Lords of Finance Monday, Apr 5 2010 

I’ve been reading a little bit of book by Liaquat Ahamed, titled Lords of Finance: The Bankers Who Broke the World. I’ve just started, but it’s an interesting book about the collapse of the world economy during the the 1930s and the four central bankers who he says are responsible for the terrible misery. Seeing as how I’m currently taking a test in my international economics class regarding international finance and the gold standard, I thought I’d share a quote that I found to be rather interesting. The quote is from William Jennings Bryan during his speech at the Democratic convention of 1896, and can be found on pages 13-14 in the book:

You came to tell us that the great cities are in favor of the gold standard; we reply that the great cities rest upon our broad and fertile plains. Burn your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the city. . . . You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.

The quote is interesting because it helps demonstrate the relationship between urban America and rural America. Bryan was very much concerned with American rurality and the farms that dominate it. Of particular concern was the gold standard. Credit growth was being restricted by the amount of gold that central banks had. This effect hurt producers and debtors, especially when prices were declining. The effect, therefore, on farmers, was quite negative. They were both producers and debtors. Credit restriction was troubling for them. It is for this reason that Bryan advocated loose monetary policy and easier credit. The quote above captures these sentiments through Bryan’s use of strong and fervid rhetoric. Though he won the Democratic nomination thrice, Bryan was never elected president.

The quote does have some relevance today. There are some on the right who today still advocate the use of a gold standard (typically euphemized by talk about “sound money”), for whatever reason (Ron Paul might be a notable example). There are benefits, but there are also significant drawbacks, one of which was highlighted by Bryan. In fact, many economists today blame, in part, the rigidity of the gold standard for the collapse of the global economic system during the 1930s. Indeed, several studies have found a strong relationship between a country’s abandonment of the gold standard and that country’s recovery from the depression. One has to wonder if those who advocate “sound money” have thought about the full consequences of reverting back to a gold standard and fixed exchange systems.


Winter Institute Tuesday, Mar 2 2010 

Again for those in the St. Cloud area, the economics department of SCSU is holding their 48th annual Winter Institute summit regarding “business and economic leadership.” It is being held on Thursday, March 4th. The first half of the event, dubbed the Academic Event, is being held in the Kimberly Ristche Auditorium in Stewart Hall for free from 8:30 A.M until 12:45 P.M. There will be lunch at noon in Atwood for $12.50, but this requires registration and I believe it is full at this time. A list of topics and speakers for the Academic Event cant be seen here. Following the Academic Event will be the Business Event, which is being held at the Best Western Kelly Inn from 2:30 P.M. until 7:30 P.M. This also requires registration and a fee. I’m not sure if this event is also full at this time. A list of topics and speakers for the Business Event can be seen here.

The event is being described as “a valuable glimpse into a vastly changed economy. Attend the SCSU morning & luncheon events for a deep discussion on economic theory, or come to the Kelly Inn afternoon & evening events for business insights and bold predictions.” There appears to be a good lineup of economics speakers for the Academic Event, including Barry Nalebuff of Yale University, Costas Azariadis of Washington University, James Bullard who is the president of the Federal Reserve Bank at St. Louis. The Business Event will include these same speakers, as well as some regional businessmen and King Banaian, who is the chairman and a professor of the economics department. The closing speaker will be Yoram Bauman who is also from the University of Washington.

Dr. Bauman is particularly interesting to me, given that he will be speaking on climate change and because I’ve done a great deal of research on the topic as well (see here for previous posts on the subject). I won’t be attending that event, but I did read a few posts on his blog regarding climate change, and they’re all quite interesting. I’m glad Dr. Bauman recognizes that climate change is a real problem and that it has significant economic implications. I was reading, for example, this post about “libertarians on global warming,” where he accuses libertarians of the “Three No’s” (a humorous reference to the dubious “Three No’s” associated with the Khartoum Resolution): “No recognition that climate change is a theoretical possibility … No peace with the IPCC … No negotiation about climate change science, i.e., no serious scientific engagement.” It is true that rightist libertarians (e.g. Cato Institute) do tend to deny climate change science for whatever partisan reasons they have (they surely have no scientific basis), but I don’t think this necessarily has anything to do with libertarianism per se. True libertarians ought to be concerned—not dismissive—about climate change, as it represents a serious violation of the rights of not only current human beings but also of future human beings, as I explain in this post. As I point out, the issue is essentially an issue of externalities, which has an easy (market-based) solution. Dr. Bauman seems to agree when he writes, “the way market-based instruments reduce pollution is by making pollution expensive.” However, I unfortunately won’t be attending that event, so I won’t be able to write about it.

This summit presents a great opportunity for those in the St. Cloud area to be engaged in the economic issues of our time and is being presented by great economic thinkers. It’s not an opportunity you’ll want to miss. I will try to attend some of the speeches and may post a response some time later.

Democracy vs. libertarianism Monday, Jan 11 2010 

One of the problems that ideologues of any persuasion probably run into is the problem of democracy. What do I mean by “the problem of democracy”? What I mean by this is that the democratic majority often does not adhere or conform perfectly to the ideology that a person or group may have. This can be a problem for the ideologue if he or she professes to be a democrat (a supporter of democracy). So, for example, the libertarian may decry the government’s role in society, despite the democratic majority wanting social programs or government regulation. Thus, any claim that we should wipe out social spending is inherently anti-democratic in this sense. My previous post on government involvement touches on this issue. Of course, the ideologue can bypass this “problem” if they do not profess to be democrats. Instead, we should simply implement the policies of our ideology, no matter how much the public is opposed to it. That is, we become authoritarians. For the libertarian or the anarchist, this is inherently paradoxical. We cannot claim to be libertarians and authoritarians at the same time—the ideas are necessarily opposed to each other. It is not possible to authoritatively implement our policies in the name of libertarianism, for example. That isn’t to say no one has tried; for example, Augusto Pinochet, in his brutal dictatorship over Chile, enacted free-market reforms in the name of “liberating.” We know that’s hypocritical, and we understand the perversity in his understanding of “liberty.” Here, “liberty” means liberty for the corporation, not for the people. Thus, the ideas of libertarianism and anti-democratic measures are incompatible.

How can the ideologue cope with “the problem of democracy”? How can we accept certain principles that the majority rejects, yet still call ourselves “champions of democracy”? I have two suggestions, and others are welcome. First, be what could be called a philosophical ideologue (cf. philosophical anarchism). That is to say, you keep your beliefs in whatever ideology you choose, but you accept the majority’s opinion as the opinion that should be adhered to. So, for example, if you’re against social spending, but the majority supports it, you continue to believe that social spending is wrong but accept the majority’s choice as the will of the people. For some, this might seem like an unpleasing solution, which I accept. It does seem contradictory to accept the choice but at the same time to not accept the choice. It would seem as if we are not truly adhering to our ideologies (that’s a common argument against anarchists who do not support the overthrow of the state—they’re not real anarchists). Do we or do we not accept that argument? The other thing I suggest is that we teach or advocate our ideology in a way that is not anti-democratic. We explain our philosophies (non-coercively) to others in the hopes that they will accept them. In this way, we can influence the outcome of the democratic choice without resorting to authoritarianism.

I accept that others may not accept this. They may say we have to cling to our ideologies, no matter what. We must reject the democratic majority. They may not say it in this way, but it is what they’re saying. I reject this argument and find it to be dangerous. Over ideology, I am a democrat.

P.S. This is a further exploration of a concept that Dr. Spagnoli explores on his blog in a post titled “What is Democracy?” In it, he explains, “Napoleon Bonaparte propelled his armies across Europe on behalf of the universal principles of liberty, equality and fraternity . . . Napoleon’s armies occupied Europe because they wanted to export French principles and French civilization. . . . France was the advance guard of the struggle of humanity for freedom and against old-style authoritarianism.” The parallels to contemporary foreign affairs are obvious enough. Claims Dr. Spagnoli, “Attacking, conquering and occupying other countries, even with the purpose of liberating these countries from oppression and archaic authoritarian forms of government, seems to be highly illogical and self-contradictory. It’s incompatible with the very principles of democracy (democracy is self-determination).” The question being raised is, “are we allowed to impose or enforce democracy in an authoritarian way?” Likewise, I raise the question if libertarians are allowed to impose or enforce libertarianism in an authoritarian way. I say no.

Is the government inefficient? Sunday, Jan 3 2010 

I found this passage somewhere on the Internet, unknown author:

This morning I was awoken by my alarm clock powered by electricity generated by the public power monopoly regulated by the U.S. Department of Energy. I then took a shower in the clean water provided by the municipal water utility. After that, I turned on the TV to one of the FCC-regulated channels to see what the National Weather Service of the National Oceanographic and Atmospheric Administration determined the weather was going to be like using satellites designed, built, and launched by the National Aeronautics and Space Administration. I watched this while eating my breakfast of the U.S. Department of Agriculture-inspected food and taking the drugs which have been determined safe by the Food and Drug Administration.

At the appropriate time as regulated by the U.S. Congress and kept accurate by the National Institute of Standards and Technology and the U.S. Naval Observatory, I get into my National Highway Traffic Safety Administration-approved automobile and set out to work on the roads built and maintained by the local, state, and federal departments of transportation, possibly stopping to purchase additional fuel of quality level determined by the Environmental Protection Agency, using legal tender issued by the Federal Reserve System. On the way out the door, I deposit any mail I have to be sent out via the U.S. Postal Service and drop the kids off at the public school.

After work, I drive my NHTSA car back home on the DOT roads, to a house that has not burned down in my absence because of the state and local building codes and fire marshal’s inspection, and which has not been plundered of all its valuable thanks to the local police department.

I then log on to the Internet, which was developed by the Defense Advanced Research Projects Administration and post on freerepublic.com and FOX News forums about how SOCIALISM in medicine is BAD because government can’t do anything right.

What this passage is getting at is the myriad functions that government serves— sometimes unbeknown to the general public—and it only begins to scratch the surface. It would, I think, be pretty safe to say government is responsible for or at least crucially linked to the development of modern society, not free markets. That’s just a descriptive statement, and I believe the main point of the quoted passage. There are some, like those “on freerepublic.com and FOX News forums,” who bemoan government and its supposed inefficiency, yet take for granted all the things it provides them (like roads and police protection).

The question, really, is an economic one. One issue that arises concerns what are called public goods. In technical terms, a public good is any “good that is non-rivalrous and non-excludable.” All non-rivalrous means is that when one person uses that good another person is not restricted from also using that good (e.g., when I log on to the Internet, this does not preclude you from doing the same). All non-excludable means is that no one wanting access to the good can be reasonably denied access to that good. A decent example might lighthouse beams that provide light to ships, regardless of which ship it might be (that is, it’s difficult to exclude other people from seeing this light). As the Wikipedia article points out, “there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful.” (The economic idea of public goods, by the way, was developed by Paul Samuelson, the pioneering Nobel laureate who died just three weeks ago.)

The problem that arises is that public goods are not produced efficiently in “free markets.” They’re under-produced. This causes what is called market failure; the market does not operate efficiently. The reason for this is because you can’t make a profit off of it, or not very much the closer the good approaches the concept of a public good. If a good produces a benefit to society that the creator of the good cannot profit from, there’s little economic incentive to produce such a good. That’s standard neoclassical economic theory, anyway. The idea is tied to what are called externalities. A positive externality is something people benefit from, e.g. clean air, but those who benefit from it don’t necessarily have to pay for it. An example I get from Milton Friedman, the great free-market thinker, is that when I plant a pretty garden in my front yard, other people get to experience the benefit of it without having to pay or do any work for it. Again, these are under-produced in free markets, according to standard theory, because there is not enough economic incentive to produce these things.

Well, one solution has been to have the government produce goods for public use, which is where the entire passage quoted above comes from. The result is that we all get to benefit from government involvement in the market place. I get the ability to tell the precise time because the government has taken the initiative to keep accurate account of time—something theory tells us profit-maximizing corporations would be unwilling to do.

At the same time, however, as the story above illustrated, people still bemoan government and its attempts to provide for the public good. The market is great, it will provide us all the things we need, and it will do so efficiently, they might say. The socialist might respond by pointing out that this is not necessarily true, and point to things like externalities and asymmetric information, which exist nearly everywhere, and conclude the market rarely works efficiently. For this reason, we need the government to provide for the public good, particularly when the unfettered market cannot. The right-winger (if they’re not Austrian) might concede that things like externalities and asymmetric information exist but posit that the government still ought not get involved because that would constitute an abridgment of our freedom, is coercive, evil, etc. The question becomes harder. Indeed, for many the question is not only economic but also ethical. At this point, I think most people begin to ask what the right balance is between market forces and government involvement. The question is left unanswered and, in mind, the answer remains to be seen.

The greatest market failure ever Sunday, Oct 18 2009 

The story of anthropogenic global warming is a story of “the greatest market failure the world has seen.”

That’s from Sir Nicholas Stern, a British economists at the London School of Economics and the Chief Economist of the World Bank from 2000 to 2003, who authored the Stern Review. The Stern Review is a 2006 report discussing the economics of global warming and is the most thorough and cited report on the subject. The report highlights the grave economic consequences of leaving global warming unabated. On the other hand, Stern said his report is “essentially optimistic.” The Review states that we can curtail the worst consequences of global warming if we act immediately. The longer we wait to take action, however, the costlier it will be in the long run. (In fact, the delays we’ve already been taking have been costing us.) What the report makes abundantly clear is that the cost of mitigating global warming is far exceeded by the costs to the world economy if we should choose to continue “business as usual.” In other words, it makes economic sense to work towards mitigating global warming (if people were rational and self-interested anyway). There is no longer any question that there is a benefit to mitigating global warming. The real question is why we haven’t been working towards that goal.

The existence of global warming highlights the inefficiency of markets. Stern explains:

The science tells us that GHG emissions are an externality; in other words, our emissions affect the lives of others. When people do not pay for the consequences of their actions we have market failure. This is the greatest market failure the world has seen. It is an externality that goes beyond those of ordinary congestion or pollution, although many of the same economic principles apply for its analysis.

This externality is different in 4 key ways that shape the whole policy story of a rational response. It is: global; long term; involves risks and uncertainties; and potentially involves major and irreversible change.

Further, “If we take no action to control emissions, each tonne of CO2 that we emit now is causing damage worth at least $85 – but these costs are not included when investors and consumers make decisions about how to spend their money.” Curtailing global warming would mean “People would pay a little more for carbon-intensive goods, but our economies could continue to grow strongly.

Explains oilman and adviser for President Bush, Matthew Simmons, “‘A crisis is a problem that was ignored.’ All great crises were ignored until it was too late.” The question now is whether we will wait until it’s too late to take action. I believe it is our moral imperative that we not.

Funny tidbit Monday, Sep 28 2009 

Here’s a short little tidbit that satires the debate on health care reform (which I’ve written a little on, e.g. here). In it includes Will Farrell and others arguing, sarcastically obviously, for not forgetting about health insurance executives who have been getting such a bad rap:

Keynes vs. the Chicago school of economics Tuesday, Sep 15 2009 

I just finished reading a very good article in The New York Times Magazine by Paul Krugman, an economics professor at Princeton University and the recipient of the Nobel Prize in Economics in 2008. It’s pretty long, but I think it’s well worth it. In it, Krugman discusses the questions of how economists got it so wrong, of how they failed to predict the current recession, of how contemporary macroeconomics has been so illusioned. He points to the prevailing economic belief (among both freshwater and saltwater economists) in an “idealized vision of an economy in which rational individuals interact in perfect markets,” that is, the Chicago school of economics that embraces the efficient market hypothesis. Krugman contends that people do sometimes act irrationally and that markets are not always efficient or perfect—ideas that I myself have come to accept despite the SCSU academe that tends to dismiss such notions. What he propose as a solution to the current problem in macroeconomics is a reversion to Keynesian economics and a heavier reliance on behavioral economics. I can certainly agree with him on many of his points, but I doubt I can do the article justice here so I advise people read it on their own.

The Fed and conflicts of interests Wednesday, Sep 9 2009 

I just wanted to make a short post about a very interesting story published in the Huffington Post about the apparent lack of criticism of the Federal Reserve by economists (particularly within academia) and why this might be. One reason, the authors argue, is because doing so is a liability for economists who wish to have their views and ideas respected. This isn’t because their ideas are necessarily wrong, but because there is an inherent conflict of interests with the Fed vis-à-vis economists. The authors explain,

One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.

How is it that economists (with marginal exceptions) have been so wrong regarding the current economic crisis and have failed to critically analyze the Fed’s consistent failures throughout its history? As it happens, there’s a lot money and respect hinging on them failing to do so. The Fed, their associates, and their grant money dominate the field. Essentially, they are what the authors call the “Gatekeepers.” For example, nearly 45% of editorial board members of top economic journals are associated with the Federal Reserve.

That’s what you call a conflict of interest. But it’s nothing it new. Take, for example, the government’s National Institute on Drug Abuse (NIDA), which holds a monopoly over medical research on marijuana. This impedes research and skews results, particularly when NIDA deliberately withholds marijuana from researchers it believes will contradict its own findings. As another example, as the article mentions, “The pharmaceutical industry has similarly worked to control key medical journals, but that involves several companies. In the field of economics, it’s just the Fed.”

As the famous saying goes, “It’s almost impossible to get a man to understand something, when his paycheck depends upon his not understanding it.

A look at the minimum wage Saturday, Jul 25 2009 

Yesterday the minimum wage rose to $7.25, thanks to a bill signed by President Bush in May of 2007. I figure now might be a good time to examine the minimum wage and its effects on employment. Forewarning: this is a very long post and is very economic oriented, so bear with me.

In my freshman year at SCSU, I took a course on the principles of microeconomics (with Dr. Komai, an excellent professor) where we learned about price floors including a minimum wage. I found the topic interesting, and so wrote about it in a research paper for my English course. In it, I argued for an increase in the minimum wage and indexing it to inflation. (Note this was in 2006, prior to President Bush signing the minimum wage increase bill.) This is back when I considered myself a Republican (!) and when most Republicans and other economic libertarians were arguing for an abolishment of the minimum wage under the assumption that a minimum wage causes higher unemployment. Many microeconomists and other economists would agree with that assessment (see, for example, this blog post by Gary Becker made around the same time as I wrote my paper). Now in an intermediate microeconomics course, I was again presented the classical economic argument that a price floor like the minimum wage will create a surplus (i.e. unemployment). Why do economists make this argument and does it make a minimum wage undesirable?

I find using graphs the easiest way to understand price floors. First of all, a price floor is when the government sets a minimum price for a product or good. This typically occurs when it is perceived that the normal (i.e. equilibrium) price is too low and that a higher price would be more favorable (such a regulation on the price is meant to be beneficial to the supplier of that good—but more on that later).

Without outside regulation, a price can be determined where the demand of a good intersects or is equal to the supply of that good. Graphically, this can be represented as:
As you can see, if the price went down, the quantity demanded would increase, but the quantity supplied would decrease (creating a shortage of goods). If the price increased, quantity demanded would decrease, but quantity sold would increase (creating a surplus). A surplus will put a downward pressure on price until the quantity demanded is equal to the quantity supplied. A shortage will put an upward pressure on price until quantity demanded is equal to quantity supplied.

If the government stepped in and made it illegal to sell or purchase a good (labor in this case) below a certain price, a surplus of that good will exist if that new price is above the equilibrium price. Graphically, this can be represented as:
If the minimum wage is set above the equilibrium wage, then there will be a surplus of labor (i.e. unemployment) because the quantity of labor supplied will be higher than the quantity of labor demanded. This is why most Republicans and many economists argue against the government instituting a minimum wage. It creates more unemployment than there would be without a minimum wage. The higher the minimum wage is above the equilibrium wage, the higher the unemployment is going to get.

That is the classical economic model of the minimum wage (also known as the “textbook model”). This explanation is short and deliberately not thorough for the purpose of space and time, but accurately represents the typical example of a price floor. In understanding economic theory, however, you should always realize that certain assumptions are being made. To gauge the reliability of that theory, you would do well to also gauge the assumptions on which the theory is being made. Sometimes you may find that, while the theory looks nice, the assumptions on which it depends can be seriously strenuous. In this case, the classical economic model makes a number of assumptions that also happen to influence how the slope of the demand curve looks (i.e. the elasticity of demand). (All elasticity means is how sensitive people are to changes as measured through percent changes. It can measure, for example, how responsive people are to changes in price. Mathematically, this can be represented as %ΔQuantity/%ΔPrice.)

If the slope of the demand curve (i.e. the wage elasticity of demand) is changed, you’re going to end up with different results. Namely, unemployment is higher the more elastic the demand. Conversely, if the demand is fairly inelastic, unemployment will not be as high. Graphically, this can be represented as:
In this example, the D1 curve is more elastic than the D2 curve. With the minimum wage set above the equilibrium wage, the quantity of labor demanded is less for the elastic demand curve (Qd1) versus the inelastic demand curve (Qd2). Therefore, the unemployment resulting from the minimum wage is smaller when demand for labor is inelastic. So we must therefore ask how elastic the demand for labor is. However, we should also realize that this model is still based on classical economic model where a number of assumptions are being made.

Gary Fields, a professor of labor economics at Cornell University, questions one of these assumptions in a 1994 article. He argues against the “one-sector model which implicitly assumes that the minimum wage applies uniformly to everyone.” Instead, he claims a two-sector model, including a covered and an uncovered sector, is more appropriate based on empirical evidence that suggests two sectors (i.e. covered and non-covered) exist nearly everywhere. Fields concludes that actual theoretical results are less clear-cut than assumed in the textbook model, which “simply cannot be relied on” because it is unrealistic. Fields also stresses the importance of empirical studies to measure the real effects of the minimum wage, because theoretical models do not suffice.

Other assumptions being made have also been challenged. For example, it’s likely the case that employers of labor have monopsonistic power—that is, where few buyers (or employers of labor) face a large amount of suppliers. Without going into detail, this would suggest a higher minimum wage would also increase employment (up to a certain point of course). Again, other assumptions can be challenged (and have been) and so it is important to not only rely on theoretical models but to also look at empirical data gathered from real-world situations.

One study I looked at was a 1994 paper by Richard Freeman, a respected labor economists at Harvard. He found that pre-1980 minimum wages had a “modest adverse effect on employment,” where a 10% increase in the minimum wage would increase joblessness by 1 to 2%, implying the minimum wage is an “effective redistributive tool.” During the 1980s when the minimum wage was held stagnant and the real value of minimum wage decreased, unemployment of low-skilled labor actually increased. In surveying three studies on employment after the early 1990s minimum wage increases, Freeman found that two reported insignificant unemployment effects and a third reported an increase in employment (suggesting employers were monopsonistic). Freeman goes on to cite other empirical studies that show moderately adverse or even positive effects on employment through minimum wage increases, again suggesting the minimum wage is an effective redistributive tool.

A highly influential paper on the effects of the minimum wage on employment was done David Card (UC Berkeley) and Alan Krueger (Princeton University) in 1992. In it, they found that employment went up after a minimum wage increase from $4.25 to $5.05 in New Jersey (while Pennsylvania’s stayed at $4.25). Classical economic theory would have suggested employment would decrease. Of course, Card and Kreuger’s work was heavily criticized, for example by George Mankiw, an influential Harvard economics professor, and Gary Becker (who I noted earlier in this post). Others, such as Joseph Stiglitz and Paul Krugman, both influential Nobel laureates, accepted Card and Kreuger’s findings. Surveys of economists have shown a decreasing amount of economists who believe the minimum wage result in significant negative employment effects, partly due to Card and Kreuger’s research (see, e.g., here). (Still, however, a majority agree a minimum wage does increase unemployment.)

Finally, in a 2004 paper by David Neumark (UC Irvine) and Olena Nizalova (MSU) find that in states with higher minimum wages, workers of ages 16 through 19 experience higher unemployment; in the 20 through 24 age range, however, the unemployment difference is smaller; and within the 25 through 29 age range, there is even higher employment in states with higher minimum wages. This suggests that young teenagers, ones most likely to live with their parents or be second income earners, take the brunt of any unemployment caused by the minimum wage. William Maloney and Jairo Mendez affirm in a 2004 paper, “[unemployment] effects [from the minimum wage] have traditionally appeared to be weak in the US, perhaps with the exception of young workers.” Those who are in most need of the minimum wage increase—those more likely to be older and have children—are the ones who seem to be the least affected by any unemployment effects the minimum wage has. The minimum wage, therefore, is a fairly well targeted policy that has the potential to help low-income families when it is raised. Indeed, Sara Lemos proclaims in a 2006 paper, “The minimum wage has a concrete potential to serve as a policy to alleviate inequality and poverty without undesirable side effects.”

Many Americans happen to agree. One reason why people tend to favor the minimum wage over other redistributive tools and transfer payments is because it creates an incentive to work. As Richard Freeman points out, a minimum wage requires no taxes or government borrowing. This is contrast to other policies such as earned income tax credits or subsidies for employers of low-skilled labor, which must come out of the government’s budget.

Critics, on the other hand, maintain the minimum wage causes prices to increase. Daniel Aaronson and Eric French, writing for a paper published by the EPI in 2006, explicitly find that prices rise about 0.4 to 1.5 percent with a ten percent minimum wage hike. This makes sense because a higher minimum wage imposes higher costs for firms who hire at the minimum wage. “Higher labor costs are pushed on to consumers in the form of higher prices,” they write. However, this reason alone should not be used to detract the minimum wage. In a 2003 paper, Sanjiv Sachdev finds that most people prefer to redistribute their income (e.g. through increased prices) in such way that rewards those who work, not to those who do not. The minimum wage acts like a redistributing tool for the poor, but unlike other means of doing so (e.g. welfare), it rewards those who work. We must therefore weigh the cost of higher prices to the rewards that the minimum wage brings.

Millions of people today work at the minimum wage, and many more are affected by the minimum wage by so-called “knock-on effects,” and whose collective bargaining is weak (Stephen Bazen, 2006). With researchers suggesting ambiguities in the classical theoretical model of the minimum wage and empirical studies showing only moderately adverse, insignificant, or even positive effects on employment, I think the minimum wage can be used as an effective policy for raising living standards of low-skilled workers. It effectively targets those who work and those most likely to be breadwinners of the household. With the new minimum wage hike passed by President Bush, I hope new studies can come out that can either confirm or deny these findings. Time will tell.

America’s brand of socialism Friday, Jul 3 2009 

Excuse the long period of time of inactivity. I’ve just been busy with other activities; in addition, Iran’s election has been dominating the news. There’s not a lot of things I have to say about that which has not already been said by plenty of people (namely: Iranians should have the right to peacefully assemble and protest their government, be free from coercion and violence, and to freely voice their opinions; that the vote-counting process was suspect and that Iran should conduct a recount; and that the U.S. government should not interfere).

Instead, I want to talk about what many want to refer to as “socialism in America.” See, for example, this post by King Banaian, a professor and the chairman of the economics department at SCSU. In it, he argues that America’s economic policy is most accurately described as “interventionism” rather than flat-out “socialism,” as some people have suggested. I would not call it flat-out socialism either. People who simply throw around the word “socialism” use it as a scare word of sorts, to draw emotional responses from people wary of government intervention. If we try to use that loose definition of socialism, however, it would be impossible to name any country that exists or that has ever existed that wasn’t socialist. So that doesn’t seem correct (unless you want to call every country a socialist one).

I prefer to think of socialism that has varying degrees of intervention. Stalinism, for example, might be approximated at one of the spectrum where the state has total control over political and economic systems. Current-day America would be on the opposite end, where the state is moderately involved in economic matters, mostly through regulation. We could say it’s a weak form of socialism. This brand of socialism now includes the bailouts of Wall Street, Big Bank, and the automotive industry, highlighted in Bush’s final months in office and continued through Obama’s current presidency. It’s important to look at the characteristics of America’s socialism, which is sometimes referred to as “socialism for the rich and capitalism for the poor.”

This form of socialism has long been seen as a criticism of America’s “capitalist” system. It is sometimes also referred to as “privatizing profits and socializing costs”; “lemon socialism”; “crony capitalism”; “corporate welfare”; or, as I referred to it as during the Wall Street bailouts, “Wall Street socialism.” There are an equal amount of euphemism to defend this policy, such as “trickle down economics,” “too big to fail,” “lender of last resort,” etc.


There has been constant refrain all throughout, however, which is that the state ensures big business is being protected, often at the cost of others not a part of corporate America (sometimes referred to as “Main Street,” as opposed to Wall Street). Some use this to explain the “rich getting richer and the poor getting poorer,” i.e. wealth or economic inequality and disparities. One way this is achieved is through privatizing corporate profits and socializing their costs. We saw this, for example, with the bailouts of AIG et al. at the expense of tax payers. Such actions by the state create what are called moral hazards, meaning corporations such as these are being shielded from risk (of failure) and so act differently (more riskily).


One problem is that power is being concentrated in unaccountable and unresponsive institutions (both non-governmental and quasi-governmental) such as the Federal Reserve (see, e.g., this and this post by Dr. Banaian). These institutions are unwilling to sacrifice themselves or succumb to market forces. This is why, for example, President Bush came out and admitted he had to “abandoned free market principles to save the free market system.” (Remember the old arguments that we have to abandon freedom in order to be free?) Another problem, of course, is unresponsive and non-participatory democracy in America, which I have discussed here.

This has been going on for a long time, of course. But this trend was especially marked during the Reagan era—an era that spoke a lot about free trade and laissez-fair economics, but one that rarely practiced it. Take, for example, when then-Treasury Secretary James Baker boasted to business groups that the Reagan administration has offered more protection to American business than any post-war presidency. (In reality, it was more than all of them combined.) As it happens, President Clinton was also unusually popular with Corporate America for being a Democrat—the reason being his unwavering protection of big business (NAFTA being a big part of that). This is, of course, all while the benefits of free markets are being touted. Never mentioned is the fact that America’s prosperity has been a product of state intervention, trade interference, and market distortions on massive scales completely unnatural to a truly free and capitalistic market. This has continued into the present with the bank, insurance, airline, and auto bailouts seen under both Bush and Obama.

The dominate message being relayed to the American people is that in order for big business, and therefore the American economy, to survive, it must be subsidized, protected, and bailed out by the state. Incidentally, this is why a national health care system has finally entered the political discourse. For decades now, Americans have placed the health care system as a top domestic priority, with most wanting some sort of nationalized system. Prior to this campaign, such a thing was described as “politically impossible”—never mind that it was what most of the population wanted. In 2008, that was different; we saw Edwards, Clinton, and Obama bringing up the issue. What changed? It certainly wasn’t public opinion. What changed was that manufacturing industry in America was being crippled by the soaring costs and so began supporting such a system. It is only through the process of it becoming a problem for a major sector of American capital and corporate interests that it enters the political agenda of the leadership in this country. Naturally, what will happen is that the costs will be socialized but their profits will continue to remain privatized.

That’s American “capitalism” in practice.

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