3: either concurrent motion or T-Bills are slightly ahead.  For the two downward moves at the beginnings of 1990 and 1995, they are three to four months ahead.

The story is similar for the most recent decade, shown in Graph 4.

Graph 4  Fed Funds and 3 Mo. T Bill Rates, 2000-2008

Looks like the Fed is a close follower of T-Bill rates, usually within a month or so.  Coming off a diffuse top, the lag can be a little longer.

Graph 5 shows a close up of 2001-5, without the odd colors.  T-Bill leadership is easily seen.

Graph 5  Fed Funds and 3 Mo. T Bill Rates, 2001-05

Two questions present themselves:

1) Does the Fed have any real power to influence interest rates?
2) What would happen if they attempted to move counter to the market?

In my mind, this casts serious doubt on the usefulness of interest rate manipulations as a monetary policy lever.   What do you think?
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