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From the New York Times:
Walmart, the largest private employer in the country, said Thursday that it would increase wages for a half-million employees as it reported its first rise in shopper traffic in more than two years. The retail giant, which has been criticized for continuing to pay some employees the bare legal minimum, said that all of its United States workers would earn at least $9 an hour by April. That would mean a raise for about 40 percent of its work force, to at least $1.75 above the federal minimum wage, the retailer said. … Walmart said that after the hike, the average full-time hourly wage will be $13 an hour, up from $12.85 an hour, while the average part-time hourly wage will be $10 an hour from $9.48.
Now labor groups and minimum wage groups argue Walmart wages should be even higher. And they continue to complain that taxpayers subsidize Walmart because some of its worker get various form of government assistance. Here’s AEI’s Michael Strain on why that argument flounders on faulty economic logic and weak moral reasoning:
Liberals have argued that programs like the EITC represent a subsidy from government to business. Despite their large profits, the liberal logic goes, businesses are choosing not to pay their workers enough money to escape poverty, forcing government to provide things like the EITC and food stamps. These provisions subsidize businesses that “should” be paying “living wages” and allow them “to get away with” paying less.
This misunderstands how wages work. If a low-skill worker can only contribute $7 per hour in revenue to a firm, then the firm will not employ the worker at $10 per hour. If it did, the firm would lose three bucks for every hour the worker was on the job. We can sentimentalize businesses all we want, but they simply aren’t going to pay workers more than they’re worth.
The argument is also wrong on a deeper level. Liberals, in supporting minimum-wage increases, implicitly argue that the employers of low-skill workers, together with consumers of the products and services the workers help provide, should bear the burden of ensuring that low-skill workers don’t live in poverty. Conservatives should reject this argument, insisting that all of society is responsible for helping the working poor — to escape poverty, to earn their own success, to flourish.
Indeed government wage subsidies are better anti-poverty policy than the minimum wage. Of course, politicians prefer the latter since the cost doesn’t go on the books of government or directly cost taxpayers. Indeed, here are a number of better ideas to help low-income workers than the minimum wage.
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A less-frequently mentioned factor that could be inhibiting economic growth is short-termism. You certainly see it in government, both state and federal, where there are huge unfunded pension and healthcare liabilities. And when we fail to reform education or improve infrastructure, that’s a kind of short-termism, too. There is also short-termism in the private sector. As economist and Nobel laureate Edmund Phelps writes in his book, “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change: “Short-termism is rife in business and finance. In the private sector, CEOs have no long-term interest in their companies, and mutual funds have only a short-term interest in holding the shares.”
In a recent speech, the Bank of England’s Andrew Haldane offers a technology-driven neurological explanation for short-termism:
A third secular, sociological headwind concerns short-termism. That sits oddly with historical trends, which points towards secular rises in societal levels of patience, in part driven by technological trends. But those trends may themselves be on the turn. Just as the printing press may have caused a neurological re-wiring after the 15th century, so too may the Internet in the 21st.
But this time technology’s impact may be less benign. We are clearly in the midst of an information revolution, with close to 99% of the entire stock of information ever created having been generated this century. This has had real benefits. But it may also have had cognitive costs. One of those potential costs is shorter attention spans. As information theorist Herbert Simon said, an information-rich society may be attention-poor. The information revolution could lead to patience wearing thin.
Some societal trends are consistent with that. The tenure of jobs and relationships is declining. The average tenure of Premiership football managers has fallen by one month per year since 1994. On those trends, it will fall below one season by 2020. And what is true of football is true of finance. Average holding periods of assets have fallen tenfold since 1950. The rising incidence of attention deficit disorders, and the rising prominence of Twitter, may be further evidence of shortening attention spans. If so, that would tend to make for shorter-term decision-making.
Using Daniel Kahneman’s classification, it may cause the fast-thinking, reflexive, impatient part of the brain to expand its influence. If so, that would tend to raise societal levels of impatience and slow the accumulation of all types of capital. This could harm medium-term growth. Fast thought could make for slow growth. Psychological studies have shown that impatience in children can significantly impair educational attainment and thus future income prospects. Impatience has also been found to reduce creativity among individuals, thereby putting a brake on intellectual capital accumulation. Innovation and research are potential casualties from short-termism.
There is evidence suggesting just that. Investment by public companies is often found to be deferred or ignored to meet the short-term needs of shareholders. Research and development spending by UK companies has been falling for a decade. They are towards the bottom of the international research and development league table. If short-termism is on the rise, this puts at risk skills-building, innovation and future growth.
So it’s a competition, then, between how the Internet provides easy access to a global database of human knowledge (“Scientists can now find the tiniest needles in data haystacks as large as Montana in a fraction of a second,” is how Joel Mokyr puts it), and how the Internet provides easy access to constant distraction. Moreover, people who are self disciplined enough to stay focused — both in avoiding technology distraction and using technology to, say, self-educate themselves — would seem to have a big edge in the labor market in years ahead.
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A rising economic tide may not lift all boats the way it used to, but better to have it rising than not. And the Wall Street Journal’s Greg Ip points out the deep, structural supply-side problems retarding US growth potential:
For most of the past six years, the U.S. economy faced a demand problem as tight credit, economic pessimism and a fixation on reducing debt discouraged consumers, businesses and government from spending. Demand finally looks healthy again. Business is hiring at the fastest pace since 2000, consumer confidence is at prerecession levels and government austerity has come to an end.
Yet as demand heals, there are growing signs that the economy has a problem with supply, or the ability of the economy to produce goods and services using all available labor, capital and know-how. Supply determines how fast the economy grows over the long term, and it largely depends on two things: the number of workers, and how productive they are. The evidence is mounting that those two key drivers of the economy’s supply side, the labor force and productivity, are seriously impaired. This isn’t holding the economy back at present, but before long it will. An economy with a sickly supply side will struggle to generate higher standards of living.
Two key data points here: First, the labor force looks like it will grow just 0.5% a year in coming decades vs. 1.5% from 1950 to 2014. Second, productivity has grown just 1.3% a year since the end of the last expansion in 2007. Put those those two together, and you have an anemic Two Percent economy. Our inadequate tax, regulatory, education, and infrastructure systems — along with a safety net that doesn’t do enough to encourage work in light of a demographic shift — seems to have finally caught up with us.
Recall the 2013 speech where President Obama said the “defining challenge of our time” was “growing inequality and lack of upward mobility.” But he should have certainly added a third problem: a permanent downshift in our growth potential. A counterfactual from the new Economic Report of the President shows just how important growth is, particularly the productivity portion.
Looking at the 1973 through 2013 period, the report shows how household incomes would have been different with (a) faster productivity growth, (b) less inequality, and (c) more labor force participation:
Taken together, all those factors would have meant a 98% increase in household income by 2013, an additional $51,000 a year. But note that productivity growth is by far the most important factor, accounting for $30,000. What’s more, this report assumes that policy changes necessary to keep inequality stable would not not hurt growth. Yet studies suggest a positive relationship between higher living standards and more inequality among advanced economies. Call it “middle out economics” or “middle class” economics” — a demand-side approach about redistributing wealth to boost middle-class consumer buying power — you can’t redistribute the fruits of growth if the garden has withered.
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Wall Street, broadly considered, is supposed to be one of America’s economic strengths. Deep capital markets, and all that. But can too much finance be bad for the real economy? The Economist sums up a new paper on the relationship between the financial economy and real economy:
In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral to pledge. … A property boom then develops. But property is not a sector marked by high productivity growth; it can lead to the misallocation of capital in the form of empty Miami condos or Spanish apartments. In a sense, this echoes the research of Charles Kindleberger who showed that bubbles are formed in the wake of rapid credit expansion or Hyman Minsky who argued that economic stability can lead to financial instability as financiers take more risk.
And this from “Why does financial sector growth crowd out real economic growth?” by Stephen Cecchetti and Enisse Kharroubi: “The productivity of a financially dependent industry located in a country experiencing a financial boom tends to grow 2.5% a year slower than a financially independent industry not experiencing such a boom.”
And from the conclusion:
First, the growth of a country’s financial system is a drag on productivity growth. That is, higher growth in the financial sector reduces real growth. In other words, financial booms are not, in general, growth-enhancing, likely because the financial sector competes with the rest of the economy for resources. Second, using sectoral data, we examine the distributional nature of this effect and find that credit booms harm what we normally think of as the engines for growth – those that are more R&D intensive. This evidence, together with recent experience during the financial crisis, leads us to conclude that there is a pressing need to reassess the relationship of finance and real growth in modern economic systems.
The WaPo’s Jim Tankersley addressed a similar issue recently and is worth reading.
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About 30% of US workers needs a state license to legally perform their jobs, up from 5% in the 1950s. As AEI’s Michael Strain has put it: ” … conservatives should support scaling back unnecessary occupational licensing at every level of government in order to advance economic liberty and create jobs.” Left-liberals, too. A new Mercatus report look at one slice of the problem, optician licensing:
The labor market institution of occupational licensing continues to grow in scope in the United In this paper, we estimate the effects of occupational licensing on opticians using data from the US Census and American Community Survey. The results suggest that opticians earn 0.3–0.5 percent more for each year that a licensing statute is in effect. In addition, tougher licensing provisions (in the form of more exams or longer education requirements) increase optician earnings by 2–3 percent. In an examination of vision insurance and malpractice insurance premiums, we find little evidence that optician licensing has enhanced the quality of services delivered to consumers. By and large, optician licensing appears to be reducing consumer welfare by raising the earnings of opticians without enhancing the quality of services delivered to consumers.
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My (seemingly) never-ending mission to figure out what’s going on with the decline in American startup ventures — over the past three decades the annual entry rate of new firms fell approximately from 15% to 10% — continues with research from George Mason University’s Nathan Goldschlag and Alex Tabarrok. They investigate whether federal regulations are to blame. Apparently not:
To investigate the extent to which the decline in entrepreneurship can be attributed to increasing regulation, we utilize a novel data source, RegData, which uses text analysis to measure the extent of regulation by industry. Our analysis suggests that Federal regulation is not a major cause of the decline in US business dynamism. … Contrary to expectation, there is a slight positive relationship; industries with greater regulatory stringency have higher startup rates. We find a similar relationship with job creation rates.
Goldschlag and Tabarrok searched the Code of Federal Regulations for sections with restrictive terms or phrases (“shall,” “must,” “may not”). They then used an algorithm to match language in that section with a particular industry. They also checked whether perhaps more dynamic sectors attracted greater regulation. But “after subjecting the data to a number of different tests we find no statistically significant relationships between dynamism and regulatory stringency.”
So how do Goldschlag and Tabarrok explain the dynamism decline? They offer several possibilities: First, maybe state regulation or legal decisions are having a dampening effect. Second, maybe we are missing all the entrepreneurship happening at older, established firm, especially due to outsourcing: “Apple, for example, is measured in US data as a relatively stable firm but the Apple ecosystem from which Apple sources its product is a maelstrom of entry and exit as Apple hires and fires new firms with each new iteration of the iPhone.” Third, maybe the problem is idea flow, “a slowdown in the technological frontier that reduces the flow of new ideas ready to be profitably implemented.” This is the Great Stagnation scenario. The researchers suggest — in another paper — these policy responses:
The direction of causality is important as the policy levers that we do have may vary in effectiveness depending on the cause. If business dynamism is primary, for example, then we may look for direct levers such as regulation of new businesses (contrary to our preliminary results) or an increase entrepreneurial immigration. If deeper technological change is at work, then our options are more limited, but perhaps policy could be more focused on improving science and math education, investing in knowledge production and fostering creativity.
But if more entrepreneurship is happening at big firms, then the startup decline is less alarming. He cites Alan Mulally’s turnaround of Ford as an example:
First, entrepreneurship is not limited to small firms. Indeed, because of scale, entrepreneurship at large firms is much more important than at small firms. Moreover, there is some evidence that CEO’s have become less managerial and more entrepreneurial over time. CEO turnover, for example, has increased over time and the turnover-performance gradient has become more steep; that is, CEOs whose firms perform poorly are increasingly likely to be fired. CEOs are also less likely to be insiders than in the past. In the 1970s only 15% of the CEOs in S&P 500 firms were outside appointments but by 2000-2005 32.7% were outside appointments (Murphy and Zabojnik 2007). The decrease in the appointment of insiders and increase in the appointment of outside, suggests that basic “managerial” knowledge and skills—How does this firm work? What do we do? What relationships need to be managed?—became less important and more general managerial or entrepreneurial ability became more important in managing US corporations.
Allan Mulally’s career is a case in point. He rose not through the ranks of Ford but came to Ford from Boeing where he had been president of Boeing Commercial Airplanes and was credited with a successful competition against Airbus. After retiring from Ford in 2014, he was appointed to Google’s board of directors—further illustrating the importance of general entrepreneurial ability rather than firm specific knowledge. Second, by all accounts Mulally remade Ford into a different firm—not just a different set of products–although there were innovative new designs and building methods–but also a new corporate culture (Hoffman 2013). … We measure new firms as firms which go from zero employment to one or more employed but restructuring and remaking old firms is not counted. If Ford can be said to have been reborn in the ashes of the financial crisis, then innovation, entrepreneurship and reallocation may be larger than we measure. … It’s plausible that information technology has made older and larger firms more flexible, nimble and capable of change.
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Maybe I knew this and just forgot about it somehow, I dunno. But this 2005 paper from Princeton economist Thomas Leonard on the racist/eugenics/progressive origin of the minimum wage is pretty fascinating stuff. It’s a strange world:
Progressive economists, like their neoclassical critics, believed that binding minimum wages would cause job losses. However, the progressive economists also believed that the job loss induced by minimum wages was a social benefit, as it performed the eugenic service of ridding the labor force of the “unemployable.” Sidney and Beatrice Webb put it plainly: “With regard to certain sections of the population [the “unemployable”], this unemployment is not a mark of social disease, but actually of social health.” “[O]f all ways of dealing with these unfortunate parasites,” Sidney Webb opined in the Journal of Political Economy, “the most ruinous to the community is to allow them to unrestrainedly compete as wage earners.” … A minimum wage was seen to operate eugenically through two channels: by deterring prospective immigrants and also by removing from employment the “unemployable,” who, thus identified, could be, for example, segregated in rural communities or sterilized. …
In his Principles of Economics, Frank Taussig asked rhetorically, “how to deal with the unemployable?” Taussig identified two classes of unemployable worker, distinguishing the aged, infirm and disabled from the “feebleminded . . . those saturated with alcohol or tainted with hereditary disease . . . [and] the irretrievable criminals and tramps. . . .” The latter class, Taussig proposed, “should simply be stamped out.” “We have not reached the stage,” Taussig allowed, “where we can proceed to chloroform them once and for all; but at least they can be segregated, shut up in refuges and asylums, and prevented from propagating their kind.”
In his Races and Immigrants, the University of Wisconsin economist and social reformer John R. Commons argued that wage competition not only lowers wages, it also selects for the unfit races. “The competition has no respect for the superior races,” said Common, “the race with lowest necessities displaces others.” Because race rather than productivity determined living standards, Commons could populate his low-wage-races category with the industrious and lazy alike. African Americans were, for Commons, “indolent and fickle,” which explained why, Commons argued, slavery was required: “The negro could not possibly have found a place in American industry had he come as a free man . . . [I ]f such races are to adopt that industrious life which is second nature to races of the temperate zones, it is only through some form of compulsion. … ”
For these progressives, race determined the standard of living, and the standard of living determined the wage. Thus were immigration restriction and labor legislation, especially minimum wages, justified for their eugenic effects. Invidious distinction, whether founded on the putatively greater fertility of the unfit, or upon their putatively greater predisposition to low wages, lay at the heart of the reforms we today see as the hallmark of the Progressive Era.
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Texas and North Dakota are the two biggest oil-producing states. They are responsible for just about all of the post-2008 surge in US oil production. And oil prices have dropped by half since last summer. And that just might mean both states — where oil drilling accounts for about 15% of GDP vs. 3% nationally — are headed for recession. Paul Ashworth and Paul Dales of Capital Economics drill down into both states. First, the Texas story:
The last major oil crash in 1986 (when Brent crude dropped from $30 per barrel to $12 in just four months) triggered a sharp fall in incomes and employment in Texas. The value of oil and gas extraction fell from $40bn per year in 1980 to only $15bn in 1986. As a result, nominal GDP contracted by as much as 3.7% in 1986. The effects spread well beyond the mining sector too. Although mining directly accounted for only 3% of all jobs then, the Texas unemployment rate surged to 9.3%, leaving it well above the national average. … The big risk now is that, because of the relatively high costs of shale production, the slump in oil revenues will be compounded by a big drop in production. Accordingly, the hit to real GDP and employment could be more severe than in 1986.
And a “double whammy” for North Dakota:
The shale boom has transformed the state from being only a minor producer of oil as recently as 2008 into the second biggest producer now. Mining employment in North Dakota has increased seven-fold in six years. The relatively high share of jobs accounted for by the mining sector (7.6% compared to a national average of 0.6%) means that North Dakota is particularly vulnerable to a drop in drilling activity. … Not only have oil prices slumped, but the sharp declines in crop prices have triggered a corresponding fall in farm incomes. Agriculture accounts for a further 10% of North Dakota’s GDP. (Texas is protected because cattle prices have held up a lot better than wheat and corn prices.) Current projections suggest that national farm income will decline by 30% in 2015.
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Let’s put aside whether or not cutting top tax rates will boost economic growth and broadly raise incomes (and, if so, to what degree). Do American generally believe high-end tax cuts are a sound pro-growth strategy ? This from a January YouGov poll:
YouGov’s latest research shows that Americans tend to be skeptical of the idea that lower taxes on the wealthy stimulates the economy, with the end result of greater wealth for everyone. 45% of Americans say that they disagree with the idea, while 29% say that they agree with it. Most Democrats (62%) disagree, while most Republicans (50%) agree with the theory. Independents tend to disagree (42%) rather than agree (28%) with the idea.
Sure, wording matters. And I think use of the loaded phrase “trickle down economics” is problematic. But let me again show the results from a different survey that I have frequently referred to:
Are these results really that surprising or counter-intuitive? As I wrote awhile back, “George W. Bush cut taxes, yet the economy didn’t seem to respond as it did in the 1980s and his term ended in economic collapse (though I am not suggesting as a result of the tax cuts).” And arguably the economy’s best economic performance ever happened right after the Clinton tax hike in the 1990s. Those might be two pretty persuasive natural experiments for many Americans. Also, upper-incomers and business (“Apple just posted the best quarter in corporate history”) seem to be recovering just fine from the Great Recession. So maybe the idea that (a) letting them keep even more of their earnings would (b) take this from a 2% economy to a 3%+ economy just doesn’t pass smell test for many folks.
Now this doesn’t mean Republicans should demonize the rich (we need more billionaire entrepreneurs) or support a higher minimum wage (expanded EITC would be better) or reject smart tax reform even if some rich folks or businesses pay less (workers bear a lot of the burden from corporate taxation, after all). And there is also value to making it clear that Republicans are not going to let top rates drift higher — a few points every few years — to the 70-90% range many on the left would prefer.
Not at all. But it does pose a thorny political issue for Republicans who would make cutting top tax rates the centerpiece of the GOP economic agenda. And, of course, big tax cuts for everyone that also lose a trillion bucks a year might seem (a) odd coming from a party that supposedly frets about the $17 trillion national debt and (b) at time when the debt has doubled in less than a decade. What’s more, the share of Americans who think of themselves as overtaxed is down to around half vs. two-thirds when the ’90s ended. Oh, if there are polls that show American think high-end tax cuts are just what the sluggish US economy need, please pass them along.
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The January retail sales number was not a good one. Bloomberg:
Sales at U.S. retailers fell more than forecast in January, reflecting smaller receipts at gasoline stations and declines at clothing and sporting goods stores. The 0.8 percent drop followed a 0.9 percent decrease in the prior month, Commerce Department figures showed Thursday in Washington. The median forecast of economists surveyed by Bloomberg called for a 0.4 percent decline. Sales excluding gasoline were little changed. The back-to-back declines indicate consumer spending, the biggest part of the economy, may be cooling after the strongest quarter since 2006. At the same time, faster job growth and cheaper fuel signal household purchases will keep underpinning the U.S. expansion.
JPMorgan economist Michael Feroli called the report a “dud … a big disappointment.” And then offered this intriguing analysis:
With the data in hand, October and November are very strong retail spending months, while December and January are very weak. It is challenging to align this pattern with the economic fundamentals: gas prices were declining in all four months, labor markets were robustly expanding in all four months, and consumer sentiment measures were generally rising steadily since last fall. Moreover, as we discuss further below, we think it’s hard to resort to special factor stories, e.g., weather, measurement distortions, etc. In terms of the implications, today’s data leave our 4Q GDP tracking unchanged at 1.7%. Real consumer spending in January was likely up 0.4%, and for 1Q we are tracking real annualized consumption growth between 3% and 4%—still a strong outcome in an absolute sense but a bit of a letdown given the favorable alignment of fundamentals.
The contrast between the income fundamentals and spending outcomes can be seen in the saving rate, which likely rose from 4.9% in December to 5.3% in January, the highest level in over a year. The message from the saving rate is that even more than five years after the end of the Great Recession, the US consumer is still exhibiting a degree of caution that was not seen before the last downturn.