A Question for Those Supporting a Minimum Wage Increase:

Why not set maximum prices on vital commodities? Say, no more than $2.50 per gallon for milk?

The Deficit

Paul Krugman is arguing that the Democrats should not spend political capital on reducing the deficit right now. (Full text at Brad DeLong).

To me, this kind of argument misses the point. I have no problem with the government borrowing money for important spending initiatives. But when the government is borrowing money, we need to look very closely at what the money is being spent on, to see how important it is. This money all has to be re-paid with interest, so it is especially important to spend it on something useful (fighting a world war, for example).

Given current wasteful government spending, though, I would argue that any money borrowed simply can't be said to be going to anything useful. Is there any doubt that billions of dollars are being wasted right now? Farm subsidies are just one example. Since the borrowed money is just going to a general fund, and the money received by the government through taxes and borrowing is fungible, the deficit spending effectively is being used for the wasteful projects.

I assume Krugman would agree that most, if not all, of our farm subsidies are bad policy. So, it seems to me that, in effect, Krugman is saying that the government should borrow money to subsidize big agricultural corporations.

I suppose his point is that it makes sense politically for the Democrats to spend money and not worry about the deficit. That's a fair point. However, it is a little depressing to hear this from someone like Krugman. It's somewhat expected for politicians to act this way. But when prominent economists lose their idealism, and give up good policy for practical policy, I get a little discouraged.

Is Government Debt Good?

Greg Mankiw says he doesn't understand the following point made by a fellow economist:

Myth No. 5: Government debt is a burden on our grandchildren. There's no better way to get people worked up about something than to call on their sympathies for their beloved grandkids. The last thing that I want to do is to burden my own grandchildren with the sins of profligacy. But we should stop feeling guilty -- at least about government debt -- because we are in better shape than conventional wisdom suggests.

Theory and practice tell us that the optimal amount of public debt that maximizes the welfare of new generations of entrants into the workforce is two times gross national income, or GDP. ...

What's going on here? There are not enough productive assets -- tangible and intangible assets alike -- to meet the investment needs of our forthcoming retirees. The problem is that the rate of return on investment -- creating more productive assets -- decreases as the stock of these assets increases. An excessive stock of these productive assets leads to inefficiencies.

See the link for the full context -- that's the key part, though.

So, as I understand it, his point is that there will not be enough places for all the new retirees (i.e. baby boomers) to invest, and thus the rate of return will fall, creating "inefficiencies."

But as one of Greg's commenters notes, "Can't retirees dump savings abroad?"

More generally, it's not clear to me why he believes that we will be at a level where there is an excessive stock of productive assets. Perhaps he has, or plans to, demonstrate this empircally somewhere, which would be interesting to see.

ADDED: I see now that his main point seems to be that the debt is not actually a burden on our grandchildren. That may be the case -- but that doesn't necessarily mean it's good policy to have deficit spending.

What is Tom Friedman Thinking?

I'm not sure what to make of Tom Friedman. It seems as though he is well-respected in some circles. (I saw him on the Daily Show and Jon Stewart was fawning all over him). But when I read what he has to say about economic matters, I'm never very impressed. And I'm not alone. If I recall correctly, the Economist savaged his book The World is Flat in their review.

In this vein, today I came across an article he wrote on a Chinese solar panel company. In it, he said two things that floored me. First, he says:

As an American, I worry that if we don't start doing everything we can to develop our own clean power, we're going to miss out on the green industrial revolution. Today, most of our hybrid cars are imported from Japan. Tomorrow, if Mr. Shi has his way, most of our solar panels will come from China.

Now, if this were a piece by Lou Dobbs, I could understand the concern. But isn't Tom Friedman supposed to be a free trader?? If he is, then why does he care who makes hybrid cars and solar panels? They should be made by the most efficient producer -- end of story. There's no reason to complain that Americans are not making them. So, his statements suggest to me that perhaps he is not completely familiar with the theory behind free trade.

Second, he says:

Congress' idiotic decision not to impose higher mileage standards on U.S. carmakers helped Detroit miss the market and almost go bankrupt.

Let me get this straight: The absence of government action caused U.S. companies to miss the market? What, was the market somehow invisible and could not be seen except with special government-issued glasses? Again, I think there is a fundamental misunderstanding here, this time of the term "market." Furthermore, there has been plenty of government intervention in green industries already, much of it for dead-end projects long-since forgotten, so it's not completely clear that government action is the solution here.

Next Stop: Socialism

Greg Mankiw reports on an idea of economist Bob Shiller:

The IRS should be instructed to automatically adjust tax rates to keep economic inequality from getting worse, according to a new proposal outlined by Robert Shiller, a Yale University economics professor.

"We have a serious problem, and it's a problem of growing inequality," Shiller said on December 6 at a Library of Congress discussion in Washington. Shiller developed the proposal with Len Burman, director of the Tax Policy Center, and the two are planning to write a book on the idea.

"We need a standard or principle of income inequality. We don't have one now," he said. Inequality provides motivation to work harder and benefits hard work, hesaid, so "we do want some inequality, but we don't have any clear idea about where we're going and what is appropriate."

The standard, which Shiller calls "inequality indexation" of the tax system, would instruct the IRS to adjust brackets and rates whenever inequality worsened beyond an agreed-on level.

Well, at least it's a moderated form of socialism. Rather than try to ensure complete equality, they agree that some amount of inequality is acceptable, but it just can't be excessive. But even in this scaled back form, it's scary to think that the government might take action to make people more "equal" in this manner. My question for them is the following: Would they prefer that people be equally poor as opposed to being unequally rich? To me, the latter is clearly the better option. I wonder how they would view this.

Thomas Sowell on Some Basic Economic Points

As is often the case, Thomas Sowell makes some good points about economic matters that some people just don't seem to get:

Apparently Wal-Mart does not pay its employees as much as third-party observers would like to see them paid. But obviously it is not paying them less than their work is worth to other employers or they probably would not be working at Wal-Mart. ...

...

Are the Ethiopian coffee growers worse off now that Starbucks is buying their beans? Supply and demand would suggest otherwise. But moral crusaders seldom have time for economics.

I second both points. If Wal-Mart's pay is so abominable, why do so many people want to work there? And how are people in poor countries better off without multinationals offering them jobs?

Economists for the Minimum Wage

Greg Mankiw asked an economist who signed the open letter supporting a minimum-wage to explain his support:

My friend told me that he viewed the minimum wage as a second-best policy. He would prefer increased cash payments to the poor, such as a much-expanded earned income tax credit (EITC) or a more general negative income tax. But if his first-best policy was politically impossible, a minimum-wage increase was, in his view, an improvement over the status quo. He admitted that the minimum wage had adverse effects on employment, but he judged those to be modest in size. All things considered, he considered a higher minimum wage better than nothing.

I can understand the sentiment, but I wonder whether it would have been better to make this reasoning clear in the letter. If an expanded EITC is preferable, that should have been stated. Also, how "modest" are the jobs losses expected to be? I'd be interested to see what level of job losses is considered acceptable by minimum wage supporters.

The Minimum Wage: Economists' Views

Greg Mankiw posts about Robert Whaples' survey of PhD members of the American Economic Association. On the minimum wage, it turns out that "37.7 percent want it increased, while 46.8 percent want it eliminated." It's interesting to compare this finding to the one that 87.5 percent agree that "the U.S. should eliminate remaining tariffs and other barriers to trade." Both trade barriers and the minimum wage have similar effects: More money to a select few, with most of the country paying a little bit more and efficiency diminished. Yet somehow a large number of economists are in favor of increasing the minimum wage, whereas only a handful would keep trade barriers.

Movie Ticket Prices

From Greg Mankiw, I thought this piece in the Washington Post was interesting:

Why will movie theaters charge the same $9.50 to see "Casino Royale" this Saturday night that they charged to see the disappointing remake of "All the King's Men" on a Wednesday night in the middle of September?

Once upon a time, theaters charged more for their blockbuster "event" movies. Wouldn't they sell more tickets and popcorn, and make more profit, if they increased the price when demand is high, and lowered it when demand is low?

Some suggested answers:

Among the factors cited most often by theater owners are the cost and hassle involved in charging different prices for different movies on different days. There's the complexity at the box office and the need for some mechanism to make sure that patrons who buy cheap tickets for one theater at the multiplex don't wind up at expensive movies. On the other hand, it's hard to believe there isn't some simple technology that could solve most of these problems.

A more plausible explanation is that consumers might consider variable pricing as somehow unfair. But the experience in other industries suggests that such objections can be overcome, particularly if theater owners would phase in the new prices by introducing discounts for slack periods before raising prices for hit movies on busy weekends.
...

My hunch is that these pricing arrangements between the studios and the theater chains, which have always been shrouded in secrecy, are the answer to our puzzle. It is the studios that want to maintain uniform pricing because it is the theater owners who would get the most benefit from variable pricing. And according to Orbach and Linav, when a few chains have tried to experiment with variable pricing, they often found that they lost access to the best movies or faced demands from distributors for higher per-head charges that discouraged them from offering discounts.

Now that the idea is out there, maybe some risk-taking theater owner will give it a try?

A Minimum Wage Increase: Some Expert and Not-So-Expert Analysis

Becker and Posner offer their sophisticated criticisms of a proposed minimum wage increase. Here's my less sophisticated take on it.

If the minimum wage is increased by legislation, the costs faced by industries who employ minimum wage workers will increase (as may those of industries who employ other low wage workers whose wages increase through the "ripple effect"). These increased costs will have one or more of the following effects (it could be some combination thereof):

1. The affected companies will increase prices to cover the increased costs
2. The affected companies will accept lower profits
3. The affected companies will reduce their costs by firing some workers or deciding not to hire some people they had previously planned to hire

Those who support the minimum wage increase may argue that #2 is the appropriate outcome. However, this possibility is somewhat deceptive. While it is possible that companies could choose to reduce their profits, the long term effect would be diminished investment in the industry due to lower profit rates. Thus, ultimately there would be job losses as a result.

If #1 occurred, it is likely that the increased prices would have a big impact on the poorest of the poor, as jobs that rely on minimum wage workers often disproportionately cater to them (e.g. fast food).

And finally there is #3. If #1 and #2 are not chosen, then the most likely result of the minimum wage increase will be job losses for those in low wage jobs.

So, anyway you slice it, a minimum wage increase will be bad for large numbers of poor people. Granted, those who keep their jobs at the higher wage will be better off (assuming prices don't rise too much). But it's a mistake to ignore the others who will be affected.

Lego to Go

According to this NY Times article, Lego is moving much of its remaining production from Denmark to other locations:

It is not that Billund, a placid town of 30,000 people in the heart of Denmark, is in any crisis. The design, promotion and marketing of Lego’s colorful little plastic bricks will remain in Billund. But between now and 2009, virtually all the manufacturing will go to factories in the Czech Republic and Mexico. In the process, the number of jobs at Lego in Billund will drop to 1,600, from the current 2,500. Five years ago, Lego employed 4,000 people, who held roughly half of all the jobs in Billund.

What surprises me is not that they are moving, but that they still had any production at all in Denmark.

BusinessWeek's Take on the Minimum Wage

BusinessWeek seems to come down largely on the side of a minimum wage increase. After much talk about the "ripple effect" that an increase will have on incomes more generally, they do note the rise in costs and job losses that may occur. However, they quickly go back to an economist who says there won't be many job losses. Overall, I count 5 paragraphs that are favorable to a minimum wage increase, and 2 that are unfavorable.

What is a Free Market Economy

In a generally respectful, though critical, post about the death of Milton Friedman, Jeff Madrick says:

But there were relatively free market economies without political freedom. One close to Friedman's early experience was Nazi Germany.

Nazi Germany was a "relatively free market economy"?????!!!!! I'm not sure Madrick really understands the term "free market."

The Minimum Wage and Employment

It seems inevitable now that the new Democratic Congress will raise the minimum wage by a decent amount. For those who are skeptical about the benefits of this kind of policy (as am I), there is some good news: It provides a great opportunity to study its impact. No doubt teams of economists will be lining up to gather data the moment any new law goes into effect. Of course, there will be contradictory conclusions. Those in favor of the increase will find it doesn't hurt employment; those against will find that it does. But it should be possible to parse through the studies to see which are more credible.