The Minimum Wage as Capitulation

It is an odd thing watching the pro-labor, pro-redistribution portions of our advocacy and activism classes capitulate to the notion that the the welfare state must be channeled through employment. When did this framing become so dominant? One of you just yelled “the Welfare Reform Act of 1996!” through my office window, but I think that’s wrong. I think the game was lost when we decided the minimum wage was a core policy signifier. There’s something irresistible about it– if there is one thing median voters everywhere seem to agree on is that their wage should be higher and their rent lower. Everything else is policy nerd gobbly-gook.

To my mind, the minimum wage is a policy failure strictly on the terms of (my own) left-of-center preferences. It is a victory of both political framing and strategy for coalitions against economic redistribution and the social safety net. That most of the left doesn’t even see this as a defeat makes it all the more devastating. Those outside the workforce are quietly placed outside the discussion and, in turn, are of secondary concern. More subtly, and perhaps more importantly, though, it builds into the policy construct a bargain that must be repeated and updated as national and local price levels change. Those repeated bargaining events force supporters to expend resources in each new iteration while, at the same time, giving their antagonists votes they can dangle when trying to secure support for their own pet policies. You want a higher minimum wage? Well, I’ve got a military procurement bill coming up next month that is slated to build 4 more F-16s in my district...

I subscribe to the belief that the failures of the US healthcare system most frequently stem from its connection to employment. Instead of heavily (or, yes, even entirely) subsidizing its purchase by consumers, we instead opted to grant a tax break to insurance provision by employers and here we are. The Affordable Care Act tried to weaken this connection, but still we are here. If you believe that health care is a human right, then connecting it to employment is a grievous error. If you believe a “living wage” is a human right, then why would you advocate making the same mistake again? We don’t live off wages, we live off consumption. If you want to guarantee an adequate standard of consumption, why would you include my employer as a go-between?

Which is not to say there isn’t political value to be mined from the $15 minimum wage debate. It has certainly crested the threshold of credible threat. It could be used as a political cudgel to bargain for a Universal Basic Income (UBI), and then bundled with the carrot: repeal the minimum wage entirely from the US law books in return for a $1,000 a month UBI that every citizen receives once they are no longer claimed as a legal dependent. For all the theoretic struggles the market might have with distortionary effects of a price floor (unemployment, low-cost discrimination) and substitution effects of a more expensive labor force (robots), I have all the faith in the world it can handle broad income effects just fine, thank you very much.


When economists talk about the minimum wage in bars, amongst themselves, without cheering and jeering onlookers, it is almost inevitably turns into a story of technocratic calibration. If we accept there is non-zero monopsony power, but also eventual disemployment effects, given the observed numbers, the optimal minimum wage is X% of the Zth percentile of the wage distribution. When these conversations happen on twitter, onlookers and participants are frequently less interested in calibration or generous in spirit. I’ve been on Twitter long enough to know that animal spirits are real, particularly when blood and memes are in the air.

Arguments over the minimum wage nearly always include references to an empirical literature that sometimes finds negative effects on employment while other times finds little to no disemployment at all, quickly followed by the theoretical point that there has to be some minimum wage above which employment would decline (or, at least, shift out of the legal sector). Part of what lets this debate persist are the modest sizes of past minimum wage increases. The one glaring exception I know of is when the Fair Labor Act of 1938 imposed a minimum wage that was roughly four times as large as standard worker wages in Puerto Rico, resulting in 65% unemployment . An exemption for Puerto Rico did not arrive for over two years and it is fair to say large portions of the economy were decimated. Future hikes had similarly negative, but far less cataclysmic, effects on Puerto Rican employment.

When the Fair Labor Act smashed into Puerto Rico with all the technocratic precision of a drunken mammoth, ~65% of the workforce ceased to be employed. But… do we really believe that 65% of people stopped working for a living? Of course not. Rather, the island labor market went gray. Under a hypothetically crushing minimum wage, employers will pay people in cash, off the books. They will hire family members, take them out of retirement or out of school. Yes, they’ll hire robots too, but I’m not really worried about 2nd order employment shifts favoring upper-middle class engineers. What I’m worried about is when whole classes of people enter the gray market (or markets even less legal), they no longer operate under the layering of legal and regulatory protections we often take for granted, especially ostensibly pro-market types who think that labor and safety standards are emergent phenomena. This sounds suboptimal to me, and probably to most labor advocates, but you know who it might sound great to? Libertarians who want the government entirely out of the workplace.

The minimum wage has become a left wing shibboleth, but that doesn’t make it good left wing policy. If anything, its one of the great right-wing gambits of the last 100 years. A policy that undermines its own ambitions at semi-regular intervals and inoculates the political marketplace against superior policies that would help far more people but, yes, would demand a larger tax bill. What more could Republican’s have asked for than a policy that holds the welfare state tax bill at bay and while handing ammunition to the Democratic coalition members purging their own ranks?

Going back to the gym?

Who doesn’t want to be stronger? You can get on the floor and do 5 pushups right now. Did you do it? Probably not. (If you did, great work.) For most people, nothing is stopping you from getting strong, except yourself.

I just keep sitting around. Going to a gym and meeting with an instructor in person used to be a way around this problem. This takes our human foibles and makes them work to our advantage. The sunk cost fallacy can work for us.

If you bought a stock and it’s a loser, you should sell! Too many people keep holding and go down with the ship.

However, knowing themselves, many people also go to the gym and sign up for a class. Not wanting to walk away from their investment, they actually do the classes.

The WSJ reports that many gyms are closing after Covid-19 forced the customers out. The article describes the machines people have brought into their homes to replace gyms. The Peloton is a signature of the year 2020. The new trend brings a live human trainer into the process of exercising alone at home.

The new machines can collect data on the user. This data is transmitted to instructors and maybe even friends. Now, from the comfort of your own home, you can “sign up for a class” again.

Had Covid struck in 1980, people might have bought fitness machines for their basements and they might even have bought a VHS to pop in and exercise with. But they would have been missing the link to a human who knows where they are supposed to be, which apparently provides more motivation.

The market has loved Peloton and smart money seems to think it will continue to do well, even with a vaccine already rolling out.

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The Sound of Silence

I became aware of SlateStarCodex during the online kerfuffle over the popular blogger, Scott, getting his real name and professional identity exposed by the NYT. He’s written a new post about the whole event. He is a victim of sorts, but he doesn’t ask for more sympathy than he deserves. His story is an interesting case study concerning free speech and the internet.

See here the consequences of becoming a known figure in 2020. Quotes from Scott:

The New York Times thought so. Some people kept me abreast of their private discussions (in Soviet America, newspaper’s discussions get leaked to you!) and their reporters had spirited internal debates about whether I really needed anonymity. Sure, I’d gotten some death threats, but everyone gets death threats on the Internet, and I’d provided no proof mine were credible. Sure, I might get SWATted, but realistically that’s a really scary fifteen seconds before the cops apologize and go away. Sure, my job was at risk, but I was a well-off person and could probably get another.

So, you know, death or abuse and unemployment is all. Scott recognizes that some people have it worse. He used his situation to discuss the whole issue of anonymity. Why do people want anonymity to discuss their ideas? Scott brings us some data:

And: a recent poll found that 62% of people feel afraid to express their political beliefs. This isn’t just conservatives – it’s also moderates (64%), liberals (52%) and even many strong liberals (42%). … And the kicker is that these numbers are up almost ten percentage points from the last poll three years ago

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The idea of a “marriage market”

For those not familiar with the idea of a “marriage market”, consider the following quote from Gary Becker from his paper “A Theory of Marriage, Part 1” (emphasis own),

“Two simple principles form the heart of the analysis. The first is that, since marriage is practically always voluntary … the theory of preferences can be readily applied, and persons marrying can be assumed to expect to raise their utility level above what it would be were they to remain single. The second is that, since many men and many women compete as they seek mates, a market can be presumed to exist. Each person tries to find the best mate, subject to … market conditions” (p. 814)

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Vegetarians and Profits

Like most people, vegetarians have some weird opinions. Let’s assume that they have the ultimate goal of fewer live-stock deaths and less chattel cattle. Ask a vegetarian what they are achieving by choosing not to eat meat and you’ll hear the explanations let loose. By abstaining from meat they’re “reducing factory farm profits” or “helping to keep the price of beef low and unprofitable”. While being a vegetarian may save more cows from the butcher’s blade, it’s not at all clear that vegetarians have a good understanding of their sometimes perpetual boycotts.

What do vegetarians even do?

The decision to consume meat or not falls nicely into the supply-and-demand framework. Fewer people willing to eat meat means fewer purchases of meat products – no matter the price. A decline in meat demand lowers both the number of cows that ranchers will raise a slaughter and the price that they receive. There you have it. By lowering demand for meat, vegetarians reduce both the quantity and price of meat, reducing profits for those evil, animal-carving businessmen.

Not so fast.

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How Should We Teach Public Goods Theory?

Joshua Hendrickson recently wrote about the provision of public goods, and how we teach public goods in economics. My post today is not so much a reply to Hendrickson, but is inspired by his mediation on public goods as I gear up to teach another semester of Public Finance.

The theory of public goods that economists discuss among themselves is pretty straightforward: when a good is both non-rival and non-excludable, there is a strong case for government intervention of some sort (though not necessarily public provision). The opposite is true when a good is both rival and excludable: there is a strong case for laissez faire.

Seems simple enough, right? But communicating this concept to undergraduates and the general public has been a major challenge. Part of the confusion arises from the term itself, “public good.” Non-economists tend to use the term interchangeably with the notion of “the common good, as is clear from Wikipedia, a dictionary, or a conversation with your grandma. For this reason, I sometimes substitute the awkward phrase “collective consumption good” (this is actually Samuelson’s term in his classic article on the topic), but all the textbooks so use it so I often default to the standard terminology.

From Jonathan Gruber’s Public Finance and Public Policy

But I think there’s a deeper problem than just terminology. Economists have put themselves in a box. Literally. Here’s a standard 2×2 matrix from Jonathan Gruber’s undergraduate public finance textbook. I don’t mean to pick on Gruber here — this is a pretty standard presentation. You can find it in many microeconomics textbooks too, or on Wikipedia. Everything goes in a box! It’s a nice stylized way to think of the terminology. It makes for nice test questions. But here’s the real problem with it as a pedagogical tool: it doesn’t seem to help many students! Or at least, it doesn’t seem to help them retain the knowledge between their micro principles courses and upper division courses (at least in my experience, I’d be happy to hear others chime in here).

So how can we teach this concept better? I have a few ideas. I’d like to hear yours too.

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The Kalecki Profit Equation: Why Government Deficit Spending (Typically) MUST Boost Corporate Earnings

Some equations or relations in economics are inspired guesswork, which may or may not precisely describe the real world. There are other equations which always hold, since they are simple accounting identities. The Kalecki Profit Equation is of the latter type. It describes precisely the factors which determine corporate profits. Knowing this relation can give investors a leg up in predicting earnings.

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An Army of Fools

Armies, both for violence and social change, are costly. Costly to recruit, to train, to provision. But what of mobs? Mobs are cheap, if difficult to plan. Born of the moment, more opportunism born of wildfire than carefully orchestrated arson.

When I see footage of the attack on the Capitol and threads of the angry anonymous on Twitter, I see something in between an army and a mob. At first glance they appear like mobs, phenomena emerging from countless micro-interactions, absent an organizing force. Within the chaos of recent years, however, we’re seeing increased evidence of organizing agents. Within the scores of angry teenagers on the social media warpath for a stronger welfare state and MAGA zealots pushing white ethno-nationalism, we’re finding incepting Russian trolls and coordinating Capitol intruders equipped for ghastly violent theater. These mobs offer evidence of ambition. Ambition to undermine US governance; ambition to prove true the prophecies of some guy from Jersey.

Social media has radically lowered the cost of rousing a mob. Even in the face of technological advancement, however, it remains an unmitigated truth that you get what you pay for. The rabble are filled to the brim with fools, absent leadership, pulling from the tails of distribution. Those with the lowest opportunity cost of time and risk. If democracies are ruddered by the median voter, what guides the mob? The people with the most time on their hands? The least to lose? The most rage? The most bored?

If the median voter is on social media, they’re listening to the mob and also getting what they paid for. What I’m curious about, however is more statistical in nature. One of the points in favor of the median versus the mean is it’s resilience to outliers. But what happens when the median is endogenous to the outliers? What happens when the median voter finds its information increasingly filtered through an army of fools?

Armies are expensive, but mobs have never been cheaper. Why bother with the risk and investment of raising an army, or build a social movement, when you can raise a mob without leaving your home?

Leopold on supply chain independence

Leopold said when he started his new blog that he would be thinking long-term. He has managed to stop staring at footage of the capital raid last week and produced a forward-looking blog. He is not the first person to speculate that the US has a vulnerability in its reliance on the country we buy the most stuff from.  

Free trade is awesome. Something that is going to link together all EWED writers is a common respect for the power of trade to make lives better. Consumers who have access to world market can have much more great stuff. Enjoying your chair, or your phone, or you lightbulbs right now? It’s great to have access to more stuff and be able tot get it cheaper.

However, there are those who worry that if country A abandons domestic production of widget B, then in the unfortunate/unexpected event of a war, country A will be in trouble. For example, it would be concerning for a military power if they are not able to make any steel themselves.

Should country A use tariffs to stimulate domestic production? Tariffs really bother economists. Tariffs bite into the wonderful benefits of free trade. Since I talk to economists, I have heard a lot of arguments against tariffs. Leopold makes a novel argument against using tariffs to advance national security interests.

The problem with tariffs, however, is that they are royally ineffective at reducing the security vulnerability we are concerned about. A general tariff incentivizes onshoring the production that is cheapest and easiest to onshore—but it is likely the imports for which onshoring would be the most expensive and difficult that present the greatest security vulnerability, as I will explain.  In the language of economics, I argue that the imports that present the greatest security vulnerability are those with the most inelastic import demand—while a general tariff most reduces those imports with the most elastic import demand.

I propose an alternative approach: general per-product quotas. These would better target vulnerability than a general tariff.

Instead of having tariffs, require that a certain number of several products be made domestically. That would be expensive, but we already put up with huge losses from tariffs. We already spend hundreds of billions of dollars on defense. The question is not whether we are going to spend money on defense. How can we spend money in the smartest way that recognizes how markets generate information? Think about the government buying 1,000 digital watches made on a friendly supply chain, and also dispensing with some costly tariffs.

Note that Leopold, if I understand him correctly, uses the word quota to mean that the government will buy a block of domestically produced goods at above-world-market prices. This is different from the way “quota” is sometimes used in international trade. See this MRU video narrated by Alex Tabarrok for a discussion of import quotas versus tariffs, a separate topic.

Fitbit got 2 billion and all I got was an email

I made a Fitbit account years ago, even though I don’t wear one. As a user, I got an email on Jan 14, 2021 alerting me that they just sold Fitbit to Google. The email assured me that Google will not try to muscle Fitbit users away from iPhones or iOS. Google has said that it will keep Fitbit data “separate from other Google ad data.” TechCrunch had some more details for me, including how many billions of dollars Fitbit was getting out of this deal.

Is it so bad to see adsbased on your sleep habits? What if you had a bad night and then saw more coffee ads the next day? Seems fine. Is it more “creepy” than seeing an ad for something you just bought?

I don’t actually know much about Google’s data structure. But I can imagine ways that a large tech company could use Fitbit data in a way that users would not like. What if Google knows that you didn’t sleep well this week. Say someone else is using Google search to find a person to recruit for a desirable job in Public Relations. What if predictive models indicate that people who don’t get at least 6.5 hours of sleep per night are low performers? What if you ended up not getting linked up with your dream job, because you weren’t sleeping well one week? This is all speculative. What if Google starts measure how your heart rate responds to viewing various website that you access through Chrome? Have they agreed to not do that as part of the acquisition deal?

In 2018, Tyler sat down with Eric Schmidt, a senior executive of Google. Tyler asked him why Google doesn’t use their massive stores of data to inform investments for a hedge fund. Here was the reply:

SCHMIDT: Well, I’ll give you a more generic answer, which is, from the moment I joined the company, there were many people who said, “Why don’t you take this information and do something that will use it for marketing purposes?”

And the answer is always the same, which is that you need people’s permission to do that, and you can be sure you won’t get that permission, if you follow that reasoning. So we decided that was a pretty bright line. For example, if a tech company that were a consumer company were bundled with a hedge fund, you would have to disclose that it was being used in that context. The people would go crazy.

But the other thing that’s true — and Google was good about this — is we took the position that it was important for us to disclose everything we were doing as well as we could.

I’ll give you a governance argument. In a large company, the employees are independent citizens of humanity, and if they see corruption in your leadership — in other words, if they see you doing things which are inconsistent with the values, you will be criticized.

Schmidt doesn’t deny that Google could take advantage of data in order to become a successful hedge fun. He says that it would look bad, and Google doesn’t want to look bad even to its own employees. Hmmm, right? I don’t bring this up to accuse Google of wrongdoing. It just makes you wonder how things will unfold in the future. One can, at least, see why the acquisition of Fitbit was scrutinized.

I use Google products heavily on my laptop. I don’t have many “smart” devices aside from my smartphone. I wore the Fitbit step tracker for a few days, but I didn’t find the information to be helpful. It’s not like the Fitbit does the dishes for me or drives me to the gym. Get me that smart device and I’ll look at any ads you want.