Friday, February 28, 2014

The NYTimes and the Minimum Wage

Once again, religious zeal is replacing common sense at the NYTimes.  Today's editorial tells us that, lo and behold, businesses benefit from a higher minimum wage.  Again, the logic is compellling.  Why limit the increase to a mere $ 10.10?  What not $ 50 per hour.  Businesses could benefit even more by the logic of the NY Times editorial.

If this line of reasoning is correct, why don't we subsidize cigarette consumption?  Raising the price of cigarettes means higher consumption and more profits for cigarette makers, if you believe the economic logic offered by supporters of the minimum wage.  Maybe it's time we lowered the price of cigarettes.  That should lead to lower cigarette consumption, if you believe the economic reasoning at the NY Times.

Why not impose price minimums on everything?  Wouldn't we like to promote more education?  Why not double the tuition at all colleges?  That should not only increase the demand for college, but make those who purchase it feel better as well.  How can it get better than that?

The economic logic of raising prices in order to spur demand and make those who pay the higher price better off is intriguing economics.  One wonders why people who pursue this line of reasoning don't expand its applicability beyond just the labor market?  Maybe we can induce people to eat more fruits and vegetables by mandating higher prices for fruits and vegetables?  The NY Times is on to something.

Saturday, February 22, 2014

Fed Forecasts -- Revisiting January of 2008

It is instructive to look at the Fed predictions in early 2008 prior to the collapse of Bear Stearns and Lehman.  In their January, 2008 meeting, the Fed research staff made the following forecast:

"Turning to the labor market, the jump in the unemployment rate in December (of 2007) in combination with our weaker outlook for growth in real GDP going forward has led us to raise our projected level of the unemployment rate to 5.2 % at the end of 2008 and 5.3 % at the end of 2009."

The above quotation is taken directly from the January 2008 transcript of the Federal Reserve Open Market committee meeting.  As we now know, unemployment was double the rates put forth in these projections.  The Fed economists could not have been more wrong.  Bernanke, Yellen and Geithner voiced no concerns about the possible inaccuracy of this forecast.

Why, based upon this kind of forecasting history, does anyone believe anything the Fed says about future of the economy and the need for fed action or inaction?  That had no idea then and they have no idea now what the economy is likely to do.

Fed Transcripts Released -- Embarrassing

This morning's WSJ provides a commentary on the nearly 2,000 pages of Federal Reserve Board meeting transcripts from 2008.  This period includes the collapse of Bear Stearns in March of 2008 and the collapse of Lehman Brothers in October, 2008.

It is truly remarkable reading, if you believe this morning's commentary.

Bernanke, apparently, was clueless throughout the year as to what was unfolding.  Only after the collapse of Lehman was Bernanke attune to the seriousness of the problem.  Then, Bernanke and others went over the cliff.  Spurred on by Tim Geithner -- whose views have never tainted by knowledge of economics -- Bernanke and the Fed embarked upon the most absurd Fed policy in its history, expanding the balance sheet by over $ 4 trillion dollars in the next five years.

There is, of course, absolutely no evidence, or even sound economic reasoning, that this Fed policy proved helpful.  Fed policy and the fiscal stimulus enacted into law in early 2009 preceded the worst economic recovery in modern US history.  The casual observer could hardly be blamed for suspecting that Fed policy and the stimulus were two good reasons a healthy economic recovery never materialized.

Now, after the fact, folks like Geithner, Paulson and Bernanke claim that the recession would have been far worse had they done nothing.  This is like a religion, since no analysis and historical facts would support this view.

What really happened is that powerful people expanded their personal power at the expense of the country and the economy.  It is obvious from the transcripts that Bernanke and Geithner were basically clueless as the crisis unfolded.  Yellen, apparently, was worse than clueless as she thought the crisis was over after JP Morgan acquired Bear Stearns.  Other academics on the Fed Board, like Mishkin, were even more clueless.

These folks seem to be able to accurately forecast only the past.  Or, at least, they cleverly rewrite history to suit their world view.  The real truth is that their policies, and the policies of the Dodd-Frank Congress, have badly damaged the American economy and the economic prospects for the vast majority of Americans.

Friday, February 21, 2014

Shaila Dewan -- Another NY Times Mindless Polemicist

Today's article in the NY Times by Shaila Dewan extolling the virtues of the "Affordable Care Act" is a classic.  Folks who get heavily subsidized health insurance are helped by the Act, according to Dewan.  That startling news is the sum and substance of the article.

Why do they benefit?  Because they don't have to pay.

On that logic, we should pass a law making everything free.  Then we could all benefit from free stuff.

There are no losers in Ms. Dewan's mind when the government provides free stuff.  So, why not cut to the chase.  Make everything free.

Ms. Dewan's article is supposedly an "economics" article.

Sunday, February 16, 2014

Banks and Regulation

The essence of modern American banking regulation is that bureaucrats, with little or no banking or business experience of any kind, can create "one-size-fits-all" regulations that will oversee bank lending practices and make them "safer."

Increasingly, bank lending officers no longer make real decisions.  What they do, instead, is enforce government dictates as to who to lend money and on what basis.

Once upon a time this excessive regulatory regime was justified by the government's self-imposed obligations under the FDIC, which guarantee commercial bank depositors' accounts up to $ 250,000 per account.  You have to wonder: what is the point of this guarantee anyway?  Why can't depositors simply use money market checking accounts which are available at almost any financial institution?  These money market accounts are as safe as FDIC guarantees since most of the securities in money market accounts are US treasuries.

So why guarantee checking accounts at all?   The only shred of an argument left is the idea that such guarantees prevent bank runs, but there are many better ways to prevent bank runs than deposit guarantees.  It is not clear that bank runs, by themselves, are an evil, in any event.  If there were no government guarantees, then banks would fall under more intelligent scrutiny by depositors and unsafe banks would lose out in the market place -- something that cannot happen with government deposit guarantees.

If you think that abandoning deposit guarantees is a radical idea, what about the idea that banks today are no longer permitted to make loans that seem reasonable to them.  Instead, lending policy is simply dictated by the whim of whoever happens to occupy the White House at that moment.   Sounds like Russia or China, not the US, with obvious implications for resource allocation.

Dodd-Frank legislation and implementation has eviscerated free market lending through commercial banks.  Shadow lenders are emerging that will replace banks until the heavy hand of government decides to come after shadow lenders.

It is a never ending race between free markets and those intent on shutting them down.  Modern banking regulations spell the end of free market commercial banking as we once knew it unless Dodd-Frank is overturned.

Monday, February 10, 2014

Why Hire Anyone?

The main impediment to economic growth is the lack of job creation.  So why no job creation?

Jobs are created by businesses.   There is a limit to how many jobs there are in government since ultimately someone has to pay the tab for government jobs.  An increasing government sector, of necessity, can only be funded by taking resources away from the private sector.  That is a process that has been accelerated in recent years.

So, why are private sector businesses reluctant to hire?  This is a question that Janet Yellen and other Obama economists never seem to ask themselves.  Their view is that "inadequate demand" is the answer and, somehow, sinking the US into even more debt is the answer.  I suppose they think that hasn't been tried anytime recently.  The Krugmans, Yellens, and their kindred in academia think that business operate like robots.  As "aggregate demand" rises dues to government spending and expanding fiscal deficits, employment skyrockets.  Why isn't that happening?  Government debt as a percentage of GDP has never been higher.  How long will this empty theory persist in the minds of the Krugmans and Yellens.

A simpler explanation is that businesses are terrified at the idea of expanding their workforce.  That's what surveys of business folks tell you.  They are also concerned that making profits is viewed as evil by the media and the White House.  You might become one of the hated "one-percenters."  After all, that is the ultimate goal of a businessman who offers employment to others.  His/her goal is to become a one-percenter.  But, that puts you in the media spotlight and makes a you a target of the media.  Why not keep a low profile?  Cut back on your labor force.  Avoid the worse penalties imposed on business by the "Affordable Care Act," by dumping your work force into the exchanges.  Outscource as much of your business as you can to avoid the incredible US regulatory burden facing any employer with the temerity to add to their workforce.

The US culture and value system has changed.  Being a businessman, trying to make a profit, is considered an "Al-Capone" type activity.  Watch TV and the movies.  How are businesses portrayed?  They are always evil, willing to pollute the environment, poison their customers...anything to make a buck.  More and more Americans view the private sector through this lens.

So, why are businesses reluctant to hire.  It is pretty clear that any way to avoid an additional employee is a path that any rational businessman/woman would choose to take.  This is a predictable outcome for the policies that the US has embarked upon in recent years. 

Imagine a law that said that you must either pay every employee 40 percent more than you paid them last year or fire them.  Otherwise you, as an employer, are violating federal law.  Is that the kind of law you would support for yourself as an employee?  I don't know anyone who would favor that law if applied to themselves.  But to the poor and unskilled, that law is being promoted as fair and having no impact on employment.  That is the proposed minimum wage law increase, except that instead of applying to everyone, it exempts everyone except the poorest and least skilled Americans.  All of this in the name of fairness.

Don't expect employment growth to improve.

Sunday, February 9, 2014

Economists and the Minimum Wage

Today's editorial in the New York Times supporting an increase in the minimum wage cites a letter to President Obama signed by over 600 economists in support of the bill by Senator Tom Harkin and Congressman George Miller to raise the minimum wage to $ 10.10.  The letter argues that the minimum wage not only increases wages at the bottom but has "spillover effects as employers adjust their internal wage ladders."  In other words, everyone makes more money all the way up and down the line.  Even better "in the academic literature....the weight of evidence now ...increases in the minimum wage have had little or no negative effect on ... employment."

This letter suggests that there is simply no reason not to push the minimum wage even higher.  Conceivably, we could make everyone as wealthy as Bill Gates and Warren Buffet by the simple expedient of mandating a $ 100,000 per hour minimum wage.  That should have a terrific "spillover" effect with no consequences on employment following the logic of this letter.

What this letter really demonstrates is the lack of scientific endeavor that permeates academia and especially modern academic economics, which often is nothing but extremely partisan politics dressed up as academic research.  The same folks who think raising taxes on cigarettes and pollution to dramatically curtail their activities think that dramatically raising the costs to employer of employees will have zero impact on employment.  Interesting!  Whether or not a minimum price effects markets depends upon how you label the axes, if you believe these economists.

Wonder if these folks are teaching their students that imposing an arbitrary minimum price in the market place will have no effect on demand, might even increase demand. That's what their letter is saying.