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Minimum Wage Effects with Non-Living Wages

I’m teaching “Economics for Non-Economists” this semester. This is an interesting experiment, and is strongly testing my belief that you can teach economics without mathematics so long as people understand graphs and tables. (It appears that people primarily learn how to read graphs and tables in mathematics-related courses. Did everyone except me know this?)

Since economics is All About Trade-offs, our textbook notes that minimum wage increases should also mean some people are not employed. Yet, as I noted to the students, in the past several decades, none of the empirical research in the United States shows this to be true. (From Card and Kreuger (1994) to Card and Kreuger (2000) to the City of Seattle, in fact, all of the evidence has run the other way, as noted by the Forbes link.)

Part of that is intuitive. If you’re running a viable business and able to generate $50 an hour, it hardly makes sense not to hire someone for $7.25, or even $9.25, to free up an hour of your time. The tradeoff is that your workers make more and your customers can afford to pay or buy more. Ask Henry Ford how that worked for him.

The generic counterargument (notably not an argument well-grounded in economic theory) was summarized accurately by Tim Worstall in one of his early attempts to hype the later-superseded initial UW study for the Seattle Minimum Wage Study Team.

[T]here is some level of the minimum wage where the unemployment effects become a greater cost than the benefits of the higher wages going to those who remain in work.

This seems intuitive in the short-term and problematic in the long term, even ignoring the sketchiness of the details and the curious assumption of an overall increase in unemployment (or at least underemployment) if you assume a rising Aggregate Demand environment. To confirm the assumptions would seem to require either a rather more open economy than exists anywhere or a rather severe privileging of capital over labor.*

On slightly more solid ground is the assumption that minimum wage should be approximately half of the median hourly wage. But then you hit issues such as median weekly real earnings not having increased much in almost forty years, while a minimum wage at the median nominal wage rate suggests that the Federal minimum wage should be somewhere between about $12.75 and $14.25 an hour. (Links are to FRED graphics and data; per hour derivations based on the 35-hour work week standard for “full-time.”)

So all of the benchmark data indicates that reasonable minimum wage increases will have virtually no effect, and none on established, well-managed businesses. The question becomes: why would that be so?

One baseline assumption of economic models is that working full-time provides at least the necessary income to cover basic expenses. Employment and Income models assume it, and it’s either fundamental to Arrow-Debreu or you have to assume that people either (a) are not rational, (b) die horrible deaths, or (c) both.

If you test that assumption, it has not obvkiously been so for at least 30 years:

The last two increases of the Carter Administration slightly lag inflation, but they are during a period of high inflation as well; the four-year plan may just have underestimated the effect of G. William Miller. (They would hardly be unique in this.)

By the next Federal increase, though—more than nine years of inflation, major deficit spending, a shift to noticeably negative net exports, and a couple of bubble-licious rounds of asset growth (1987, 1989) later—the minimum wage was long past the possibility of paying a living wage, so any relative increase in it would, by definition, increase Aggregate Demand as people came closer to being able to subsist.

The gap is greater than $1.50 an hour by the end of the 1991 increase. The 1996-1997 increase barely manages to slow the acceleration of the gap (to nearly $1.70), leaving the 10-year gap in increases to require three 70-cent increases just to get the gap back down to $1.86 by their end in 2009.

Nine years later, almost another $1.50 has been eroded, even in an inflation-controlled environment.

Card and Kreuger, in the context of increasing gap between “making minimum wage” and “making subsistence wage,” appear to have discovered not so much that minimum wage increases are not negatives to well-run businesses so much as that any negative impact of an increase, under the condition that the minimum wage does not provide for subsistence income, will be more than ameliorated by the increase in Aggregate Demand at the lower end.

My non-economist students had very little trouble understanding that.

*The general retort of “well, then, why not $100/hour” would create a severe discontinuity, making standard models ineffective in the short term and require recalibration to estimate the longer term. Claiming that such a statement is “economic reality,” then, empirically would be a statement of ignorance.

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Any Economist Who Talks about Rational Investment is Full of Shit, Hoosier Edition

CPAC had a gathering of Republican Governors today. As Jennifer Hayden (@Scout_Finch) on Twitter noted, the Brownback/Walker/etc. panel was called “How to ruin your state’s economy with one easy tax cut.”

So naturally my thoughts shifted to the one way blowing up your state’s economy could be ameliorated: if some unearned windfall occurred. Could a Legislature be saved from itself?

Lo and behold, the PowerBall jackpot was won by a ticket in Lafayette, IN, last night. The Indianapolis Star (Dan Quayle’s ancestral paper, fwiw) notes that this is the second large-value ticket won in the Hoosier State in the past nine months:

A Powerball ticket purchased in Lafayette is worth about $435 million this morning, a Hoosier Lottery official said Thursday….

In July, another Hoosier hit a big jackpot in the Mega Millions game. That ticket, worth about $541 million, was sold at a Speedway gas station in Cambridge City.

One great thing about having people win nearly $1,000,000,000 in the lottery is the tax windfall for the State.

So what is the brilliant Indiana State Senate planning to do with those windfall profits? If you guessed “invest in human capital,” you must be an idiot or an economist (but I repeat myself):

A powerful Indiana Senate panel on Thursday slashed a proposed funding increase for a state program that sends poor children to preschool, jeopardizing a major pillar of Republican Gov. Eric Holcomb’s agenda.

The move imperils efforts by Republican and Democratic education advocates to help Indiana catch up with more than 40 other states that offer significant preschool programs, according to 2015 figures from the National Institute for Early Education Research at Rutgers University.

So much for that Rutgers-joining-the-Big-Ten thing meaning that Indiana State Senators pay attention to the needs of their constituents:

Increasing state funding for preschool programs was a major issue in the governor’s race last year. Democrat John Gregg called for a universal program, while Holcomb said he supported expanded access for poor kids. The state currently spends $10 million a year on a preschool pilot program, called On My Way Pre-k, which is offered in five counties. But advocates say demand far outstrips available funding and sought $50 million for preschool programs in the next state budget.

The Thursday vote by the Senate Appropriations Committee reduced a $10 million a year increase that Holcomb sought to $3 million.

Maybe that $7MM savings will go toward saving two more jobs at Carrier. Maybe the Fed could get interested; I hear an unpopular ex-Governor from that State might now have a position of power there.

The current pilot program was created at the behest of former Gov. Mike Pence, now the vice president, over the objection of many skeptics. But Pence shocked advocates when he opted not to seek $80 million in federal preschool funding for the effort.

Gosh, I wonder why he “shocked” them?

The adoption of a statewide program has proven politically difficult with tea party groups, religious conservatives and a network of home schoolers opposed.

Oh, right, because they were stupid enough to believe he cares about his constituents in the first place.

Short of destroying the entire Midwest with a neutron bomb, there is no chance those states will contribute positively to the economy this century. But economists will keep pretending that they aren’t destroying their seed corn, which may be even more pathetic.

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When to Stop Reading a “Non-Fiction” Article

(cross-posted from Skippy the Bush Kangaroo)

Mark Thoma sends us to Benjamin M. Friedman. Given that imprimatur, one expects precise analysis. (Mark, after all, is an econometrician by trade.)

So it was surprising to stop reading so early. Specifically, I gave up on this cretinous piece of garbage at:

especially during the president’s first year in office, when the Democrats held a filibuster-proof supermajority in the Senate

Just so you know I’m not pulling from context:

The most pressing among [other economic problems than that “roughly one in six Americans — 50 million in a population of 307 million — had no health insurance”] was, and remains, financial reform. Rather than advance its own set of proposals — especially during the president’s first year in office, when the Democrats held a filibuster-proof supermajority in the Senate — the administration largely left the matter to Congress.

So this is the usual argument. The stimulus had been passed, so “the Obama domestic agenda shifted to health care.” I consider this horseshit*, but your mileage may vary.

What is clearly horseshit though, except in the most technical of senses, is the claim that “the Democrats held a filibuster-proof supermajority in the Senate” as if that were for the entire first year of Obama’s presidency, not just from 07 July 2009 (when Al Franken was finally sworn in as the 60th Democrat) to 25 August 2009 (when Ted Kennedy died).

Less than two months isn’t even close to a year, and “a lie is a very poor way to say hello.”** It’s an even poorer way to premise the rest of your “but Obama didn’t try to deal with MY problems” article—especially when he did.

Billmon was correct ten years ago; the Washington Post should have been destroyed with fire and sword. (Indeed, Billmon just neglected to mention the need to salt the earth at 1150 15th street NW.) Jeff Bezos appears determined to continue the tradition.***

*The Administration did, after all, continue to support and argue for “financial reform”–the Consumer Financial Protection Board was founded on 21 July 2011.

**in the words of Edith Keeler and/or Harlan Ellison

***This is datapoint number 1,000,000 or so in favor of that.

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Tim Duy Explictly Declares Reality is Real

And confirms that his own position: is the same as that of Brad DeLong (et cetera.) and those of us who try paying bills

[T]he [Federal Funds Interest Rate target] debate has shifted in the opposite direction as market participants weigh the possibility of a rate cut. The Fed is probably not there yet, but internally they are probably increasingly regretting the unforced error of their own – last December’s rate hike. [emphasis mine]

Now he just has to come a few steps further to realize that the major U.S. money center banks remain insolvent. But that’s outside of his purview as Watcher to Feds, so we shouldn’t expect to see that in print anytime soon.

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The Fed Continues Trying to be Insane

The Fed did the right thing, and moved in the right direction, though in part for the wrong reason today.

Go to Tim Duy for the rational approach. For me, I quote the Fed

Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. [emphases mine]

check the market


and conclude that, with one exception, the only question worth asking is, “What color is the sun on the planet of the Fed Governors?”

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When He’s Right, He’s Right

Brad DeLong (via Mark Thoma, since my desktop is dead and I saw Mark’s post first):

I question Noah [Smith]’s description of the people as “brightest”. If you insist on trying to understand business cycles by requiring a single consumption Euler equation (rather than, say, risk-averse rich 70-somethings with short horizons; myopic middle-class 40-somethings, and the liquidity constrained); if you insist on trying to understand business cycles by requiring that firms engage in Calvo pricing; If you insist on trying to understand business cycles by requiring rational expectations (rather than anchored, adaptive, extrapolative, perfect-foresight, and Panglossian)–well, then you really aren’t very bright at all, are you?

Only two quibbles: Brad opens his piece by describing Noah as “smart young whippersnapper” and then eviscerates him. In Brad’s previous [immvho, failed] attempt at evisceration, Alex Seitz-Wald* was described as “a smart man.” So the quibbles are:

(1) What does Brad have against smart people?

ETA: This appears to be The DeLong Tell. He (correctly) praises “the very-sharp Tim Duy.” No reference to “smart” at all. If he were playing poker, this would be the equivalent of eating the Oreo.

(2) Alex is 29. I’m not certain of Noah’s age, but he (1) graduated undergraduate and spent three years in Japan and (2) received his Ph.D. in 2012 (four years ago). So my minimum guess for Noah would be:

graduated at 21 + 3 years in Japan + 3 years earning/finishing** Ph.D. + 4 years since then = 31.

And if you’re setting the morning line there, I’m taking the over.

So how is Noah a “smart young whippersnapper” and Alex a “smart man,” when the former is clearly a few years older than the latter?

*In the interest of full disclosure, I note that Alex married into my wife’s family this past Memorial Day. Also, in the interest of accuracy, I note that Brad is dead wrong in his framing of Alex’s piece. [That’s for another posting.] But, heck, even smart people like Brad make mistakes.

**This assumes some of the time in Japan was spent on work that directly contributed to completing his Ph.D. This seems an optimistic assumption.

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If You Thought 2010 was Recovery Summer, Wait until you see 2016!

Cue the Fed Taking a Dump in the Empty Punch Bowl

In May, the civilian labor force participation rate decreased by 0.2 percentage
point to 62.6 percent. The rate has declined by 0.4 percentage point over the
past 2 months, offsetting gains in the first quarter.

But the headline number is “at full employment,” if you are determined to be stupid or the President of the Boston Fed (which did not used to be redundant).

The only thing that could save Janet Yellen’s reputation now would be if she became impaired or died before the 16th.

Meanwhile, the [ETA: major U.S. money-center] banks remain insolvent.

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