Random Observations About Bonaire
I’ve been spending a wonderful week diving and relaxing at Harbour Village, in Bonaire. I have just a few unorganized observations:
- This is a day destination for Royal Caribbean. The Horreure of the Seas was in here yesterday. The whole town of kralendijk transformed from sleepy nowheresville to enormous trinket shop for the day. We hid in the resort.
- I did not expect to see a reference to a Shofar here in the Caribbean. But there is an island accounting firm called Shofar accounting.
- The wind here is strong and constant. The bay between the main island and Klein Bonaire is one of the best kitesurfing spots I’ve seen.
- If you don’t dive, sail or kitesurf, there isn’t too much for you here (Except the climate). Harbour Village has the best beach apart from the uninhabited Klein Bonaire
- Harbour Village is luxurious, but dive-oriented. The hotel staff are a little diffident in general. The dive staff, on the other hand, are really friendly and helpful.
- As I type this there is a gorgeous orange and black bird on our balcony with a descending minor-third whistle call (like a doorbell). A Troupial (icterus icterus)
- My eighteen year-ols son is enjoying drinking legally
Torture and Morality
This isn’t my usual fare, but I get confused by the posturing condemnation of Zero Dark Thiry: Which is the harder-won morality, eschewing torture because it’s useless, or despite its usefulness?
The real issue is the human rights of the people who fall under the suspicion of Bigelow’s CIA interrogators, who include Maya (Jessica Chastain) and her mentor, Dan…..
I believe she supports all protests, but she undermines the protestors by showing the CIA heroes of her film using torture, getting results, and never, ever, being held to account for their gross violations of human rights and common decency. In “The Greatest Manhunt in History (ZD30),” anything goes; the end justifies the means, where the means include cruel, inhuman and degrading treatment.
Minimum Wage and the Laffer Curve
Naturally, the economics blogosphere is afire with talk of the minimum wage. One of the obvious arguments opponents make is “if a minimum wage hike is so great, why not raise it to $100/hr”? Rhymes with Cars and Girls describes the course of the discussion:
This argument is a variation of a This Policy Doesn’t Do What It Does argument. I might think that when the government puts a price floor on labor that has an effect – in the only conceivable possible direction for that effect to point – but I’m not allowed to ever say or think so without untangling this effect perfectly from every last variable with a definitive, complete ‘study’. Which is something that would be impossible for humans to do, hence, the minimum wage is permanently fine.
This know-nothing approach also allows the anti-anti-minimum-wage theorist to poo-poo arguments like Well then why not raise it to $90/hour? That’s ‘silly’, goes the logical, calm argument. It’s just silly! What is left unexplained is where the magical inflection-point occurs between $9 and $90. The anti-anti-minimum-wage theorist apparently knows there is such an inflection-point, and must indeed know where it is (or at least knows a lower-bound for it, so as to be able to know that $9 lies below it), but isn’t divulging anything further than that. Pity. But of course this I’m-not-telling-you-where-the-magical-inflection-point-lies issue plagues all This Policy Doesn’t Do What It Does discussions.
Keith Hennessey makes similar points. After a certain level, it becomes obvious that raising the minimum wage would act as a horrific employment-killing price control. Defenders are making a special pleading that smaller adjustments can interact with other economic feedback forces to keep unemployment from growing (as Card and Krueger observed in NJ and PA fast food establishments) or even decrease it (see Menzie Chinn and others below).
This all reminds me of the Laffer curve. At confiscatory tax levels the downward slope of the Laffer Curve (higher rate–>lower revenues) is trivially true, even as at is undeniably upward-sloping at very low levels. Ideologues will tie themselves in knots trying to deny or confirm the truth of Laffer’s insight at any tax level for fear it might be giving hard-won ideological ground at current tax rates.
Just as there is an “optimum” tax rate under Laffer (presuming you believe that maximizing government revenue is a desirable objective, which I don’t), there is, theoretically a ‘clearing wage’ in an economy. Raising the minimum wage to the unskilled clearing wage will do little damage to unemployment. As Menzie Chinn shows, there may be a level above the clearing wage where the income effects will overcome the job reduction effects, raise consumption and thereby have a positive impact on hiring. Others have proposed that minimum wage hikes act as some sort of productivity stimulus, prompting employers to adopt better employment policies and workers to work harder. This strikes me as ridiculous. At any rate, raising the minimum well above the clearing wage (or, if you will, the Menzie Chinn-adjusted and/or productivity-enhanced Clearing Wage) will undoubtedly put people out of work. This all raises two broad questions, one philosophical and one more realistic.
a)On Principle: is it appropriate at all to set the terms of private contracts? even if the minimum wage is below the Clearing Wage, what does that accomplish? ( I did read some arguments suggesting that it increased worker dignity, but I came away wondering how that was quantified). Obviously, the government interference in private contracts train has left the station, but that doesn’t make it right.
b) Isn’t the Clearing Wage different in different parts of the country? Can the federal government even know the clearing wage? Don’t they take a great risk of putting people out of work?
Anyway, here’s a review of some other posts.
- Steven Landsburg does a nice survey of the arguments, but states that the burden of raising the minimum wage falls unfairly on certain types of businesses.
- Naturally, Krugman’s first entry is just to say that the opponents of the minimum wage don’t care about poor people, Q.E.D., although he was quite clear about the labor effect back in 1998. His second entry (linked and critiqued by Landsburg above) gives a skewed recitation of the literature, thus depending on the bias or ignorance of his readership.
- Megan McArdle gives a good review of the literature and its limitations
- Tyler Cowen politely (as is his wont) points out some major discrepancies in how pundits talk about setting a minimum labor price depending on who sets it and the context.
- Bob Murphy describes surveys of economist showing great caution about raising the minimum wage, certainly by large amounts. There is substantial support for eliminating it altogether. Then he gets all empirical
- Mankiw is brief, but has covered the topic before.
- David Henderson notes that illegal immigrant work is affected by the minimum wage and discusses the monopsony case.
- Menzie Chinn does the math and finds employment can go up if the effect on income/consumption is high enough
- Mark Perry reminds us that teenage unemployment increased after the last hike
- Mark Thoma says an increase in the EITC would be better theoretically, but the minimum wage requires far less government bureaucracy
- Free Exchange reviews the arguments
The intuitive logic is encapsulated nicely in this cartoon:
Improving pension demographics
Glenn makes a reasonable point about the pseudo-proposal for universal pre-k:
“There’s another way of looking at this: as an overt sop to the teachers’ unions. What a great way to expand the ranks of the credentialed, licensed, and dues-paying members. And don’t forget tenure.”
Good point. It wouldn’t just expand the teacher ranks, theoretically it would bring in lots of younger dues-paying members. Growing the paying-in cohort would extend the life of the ponzi scheme of state/teacher pension retirement plans for many more years.
Of course the right immigration policy would do this for social security as well. I say let in anyone under 30 who can get a job on the books. Wouldn’t hurt housing either.
On the Tamara Ecclestone Paradox..
Chris Dillow suggests a rational paradox in attitudes towards the inheritance tax:
who are the sort of people who expect to get big inheritances and so are deterred from working? There are two (extreme) possibilities:
1. The rich have high skills, and such skills are passed onto their children by genes or environment. If this is the case, the economy will lose a lot if the children of the rich are disincentivized from working. We should therefore favour high inheritance taxes as a way of reincentivizing them to work.
2. The children of the rich are airheads, wastrels and no-marks, so it’s little loss to the economy if they are out of the labour market. If this is so, the case for high inheritance taxes to motivate them to work is weak.
Which generates my paradox. The sort of people who instinctively oppose inheritance taxes tend, I suspect, to believe the rich pass on skills to their children. But if you believe this, you should favour higher inheritance taxes on economic grounds. On the other hand, those – like me – who viscerally support inheritance taxes tend to think the children of the rich are abominations who can safely be kept out of the labour market. To us, the country would be a better place if George Osborne had been disincentivized from working. But if you believe this, you shouldn’t want an inheritance tax that forces the little bastards into work.
While this is true as far as it goes, there are many other dimensions through which people estimate the (dis)utility of inheritance taxes:
- Allocation of resources: does inherited wealth get cycled productively into the economy? Some think it is a huge waste if money sits in trust dribbling out to support the allegedly idle lifestyle of the heirs. But if the children of the rich are “abominations”, surely they will be parted with the money eventually. It will be spent, and enrich the rest of us based on what we can sell to them (or sell to those who sell to them). After all, economists like Paul Krugman complain that the wealthy’s marginal tendency to consume is too low. An abomination’s big inheritance is a stimulus program! Shirtsleeves to shirtsleeves.
- Fairness/justice. Some simply can’t abide that the children of the wealthy should enjoy such a windfall simply by dint of being in the lucky sperm club.
- Redistribution: Some just can’t stand the idea of all those resources not being available to government or given to the disadvantaged
- Property/liberty: Some believe estates are after-tax property and can’t be taken on a property rights basis, regardless of what heirs might do with the proceeds.
Dillow thinks too much like an economist. Not everyone views taxation through an incentive lens, although most of our polity could stand to do more of that.
A Minimum Productivity Law
Adam Ozimek is his typically perceptive self on the minimum wage (emphasis mine):
The impact of the minimum wage on unemployment is a divisive issue among economists. Simple labor economics might seem to predict that a wage floor would necessarily lead to a labor surplus. But it turns out that there are other ways for markets to adjust. This can be a hard pill for neoclassical economists and those who think like them to swallow, but it helps if you think of the minimum wage as it really is: a minimum productivity law.
That’s right. Even if you buy those economists who have modeled the economy maintaining or increasing jobs under a minimum wage hike, it is still identically true that employers won’t hire anyone unless they believe they will be more productive, on the margin, than their labor cost. So they either believe they will pass the wage on in price hikes, or that they can now work people harder or differently to let their workforce’s marginal product keep up. This is one reason Ozimek suggests that conservatives might learn to love the minimum wage hike. Personally, I suspect you can have these unanticipated effects only with small marginal changes in the minimum wage. There’s only so much worker productivity lying around to be gathered up by allegedly sleepy capitalists waiting for a minimum-wage lightbulb to turn on over their heads. If the minimum wage gets large enough it will function like any other price control, i.e. really badly.
Unfortunately, the law will also put a bunch of teenagers out of work. I very much doubt the law’s progressive supporters want that, or the “minimum productivity law”, or the inflation in basic foods and services that would come from passing on the additional labor cost. But don’t let that stand in the way of something that sounds good.
Eventually, if employers are not successful passing on the incremental cost in labor, they will seek to reduce the workforce. Then the state must add workplace practice restrictions that make it difficult or expensive to do so, and sooner or later you have a European labor situation, where nobody wants to hire young people for fear of getting stuck with them.
It sounds good in a speech, but promises unintended and undesirable consequences.
Killer Graph?
Matt Yglesias posts yet another chart of government spending and claims that its point is so obvious that no further comment is required. This is just one in a long series of supposedly killer graphs going around the blogosphere. In doing so he makes the implicit argument that stimulus spending should be viewed as normal trend spending. I think Yglesias knows better, but thousands linking to him do not.
This is Yglesias’ chart of nominal federal expenditures from FRED. Kudos to him for using total expenditures, which includes Social Security, etc., instead of the GDP breakdown where SSI is included in personal (private sector) income. Brickbats for not inflation-adjusting or % of GDP
Yglesias has pulled down the ‘total federal expenditures’ data from FRED. This is the right series to use for the Federal Government, as it includes government outlays for social security. Since these items are not “Final Consumption”, they are often not included in the figures from BEA or FRED when people use the GDP series, which is misleading (they show up when spent in private consumption rather than government consumption).
I prefer to use the TOTAL government expenditures series (including state and local spending), since nearly $1 Trillion passes from the Federal government to the states (the accounting in the above series can be funny on this), and it gives a more complete picture of government’s footprint in the economy. It is really important to think about two things in long time series: First, are you using consistent units? One option is to adjust to real dollars (like this)
Real Federal Outlays
Another is to show per capita spending, which demonstrates how much the government is spending on each of our behalf, performed here by Veronique de Rugy:
Federal Outlays per Capita – How much the Federal Government is shelling out for each person in the US.
Finally, you can compare the spending to our economy’s capacity to sustain it, which means taking the nominal series Yglesias uses and comparing it to nominal GDP, which I’ve done below for both federal and total expenditures:
Nominal Federal and Total Government Expenditures as a percent of nominal GDP – FRED
One thing Yglesias and I would agree on is that current outlays are decreasing. The difference, as I pointed out in a rant about Ezra Klein’s alleged killer graph, is that we are coming off of HUGE increase in government spending compared to our capacity to pay. All of these appropriately adjusted graphs reveal the huge relative increase in spending in 2009. Worse, we are facing much larger increases in entitlements that will pressure that number higher, so we need to either reform entitlements or find savings in the discretionary budget (or both, more likely). ”Stimulus” is supposed to be temporary. I don’t think either Yglesias or Klein, or any of those waving around spending graphs that show modestly decreasing slopes in the last few years, fully concedes that they are arguing that stimulus-level spending should be our new baseline.
Projected growth in Entitlement Spending as & of GDP
Measures of housing cost
In another Facebook back and forth, friend Mark asked about manipulation of chained CPI through the elasticity/substitution adjustments and whether they could be manipulated. In response I brought up my favorite opaque contributor to CPI, “Owner-Adjusted Rent”. I went to see if FRED could help me compare the CPI adjustment to housing prices and voila!
CPI owners’ Equivalent Rent vs. Case-Schiller 20 cities housing index
AS you can see, home prices move around a bit more than inflation has captured, thus our anecdotal experience of inflation, depending on the year we have to buy or sell a residence, or even sign a lease, can be very different from CPI.
Good Sentences – Jeremy Grantham
Grantham reflects on the investing era I grew up in.
The longer the engineered rates stay below true market rates, the higher asset prices become until, yes, you’ve got it, corporate assets begin to sell way over replacement cost. Then, if the heart of capitalism is still beating at all, a long period of over-investment begins and returns are bid down and everything moves into balance, often helped along if asset prices get too high, as in 2000 and 2007, by a good healthy market crunch. (This strategy will be seen in future years as archetypical of the Greenspan-Bernanke era: badger and bully investors into taking more risk and eventually pushing assets – houses or stocks or both – far over replacement value, followed eventually, at long and hard-to predict intervals, by exciting crashes. No way to run a ship, but it does produce an environment that contrarians like us, who can take a few licks, can thrive in.)
Hard to believe..
A friend points out that Brad DeLong and I aren’t far apart on ideal healthcare solutions. Actually, I’ve agreed with him on substance quite a few times, but I find it painful to read his stuff because he’s such a disaster rhetorically. No cheap insult goes un-hurled at Brad’s deemed opposition. “Why oh why….” So I missed this.