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?

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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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.

What’s the Worst Tax?

It’s the most wonderful time of the year, when we start to get all those little documents in the mail and electronically showing how much you earned in the past year. The purpose of these little documents, of course, is to complete your federal and state income tax returns. While many Americans dislike paying income taxes, there is another tax that is rated as even worse in surveys: the property tax.

Why do Americans dislike the property tax so much? One popular explanation is that people don’t like the idea that “you never really own your property.” In other words, even after you have paid off your mortgage, you must continue to pay property taxes, which feels like a form of “rent” that you pay to the government. Of course, that “rent” does pay for a variety of public services, primarily K-12 education in most locations, but this still seems to rub many Americans the wrong way. The libertarian phase “taxation is theft” conveys a similar sentiment for income taxes, that you never “really own” your own labor if you must pay taxes on your earnings.

But there is also an economic explanation for the hatred of the property tax: it is very salient, especially to taxpayers that no longer have a mortgage. While those of us that still have a mortgage on our home pay property taxes through our normal monthly mortgage payment, Americans that have paid off their mortgage typically write a check (or two) to pay the full amount of their property tax bill. An interesting paper by Cabral and Hoxby finds that jurisdictions with more taxpayers using escrow for their property taxes (meaning they have a mortgage) also have higher property tax rates. And furthermore, they “find that owners with tax escrow report their taxes much less accurately than those without tax escrow” (look at Figure 2 in the paper to see the huge differences).

Income taxes, on the other hand, are not salient for most Americans. Payroll withholding means that the taxes are taken out before we even get our paycheck, and you’ll only notice them if you look at your pay stub. And about three-quarters of US taxpayers get a tax refund at the end of the year. For most Americans, the only salient part of the income tax system is a check they receive as a refund, rather than writing a check for their property taxes.

What does all this mean? Should income taxes be made more salient? Should property taxes be made less salient? A simple answer could be that all taxes should be equally salient. Or if you view one tax as superior in some way, maybe that tax should be less salient, so there is less opposition to it.

I don’t have the answers to these questions. But I do have a question for readers: do you know your own income tax rate? Specifically, what is the marginal rate on your federal income taxes? I invite readers to write down their guesses, then look up the correct answer. How close were you? Please leave a comment, and be honest!

QE, Stock Prices, and TINA

The U.S. economy as quantified by GDP has been sputtering along in slow growth mode for a number of years. It took a huge hit in 2020 due to covid shutdowns and has not nearly recovered. But stock prices have been rocketing upwards, and this past year is no exception. Markets took a cliff-dive in March, but have since way overshot to the upside.

Here is a plot of the past five decades of U.S. GDP and of the Wilshire 5000 index, which approximates the total stock market capitalization in the U.S.:

Chart Source: St. Louis Fed, as plotted by Lyn Alden Schwartzer

These two curves have crisscrossed each other over the past five decades, but in recent years the stock market has roared to the upside. One of Warren Buffet’s favorite metrics as to whether stock are overvalued is to consider the ratio of these two quantities, i.e. the market-capitalization-to-GDP (Cap/GDP) ratio:

Source: Lyn Alden Schwartzer

The ratio is much higher than it has even been. The last time it got this high was in 2000, and that did not end well.

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Excess Mortality in 2020

My last post of 2020 tried to end the year on an optimistic note: the rapid innovation of a new vaccine was truly a marvel. But I also warned you that I would have a post in the new year talking about the deaths of 2020 during the pandemic. And here it is.

Throughout 2020, I have tried to keep up with the most recent data, not only on officially coded COVID-19 deaths, but also on other measures. An important one is known as excess mortality, which is an attempt to measure the number of deaths in a year that are above the normal level. Defining “normal” is sometimes challenging, but looking at deaths for recent years, especially if nothing unusual was happening, is one way to define normal. The team at Our World in Data has a nice essay explaining the concept of excess mortality.

One thing to remember about death data is that it is often reported with a lag. The CDC does a good job of regularly posting death data as it is reported, but these numbers can be unfortunately deceptive. For example, while the CDC has some death data reported through 51 weeks of 2020, but they note that death data can be delayed for 1-8 weeks, and some states report slower than others (for reasons that are not totally clear to me, North Carolina seems to be way behind in reporting, with very little data reporting after August).

So there’s the caution. What can we do with this data? Since 2019 was a pretty “normal” year for deaths, we can compare the deaths in 2020 to the same weeks of data in 2019. In the chart at the right, I use the first 48 weeks of the year (through November), as this seems to be fairly complete data (but not 100% complete!). The red line in the chart shows excess deaths, the difference between 2019 and 2020 deaths. From this, we can see that there were over 357,000 excess deaths in 2020 in the first 11 months of the year, or about a 13.6% increase over the prior year.

Is 13.6% a large increase? In short, yes. It is very large. I’ll explain more below, but essentially this is the largest increase since the 1918 flu pandemic.

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The Feel of Money

The Federal Reserve System has the ability create virtual dollars with the stroke of a key. They also issue the physical bills of U.S. currency ($1, $1, $2, $5, $10, $20, $50, and $100). The actual manufacturing of the bills for the Fed is done by the federal Bureau of Engraving and Printing.

Wouldn’t it be nice if you could just print up a bunch of $100 notes yourself? Well, the feds have already thought of that, and include an ever-growing array of features to make it hard to duplicate these bills.

Counterfeiting of dollar bills has a long history. Following a distasteful experience of runaway inflation with paper money during the Revolutionary War, the U.S. remained primarily on a gold standard for most of its existence. The first major issuance of paper money was in 1862, to help finance the Civil War. Counterfeiting of these bills soon became a major problem, with up to half the dollars in circulation being phony. A primary mission of the U.S. Secret Service when it was founded in 1865 was to combat counterfeiting.

During World War II, the Nazis in “Operation Bernhard” succeeded in producing enough counterfeit British money that the U.K. had to switch production of banknotes to a different format. The work was carried out by prisoners at concentration camps. Later in the war, the prisoners were tasked with counterfeiting U.S. currency as well. Due to the security features in the dollars, this was a more complex task. Also, the prisoners realized that their chance of being killed was higher after they succeeded in devising a process for making counterfeit dollars, so they slowed the work down as much as they could.  The $100 bill has been a frequent target of more recent counterfeiters, including the British Anatasios Arnaouti  gang and (allegedly) North Korea.

Modern U.S. currency includes numerous feature which make it difficult to duplicate. Only about 1 note in 10,000 in circulation is fake. You can click this link

The Seven Denominations | U.S. Currency Education Program

to zoom in on each of the seven denominations of U.S. currency and see the current security features for each one. The more valuable bills get more sophisticated. The $100 bill has color-shifted numerals and bell image, a 3-D security ribbon with shifting images of bells and 100s, a security thread which glows under ultraviolet light, and subtle watermarks. Magnetic features are also included.

But it turns out that one of the most reliable and hard-to-duplicate features of dollars is the feel in your fingers, a result of the material they are made from and the printing process which gives a 3-D texture:

Perhaps the most difficult-to-duplicate counterfeit deterrence feature of U.S. banknotes is its unique yellow-green paper, manufactured under close security by a single U.S. firm from a mixture of 75 percent cotton and 25 percent flax. When combined with intaglio-printed images and numerals, this gives the notes a unique “feel,” which surveys have reported is the most common method of counterfeit detection by the public and bank employees.

So, if you want your own $100 bills, it looks like you will have to earn them, or wait for the next stimulus check to arrive.

Economists Watching Vaccines Every Day

EWVED could be our new name. Americans worked so hard to develop a vaccine (here’s Jeremy’s ode to development) and now we are seeing the distribution become painfully slow.

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