What ever Happened to “We” the People?

images (1)I am writing a post today as an outcropping of my professional pursuits, my status in life, and about the person I love who is mired deep in the kind of long term, blue-collar unemployment that didn’t used to exist in this country. I am underemployed at the moment because I don’t want to jump out of my sustainable life here to something that is risky and might not work out for me at my stage in life. I am trying to set up my end game and feel like I really can’t afford the risk of moving someplace for a job that may or may not pan out or some place where I basically suffer to exist.  I am in a state of perpetual hunker down because of this. It is stressful and eating into my investments which I am fortunate to have but are not inexhaustible. I will not talk about my friend’s situation because, of course, it is personal. But, I will say watching some one so beautiful struggle with self worth issues because this economy only works for a few and because our government persistently sticks to such an untrue narrative about our economy just keeps me on the edge of tears.  I am not an overly emotional person at all.  Living in the USA should not mean living in a state of risk avoidance, depression, poor shaming and poverty creation.

There are many things that I grew up with and assumed would be there when I grew up that I despair frequently at their loss and threatened existence. My kids,as you know, are doing fine. My father got his degrees on the GI Bill and saw to it that my sister and I were educated. As a result, my girls and I never even considered not going to university. Doctor Daughter is now a full-fledged OB-GYN in the process of getting board certified in Washington State where she will undoubtedly become very rich very quickly with her soon-to-be radiologist husband. Youngest daughter just took her GMAT and is headed for her MBA in the fall. She and her boyfriend of three years have very good jobs and make great money. But the deal is, that was the path set before us because our families can now chose further upward mobility through higher education and jobs in the right sectors.  We are all there. For my son-in-law, it is because his parents had access to immigration to the US and US public universities. For us, it was because my father who comes from a railroad worker and Oklahoma/Kansas dirt farmers could go to university.  That happened because my granddad had a great blue collar job that began with digging ditches for the Atchison, Topeka, and the Santa Fe and my dad’s access to the GI bill.  The real success stories of last century come from the many of us who got access to what we did because “we” the people invested in ourselves and each other. We also decided to jointly insure ourselves against personal and community disasters.  All of these accomplishments are under direct assault today and we are failing ourselves and each other in many ways.

There used to be an alternative path through good, stable, well-paying jobs that took training, skill, hard work and experience.  Original socioeconomic status wasn’t all that relevant.  That path has dried up.   The heart wrenching stories told in this NYT article about the crumbling city of Port Clinton, Ohio are typical of many midwestern, formally thriving industrial cities. The article contrasts the life of the author’s grandchildren and those of his blue collar classmates who went to school in the small town.  This narrative is one played out all over the country.  The conclusion is compelling.

The contrast with the egalitarian ethos and reality of the 1950s — the contrast between the upward mobility experienced by J and the bleak prospects of R — vividly captures Port Clinton’s transformation in the last half-century, much like that of the rest of the country. My research team has talked with dozens of R’s from Austin, Tex., to Duluth, Minn., and from Atlanta to Orange County, Calif.

The crumbling of the American dream is a purple problem, obscured by solely red or solely blue lenses. Its economic and cultural roots are entangled, a mixture of government, private sector, community and personal failings. But the deepest root is our radically shriveled sense of
“we.”
Everyone in my parents’ generation thought of J as one of “our kids,” but surprisingly few adults in Port Clinton today are even aware of R’s existence, and even fewer would likely think of her as “our kid.” Until we treat the millions of R’s across America as our own kids, we will pay a major economic price, and talk of the American dream will increasingly seem cynical historical fiction.

Yes. We have a “radically shriveled sense of we” these days and it is killing the economy for all but a few of us.  It is fueling racial resentment.  It is even leading to a zero sum game for the folks reaping the benefits right now even though they adamantly refuse to see that future. Much of the problem is because  The Pay is too Damn Low.  More and more of productivity gains and corporate income gains are going to a small number of passive investors and not to the people involved in producing the gains.  It is upending classical labor theory and actually invigorating the old ideas of Karl Marx as I have written before.  Please remember, I am not a Marxist but I and others see the coming fruition of many of his philosophical points on how capitalism would eventually self-destruct.   The New Deal did not bring about  radical change.  It brought about upward mobility and societal safety nets so we did not get radical change. Nothing fuels revolution like national despair.

The workers’ grievances are simple: low wages, few (if any) benefits, and little full-time work. In inflation-adjusted terms, the minimum wage, though higher than it was a decade ago, is still well below its 1968 peak (when it was worth about $10.70 an hour in today’s dollars), and it’s still poverty-level pay. To make matters worse, most fast-food and retail work is part time, and the weak job market has eroded what little bargaining power low-wage workers had: their earnings actually fell between 2009 and last year, according to the National Employment Law Project.

Still, the reason this has become a big political issue is not that the jobs have changed; it’s that the people doing the jobs have. Historically, low-wage work tended to be done either by the young or by women looking for part-time jobs to supplement family income. As the historian Bethany Moreton has shown, Walmart in its early days sought explicitly to hire underemployed married women. Fast-food workforces, meanwhile, were dominated by teen-agers. Now, though, plenty of family breadwinners are stuck in these jobs. That’s because, over the past three decades, the U.S. economy has done a poor job of creating good middle-class jobs; five of the six fastest-growing job categories today pay less than the median wage. That’s why, as a recent study by the economists John Schmitt and Janelle Jones has shown, low-wage workers are older and better educated than ever. More important, more of them are relying on their paychecks not for pin money or to pay for Friday-night dates but, rather, to support families. Forty years ago, there was no expectation that fast-food or discount-retail jobs would provide a living wage, because these were not jobs that, in the main, adult heads of household did. Today, low-wage workers provide forty-six per cent of their family’s income. It is that change which is driving the demand for higher pay.

The situation is the result of a tectonic shift in the American economy. In 1960, the country’s biggest employer, General Motors, was also its most profitable company and one of its best-paying. It had high profit margins and real pricing power, even as it was paying its workers union wages. And it was not alone: firms like Ford, Standard Oil, and Bethlehem Steel employed huge numbers of well-paid workers while earning big profits. Today, the country’s biggest employers are retailers and fast-food chains, almost all of which have built their businesses on low pay—they’ve striven to keep wages down and unions out—and low prices.


The deal is that big businesses are making record level profits and the record-setting levels of the DJ industrial average show that we are not failing the largest businesses and the richest people in the country.  They do not need to be exempt from more taxation or responsibility from the moral hazard and the social costs they inflict on society.  The benefits of their existence do not trickle down on us.  What trickles down is their costs to society like those of the last financial crisis and that of oil spills, chemical company fires, and toxin produced illnesses.  A strong economy comes from jobs and middle income prosperity and spending.  Many private sector jobs are so bad they no longer do anything but sustain people in intense suffering.

One of the big reasons the U.S. economy is so lousy is the American companies are hoarding cash and “maximizing profits” instead of investing in their people and future projects.

This behavior is contributing to record income inequality in the country and starving the primary engine of U.S. economic growth–the vast American middle class–of purchasing power. (See charts below).

If average Americans don’t get paid living wages, they can’t spend much money buying products and services. And when average Americans can’t buy products and services, the companies that sell products and services to average Americans can’t grow. So the profit obsession of America’s big companies is, ironically, hurting their ability to accelerate revenue growth.

One obvious solution to this problem is to encourage companies to pay their people more — to share more of the vast wealth that they create with the people who create it.

The companies have record profit margins, so they can certainly afford to do this.

But, unfortunately, over the past three decades, what began as a healthy and necessary effort to make our companies more efficient after the malaise of the 1970s has evolved into a warped consensus that the only value that companies should create is financial value (cash) and that the only thing managers and owners should ever worry about it making more of it.

This view is an insult to anyone who has ever dreamed of having a job that is about more than money.

People take risks when they feel they have adequate safety nets to do so.  We are ripping apart the nets that let people try new things and move to do things.  We are losing opportunities to educate and advance our society and our people.

As Jared Bernstein, an economist at the Center for Budget and Policy Priorities, told me, “The best friend that low-wage workers have is a strong economy and a tight job market.” It isn’t enough to make bad jobs better. We need to create better jobs.

That simple statement and the politics of right now have led Robert Reich to suggest that some policy makers actually want high unemployment to suppress wages and keep the profits trickling up to big investors.   All the while, these same politicians fuel racial resentment.  They tell formerly well-off white blue collar workers that it is immigration and and reverse racism in civil rights legislation that has hurt their livelihoods.  Meanwhile, the media keeps up the false narrative that it’s the defict, it’s social security, and it’s medicare that is hurting us.  Putting money into the group of people most likely to spend it is the way to drive the American Economy.  We economists have known that for years.  Hoarding money at the top and refusing to use the governments power to tax and spend is bad economic policy. Our fiscal policy is killing the American Dream instead of driving it.

tumblr_madbelHBtf1rubozqo1_500There are other examples besides our labor market.  Health insurance is just one more market where “we” the people can do right by each other and can actually improve outcomes.  I want to point you to the irascible Andrew Sullivan who uses Hayek–the economic god of the libertarian cult–to explain why social insurance –like Social Security and Medicare–actually stops freeloading off the economy rather than encouraging it.  In this situation, he explains why Obamacare actually forces us to take personal responsibility.  It is a argument from a different perspective on why “we” the people have to act on economic principals to preserve our society and way of life.  In this essay, he criticizes the right wing radical group Freedomworks.  The groupis trying to get 20somethings to burn their Obamacare cards which is in itself pretty crazy because the cards are nonexistent.  Actually, what this does is wreck the risk pool for all of us.  But, here is an argument for the leverage of government on a market that has failed so many people from another vantage point.

It is not being independent; it’s being potentially dependent on others while giving nothing in return. And insurance is an inherently collective endeavor. That’s how it works. It’s one area where going it alone makes very little sense. And, of course, the bigger the insurance pool, the lower the premiums. This is not socialism. It’s a simple insurance principle, used by free countries for centuries. It certainly passed muster with Friedrich Hayek, a man you would think would be an influence on the Tea Party’s political program. I’ve cited this before but it’s worth citing again:

Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong … Wherever communal action can mitigate disasters against which the individual can neither attempt to guard himself nor make the provision for the consequences, such communal action should undoubtedly be taken.

That’s from The Road To Serfdom, one book of the libertarian and conservative Bible. And it’s common sense. It’s leveraging a simple principle – pooling risk – and extending it as far as possible to guard against the “common hazards of life.” There is nothing leftist or socialist about it. And it demands that each of us be personally responsible for the costs our own encounters with illness or accident impose upon our neighbors, rich and poor, young and old. If FreedomWorks were consistent, it would encourage twentysomethings to “burn their Obamacare card” while simultaneously pledging never to seek medical care under any circumstances. That would be coherent, if bonkers. What’s incoherent is claiming that refusing to contribute to a system you nonetheless intend to use is anything but a scam.

In fact, what FreedomWorks is encouraging is the real socialism. It’s using the 1986 law to force hard-working Americans to pay for free-loaders’ care.

The deal is that when labor markets or social insurance markets or health insurance markets fail a group of us, they fail and cost all of us one way or another.  The cost us through increased crime, mental health issues, drug and alcohol abuse, family instability.  People losing homes costs us.  When houses go on the market at fire sale prices, it drags down the home prices of every one in the neighborhood.  When wages are low, people don’t spend money at the the local businesses who cannot afford to hire more people or order inventory.  Children raised with poor educational opportunities in crime ridden areas most likely become problems that cost us dearly in our incarceration nation.  We fully know that there are places where the government can act and change the momentum. Yet,  our government fails us.  The government of  “we” the people is not using the known and available tools to correct things.  It is, in fact, actively undermining economic health.  Economists known that deficit reduction is impeding the economy yet that is not the conventional wisdom floating around the beltway. Pundits and Policy makers are either being deliberately ignorant or lying.

Hardly a day goes by when either government analysts or the macroeconomists and financial forecasters who advise investors and businesses do not report on the latest signs of economic growth — in housing, consumer spending, business investment. And then they add that things would be better but for the fiscal policy out of Washington. Tax increases and especially spending cuts, these critics say, take money from an economy that still needs some stimulus now, and is getting it only through the expansionary monetary policy of the Federal Reserve.

“Fiscal tightening is hurting,” Ian Shepherdson, chief economist of Pantheon Macroeconomic Advisors, wrote to clients recently. The investment bank Jefferies wrote of “ongoing fiscal mismanagement” in its midyear report on Tuesday, and noted that while the recovery and expansion would be four years old next month, reduced government spending “has detracted from growth in five of past seven quarters.”

We know that insurance is by definition a collective effort because of its pooling of risk.  Its goal is risk mitigation and therefore, cost reduction.  Yet, here we go down the path of bringing down the government for an effort to reign in the dysfunctional health insurance industry.  Not only are some policymakers willing to blow up our social insurance programs, they are doing so at the high risk of blowing up the entire economy when so many folks are still suffering from the last blowup and their inability to do something to stop the suffering.   This kind’ve foolishness really needs to come to an end.  There is nothing to be gained by any of us for this type of incessant nonsense.   Many policymakers and their pundit enablers are putting themselves and their friends’ interests above that of the country’s and that of “we” the people.  It is hurting many of us including a huge number of children whose lives look pretty bleak at the moment.  Spend some time reading the narratives of folks in that top story that these guys poor-shame daily and then think of the possible programs that would actually put the cost of market failure back on the companies and people that caused it to start out with.  It would also put people back to work. Then, start to wonder if our country can ever look like it did when it was truly the land of opportunity instead of the land of “we” the few, powerful, and rich.  It is a very American ideal to think we could have a country where every one can find a well-paying job and join together to pay to insure against and provide for the risk of disasters.


The Media and Policy Makers deliberately misrepresent and ignore Economists

I use to watch PBS a lot. It’s been rather overrun by nutso libertarians and republicans the same way Europe was over run with Bubonic Plague-carrying fleas black_deathduring the middle ages.  Back in the middle ages, the “enlightened” religious and kingdom policy makers decided cats were the problem–since they obviously represent all things witchy–when they were really part of the solution.  Cats ate rats and mice and a lot of the worst of the flea-bearing vermin.  The guilty fleas escaped blame.  Nowdays, pundits, policy preachers, and the political class believe that economists are part of the problem and have created a serious amount of snake oil-based explanations that simply do not hold up to analysis or data.

So, PBS Newshour gets David Brooks–dilettante extraordinaire–and Ruth Marcus–professional effete intellectual snob for hire–to explain the recent employment numbers.  Yup,  why get economists to talk about the consensus in our community when you can have inside-the-beltway surrealism ?  Why is David Brooks given a platform to spew lies, nonsense, and propaganda?  Dr. Baker, I am excerpting you completely.  Forgive me the lapse in fair use.

The PBS Newshour won the gold medal for journalistic malpractice on Friday by having David Brooks and Ruth Marcus tell the countrywhat the Friday jobs report means. Brooks and Marcus got just about everything they said completely wrong.

Starting at the beginning, Brooks noted the slower than projected job growth and told listeners:

“Yes, I think there’s a consensus growing both on left and right that we — the structural problems are becoming super obvious.

“So when the — this recession started a number of years ago, you had 63, something like that, out of 100 Americans in the labor force. Now we’re down, fewer than in [the employment to population ratio is now 58.7 percent] — than when the recession started. And so that suggests we have got some deep structural problems. It probably has a lot to do with technological change. People are not hiring — companies are not hiring human beings. They’re hire machines.”

It’s hard to know what on earth Brooks thinks he is talking about. There is nothing close to a consensus on either the left or right that the economy’s problems are structural, as opposed to a simple lack of demand (i.e. people spending money). This is shown clearly by the overwhelming support on the Federal Reserve Board for its policy of quantitative easing. This policy is about trying to boost demand. A policy that the Republican Chairman, Ben Bernanke, has repeatedly advocated to Congress as well. This policy would not make sense if they viewed the weak demand for labor in the economy as being the result of structural problems. So clearly Brooks’ consensus excludes the Fed.

It also is worth noting the other part of Brooks’ story, that instead of hiring workers firms “hire machines,” is completely contradicted by the data. Investment has actually slowed in the last couples of years. (Non-residential investment is up by just 2.4 percent from its year ago level.) This means that firms are not hiring machines, or at least not as rapidly as they had in prior years. Also the rate of productivity growth has slowed sharply from the pre-recession period. In the last three years productivity growth has averaged less than 1.0 percent a year. This compares to more than 2.5 percent a year from 1995 until the recession in 2007. This means that machines are displacing workers much less rapidly than in a decade when we had much lower unemployment.

How does one get a job speculating on national TV on things one knows nothing about?  I think I would like a job like that.  It has to be easier than actually going to school and become a research specialist in a field. I think I’d be great at astrophysics commentary. Maybe I can replace Dr. Neil DeGrassi who gets all the kewl special effects-based astronomy gigs on PBS.  Hell, there’s a doctor in front of my name too.  Who cares if it’s not in anything germane or relevant to astrophysics?  Certainly not PBS.   But,here’s the shrill one with the facile, data-based debunk.

Indeed: one strong indicator that the problem isn’t structural is that as the economy has (partially) recovered, the recovery has tended to be fastest in precisely the same regions and occupations that were initially hit hardest. Goldman Sachs (no link) looks at unemployment in the “sand states” that had the biggest housing bubbles versus the rest of the country; it looks like this:

So the states that took the biggest hit have recovered faster than the rest of the country, which is what you’d expect if it was all cycle, not structural change.

I’ve done a quick and dirty take on unemployment by occupation, looking at changes in unemployment rates from the 2007 business cycle peak to the unemployment peak in 2009-10, and then the subsequent decline; it looks like this:

It’s the same as the geographical story: the occupations that took the biggest hit have had the strongest recoveries.

In short, the data strongly point toward a cyclical, not a structural story — and there is broad agreement, for once, among economists on this point. Yet somehow, it’s clear, Beltway groupthink has arrived at the opposite conclusion — so much so that the actual economic consensus on this issue wasn’t even represented on the Newshour.

Robert Reich thinks that its basically in Republican best interests to keep people unemployed and suffering.  Believe me, people are unemployed and suffering.  I can really offer us some anecdotal evidence on that as well as the numbers.

Job-growth is sputtering. So why, exactly, do regressive Republicans continue to say “no” to every idea for boosting it — even last week’s almost absurdly modest proposal by President Obama to combine corporate tax cuts with increased spending on roads and other public works?

It can’t be because Republicans don’t know what’s happening. The data are indisputable. July’s job growth of 162,000 jobs was the weakest in four months. The average workweek was the shortest in six months. The Bureau of Labor Statistics has also lowered its estimates of hiring during May and June.

It can’t be Republicans really believe further spending cuts will help. They’ve seen the effects of austerity economics on Europe. They know the study they relied on by Carmen Reinhart and Kenneth Rogoff has been debunked. They’re no longer even trying to make the case for austerity.

It could be they just want to continue opposing anything Obama proposes, but that’s beginning to seem like a stretch. Republican leaders and aspiring 2016 presidential candidates are warning against being the “party of ‘no.’” Public support for the GOP continues to plummet.

The real answer, I think, is they and their patrons want unemployment to remain high and job-growth to sputter. Why? Three reasons:

First, high unemployment keeps wages down. Workers who are worried about losing their jobs settle for whatever they can get — which is why hourly earnings keep dropping. The median wage is now 4 percent lower than it was at the start of the recovery. Low wages help boost corporate profits, thereby keeping the regressives’ corporate sponsors happy.

Second, high unemployment fuels the bull market on Wall Street. That’s because the Fed is committed to buying long-term bonds as long as unemployment remains high. This keeps bond yields low and pushes investors into equities — which helps boosts executive pay and Wall Street commissions, thereby keeping regressives’ financial sponsors happy.

Third, high unemployment keeps most Americans economically fearful and financially insecure. This sets them up to believe regressive lies — that their biggest worry should be that “big government” will tax away the little they have and give it to “undeserving” minorities; that they should support low taxes on corporations and wealthy “job creators;” and that new immigrants threaten their jobs.

It appalls me that some one classified as a “liberal”–like Ruth Marcus supposedly is–can be a mouthpiece for lies that support a decidedly illiberal agenda.   I believe Economist Mark Thoma has the correct take on this one.

The arguments serve an ideological goal. Perhaps we shouldn’t assume that the main motivation of many pundits and policymakers is economic rather than political?

True Dat.


Friday Reads: Life’s Labor Lost

lll Good Morning!

I think I’ve mentioned that I’m not a labor economist.  I’m a financial economist.  However, it’s hard to get through any econ program with out learning something about the labor markets given that it’s one of the most basic of all markets.   I wanted to talk about the increased minimum wage proposal in the President’s SOTU address.

You’ll probably hear quite a bit about how minimum wages create unemployment.  This is true under specific conditions.  The minimum wage must be below the going wage or what we call the equilibrium or clearing wage so that it is ‘binding’  or actually creating an excess supply of job seekers for that wage and less jobs than would be available at the clearing wage. You can look at the graph of the US below and see that in many states, the proposed Obama increase to the minimum wage is lower than the going wage in many states.  The poorest states–mostly in the south and middle of the country–are the ones with the lower wages.

However, the basic 101 econ labor market conditions, assumptions and model are very simplistic.  All of these things impact the outcome and can determine if the minimum wage increase creates any excess workers.    Labor economists that look at the real world have found some additional things about minimum wages that suggest that minimum wage can benefit the economy at large and unemployment at large.  They can also help create efficiencies in unexpected places, which is always good for markets.

I’m going to try to give you some background from the popular press, scholarly articles, and a conservative magazine where economists explain why increasing the minimum wage can be good for the economy.  Actually, there’s so much good rationale that even Walmart lobbies congress for increases. That probably will surprise you, but it’s pretty simple.  Minimum wage workers are Walmart shoppers.  Giving them more income turns them into customers. They don’t have any leftover money so they basically spend all they get.  This is good for Walmart.  This isn’t true for richer folks.  They tend to sit on their money and it goes to places that can take time to work through our economy if it actually goes to our economy and not some place else entirely.

So, let me first start with a New Yorker article called “The Case for a Higher Minimum Wage”.  This is, of course, not the scholarly arguments. However, there’s some good background information in the article to get us situated with the stylized facts. Unlike House Republicans and Joe Scarborough,  people that actually want to know abut things rather than opine through their bungholes love them some stylized facts.

While the labor economists and econometricians are still arguing about which of their many studies can be relied upon, there are quite a few things about minimum wages, and their impact on the economy, that we know for sure. Taken together, these things amply justify raising the minimum wage, as President Obama called for in his State of the Union address.

The first statement we can make without fear of contradiction is that, at $7.25 an hour, the current minimum wage is pretty low. In nominal dollars, it’s gone up quite a bit over the past twenty-five years. In 1978, it was $2.65; in 1991, it was $4.25. But these figures don’t take into account rising prices, which eat away at purchasing power. After adjusting for inflation, the minimum wage is about $3.30 less than it was in 1968. Back then—forty-five years ago—the minimum wage was $10.56 an hour, according to a very useful chart from CNNMoney.

We also know that the U.S. minimum wage is low compared to its counterparts in other advanced countries. In France and Ireland, for example, the minimum remuneration level is more than eleven dollars an hour. Even in Great Britain, which is usually regarded as a country with a flexible, U.S.-style labor market, it is close to ten dollars an hour. Another informative chart, this one from Business Insider, shows that the U.S. minimum wage is comparable to ones in places like Greece, Spain, and Slovenia—countries where G.D.P. per capita and labor productivity are markedly lower than here in the United States. We have an advanced economy but a middle-level minimum wage.

A second important and (largely) undisputed finding is that there is no obvious link between the minimum wage and the love's labour's sketch copyunemployment rate. During the nineteen sixties, when the minimum wage was raised sharply, unemployment rates were sharply lower than they were in the nineteen eighties, when the real value of the minimum wage fell dramatically. If you look across the states, some of which set a minimum wage above the federal minimum, you can’t see any sign of higher rates leading to higher unemployment. In Nevada, where the national minimum of $7.25 an hour applies, the jobless rate is 10.2 per cent. In Vermont, where the minimum wage is $8.60 an hour, the unemployment rate is 5.1 per cent. What these figures tell us is that other factors, such as the overall state of the economy and how local industries are doing, matter a lot more for employment than the level of the minimum wage does.

There are, in fact, many things that impact how the level of the minimum wage will impact an economy. Some economists have found that a “properly functioning minimum wage” can actually improve labor flows in a market.  Lee & Saez (2010) show under which conditions this can happen. This link goes to a theoretical paper so if calculus is not you’re thing, you may want to take my word for it. I’m going to show you the technical result as well as the authors’ story that is much more intuitive so you get an idea of how economists look at these things. This is from the paper’s introduction and conclusion which are the parts without the calculus!!

We show that a binding minimum wage is desirable as long as the government values redistribution from high-to low-wage workers, the demand elasticity of low-skilled labor is finite, the supply elasticity of low-skilled labor is positive, and most importantly, that the unemployment induced by the minimum wage is efficient, i.e. unemployment hits workers with the lowest surplus first. The intuition is extremely simple: starting from the competitive equilibrium, a small binding minimum wage has a first order effect on distribution but only a second order effect on efficiency as only marginal workers initially lose their job.

This is from the employer’s view point.  It basically says they let go of their worst employees first so they really don’t lose much.  Also, it implies it’s probably not a large number that are released.  The problem is that this doesn’t really look at the increased number of people that might enter the work force to get at the higher wage.  This is part of the excess worker phenomenon as  people that wouldn’t be in the market for the lower wage will enter the market if the wage is higher.  Therefore, more people will be looking for jobs than there will be jobs available.  However, this isn’t as big of a problem as job losers for society as a general rule.  It just makes the numbers appear worse.

The second part of the paper considers the more realistic case where the government also uses taxes and transfers for redistribution. In our model, we abstract from the hours of work decision and focus only on the job choice and work participation decisions. Such a model can capture both participation decisions (the extensive margin) as well as decisions whereby individuals can choose higher paying occupations by exerting more effort (the intensive margin). In that context, the government observes only earnings, but not the utility work costs incurred by individuals.1

In such a model, we show that a minimum wage is desirable if unemployment induced by the minimum wage is efficient and the government values redistribution toward low-skilled workers. The intuition for this result is the following. A binding minimum wage enhances the effectiveness of transfers to low-skilled workers as it prevents low-skilled wages from falling through incidence e ffects. Theoretically, the minimum wage under efficient rationing sorts individuals into employment and unemployment based on their unobservable cost of work. Thus, the minimum wage partially reveals costs of work in a way that the tax system cannot.

This is an interesting result since it basically says that it’s a more efficient way of giving poorer folks incomes by keeping the most efficient ones in the labor force instead of being unemployed and relying on government programs.  Their model argues that a minimum wage efficiently rations ‘out of work’ benefits.  So, in this case, yes it creates some unemployment, but generally this means the workers who are the most ‘deserving’ of the job stay in the job and those that aren’t can fall into the safety net and be retrained or schooled to improve their prospects.

One of the primary results of a paper by Dube et al (2o12) is estimating the decrease of what we call “churning” or what you probably know as job-hopping. This behavior costs employers a lot of money since the initial employment and training periods can be expensive for even the lowest wager earners.  Reducing churning means less of these expenses overall and basically coverage of the increased wage. So, in this case, the minimum wage makes the employer think about the total wage bill and not just the portion related to hourly work.

state-minimum-wages

Here’s one of the more interesting set of arguments from the conservative point of view.  This is the idea that by providing a good working wage at the bottom wage earners, you stop the problem of a potential ‘college graduate’ bubble.  Since the majority of jobs in this country still don’t require a college degree, people will be more likely to work jobs and not over-educate themselves. The author also argues that the kinds of jobs that tend to be minimum wage jobs are not out-sourceable so improving the lot of these folks improves a lot more than just the people in the jobs.  Minimum wage jobs tend to be service jobs and the benefits of the incomes and the jobs themselves will stay in the country regardless of the higher wage. We again see the argument that most economists make about ‘trickle-up’ economics.  Giving more income to the lowest wage earners actually creates a stimulus because they spend their money and there are a lot of them.

Although the direct financial benefits to working-class Americans and our economy as a whole are the primary justifications for the proposal, there are a number of subsidiary benefits as well, ranging across both economic and non-economic areas.

First, the net dollar transfers through the labor market in this proposal would generally be from higher to lower income strata, and lower-income individuals tend to pay a much larger fraction of their income in payroll and sales taxes. Thus, a large boost in working-class wages would obviously have a very positive impact on the financial health of Social Security, Medicare and other government programs funded directly from the paycheck. Meanwhile, increased sales tax collections would improve the dismal fiscal picture for state and local governments, and the public school systems they finance.

A final argument for using a minimum wage is that even though it tends to be less efficient and more costly than just supplementing the incomes of low income earners, it tends to be politically easier to get an increase through congress than a subsidy.

Does raising it improve the plight of the worst off, at a reasonable price?

A lot depends on your definitions, but economist Adam Ozimek makes a smart point. According to a 2007 study by the CBO, an increase in the minimum wage to $7.25, like that eventually passed that year, would increase wages by $11 billion, of which $1.6 billion went to poor families.

By contrast, increasing the Earned Income Tax Credit for large families (as happened in the stimulus bill) and for single people would cost $2.4 billion, of which $1.4 billion would go to poor families. The EITC option costs one fifth as much to society but does about as much good for poor families. That suggests that if you want to help families escape poverty, wage subsidies are a more cost-effective option than the minimum wage.

Oddly enough, the conservatives are less interested in the net savings, than the process of doing this, so they prefer minimum wage increases to the EITC option.  This means Boehner should be happier than he is with this proposal.

Furthermore, as large portions of the working-poor became much less poor, the payout of the existing Federal Earned Income Tax Credit (EITC) would be sharply reduced. Although popular among politicians, the EITC is a classic example of economic special interests privatizing profits while socializing costs: employers receive the full benefits of their low-wage workforce while a substantial fraction of the wage expense is pushed onto the taxpayers. Private companies should fund their own payrolls rather than rely upon substantial government subsidies, which produce major distortions in market signals.

So, I hopefully didn’t overwhelm you with too much stuff over coffee, but I would like to remind you that this is basically the mornings read post. So, since I’ve run out of space, it’s now your turn to share the other things. Oh, and it’s okay to ask questions or tell me that something confuses you.  I’m assuming you’re not a labor economist either.  Again, there’s a lot of controversy and a lot of different circumstances and assumptions around all these models.  But, it should let you know that increasing the minimum wage can be good policy for a variety of reasons even though it might impact the number of people looking for or working at those jobs.

What’s on your reading and blogging list today?


Thursday Reads: GOP Wars on Democracy, Social Safety Net; Russia and Syria; MacDonald Follow-Up; and Ancient Cheese making

dog_reading

Good Morning!!

Now that Rick Snyder has succeeded in turning Michigan into a right-to-work-for-less state, he and his Republican House have passed a supposedly “new and improved” emergency manager law. The Detroit Free Press reports:

The House passed the Local Financial Stability and Choice act in a 63-46 vote late Wednesday, with Rep. Kevin Cotter, R-Mt. Pleasant, as the only Republican to join Democrats in voting against it.

Immediate effect for the new bill was rejected 63-45, meaning it would take effect around the end of March if passed by the Senate, likely to happen Thursday, and signed by Gov. Rick Snyder, as expected.

The legislation introduced by Rep. Al Pscholka, R-Stevensville, is similar to a draft Treasurer Andy Dillon and Gov. Rick Snyder had released. The administration said it’s designed to address shortcomings in Public Act 4 by giving local officials in financially troubled cities and school district more input in decisions.

Incoming House Minority Leader Tim Greimel, D-Auburn Hills, said it is a “mirror image” of what voters just rejected and “another slap in the face to democracy perpetrated by this House.”

It appears that both Wisconsin and Michigan are now totally owned by the Koch Brothers. Think Progress reports on How Michigan Voters Can Repeal The GOP’s Anti-Union Powergrab, but this is starting to feel like whack a mole. Republicans seem determined to kill democracy one state at a time.

The New York Times Fed Ties Rates to Joblessness, With Target of 6.5%

The Federal Reserve made it plain on Wednesday that job creation had become its primary focus, announcing that it planned to continue suppressing interest rates so long as the unemployment rate remained above 6.5 percent.

It was the first time the nation’s central bank had publicized such a specific economic objective, underscoring the depth of its concern about the persistence of what the Fed chairman, Ben S. Bernanke, called “a waste of human and economic potential.”

To help reduce unemployment, the Fed said it would also continue monthly purchases of $85 billion in Treasury securities and mortgage-backed securities until job market conditions improved, extending a policy announced in September.

But the Fed released new economic projections showing that most of its senior officials did not expect to reach the goal of 6.5 percent unemployment until the end of 2015, raising questions of why it was not moving to expand its economic stimulus campaign.

Ben Bernanke indicated there isn’t much more the Fed can do at this point. Perhaps its time for GOP lawmakers to quit trying to destroy the economy?

I couldn’t believe this story about cops gone wild in New Hampshire. Raise your hand if you knew it was illegal to buy “too many” iPhones.

Police in Nashua, New Hampshire say they were forced to use a Taser on a 44-year-old Chinese woman who does not speak English after she was told to leave an Apple Store because she was trying to buy too many iPhones.

Through a translator, Xiaojie Li told WMUR that she had bought two iPhones from the Pheasant Lane Mall Apple Store on Friday and returned on Tuesday to buy more to send to her family in China.

“The manager of the Apple Store came and told her something, but she didn’t understand,” Li’s daughter explained.

Soon after that, shoppers captured cell phone video of police — who were providing security at the store’s request — using a stun gun on Li as she laid on the mall floor screaming.

The Apple store employees had to call the police because a customer was spending too much money in their store? That’s just one more reason I’ll never buy an Apple product.

Senator Bob Corker has introduced a bill that would cut Social Security, Medicare, and Medicaid by nearly $1 Trillion in reture for raising the debt ceiling.

Corker said the Dollar For Dollar Act would include $937 billion in savings from Medicare, Medicaid and Social Security, with an equivalent, dollar-for-dollar hike to the debt ceiling.

Corker offered some details about his bill during a speech on the Senate floor Wednesday. Corker said his bill would raise the age of Medicare eligibility to 67 and would include the Medicare Total Health package that would increase private-sector competition for covering the elderly. Corker also said there would be a form of means-testing, making wealthy Medicare recipients pay more of their healthcare needs.

Corker said he’d also “slowly” raise the age of eligibility for Social Security benefits, but did not specify an age.

“We should address [Social Security] now because it’s causing the government to spend more than it takes in,” Corker said. “It will be bankrupt by 2017 if we do nothing.”

Izzat so. Social Security will be “bankrupt” five years from now? Prove it, Corker. What an asshole. And this is the guy the corporate media has been presenting as a GOP moderate who is willing to work with Obama.

According to the Washington Post, Russia is admitting that: Assad is losing control and rebels might win in Syria

MOSCOW — Syria’s most powerful ally, Russia, said for the first time Thursday that President Bashar Assad is losing control of his country and the rebels might win the civil war, dramatically shifting the diplomatic landscape at a time of enormous momentum for the opposition.

While Deputy Foreign Minister Mikhail Bogdanov gave no immediate signal that Russia would change its stance and agree to impose international sanctions on Assad’s regime, his remarks will likely be seen as a betrayal in Damascus and could persuade many Syrians to shift their loyalties and abandon support for the government.

Russia’s assessment could also further strengthen the hand of the rebels, who have made some significant gains in their offensive, capturing two major military bases and mounting a serious challenge to Assad’s seat of power, Damascus.

“We must look at the facts: There is a trend for the government to progressively lose control over an increasing part of the territory,” Bogdanov, the Foreign Ministry’s pointman on Syria, said during hearings at a Kremlin advisory body, the Public Chamber. “An opposition victory can’t be excluded.”

Here’s an interesting follow-up to Gene Weingarten’s excellent story about the Jeffrey MacDonald case, which I wrote about recently. Weingarten did a live chat at the WaPo on Tuesday in which he was a little more revealing of his own opinions. I learned that he had the same incredulous reaction when he heard the words supposedly chanted a by “hippie intruder” to MacDonald’s home, “Acid is groovy…kill the pigs.”

This is an odd thing to say about a 6,400-word story, but I found myself without the space to tell it as completely as I’d have liked. The introduction to this chat is mostly for those of you who have read the story and are still not persuaded, beyond a reasonable doubt, that MacDonald killed his family and that “A Wilderness of Error” is a deeply flawed and manipulative book. All the rest: Feel free to plow ahead into the questions.

I remember the killings. I was an 18-year-old hippie at the time, roughly the same age as Helena Stoeckley. I didn’t do as many drugs as she did, but I did plenty, including mescaline, LSD, and heroin. When I read in the newspaper that Jeffrey MacDonald – still presumed an innocent victim – told police that his attackers had been vicious hippie intruders who chanted “acid is groovy – kill the pigs,” I knew he had done it. As did every hippie in every city who read that statement with any degree of analytical thought. No self-respecting killer hippie would ever have uttered, let alone chanted, that uncool, anachronistic thing as late as 1970. That was exactly what some ramrod-straight 26-year-old Ivy League frat-boy doctor who was contemptuous of the counterculture would have thought a hippie would say.

Not to mention that hippies, um, didn’t kill people, at least not while stoned in drug-induced trances. The Manson gang were not hippies. They were weirdo murderers. They went around murdering people, not just Sharon Tate and her friends. They did not come out of the dark, descend on a house, do their savage thing, and then disappear back into the world never to be heard of again. That’s not how it works with murderous gangs who would kill sleeping children. Oh, and hippies also don’t arrive at a house intent on mass murder without remembering to bring along any weapons, relying on whatever knives and pieces of wood they might happen to find inside the house. The Manson people brought a shotgun.

But, okay. Forget all that. That’s just me bloviating. Maybe the MacDonald killers were different from all other killers. Maybe they were really disorganized, absentminded murderous hippies who talked funny and only killed just this once. Oh, and who came to hassle the doctor for drugs because they were drug addicts, and who killed his family, but never opened a closet to discover a big stash of syringes and drugs, including amphetamines. Or maybe they saw that stuff but didn’t steal it because murder may be one thing, but stealing is just plain wrong.

After that, he goes through the evidence and responds to readers’ questions. Check it out if you’re interested.

A fragment of a sieve that researchers say were used as cheese strainers.

A fragment of a sieve that researchers say were used as cheese strainers.

Finally, the Wall Street Journal had a fascinating science story yesterday: Europe’s First Cattle Farmers Quickly Added Cheese to Menu.

Researchers on Wednesday said they found the earliest known chemical evidence of cheese-making, based on the analysis of milk-fat residues in pottery dating back about 7,200 years. The discovery suggests Europe’s early farmers added a cheese course to their diet almost as soon as they learned to domesticate cattle and started regularly milking cows.

Scientists led by geochemist Richard Evershed at the U.K.’s University of Bristol tested ancient, perforated clay pots excavated at sites along the Vistula River in Poland, and found they had likely been used by prehistoric cheese mongers as strainers to separate curds and whey—a critical step in making cheese.

The pots have long puzzled archeologists, but their new analysis, reported in Nature, revealed unique carbon isotopes of milk in the traces of fatty acids that had soaked into the ceramic sieves.

“It is a no-brainer,” said Dr. Evershed. “They have to be cheese strainers.”

No one knows exactly when or where cheese-making began, but experts said the traces of milk fat on these unglazed clay strainers are the clearest evidence yet of the origins of this basic biotechnology, which launched a dairy trade that today produces more than 11 billion pounds of cheese every year and as many as 5,000 different named varieties world-wide, from Appenzeller to Zamorano.

As a cheese lover, I was very interested to learn about this.

That’s all I have for you today. What are you reading and blogging about?


Thursday Reads

Einstein reading

Good Morning!

The New York Times has added more fodder for the Republicans’ Benghazi attacks. James Risen Mark Mazzetti and Michael S. Schmidt report that: U.S.-Approved Arms for Libya Rebels Fell Into Jihadis’ Hands.

The Obama administration secretly gave its blessing to arms shipments to Libyan rebels from Qatar last year, but American officials later grew alarmed as evidence grew that Qatar was turning some of the weapons over to Islamic militants, according to United States officials and foreign diplomats.

Of course there’s no evidence that this had anything to do with the Benghazi attacks, but I’m sure that won’t stop Senators McNasty, Huckleberry Closetcase, and their new pal Senator Kelley Ayotte from pretending otherwise.

No evidence has emerged linking the weapons provided by the Qataris during the uprising against Col. Muammar el-Qaddafi to the attack that killed four Americans at the United States diplomatic compound in Benghazi, Libya, in September.

But in the months before, the Obama administration clearly was worried about the consequences of its hidden hand in helping arm Libyan militants, concerns that have not previously been reported. The weapons and money from Qatar strengthened militant groups in Libya, allowing them to become a destabilizing force since the fall of the Qaddafi government.

Also at the NYT, Jared Bernstein once again explains why politicians (and the media) in the Village need to stop obsessing on taxes and start focusing in increasing employment and, along with it, consumer demand.

WITH the budget-and-tax showdown dominating headlines, most Americans probably missed an even more ominous story: according to a report by the Congressional Budget Office, America’s underlying growth rate — that is, the best the economy could do, under optimal conditions, without driving up inflation — has slowed from just under 4 percent a year in 2000 to just under 2 percent today.

Why does this matter? For one thing, the combination of a lower underlying growth rate, which you could think of as the economy’s speed limit, and a less equitable distribution of that growth was a reason middle-income households did so badly and poverty went up in the 2000s.

During the 1990s, in contrast, stronger demand for goods and services led to much faster job growth and the last real gains experienced by middle- and lower-income households. Faster growth in those years also spun off a lot more government revenues, which interacted with slightly higher tax rates to take the budget from deficit to surplus.

Read the whole thing and fantasize what we could be doing if we had smarter leadership in DC.

Back in Republican la-la land, Joel Kotkin at Forbes claims that blue states are committing suicide by supporting raising tax rates on the rich.

With their enthusiastic backing of President Obama and the Democratic Party on Election Day, the bluest parts of America may have embraced a program utterly at odds with their economic self-interest. The almost uniform support of blue states’ congressional representatives for the administration’s campaign for tax “fairness” represents a kind of bizarre economic suicide pact.

Any move to raise taxes on the rich — defined as households making over $250,000 annually — strikes directly at the economies of these states, which depend heavily on the earnings of high-income professionals, entrepreneurs and technical workers. In fact, when you examine which states, and metropolitan areas, have the highest concentrations of such people, it turns out they are overwhelmingly located in the bluest states and regions.

Really? Then how come we did so much better under the Clinton tax rates in the ’90s? After all, that’s all that is happening–except that the first $250,000 of these poor rich people’s money will still be taxed at the Bush rates. But that’s not how Kotkin sees it.

The people whose wallets will be drained in the new war on “the rich” are high-earning, but hardly plutocratic professionals like engineers, doctors, lawyers, small business owners and the like. Once seen as the bastion of the middle class, and exemplars of upward mobility, these people are emerging as the modern day “kulaks,” the affluent peasants ruthlessly targeted by Stalin in the early 1930s.

OMB!! “Wallets…drained!” “Stalin!” Let’s all freak out!

The ironic geography of the Democratic drive can be seen most clearly by examining the distribution of the classes now targeted by the coming purge. The top 10 states with the largest percentage of “rich” households under the Obama formula include true blue bastions Washington, D.C., which has the highest concentration of big earners, Connecticut, New Jersey, Maryland, Massachusetts, New York, California and Hawaii. The only historic “swing state” in the top six is Virginia, due largely to the presence of the affluent suburbs of the capital. These same states, according to the Tax Foundation, would benefit the most from an extension of the much-lambasted Bush tax cuts.

Hey Joel, maybe it’s not all about taxes, even though that’s all that seems to matter to you. Maybe some blue state folks think the whole economy would benefit if more people got back to work, earned some money and spent it–as suggested by Jared Bernstein in yesterday’s NYT (see above).

As Zandar notes, Kotkin then goes on to show how Republicans can use the home mortgage deduction and other methods to punish the blue state richies for voting for Obama.

- Keep the tax rate on capital gains the same.

- Raise income taxes on the top income bracket for 2013, those making $398,350 and up (single filers, married joint filers, or head of household).

- Means-test, or eliminate entirely, the mortgage interest deduction (which benefits taxpayers in areas with the highest real estate values and mortgages – i.e., Hawaii, D.C., New York, California and Connecticut).

- Means-test or eliminate entirely the federal deduction of state and local taxes, which is disproportionately utilized by those in high-tax blue states: “In 2005, taxpayers in California and New York together made up 20 percent of those claiming the deduction and accounted for 30 percent of its value. Itemizers in New York, New Jersey, Connecticut, and California claimed on average over $12,000 per household.”

Talk about a sore loser! Kotkin must be really bitter about Romney’s failure to get those blue state dopes to vote for him.

Meanwhile all those Romney voters in the red states are dreaming about seceding from the union. But if they did, asks The Nation, “Who’d Pay for Their Massive Government Handouts?”

In the wake of Obama’s victory, citizens in several states submitted petitions to secede from the United States. It is something of an irony that the very states seeking secession from “big government”—like Louisiana and Alabama—have been among the top beneficiaries of that selfsame government. Put bluntly, the government would be far smaller without them, and they would seriously struggle far more without it. Indeed, were they to become independent, most would be failed states in need of a bailout. Only this time their benefactor would be not the federal government but the International Monetary Fund, of which the United States is the principal donor. Louisiana and Alabama would go the way of Greece and Spain.

Oh, the irony of it all! And here’s another irony for Republicans to chew on. From TPM: Why Insurers Are Wary Of Raising The Medicare Age

House Republican leaders want to avoid the fiscal cliff with a proposal that would gradually raise the Medicare eligibility age to 67. Democrats are broadly reluctant to cut benefits, but President Obama was willing to accept the policy last year in failed deficit reduction talks with House Speaker John Boehner, and top Democrats have left the door open to including that measure in a grand budget bargain.

It may seem counter-intuitive: why would an industry threatened by government insurance not want it to shrink?

The reason: hiking the Medicare eligibility age would throw seniors aged 65 and 66 off Medicare and into the private market, forcing insurers, who will soon be required to cover all consumers regardless of health status, to care for a sicker, more expensive crop of patients.

“The risk pool issue is important,” the insurance industry source said. “[I]f you add more older and sicker people to the pool, that’s definitely going to have any impact on premiums.”

The policy would save the federal government $113 billion over a decade, according to the Congressional Budget Office. But it achieves that by raising the cost of private insurance: the Kaiser Family Foundation projected that a Medicare age of 67 would raise costs for under-65 patients by an average of $141 in 2014. (In practice it would be phased in.)

Duh!

And even more Republican stupidity: Right wing nutcases are all bent out of shape because their favorite crazy propaganda movie didn’t get any Oscar nominations.

Gerald Molan, the director of the extremely anti-Obama movie, 2016: Obama’s America , is mad that his and Dinesh D’Souza’s film ["2016"] wasn’t on the shortlist of documentaries nominated for an Academy Award.

“The action confirms my opinion that the bias against anything from a conservative point of view is dead on arrival in Hollywood circles,” he complained to the Hollywood Reporter.

It couldn’t possibly have anything to do with the fact that the movie is based on a pack of lies and right wing conspiracy theories, could it?

To cleanse your palate of right wing and DC craziness, try watching this video from NASA that show views of the Earth from space. Here’s a still shot:

new-view-earth-at-night-usa_62009_600x450

So what are you reading and blogging about today? I’ve been a little out of the loop for the past couple of days, so I look forward to clicking on your links!