Topic: Finance, Banking & Monetary Policy

The Minimum Wage: Immoral and Inefficient

Democratic politicians are desperate to make up for ObamaCare’s disastrous roll-out.  Thirteen states are increasing their minimums this year, and some Democrats believe raising the national minimum wage is a winning campaign issue for November.

There’s no doubt that raising the minimum wage would reduce employment and slow economic growth.  Worse, government wage-setting is immoral.  It is unfair and wrong for politicians to posture as philanthropists while forcing other people to pay higher salaries.

The first question is the minimum’s impact on employment and price levels.  The answer is clear:  the cost of higher wages will be borne in varying degrees by customers, workers, and investors.  As I wrote in the American Spectator:

as Nobel Laureate Milton Friedman observed, there ain’t no such thing as a free lunch.  Arbitrarily raising the cost of labor—there is no principled basis for choosing any particular government minimum—will increase prices, reduce investor returns, and cut employment levels.

Most vulnerable are workers with the least education, experience, and skills, who tend to be young and minorities.  Forcing up wages will not only reduce overall employment, but shift jobs toward higher-skilled workers who are more productive and thus warrant higher pay.  The minimum wage also encourages mechanization, since it makes economic sense for companies to invest more in machines to spend less on labor. 

In effect, the minimum wage is a tax on labor-intensive companies.  No surprise, then, as explained by Mark Wilson of Applied Economic Strategies in a Cato Institute Policy Analysis:  “The main finding of economic theory and empirical research over the past 70 years is that minimum wage increases tend to reduce employment.” 

The strangest claim may come from the Financial Times, which editorialized:  “a higher wage would stimulate the economy without adding a dime to federal spending.”  However, to the extent raising the minimum increases the total amount of wages, it does so by redistributing the money from other people, who end up with less to spend on consumption. 

No doubt, the employment impact of a small increase, especially if salary levels have been rising, would be modest, which explains recent economic studies demonstrating lesser job loss.  But the less significant the increase, the less meaningful any potential benefit.

In contrast, those who claim that raising today’s minimum would have no impact on employer behavior fail to demonstrate the courage of their convictions.  If government can hike wages without harm, why stop at $10 or $15 an hour?  Why not go to $1000 or $1500?  Then everyone in America could be rich at no cost to anyone!

Yet there is an even more fundamental issue.  The minimum wage is the modern perversion of compassion into coercion:  I believe there is a moral imperative for you to earn more, so I force someone else to pay more.  I feel moral while sticking someone else with the bill. 

However, if “we,” the citizens of America, believe people should earn more, then “we,” the citizens of America, not a few labor intensive businesses, should pay for those above-market wages.  Opposing the minimum wage is simple fairness.

While many advocates no doubt are true believers, for some fairness talk is pure twaddle.   John Cassidy wrote in the New Yorker:  “In the current political environment, there is little chance of pushing through another hike in income-support programs.  Raising the minimum wage pushes the burden onto corporations and consumers.” 

Washington should be systematically reducing, not increasing, the cost of doing business.  Yet the regulatory-happy Obama Administration has been imposing multiple burdens on commerce, starting with ObamaCare. 

The next time someone rises to support arbitrary government wage-setting, they should be asked what they are doing personally to help the economically disadvantaged.  Raiding the wallets of others does not count as compassion

RIP Economist and Cato Friend Walter Oi: An Advocate for Liberty and the Volunteer Military

With most people focused on the coming of Christmas, the death of economist Walter Oi received little attention.  Educated at the University of Chicago and appointed professor at the University of Rochester, Oi was an outstanding labor economist.  He was no mere ivory tower advocate of liberty.  He was a Nisei, or second-generation Japanese-American.  At age 13 during World War II his family was interned in California.

Life didn’t get easier for him.  His eyesight steadily deteriorated, and he could not read text upon entering college.  He fully lost his sight in 1956.  Yet he went on to gain a PhD, teach, research, serve on presidential commissions, and gain a long list of honors.  His career should embarrass the rest of us.

Moreover, like Cato’s late chairman, Bill Niskanen, Oi stood on principle irrespective of cost.  In warm tribute to the latter, economist David Henderson, a University of Rochester colleague and another Cato Institute friend, pointed to Oi’s criticism of the future prospects for agriculture when teaching at Iowa State University and opposition to proposals for government reparations for the internment of Japanese-Americans.

Oi’s research interests were many but, Henderson wrote:  “If you are an American male younger than 66, you should take a moment and give thanks to economist Walter Oi.  Walter died on Christmas Eve 2013.  Even though you probably haven’t heard of him, he has had a profound effect on your life.  He helped end military conscription in the United States.”

I am one of those who was able to choose my own way, rather than be subject to presidential diktat and sent off to fight in a stupid, unnecessary foreign war.  Tens of thousands of Americans would have been alive had the draft not been available in the 1960s to provide a guaranteed supply of cannon fodder for Lyndon Johnson’s and Richard Nixon’s misadventure in Vietnam.

Many people played critical roles in causing this self-proclaimed free society to rely on a free people for its defense.  Richard Nixon, who proposed the All-Volunteer Force.  Martin Anderson, for whom I later worked in the Reagan White House, who convinced Nixon to tackle the issue.  Milton Friedman, who served on the famous “Gates Commission,” which recommended the shift.

And Walter Oi, who served as a staff economist on the latter panel.

As Henderson, who now educates military officers at the Naval Postgraduate School, explained, Oi’s “passion for free labor markets was what motivated his work on the draft.  His contribution was to point out—and estimate two costs.  First, there was the hidden cost imposed on draftees and ‘draft-induced’ or ‘reluctant’ volunteers.  …  The second cost Oi estimated was the increased annual budget outlay needed to eliminate the draft.”

The AVF obviously was a moral triumph.  It also turned out to be a practical achievement.  The military did far better recruiting people who wanted to serve than impressing those who only wanted out.  Today America has the finest military it has ever fielded, and the best in the world. 

As I wrote in a Cato Policy Analysis:

Indeed, a draft would degrade the military’s performance, requiring induction of less-qualified personnel, who are rejected today, and raising the rate of ‘indiscipline’ by filling the armed services with people who don’t want to serve.  It comes as no surprise that the military leadership opposes conscription.

Walter Oi was sui generis.  He personally suffered from tyrannical though democratic government.  He overcame disability without complaint.  He risked job and opposed government benefits because he valued honesty and principle.  He backed his commitment to liberty with wide-ranging and quality economic research.  And he made a huge difference in the lives of tens of millions of his countrymen.

RIP Walter.

Krugtron the Invincible or the Undercover Economist?

If one questions the old-school Keynesian orthodoxy, one risks being accused by Paul Krugman of being complicit in an “anti-scientific revolution” in macroeconomics:

[w]e had a scientific revolution in economics, one that dramatically increased our comprehension of the world and also gave us crucial practical guidance about what to do in the face of depressions. The broad outlines of the theory devised during that revolution have held up extremely well in the face of experience, while those rejecting the theory because it doesn’t correspond to their notion of common sense have been wrong every step of the way.

Yet a large part of both the political establishment and the economics establishment rejects the whole thing out of hand, because they don’t like the conclusions.

Galileo wept.

While there is no question of the importance of Keynesian models in 20th-century economic thinking, the current pluralism of modeling and empirical strategies in macroeconomics is a fact of life. The existence of divergent views on macroeconomics should not be surprising, given by the difficulty of doing clean empirical tests. Krugman does his discipline a disservice by elevating one narrow subset of models to the status of a well-established scientific truth and presenting the views of a large part of what he calls “the economics establishment” – i.e. of numerous other academics – as somehow obviously false and irrelevant.

So when it comes to economic journalism, one can – and should – do better than Krugman. To see a living example, come next Thursday to Cato and listen to Tim Harford (or watch live here if you can’t make it). Harford may disagree with libertarians on many issues but, unlike Krugman, he has always been the epitomy of civility. What is more, his writings demonstrate that one can communicate complicated ideas to wide audiences without falling into tired ideological clichés and self-righteousness.

Inflation and Injustice

More than a few places in this world people are trying to better themselves by saving money. Many people without access to formal financial services (or awareness of their benefits) are trying to amass capital by squirreling away cash. If wariness and luck prevent that money from being stolen, their nest-eggs might provide life-saving health care, seed capital for businesses, the means to move, education for children, and numerous other enhancements to poor people’s well-being. I say good for them. But there are people out there who don’t care if government policy stands in the way.

Unknown to many cash-hoarders—unsophisticated investors who should have our sympathy—official government policy in many countries is to inflate the currency. Under stable conditions, such policies might reduce the value of the existing stock of money at a rate of about 2% per year.

That is a boon to governments, of course, which are typically debtors. The policy quietly reduces real government debt by 2% annually without need of raising official taxes. And whether they spend the money themselves or infuse their banking sectors with liquidity, governments use monetary policy to curry favor with important political constituencies, thus solidifying power.

Bernanke’s View of Fiscal Policy

Federal Reserve chairmen are famous for their opaque but sophisticated-sounding comments designed to make it appear that they know more about the shape of the economy than they really do. But outgoing chairman Ben Bernanke’s direct and transparent assertions yesterday about fiscal policy also left me scratching my head.

In response to a reporter’s question about why the economy has not created more jobs:

Bernanke saw several of the usual reasons: the nature of the financial crisis, the housing bust and trouble in Europe. But he added one more. ‘On the whole, except for in 2009, we’ve had very tight fiscal policy,’ he said. ‘People don’t appreciate how tight fiscal policy has been.’

In the usual (and weird) Keynesian view of the economy, government deficits are stimulative while surpluses are “tight” or destimulative. The following chart (based on CBO) shows that in the four years after 2009, we had $4.4 trillion of federal deficit spending, or supposed Keynesian stimulus. Calling that “very tight fiscal policy” is absurd.

Edwards Chart

Some Preliminary Thoughts on the New “Final” Volcker Rule

There was only one way that the five regulatory agencies tasked with drafting the Volcker Rule–the provision of Dodd-Frank limiting proprietary trading by banks–were ever going to meet the year-end deadline and give meat to a poorly drafted statutory provision. That was if they retained maximum ex post facto discretion to decide whether bank activity is permissible or not under the rule. Unsurprisingly, this appears to be exactly what they have done.

I have some particular concerns:

The rule will require a “maze of regulators” (via the Wall Street Journal)

You thought the debate over the extraterritorial application of cross border derivatives (i.e., the fight between the Securities and Exchange Commission and the Commodities Futures Trading Commission)was contentious? Volcker is going to be five times worse. The rule still requires ongoing monitoring and enforcement by FIVE separate agencies and, as Wayne Abernathy of the American Bankers Association noted, there is still no mechanism for coordination built into the rule.

The rule lacks “bright line distinctions” (per Janet Yellen)

Basically banks won’t know if they’re in compliance or not until their regulator determines it. Ominously, SEC chairman Mary Jo White said that the regulators would be available to add “clarification.” Needless to say, a final rule should not need clarification.

The devil is in the enforcement

Several of the regulators noted that the key to “successful” implementation of the rule is ongoing monitoring and enforcement. But how do you monitor and enforce a rule that doesn’t have a bright line? So much for the rule of law.

The rule contains an exception for sovereign debt

In other words, banks can trade in as much sovereign debt as they want for their own account, but if they were to engage in similar activity with respect to investment grade corporate debt–Exxon Mobil for example–this will be illegal proprietary trading. (I feel safer already!)

Much of the “new final” rule does not have the benefit of public input

The two SEC commissioners who voted against the rule both complained they did not have sufficient time to review the contents–one labeled the year-end deadline “wholly political”–and were concerned that many of the new provisions did not have the benefit of public comment. They are correct that, at the very least, the rule should have been re-proposed as a draft.

For a full transcript of the final rule and Volcker related materials, see here.

“We wouldn’t file a complaint against someone who doesn’t have liability”

A group called the National Fair Housing Alliance has taken the lead in levying sensational bias charges against mortgage lenders, claiming that neglect of REO (real-estate-owned) properties following foreclosure has followed racially discriminatory patterns. It helped negotiate the extraction of $42 million from Wells Fargo, and is pursuing tens of millions in claims against Bank of America and other lenders. NFHA’s claims have routinely been given unskeptical circulation in the press, but now an investigation by Kate Berry and Jeff Horwitz in the American Banker is bringing overdue scrutiny:

The group has disclosed addresses for only a fraction of the properties it alleges the banks have neglected, but a review of those it has released indicates that NFHA regularly misidentified the institution legally responsible for maintaining specific homes. In some cases, it conflated the banks responsible for maintaining properties with those that were simply serving as trustees for mortgage-bond investors. In others, it faulted banks for damage that occurred before they took possession of properties.

Not in dispute is the leverage the NFHA has gained in its dealings with banks from its close ties to supporters in the federal government. Unusual among Washington agencies, the Department of Housing and Urban Development both funds housing discrimination investigations by nonprofits, including by the NFHA, and provides the venue for them to negotiate their claims.

Grants from HUD and Fannie Mae helped get the NFHA and its leader, Shanna Smith, into the profitable business of investigations in the first place. Banks complain without success about Smith’s practice of demanding a deal while withholding the actual identities and addresses of the properties said to be suffering from bank neglect. Now the HUD-brokered Wells Fargo settlement has paid off richly with $30 million+ for the NFHA and its affiliates, the better with which to stir up more complaints. And watch the revolving door spin, amid few qualms arising from conflicts of interest: “Sara Pratt, the HUD official responsible for investigating and resolving the NFHA’s complaints, and who oversaw its settlement with Wells Fargo, is a former NFHA staffer and consultant.” [cross-posted from Overlawyered]