Topic: Regulatory Studies

American People to Government: Don’t Mess Up the Economy

The American people get it.  The government is likely to go too far in “fixing” the economy. 

Explains Rasmussen Reports:

Fifty-four percent (54%) of U.S. voters worry more that the federal government will try to do too much to fix the economy rather than not enough. That’s up three points from a month ago and the highest level of concern found on this question since Barack Obama was elected president.

A new Rasmussen Reports national telephone survey finds that just 37% are more worried that the federal government will not do enough in reacting to the nation’s current economic problems. That’s little changed from last month and down from a high of 44% in January.

Last October, as the meltdown of Wall Street dominated the front pages, 63% worried that the government would do too much. By the first week of November, that number had fallen to 46% and it stayed below the 50% level for several months.

Among the nation’s Political Class, (70%) worry that the government will not do enough. As for those who hold populist or Mainstream views, an identical percentage (70%) fear the government will do too much.

Notable is the contrary thinking of the political class.  The vast majority worries that the government won’t do enough.  Unfortunately, this group has far more influence over what government is likely to do than does the general public.

What Recovery?

Despite the ballyhooed cash-for-clunkers program, retail sales dipped in July. Initial claims for unemployment also rose. Housing continues to be plagued by foreclosures. And many banks are still operating under the burden of toxic assets, which inhibits their ability to provide credit. These are not the recipe for an economic recovery. Yet the Federal Reserve is signalling it thinks a recovery is on the way. And President Obama is making happy talk on the economy.

A recovery may very well technically begin in the 3rd quarter of 2009, as signalled by rising GDP. But it is shaping up to be a jobless and joyless recovery. Firms are finding ever new ways of producing and earning some profits without hiring workers. The prospect of higher taxes for health care and to fund all the bailouts understandably makes businessmen cautious about taking on the liability of new workers.

The administration’s economic policy has been behind the curve. The idea of initiating new federal mandates, like health care and cap-and-trade with the attendant higher taxes, is a sure way to derail an economic recovery. What is needed is less spending and broad-based tax cuts. The administration’s economic policy is the real clunker and it is time to trade it in.

Time for a Change in Sugar Policy

Washington’s dysfunctional agricultural policy is costing consumers again.  Limits on sugar imports, designed to protect a few large sugar producers, are driving up prices in a tight market.  Reports the Wall Street Journal:

Some of America’s biggest food companies say the U.S. could ‘virtually run out of sugar’ if the Obama administration doesn’t ease import restrictions amid soaring prices for the key commodity.

In a letter to Agriculture Secretary Thomas Vilsack, the big brands – including Kraft Foods Inc., General Mills Inc., Hershey Co. and Mars Inc. – bluntly raised the prospect of a severe shortage of sugar used in chocolate bars, breakfast cereal, cookies, chewing gum and thousands of other products.

The companies threatened to jack up consumer prices and lay off workers if the Agriculture Department doesn’t allow them to import more tariff-free sugar. Current import quotas limit the amount of tariff-free sugar the food companies can import in a given year, except from Mexico, suppressing supplies from major producers such as Brazil.

While agricultural economists scoff at the notion of an America bereft of sugar, the food companies warn in their letter to Mr. Vilsack that, without freer access to cheaper imported sugar, ‘consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted.’

Officials of many food companies – several of which are enjoying rising profits this year despite the recession – declined to comment on how much they might raise prices if they don’t get their way in Washington.

The letter is the latest salvo fired in a long-simmering dispute between U.S. food companies and the sugar industry over federal policy that artificially inflates the domestic price of U.S.-produced sugar in order to support the incomes of politically savvy sugar-beet farmers on the Northern Plains and cane-sugar farmers in the South. Most years, the price food companies pay for U.S. sugar is twice the world level.

President Barack Obama ran on the platform of change.  How about changing agricultural policies which enrich the farm lobby at consumer and taxpayer expense?

Barney Frank Endorses Regulatory Protectionism

When a government increases the burden of taxes, spending, and/or regulation, this makes it more likely that productive resources - on the margin - will gravitate to jurisdictions with better economic policy. Crafty politicians understand that the freedom to cross borders is a threat to statist policies, which is why international bureaucracies dominated by high-tax nations, such as the Organization for Economic Cooperation and Development, are trying to undermine tax competition between nations by imposing fiscal protectionism. The same is true for regulation. The Chairman of a key House committee wants to impose regulatory protectionism to restrict the ability of Americans to patronize banks and other financial services companies based in jurisdictions with more laissez-faire policies. The Financial Times has the unsavory details:

Barney Frank, chairman of the House financial services committee, said he was concerned the new U.S. push to regulate banks and brokers more rigorously could put it at a competitive disadvantage if other countries did not follow suit. As a result, he would like to ban U.S. banks from doing business with countries not subject to similarly tough standards on everything from leverage limits and capital requirements to rules on transparency and clearing of derivatives. “Once we have rules  . . . we will say to anybody who wants to be an outlier, ‘you forfeit your right to participate in the American system’,” Mr Frank told the Financial Times. “We will instruct the [Securities and Exchange Commission] and Treasury and the Fed to deny access to the American financial system to any country that holds itself out as a haven to escape our financial regulation.” …“It is absolutely the wrong approach,” said a top industry lawyer, who did not want to be identified criticising Mr Frank. “The assumption is that everybody has to do business in the U.S. and we can set global standards. That is absolute nonsense. There are alternatives, including Hong Kong,” the lawyer added. …Tim Ryan, president of the Securities Industry and Financial Markets Association, said that U.S. regulations should not be imposed on other countries. …Mr Frank’s interest in banning groups from non-co-operating countries stems in part from the U.S. experience after it adopted the Sarbanes-Oxley corporate accountability law. Many overseas companies opted to list outside the U.S. rather than comply with Sarbox requirements.

Who are Entrepreneurs?

The Kauffman Foundation has produced an interesting study about the background of entrepreneurs.  They create businesses for many reasons, including to make money and work for themselves, and play a major role in generating the economic growth that benefits the rest of us.  Too bad politicians, who create so little of value, so often stand in the way of productive entrepreneurs.

Reporting the Minimum Wage

Economists generally agree that minimum wage laws tend to put low-skilled workers out of work. (Even economists who support minimum wage laws for reasons of politics or “justice” don’t really argue that the laws don’t raise unemployment.) But that message hasn’t really reached journalists. Today’s stories on the mandated rise in the minimum wage take one of two forms: Assuming that the raise is “good news” for low-paid workers, or quoting one economist on each side. The latter is certainly better, but it does convey the sense that “economists disagree about the effects of minimum wage laws,” which doesn’t really reflect the state of economic knowledge.

NPR used both versions. Some of its hourly newscasts led with “The minimum wage hike  means 70 cents more per hour for low-income workers.” But some also noted, ”That’s supposed to be good news for low-income workers, but economists disagree about whether it will help or hurt the economy.” NPR did a somewhat balanced story yesterday. 

Many journalists went with the easy, mostly wrong, “good news” approach, as these headlines and first sentences illustrate:

  • ABC News: Relief for Workers at Bottom: Minimum Wage Goes Up
  • Time: With the U.S. trillions of dollars in the hole, 70 cents an hour sounds like chump change. But it’s a big boost for the millions of workers who earn that much extra as of July 24.
  • Philadelphia Inquirer: Minimum-wage workers to get a pay bump today
  • WFMY (Greensboro, NC): Starting today, minimum wage workers will see extra cash in their pay checks.
  • News on 6 (Tulsa): Thousands of Oklahoma workers will receive a pay raise on Friday when a new federal minimum wage takes effect.

But some did at least acknowledge the controversy:

  • APMinimum wage hike could threaten low earners’ jobs
  • USA Today: The third minimum wage increase in three years, effective Friday, is a moneymaker and a money-taker: Millions of workers soon will see pumped-up paychecks, while many already-struggling businesses face the burden of increased payroll costs.
  • CNN: Minimum wage hike: More money or fewer jobs?/On Friday the federal minimum wage jumps to $7.25 an hour from $6.55. Economists differ as to whether that will hurt or help low-income workers.
  • Kansas City Star: The federal minimum wage rises today from $6.55 to $7.25 an hour, bringing with it controversy about whether the increase is good or bad for the economy.

The New York Times gets the prize for its stark decline in economic understanding. Its editorial today begins, in a triumph of hope over economic reasoning:

An estimated 2.8 million employees will get a raise on Friday, as the federal minimum wage rises from $6.55 an hour to $7.25. Another 1.6 million whose hourly pay hovers around $7.25 are also expected to get a boost as employers adjust their pay scales to the new minimum. The raise is badly needed. It is also wholly inadequate.

But for decades the Times’s editors knew better. Sure, Henry Hazlitt wrote some of their editorials back in the 1930s. But that doesn’t explain the paper’s continuing criticisms of the minimum wage into the 1990s. Richard McKenzie wrote a short book in 1994 called Times Change: The Minimum Wage and the New York Times. Bruce Bartlett reported some of the history in 2004:

For decades, that paper had carefully and consistently editorialized against the minimum wage. But 5 years ago, for no apparent reason, it reversed a policy dating back to 1937 and suddenly endorsed a higher minimum wage. Its latest editorial on this topic appeared on July 24, in which legislators in Albany were urged to agree on a “much-needed increase in the minimum wage” for New York State.

When I first began clipping Times editorials on the minimum wage back in the 1970s, they were unambiguous in their condemnation of it as misdirected, inefficient, and having negative consequences for most of those it was supposed to help. For example, an August 17, 1977, editorial stated, “The basic effect of an increase in the minimum wage … would be to intensify the cruel competition among the poor for scarce jobs.” For this reason, it said, “Minimum wage legislation has no place in a strategy to eliminate poverty.”

In the 1980s, the Times became even more aggressive in its denunciations of the minimum wage. Rather than simply argue against increases, it actively campaigned for abolition of the minimum wage altogether. Indeed, a remarkable editorial on January 14, 1987, was entitled, “The Right Minimum Wage: $0.00.”

Everything in that editorial is still true today. “There’s a virtual consensus among economists that the minimum wage is an idea whose time has passed,” it said. “Raise the legal minimum price of labor above the productivity of the least skilled workers and few will be hired,” it correctly observed. In conclusion, “The idea of using a minimum wage to overcome poverty is old, honorable — and fundamentally flawed. It’s time to put this hoary debate behind us, and find a better way to improve the lives of people who work very hard for very little.”

Even in the 1990s, the Times remained skeptical about the value of raising the minimum wage. An April 5, 1996, editorial conceded that a proposed 90 cent increase in the minimum wage would wipe out 100,000 jobs. It said that Republican critics of the minimum wage as a “crude” antipoverty tool were right.

By 1999, however, the nation’s newspaper of record had completely reversed itself. In a September 14 editorial, it endorsed a sharp increase in the minimum wage, arguing that it would have no impact whatsoever on unemployment. “For millions of workers, a higher minimum wage means a better shot at self-sufficiency,” it stated.

Bartlett suggested that the Times ought to tell its readers why it changed a long-standing, well-grounded, and indeed correct editorial position.

“Employee Free Choice Act” Still Bad News

One piece of good news out of Washington yesterday was the decision among supporters of the Orwellian-named Employee Free Choice Act to dump a provision that would have virtually eliminated the secret ballot in union-organizing elections.

The bill is the number-one legislative priority of major U.S. labor unions. It is packed with provisions aimed at making it easier for unions to organize workplaces and halt the relentless 40-year slide in private-sector union membership.

The jettisoned provision would have allowed unions to organize a workplace simply by “persuading” a majority of workers to sign cards saying they want a union. Of course, such a system would leave individual workers wide open to intimidation, as I explained in a recent op-ed. Business-funded ads against the measure struck a cord with voters who are understandably fond of the secret ballot, and the provision became a step too far for moderate Democrats.

What remains of the bill is still bad news. It would reduce the typical union-organizing election from two months to as short as five days. This is a provision that could only be favored by the side that wants workers to be deprived of the information and the time they need to make an informed decision.  And it would force employers to accept the decision of a government arbitration panel even if the resulting union contract would threaten the company’s survival.

University of Chicago law professor Richard Epstein explained cogently in a recent cover story for Cato’s Regulation magazine why the  the bill is fundamentally at odds with our basic constitutional rights.