Oh my goodness mind blown so hard right now.
I was talking to my roommate the other day about the scary reality that the standard of living in Western countries is effectively subsidized by poverty in the countries where those goods are produced. We have cheap ipods, televisions, basketballs, and various other types of consumer goods because other countries don’t prohibit employers from exploiting desperately poor individuals whose circumstances and lack of savings or capital leave them little in the way of economic alternatives.
There’s going to come a day when this system falls apart. The standard of living in many of these countries is going up. As these countries continue to develop social, political, and economic infrastructure that gives people at the bottom more economic alternatives, they’ll be able to demand better wages and working conditions. Eventually, it will be impossible for Multinationals to continue exploiting cheap labor in these less-developed countries, because labor won’t be cheap anymore. When that time comes, the standard of living in America is probably going to drop relative to what’s it’s been in the past. And the gravy train will be over.
Two rich economies, relatively similar in structure, reacted very differently to the global financial shock of late 2008. In America output sank sharply but then rebounded to new highs. Employment, by contrast, fell dramatically and has recovered much more slowly; it has yet to regain the pre-crisis peak. In Britain the trends were reversed; employment is setting new highs while output suffered an L-shaped recovery.
The key difference appears to be rates of inflation. Higher inflation in Britain reduced real wages. That, in turn, allowed firms to meet a given level of demand by using more workers less intensively—at lower productivities. In America, by contrast, lower inflation meant that real wages rose over the course of the recession and recovery. Some research results suggests that firms respond to sticky real wages by wringing more output out of existing workers—raising productivity. Firms meet a given level of demand using fewer workers more intensively, resulting in a jobless recovery."
It looks like over at EPI, roughly 75 economists, including 8 former heads of the American Economic Association, have signed a letter urging Congress to raise the federal minimum wage. Here’s the text of the letter:
Dear Mr. President, Speaker Boehner, Majority Leader Reid, Congressman Cantor, Senator McConnell, and Congresswoman Pelosi:
July will mark five years since the federal minimum wage was last raised. We urge you to act now and enact a three-step raise of 95 cents a year for three years—which would mean a minimum wage of $10.10 by 2016—and then index it to protect against inflation. Senator Tom Harkin and Representative George Miller have introduced legislation to accomplish this. The increase to $10.10 would mean that minimum-wage workers who work full time, full year would see a raise from their current salary of roughly $15,000 to roughly $21,000. These proposals also usefully raise the tipped minimum wage to 70% of the regular minimum.
This policy would directly provide higher wages for close to 17 million workers by 2016. Furthermore, another 11 million workers whose wages are just above the new minimum would likely see a wage increase through “spillover” effects, as employers adjust their internal wage ladders. The vast majority of employees who would benefit are adults in working families, disproportionately women, who work at least 20 hours a week and depend on these earnings to make ends meet. At a time when persistent high unemployment is putting enormous downward pressure on wages, such a minimum-wage increase would provide a much-needed boost to the earnings of low-wage workers.
In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market. Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front.
Henry Aaron, Brookings Institution
Katharine Abraham, University of Maryland
Daron Acemoglu, Massachusetts Institute of Technology
Sylvia Allegretto, University of California, Berkeley
Eileen Appelbaum, Center for Economic and Policy Research
Kenneth Arrow, Stanford University*+
David Autor, Massachusetts Institute of Technology
Dean Baker, Center for Economic and Policy Research
William Baumol, New York University+
Jared Bernstein, Center on Budget and Policy Priorities
Josh Bivens, Economic Policy Institute
David Blanchflower, Dartmouth College
Alan Blinder, Princeton University
Heather Boushey, Washington Center for Equitable Growth
Clair Brown, University of California, Berkeley
Gary Burtless, Brookings Institution
David Cutler, Harvard University
Sheldon Danziger, Russell Sage Foundation
Angus Deaton, Princeton University+
Gregory DeFreitas, Hofstra University
Peter Diamond, Massachusetts Institute of Technology*+
Avinash Dixit, Princeton University+
Arindrajit Dube, University of Massachusetts, Amherst
Ronald Ehrenberg, Cornell University
Henry Farber, Princeton University
Nancy Folbre, University of Massachusetts, Amherst
Robert Frank, Cornell University
Richard Freeman, Harvard University
Claudia Goldin, Harvard University+
Robert Gordon, Northwestern University
Darrick Hamilton, The New School
Heidi Hartmann, Institute for Women’s Policy Research
Raúl Hinojosa-Ojeda, University of California, Los Angeles
Harry Holzer, Georgetown University
Marc Jarsulic, Center for American Progress
Lawrence Katz, Harvard University
Melissa Kearney, University of Maryland
Adriana Kugler, Georgetown University
Mark Levinson, SEIU
Frank Levy, Massachusetts Institute of Technology
Lisa Lynch, Brandeis University
Julianne Malveaux, Past President, Bennett College
Ray Marshall, University of Texas, Austin
Alexandre Mas, Princeton University
Eric Maskin, Harvard University*
Patrick Mason, Florida State University
Lawrence Mishel, Economic Policy Institute
Alicia Munnell, Boston College
Samuel Myers, University of Minnesota
Manuel Pastor, University of Southern California
Robert Pollin, University of Massachusetts, Amherst
Michael Reich, University of California, Berkeley
Robert Reich, University of California, Berkeley
William Rodgers, Rutgers University
Dani Rodrik, Institute for Advanced Study
Jesse Rothstein, University of California, Berkeley
Cecilia Rouse, Princeton University
Jeffrey Sachs, Columbia University
Emmanuel Saez, University of California, Berkeley
Isabel Sawhill, Brookings Institution
Thomas Schelling, University of Maryland*+
John Schmitt, Center for Economic and Policy Research
Robert Shapiro, Georgetown University
Heidi Shierholz, Economic Policy Institute
Dan Sichel, Wellesley College
Timothy Smeeding, University of Wisconsin, Madison
Robert Solow, Massachusetts Institute of Technology*+
A. Michael Spence, New York University*
William Spriggs, AFL-CIO
Joseph Stiglitz, Columbia University*
Lawrence Summers, Harvard University
Peter Temin, Massachusetts Institute of Technology
Mark Thoma, University of Oregon
Laura Tyson, University of California, Berkeley
Paula Voos, Rutgers University
* Nobel laureate
+ Has served as American Economic Association president
Somewhere in the basement of the Mises Institute, a dark ritual is being performed in an attempt to make this study spontaneously combust in a ball of flame.
Bruce Bartlett discusses the Basic Income Guarantee, vis-a-vis Switzerland’s recent proposal to give every citizen the equivalent of $2,800 per month in guaranteed income:
In October, Swiss voters submitted sufficient signatures to put an initiative on the ballot that would pay every citizen of Switzerland $2,800 per month, no strings attached. Similar efforts are under way throughout Europe. And there is growing talk of establishing a basic income for Americans as well. Interestingly, support comes mainly from those on the political right, including libertarians.
The recent debate was kicked off in an April 30, 2012, post, by Jessica M. Flanigan of the University of Richmond, who said all libertarians should support a universal basic income on the grounds of social justice. Professor Flanigan, a self-described anarchist, opposes a system of property rights “that causes innocent people to starve.”
Bartlett quotes F.A. Hayek from Law, Legislation, and Liberty:
The assurance of a certain minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself, appears not only to be a wholly legitimate protection against a risk common to all, but a necessary part of the Great Society in which the individual no longer has specific claims on the members of the particular small group into which he was born.
Milton Friedman also supported a Basic Income Guarantee in the form of a Negative Income Tax:
Friedman’s argument appeared in his 1962 book, “Capitalism and Freedom,” based on lectures given in 1956, and was called a negative income tax. His view was that the concept of progressivity ought to work in both directions and would be based on the existing tax code. Thus if the standard deduction and personal exemption exceeded one’s gross income, one would receive a subsidy equal to what would have been paid if one had comparable positive taxable income.
Bartlett also points to Matt Feeney, writing for Reason, who notes that a Basic Income Guarantee, if it completely replaces the present welfare state, would enhance personal liberty, preserve human dignity, and save money:
one of the tragedies of the current welfare system is that it strips welfare recipients of their dignity while treating many of them like children, and functions on the underlying assumption that somehow being poor means you are incapable of making good decisions.
Instead of treating those who, often through no fault of their own, have fallen on hard times like children who are incapable of making the right choices about the food they eat or the drugs they may or may not choose to take, why not just give them cash? Doing so would not only cut down on the huge administrative costs of America’s welfare programs, it would also promote personal responsibility and abolish much of the humiliation and stripped dignity associated with the current welfare system.
Obviously this is still government redistribution, and as such, violates the much beloved Non-Aggression Principle that many Libertarians abide by. Nonetheless, the Basic Income Guarantee strikes me as a perfect example of not allowing the perfect to be the enemy of the good. If we could eliminate the cumbersome bureaucracies that define the present welfare state, and replace them with a simple cash transfer, that seems like a win for increasing individual liberty and reducing the size of government. It also takes the fate of the poor out of the hands of government agencies, who may deny someone access to benefits on so little as an outdated form. If there is such a thing as a Libertarian welfare state, the Basic Income Guarantee is a way to achieve it.
an anonymous online commenter on the current economy. (via alchemy)
LTMC: When I was working at a gas station, I had an old-timer come in and tell that he used to make $2/hour at a factory job when he was in his late 20’s. He said he could feed his whole family for the night by buying a 24-cut pizza for $2. Fast forward to my gas station job, where I was making $8/hour, but a 24-cut pizza in my town costs closer to $20—2.5 times more on a dollar-for-dollar basis. He said he had no idea how I even survived on what I was making (I was insured through college at the time, but had no savings, and relied on family for large expenses).
This is what people mean when they talk about income inequality. The reason wages have not kept pace with expenses is because the nation’s previous method of wage redistribution—union representation—has declined substantially. Wage increases have subsequently been absorbed on an increasingly larger basis by corporate entities and the top 1% of earners. Strong unions used to serve as a soft redistribution mechanism to help ensure that increases in prosperity were shared equally. A critical mass of union representation in the labor force has always had derivative wage benefits in the non-union labor market. That critical mass no longer exists, however. Consequently, the decline of union labor has led to a concurrent decline in wages relative to expenses, because there’s no longer an institutional mechanism for redistribution of earnings increases in the economy. The critical mass of union representation is gone, and nothing has taken its place.
Many conservatives insist that increasing the money supply (the blue line in the graph above), will inevitably lead to massive increases in inflation (the red line).
To which all one can say is: anything is possible. But the recent record suggests such fears are overblown …
When opinions and data collide, I always go with data.
LTMC: To play devil’s advocate for a moment, some economists would argue that this graph misattributes inflation to the CPI. Inflation is simply an increase in the money supply. An increase in prices is rather a symptom of inflation, not inflation per se. We also don’t see represented here what the effect would have been if the money supply were not increased. Presumably we would have had a decrease in the price index (or if you prefer, “deflation”), relative to the current baseline.
Plenty of economists would view deflation as a bad thing. But there are others who would view such deflation as merely the hangover from decades of artificial growth fueled by inflationary monetary policy. Under this view, deflation would actually be a good thing, because it is the first step on the road to a healthy economy where prices come closer to representing real (rather than artificial) wealth, as opposed to a proxy hybrid of the former and latter. The business cycle would finally have time to readjust. Deflation represents that adjustment.
I’m not saying I agree with any of this. But I do think these ideas need to be addressed to get a complete picture of the economy. 2% price inflation is a great target (and even higher inflation might be better under certain circumstances). But we ought to reckon with the idea that there may be additional consequences to increasing the money supply over and above increases in the consumer price index—consequences which we can’t see on this graph. And I say this as a guy who thinks Keynes mostly had the right idea.
Rohin Dhar, back in March, said that engagement rings are a sham, and it’s time that we stop asking men (or women, as the case may be) to buy them:
Americans exchange diamond rings as part of the engagement process, because in 1938 De Beers decided that they would like us to. Prior to a stunningly successful marketing campaign 1938, Americans occasionally exchanged engagement rings, but wasn’t a pervasive occurrence.
Not only is the demand for diamonds a marketing invention, but diamonds aren’t actually that rare. Only by carefully restricting the supply has De Beers kept the price of a diamond high.
Countless American dudes will attest that the societal obligation to furnish a diamond engagement ring is both stressful and expensive. But here’s the thing - this obligation only exists because the company that stands to profit from it willed it into existence.
A diamond is a depreciating asset masquerading as an investment. There is a common misconception that jewelry and precious metals are assets that can store value, appreciate, and hedge against inflation. That’s not wholly untrue…Diamonds, however, are not an investment. The market for them is neither liquid nor are they fungible.
Edward Epstein puts numbers on the issue:
Because of the steep markup on diamonds, individuals who buy retail and in effect sell wholesale often suffer enormous losses. For example, Brod estimates that a half-carat diamond ring, which might cost $2,000 at a retail jewelry store, could be sold for only $600 at Empire.
In other words, when you buy a diamond for your significant other, you’re not buying an appeciating asset, as many people probably think. Your spouse’s diamond ring is more comparable to a used car than a precious work of art.
A friend of mine has a mother who works as a jeweler, and confirmed Dhar’s conclusions. She said that a ring actually loses value when it has a diamond in it, because it costs jeweler’s more money than it’s worth to remove the diamond and resell them. Plain wedding bands are actually a much better investment. Diamond rings, however, are a no more reliable store of value than your 1996 Ford Taurus with missing mirrors and a rusted tailpipe.
Don’t understand about Diamonds
And why men buy them
What’s so impressive about a Diamond
Except the mining?”
New York City Mayor Bill de Blasio borrowed a page from the Clinton playbook tonight when he appeared to embrace two...