Saturday, February 22, 2014

De-Coding Economic Propaganda

Raising the minimum wage is in the news again, and with it, lots of economists disagreeing  about what the effects will be.  For every study showing a minor negative effect on employment, another is presented another showing a minor positive effect.  Into the fray has stepped the Employment Policies Institute (EPI) with a dedicated website devoted to educating people about the horror that raising the minimum wage will apparently be.

The top of the website displays a picture of Bill Gates with the caption "why isn't the President listening to this guy?"--not a good start.  Reading further, it only gets worse:

Employees that earn the minimum wage tend to be young, and work in businesses that keep a few cents of each sales dollar after expenses. When the minimum wage goes up, these employers are forced to either pass costs on to consumers in the form of higher prices, or cut costs elsewhere–leading to less full-service and more customer self-service. As a result, fewer hours and jobs are available for less-skilled and less-experienced employees.
Many businesses that pay at or near minimum wage do, actually, have decent profit margins and claiming that increasing wages "forces" businesses to pass on the costs to consumers or reduce staffing is simply ridiculous.  A business could also reduce pay-levels of upper management, decrease dividend payouts, stop buying back their own stock, etc.  The framing also seems worded to encourage the reader to think of a small business, when in fact most people work for large corporations, who are sitting on mountains of cash right now, btw.
Minimum wage increases do not help reduce poverty. Award winning research looked at states that raised their minimum wage between 2003 and 2007 and found no evidence to suggest these higher minimum wages reduced poverty rates. While the few employees who earn a wage increase might benefit from a wage hike, those that lose their job are noticeably worse off.
Notice that it is not mentioned which award this research won or who was giving it out.  And then, of course, winning an award (even a prestigious one that you would feel comfortable mentioning by name) doesn't guarantee the accuracy of your work.  Barack O'bomba, for example, received a Nobel Peace I think you see my point.

And as Prof. Sprigs discusses at 6:58 in the video below, studies of the effects of minimum wage have by-and-large either shown no effect or little effect on employment; sometimes that minor effect is positive and sometimes it's negative.  Often, it is statistically insignificant.  Which is what you would expect when looking for the effect of a single variable in a complex, densely inter-twingled system like our economy.
Employees who start at the minimum wage aren’t stuck there. Research found that the majority of employees who start at the minimum wage, move to a higher wage in their first year on the job.
Again, they don't say specifically what research they are referring to, nor do they provide a link to it so that a reader can consider it on its own merits.  It's also worth keeping in mind that most economic "research" was calling for smooth sailing into the indefinite future...right up until the entire financial system imploded.  One should always take economic research with a grain of salt--numbers are easy to manipulate, and perfectly legitimate mathematical operations can provide you with totally illegitimate conclusions.  The numbers, as my old college adviser used to say, never speak for themselves.

Also, having extensive experience in the low-wage sector, I can give you a little hint for understanding that last claim about most workers moving to a higher wage within a year.  Some years back I got a job as a nursing-home housekeeper.  Starting wage--$7.25/hr.  My raise after six months of, by all accounts, stellar job performance--$0.10/hr. 

Just an educated guess here, but I bet the research this website is referring to would claim that my extra dime per hour was "moving to a higher wage."

Here is a much more realistic discussion of the likely effects of raising the minimum wage:

Friday, February 14, 2014

A simple model of monetary stimulus

When the Federal Reserve decides that it wants to increase the amount of currency in circulation, in order to stimulate the economy, its method of accomplishing this is to buy securities from its “primary dealer” banks (normally US Treasury bonds, and recently MBS or mortgage-backed securities). This has the effect of increasing the cash reserves of those banks, who are expected to then lend it out into the economy. In short, whenever new currency is created, it is first used to purchase assets from a private bank, which will then, it is hoped, lend it out into the economy for productive purposes.

This method of economic stimulus, however, has the paradoxical and quite harmful effect of concentrating wealth in the financial sector while depriving the real economy (i.e. the people and businesses that actually make things) of income. The simple reason for this is that all loans made by a bank must be repaid with interest. To the extent that a loan is not entirely repaid, there will generally be a forfeiture of property to the bank to cover their financial losses. In spite of the occasional bad loan, the net effect of adding currency to the economy through interest-bearing loans is to transfer financial assets from real-economy actors to financial-sector actors. A simple model will make plain why this is the case.

Imagine that we have an economy composed of three sectors: the productive sector (real economy), the financial sector (banks), and the government sector. We can imagine the productive sector as itself composed of households and businesses, with currency circulating continually between the two: households buy goods and services from businesses who, in turn, pay wages back to households.

Now, let us suppose that the productive sector of the economy has a monthly GDP of $1000. This means that every month, businesses pay households $1000 in wages which households then spend at businesses, providing the businesses with the revenue to pay out in wages at the beginning of the next monthly cycle. For simplicity, we assume that households spend all of their income every month and that businesses use all revenue for wages. Essentially, in our model businesses and households are simply passing $1000 back and forth between themselves.

Now let's suppose that the population of our economy grows and additional households are created. In the absence of any action from the government (which is the only sector that can add additional currency to the productive sector), the income per household in the productive sector must necessarily decline. If we previously had 10 households receiving $100 a piece per month, and now we have 11 households, each household will now only receive $90.90 per month. If the government desires to maintain wage levels at $100 per month, it will need to add an additional $100 to the amount of currency currently circulating in the productive sector.

In order to do this, the government gives $100 to the financial sector to lend into the economy. Assuming the bank lends the entire amount into the economy, in the month that the government increases the amount of currency, the GDP of the economy will increase by $100 to $1100 (as households borrow and spend the $100 into circulation), providing enough currency for each household to once again receive $100 per month. However, his return to normalcy is short-lived.

Assuming that all loans get repaid, with interest at the beginning of the next monthly cycle, during the next month the GDP of our little economy will have to decrease by $110 (assuming 10% monthly interest, for ease of calculation), in order to repay the $100 principal plus $10 in interest. This means that at the start of the following cycle, the amount of currency will be once again too low to allow incomes to remain at $100 per month. Only now, the situation will be worse than before the government's “monetary stimulus,” since the economy's real GDP will have gone from $1000 to $1100 to $990, giving an average household salary of $90—90 cents less than before the currency increase.  The apparent surge in economic activity and household prosperity is followed quickly by decline for households and businesses alike.

Now, the only way for the household sector to maintain it's level of income and consumption is to once again borrow from the financial sector. Only now, instead of borrowing $100, households must borrow $110 in total from the financial sector to maintain their income levels (which, remember, are determined by levels of spending; businesses can't pay wages to households until households first buy from them). This, of course, only further worsens the problem as $121 must now be repaid to the financial sector at the beginning of the following cycle, leaving only enough money left in the real economy to provide households with a $79.90 monthly average salary.

It should be easy enough to understand why it is that an economic stimulus program that depends on private banks lending new currency into the real economy at interest is a self-defeating and perverse policy choice (unless, of course, one happens to work in the financial sector). The only way to add wealth to the household sector through lending would be to offer the loans at a negative interest rate: that is, loan $100 and only require $90 back. In the above example the government would give the financial sector $1000 to loan into the economy at a negative 10% interest rate, leaving an extra $100 in the economy after the loans had been repaid.

If the goal of monetary stimulus is to increase the average household wage, negative interest loans make far more sense than positive interest loans. Positive interest loans, in fact, make no sense at all.

Friday, February 7, 2014

A brief history of social uplift in Montana...

The first successful uplift movement in Montana was conceived and accomplished by the Vigilantes. Crude in plan and rude in perfomance, there was an uprising which destroyed the last doubt in lawless minds with respect to the efficiency of government “of the people, by the people, for the people”. It demonstrated that absence of law afforded no excuse for crime and gave security to life and property without increase of taxation. In some of the valleys where the Vigilantes rode, less than half a century ago, land now has a market value of as much as one thousand dollars per acre for orchard home uses, but the most profitable crop which ever hung from Montana trees was in the gruesome forms of dead outlaws. Then and there was implanted a respect for the penalties of wrong-doing and a regard for the rights of others which has endured against the insidious influence of wholesale corruption and the most subtle encroachments upon the powers of government, to the present time. It is today more dangerous in the state of Montana to steal a horse than to loot a bank or to bribe a legislative majority, chiefly because the Vigilantes failed to furnish a precedent in justice for bank-looting and legislative corruption as they did for horse thieving; while later administrators of justice, in the approved manner of courts, have regarded precedent and form and ceremony above the purpose of the law and the effect of justice.

~Jere C. Murphy; The Comical History of Montana: A Serious Story for Free People (1912)

Saturday, February 1, 2014

The History of Absentee Bosses in Montana

I’ve been reading A Comical History of Montana: A Serious Story for Free People, by Jere C. Murphy (pub. 1912). Here is what Murphy had to say about the situation in Montana at that time, after describing how all of the mines, reduction works, public utilities, courts and politicians of “the Treasure State” were brought under monopoly control:
All this by the power of lawless corporate combination and the thimble-rigging of high finance, exercised by absentee bosses who have gained possession of this inestimable wealth and control of these stupendous influences without honest investment, honest purpose, or honest accounting whatsoever.
Who are these absentee bosses?
The constitute a small group among the conspicuous confidence operators of Wall Street.
How did they get this enormous wealth and these tremendous powers?
They bought some of it from the owners of the property and some of it from law-makers and other officials employed by the public.
Where did they get the money?
That, also, they got from the public.
What did the public get?
The public got watered stock in a generously assorted variety of mining, smelting, water power and public utility companies.
Do the operators pay dividends on these watered stocks?
Only when it suits their convenience and promotes their efforts to unload more watered stocks.
The more things change...