Minimum Wage, Maher, and Math

CORRECTION: The original article contained an assumption of 25m people currently at minimum wage. That number is incorrect in that it actually represents the number of workers below $11.50/hr that would be impacted by a new $10.10 minimum wage. This did, in fact make the math wrong. The article below has been changed to include more accurate numbers.

Maher-MinWageThe ongoing political battle over minimum wage too often seems to lose site of the larger goal each side is trying to achieve. And further, I’m increasingly understanding that the stated goals are not too far apart. This leads me to believe that someone has an actual goal different from their professed goal, or that my math is just way the hell off.

As Bill Maher alludes to in the depicted quote, the right is frequently on record as having a desire to reduce or eliminate safety net programs. This is also a goal of the left. The difference being that the right seems to want to eliminate the net on the premise the need will then go away, whereas the left wants to eliminate the need for the net so it can die of natural causes.

Let me start by asserting something I hope everyone can agree on. As a society, we will not simply remove the safety net and let any significant portion of the population wallow in abject poverty. While some may see this as an obvious humanitarian position, even the most pure-blood capitalist has to recognize that, historically, having a large, persistent, impoverished, and increasingly desperate economic underclass never ends very well for those who control the wealth and resources. To that end, there is an inherent balance between the government subsidizing low-skill workers through safety net programs and having private industry pay full freight for the labor they are using. Someone is going to pay for these folks.

My second assertion is that there is no ideological reason to keep the minimum wage at the current $7.25 rate. If you accept minimum wage as adding value to the economy and to society, then it should represent a living wage that would allow a worker to live without government supplements. If you fall on the side of free market capitalism, then there should be no minimum wage and the market should set the rate at whatever it will bear.

Third, let’s assume that the current minimum wage, in addition to current safety net supplements, are minimal but sufficient compensation for low-skill workers. Finally, let’s assume the CBO report (PDF) on the impact of raising the minimum wage to $10.10 is a reasonable predictor of the outcome.

Given these constraints, the cases to consider are an increased minimum wage at which workers’ dependence on the safety net would be lessened or eliminated, verses a natural wage floor that if lower than the current minimum wage would require an increase in safety net benefits just to keep workers even with where they are today.

Now for the math: the CBO says there are 17m low wage workers (currently making below $10.10/hr), and as a result of raising the minimum to $10.10/hr, 500k (3%) would lose their jobs and the remainder would get a raise. As seen in the worksheet below, assuming the lost jobs are all at the current minimum wage end, the newly unemployed represent a $7.25b loss of wages.

In the other case, I think we can agree that given the current unemployment rate for low-skill workers that there is an excess of supply. This means the $7.25 minimum wage is holding the wage floor artificially high. Market forces should seek a lower wage, and I think we can say with confidence that absent a minimum wage law, the wages of the majority of low-skill workers would fall.  For the model below, I somewhat generously assumed that 20% of workers currently at the minimum wage would retain that wage because their value to their employers warranted it. I also assumed that the actual wage for the remaining 80% would fall by only $0.30/hr, which is almost certainly a low number. Still, the resultant wage losses for the group amount to $7.92b.

In addition, the CBO estimates that 8m workers who are currently above the $10.10/hr rate would see a net positive gain from the ripple effect of a higher minimum wage. While not stated, presumably this group would be negatively effected by the ripple of the wage floor falling. (None of the 8m were included in this corrected analysis.)

MinWageWorksheet

In either case, we’ve assumed the government is on the hook to provide some form of substitute compensation to make up the loss for the effected workers. Clearly, it’s cheaper for the government to wholly pay for the unemployed 3% than to offset the loss of the 97%.

Further, the minimum wage increase should lessen the dependence on the safety net for the workers who get raises. Assuming workers only reduce their dependence by $600/yr, the result is a $7.92b savings that more than offsets the payments to the 3%. Given that Food Stamp benefits alone are about $1600/yr/person and EITC ranges from $500 to over $6k, recovering $600/employee seems pretty conservative. This is backed up by the CBO report that concludes for the raised minimum wage case that the impact on the federal budget would be a wash.

There is no obvious offsetting revenue stream for letting the market set the wage floor unless we assume a rise in corporate profits and increased revenue from corporate taxes. If this new tax revenue offsets the incremental safety net cost, then why not have the companies pay the money directly to their workers through wages rather than paying it in taxes and having the government redistribute it to those same workers?

All bleeding heart issues aside, I can’t see how raising the minimum wage is not a net economic benefit to society as a whole. Certainly it’s not a disaster as federal minimum wages have been around since 1938—a period during which the USA rose to be the preeminent economic power in the world. This does not prove causation, but does prove that prosperity is very possible with a minimum wage in place.

Further, economically speaking, having the government set a minimum wage is not different than a union or other collective bargaining organization setting a wage-price above what the natural unregulated non-unionized worker price would be.

It seems that advocating for the alternative to a living minimum wage necessarily admits some hidden ideological agenda. Perhaps the motivation is really to benefit individual companies rather than society. Perhaps the assumption that we wouldn’t financially marginalize chunks of our population is not valid. But it’s unclear how it can be rationalized to be about macroeconomic benefit to the country. Or maybe my math really (still?) is whacked. I’m happy to have the error in my ways pointed out, because I’m clearly missing something here.


GOP senators to feds: Leave the Internet alone

12217_large_neutral-bits.pngIt’s this sort of thing that really pisses me off. The intention is exactly right. The Internet should be free of interference. It should continue to be accessible by anyone, empower content and service creators, and foster innovation. Yet excluding all government regulation of the Internet is exactly contrary to achieving that goal.

In fairness, the issue of Net Neutrality is a bit complicated.  Most people don’t know how the Internet works. And this leaves open the opportunity to exploit that lack of understanding through politi-speak gems like this

“There are exceptions of course, but far too often, when you hear someone say, ‘We need regulations to protect the Internet,’ what they’re actually saying is they don’t really trust the entrepreneurs and Internet technologists to create the economic growth and to increase public welfare.”

Net Neutrality regulations don’t stifle entrepreneurs and technologists. Rather, they keep the network available for them. Net Neutrality reigns in big ISPs from exploiting their effective monopolies for increased profit and offering preferential treatment for other large companies who can afford to pay to play. It protects the consumer and the entrepreneur from big business.

In a very real way, keeping the government from regulating the Internet is simply paving the way for a few large private business to regulate it. There’s no way that ends well for small businesses and consumers.

All regulations are restricting someone else’s freedom. That doesn’t make them all bad. Net Neutrality regulations are all about preserving the freedom of the Internet. If you would rather trust AT&T, Time Warner, Verizon, and Comcast to keep your network a free and open egalitarian network… you’re more than a little naive.


SOPA on a Rope

SOPA-on-a-ropeThe current bill in Congress known as SOPA (Stop Online Piracy Act) or as it’s known in the Senate, PROTECT IP (Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property) is just beginning to get coverage in the non-technical press.  In draft, this was called the E-PARASITE Act (Enforcing and Protecting American Rights Against Sites Intent on Theft and Exploitation Act). Seriously, who names these things?

From the names, it all sounds like goodness right? Theft, exploitation, piracy, who wants that?  If only it were that simple.

The intent of the bill is to crack down on illegal online file sharing.  There’s ample room for debate about how damaging online piracy truly is, and whether or not it makes business sense for content providers to aggressively attack their customers, but that’s a topic for another day.  Even if we accept that online piracy threatens to destroy the music and movie industry (just like VHS tapes and writable CDs did), the proposed bill is absolutely not the way to go about preventing it.

There are lots of articles out there on why this is so.  You can read the bill yourself, or read others’ analyses here, here, or here.  However, let me try and boil down the basics for you.

The Great Firewall of the USA: Enforcement of SOPA will require the creation of a Internet filters by all domestic ISPs to control what sites you are allowed to visit. This may be well intentioned censorship, but it’s still censorship, and it puts the mechanisms in place for less benign intentions. Do we really want to head down that slippery slope?

Online Security: Let’s face it, once the firewall goes up, many of us will find ways around it. This will involve a combination of foreign or rogue DNS servers, proxies, or VPN services. It doesn’t take a lot of imagination to believe that once you start getting your Internet delivered through black market servers that your online security will be at greater risk.

No More Safe Harbors:  The current law allows web site owners some protection under the “safe harbor” clause.  That means that if you were to post a comment on this article containing some illegal content, the owner of the content could demand I take it down, and I would be obliged to do so. But if the owner wanted to sue for damages, he couldn’t sue me as the website owner.  Rather, he’d have to come after you as the one who posted it.  Under SOPA, that protection is gone.  If you upload a funny Big Bang Theory clip to Facebook, CBS can sue Mark Zuckerberg for damages. SOPA will undoubtedly result in far fewer sites taking on the risk of letting you post things on them. The web will become a lot less participatory.

Loss of Due Process:  This is perhaps the most egregious implication. Under SOPA, website owners are guilty until proven innocent.  Based only on an accusation of having illegal content on your site, anyone can demand that the ISPs block access to your site, and may further demand that all banks stop doing business with you.  Sure, you can appeal to the court, but that could take months or years to settle. In the meantime, you’re out of business.

As the major backer of SOPA, the entertainment industry is making lots of assurances that the provisions of SOPA would never be used for anything but the most noble of causes.  They are full of it.  These same people have already collaborated with the Department of Homeland Security and Immigration and Customs Enforcement to stretch the In Rem Forfeiture clause (allowing for the immediate seizure of property used in the commission of a crime) to include domain name seizures of websites with no warning or due process.  They are wielding this with a broad brush and have repeatedly seized domains eventually found legal by the courts, but by then put out of business.  Oops.

This whole SOPA mess has also created some strange bedfellows.  The tech community and most high tech companies have come out against it.  Along side them are Michele Bachmann and her Tea Party Coalition.  Ironically, the Tea Party and the Techies were on staunchly opposite sides of the Net Neutrality debate, so this is a somewhat uneasy alliance.

On the other side we find the Hollywood studios, music companies, and the organizations like RIAA and the MPAA that lobby for them.  We also find VP Joe Biden and several key Democratic legislators who have historically been supportive of anything Hollywood wants.  To her credit, Hillary Clinton has expressed some concerns about SOPA, and Obama claims to be on the fence.

To that end, Obama is currently taking input on the issue.  If you want to oppose the bill, go to the White House website and sign the online petition.  As of this writing, we are still a few thousand signatures short of the “pay attention to me” threshold.  Yes, you have to create a White House account to sign the thing, but it only takes a minute.

On the other hand, if you think SOPA sounds like a great idea and want to know how to support it, please write a long letter and mail it to your local animal shelter. They are always looking for material to line the bird cages with.

 


Printing money is not as crazy as it may sound

MacroeconomicsI am not an economist.  However, for reasons I dare not delve into too deeply, my lady finds discussions of economics a turn-on.  The downside is that now I not only have to compete with George Clooney and Toby Keith, but also with the likes of Ezra Klein and Brad DeLong.  If one of them ever develops tech skills, I’m toast.  In the meantime, “Get in line boys.”

As I’ve written in this space before, one of the damnable things about macroeconomics is that it is so blastedly non-intuitive.  Most of us are schooled or experienced in microeconomics (open systems), whether that be managing a household budget or running a business.  Macro, or closed systems like the U.S. economy, work on a very different set of rules and have a very different set of control levers to work with.  It’s abstruse stuff, and my hope is that maybe I can do a bit of the heavy lifting here, so some elements of macroeconomics make a little more sense.

Presidential hopeful Rick Perry made headlines this week for his statement that if the Fed decides to print more money, it should be seen as a treasonous act. Perry’s not alone here.  While most politicians are distancing themselves from claiming it’s treasonous, many are advocating that the Fed should not take further actions like “Quantitative Easing” to increase the money supply.

So what does all that mean?  Printing money out of thin air sure sounds like a dumb solution.  Doesn’t that just make my hard-earned money worth less? How would that help the economy?  These are all reasonable questions.  Questions which I’ve been struggling to get my own non-economist head around by reading what actual economists are saying.  The trouble is, folks like Matt Yglesias and Scott Sumner often write for an audience of fellow economic geeks.  And it’s often damn hard to wade through the jargon to figure out the underlying principles at work.  But I think I have a handle on it, and want to share my translation and understanding.

First, “printing money” is a euphemism.  No actual currency gets produced.  Rather, the Federal Reserve has a number of levers by which it can alter the supply of money.  Think of the U.S economy as the proverbial pie.  Each slice of pie represents a unit of money, like a dollar.  Increasing the money supply doesn’t change the size of the pie, but it does change the size of the dollar (slice).  If you carve the pie into more slices, then each slice has less in it.  “Quantitative Easing” is one of the levers the Fed can use to increase the size of the money supply.  And yes, the effect of this is to lessen the value of the dollar.

A weaker dollar seems like a bad thing.  It offends the American sensibilities to think of anything about us as weak.  But in cold economic terms, there are pluses and minuses to a devalued dollar.  A weak dollar doesn’t translate to a weak economy.  In fact, in our present situation, it could translate to a stronger one.  But first, a word about… inflation.

Another term for devaluation is inflation, a word that also sounds bad.  Inflation is especially troubling to those of us that lived through the 70’s and early 80’s where double-digit inflation was rampant.  We also saw the economic collapse of Argentina, Zimbabwe, and other countries because of hyperinflation.   But we need to remember that inflation is a lot like oxygen.  Too little can be just as deadly as too much.  Japan’s “lost decade” of the 1990’s was a period marked by very low inflation, economic recession, low productivity, and high unemployment.  Sound familiar?

Inflation in America has been at historic lows for the last couple of years.  The key is to find the sweet spot of around 3% and hold that.  In many respects, this is what the Fed’s job is.  It tries to maintain that small positive healthy inflation rate.  It’s a balancing act.  And an over-correction could send inflation spiraling in either direction.  This is primarily what conservative fear at the moment.  That an attempt to nudge inflation up will start a cascade reaction that will send us back to the 70’s.  No one wants that.  (Unless you’re invested long in polyester and hairspray commodities.)

But why is some inflation good, and why would a little extra be good right now?

In terms of the flow of money in an economy, the net effects of inflation in absolute dollars are a rise in the cost of goods, a rise in the cost of labor (wages), and a rise in value of assets (homes, stocks).  Granted, these don’t always rise uniformly.  Prices tend to rise ahead of wages, causing short term pain.  But wages do follow suit, eventually making the inflation kind of a wash.  Remember back in the early 80’s when getting a 10-15% annual raise was common?

What doesn’t change in a good way with inflation is cash.  In other words, if you’re sitting on a lot of liquid assets, those assets become worth less.   Who’s sitting on cash?  Well, big corporations are sitting on over a $1 trillion, and of course banks have a lot of fixed cash assets, not the least of which are all the mortgages out there.  If you’ve loaned out $100k at 4% for 30 years and inflation suddenly hits 5%, you’re losing money.

On the flip side, inflation would be great for consumers who are currently sitting on near record household debt.  As an example, many people are currently underwater on their mortgages.  Let’s say you owe $200k on a $175k house.  Inflation doesn’t change the amount you owe, but it does increase the value of the property.  So now you’re not underwater anymore.  Further, if you have a low-interest home loan, a higher inflation rate suddenly makes that nearly free money.  It doesn’t decrease your absolute debt, but it does decrease your relative debt, especially as your wages start to rise.

Finally, inflation also punishes people who are sitting on cash.  As almost everyone has said since the economy went south in 2008, we need cash to flow to stimulate the economy.  Think of money like the blood of the economy.  To the body as a whole, it’s less important exactly how much blood you have, than that the blood you have is circulating vigorously through your system.  The U.S. has an ample blood supply, but it’s currently pooled.  We need to get it pumping, and inflation helps that.

There are also advantages to America relative to the world.  A weaker dollar makes our goods cheaper to sell to other countries, and imported goods more expensive here.  This is an immediate boon to exporting companies.  However, given that we import a ridiculous portion of the goods bought in this country, it will drive the cost of those goods higher.  The good news is that there will be less incentive to design, manufacture, and service goods overseas, and that would mean more jobs for Americans as jobs start to come back onshore.  But again, that’s a short term pain for long term gain bargain.

Hopefully by now, you’re starting to think that maybe this whole printing money thing doesn’t sound quite so treasonous. Maybe you’re thinking it’s even worth a shot, or at least that it’s a perfectly reasonable tool to use.  Ironically, Rick Perry himself believes it will have a positive effect on the economy.

Perry said the central bank’s leader would be committing a “treasonous” act if he decided to “print more money to boost the economy.” Such action, the governor told a crowd in Iowa, would amount to a political maneuver aimed at helping Obama win re-election.

Perry is explicitly saying that increasing the money supply would boost the economy.  What he finds treasonous is only that he knows a better economy would help re-elect Obama.  All of which brings us to why increasing the money supply is politically unpopular.

  • It aids Obama’s re-election, so Republicans are opposed
  • It hurts banks so they are opposed
  • It hurts companies who have moved all their operations offshore, so they are opposed.
  • It raises prices ahead of wages and new jobs, so in the short term, voters will be opposed.
  • Voter anger and the resultant news cycles and Gallup polls will crucify incumbents, so they are opposed.

None of these reasons make increasing the money supply bad policy.  They simply mean that this is a situation where the needs of the many outweigh the needs of the few.  Unfortunately, the few are largely in charge of the policy.  However, the beauty of the money supply is that changing it does not require Congressional approval.  The Fed has the authority to act on its own.  Although the Fed is largely populated with people from the financial industries who appear to be way more scared of large inflation than lack of it.  But still, there is less of a barrier to action here than almost any other plan available.

Anything we do to fix the economy is going to cause some pain somewhere.  Increasing the money supply is perhaps the most actionable thing we can try.  It may be insufficient, and there are some risks involved.  But dammit, let’s at least do something.  I’m tired of our strategy being all hope and no change.


Forward to the Past

Current Conservative dogma is that Doc & MartyFederal government is bad.   The belief is rooted in the premise that it is the wrong level at which to govern.  Policy should be made at the state level, or better yet, at the county or town.

There is a visceral appeal to this position.  If government is about me, I want it close to me so I can be heard.  I don’t wish to be one of millions of voices, but rather one of hundreds or thousands.  That way, what’s important to me and my neighbors will get done.  Someone will care about me.

The result of this view is Conservative opposition to federal meddling in education, roads, health care, commerce, environmental conservation, banking, and almost anything else excepting the military.

And a century and change ago, this view made perfect sense.  But the world has changed since then, and policy needs to change with it.  In fact, decentralization is decidedly the wrong trend in today’s world.

Back in the day (circa 1900), you could spend the better part of a day searching your hometown for something made more than a few hundred miles away.  When someone left town, they moved to the next county.  Living your life in that time involved a largely local dependence.  Events happening half a continent or half a world away were interesting news items, but bore no real consequence on your life.

Look around your town or workplace today.  Try to find something of local origin.  Hell, try to find something strictly made in the USA.  Your dependence is easily national, and rapidly becoming global.  You may live in New York, but you care that roads are maintained in Kansas so that a truck can bring you a new Samsung TV.  Your car runs on imported oil.  Your new boss telecommutes from a different state.  And your Internet tech support comes from Mumbai.  Whether you like it or not, and even whether you realize it or not, you are dependent on a national and international infrastructure.  An infrastructure encompassing transportation, safety, education, economy, and much more.

Yes, local control is dwindling, but not because larger governments are usurping power.  Rather, it’s because where local governments used to contain all the dependent pieces, now larger governments do.  And effective management and control is only achieved if all the dependent pieces are under the umbrella.  The inevitable trend is toward consolidation.

Interestingly, this globalization trend has been recognized and embraced on the business side for decades.  No one is arguing that Microsoft should be broken up and managed as a loose confederation of state-specific companies. (“I’m sorry, you’re running Windows 7-Virginia, so I can’t read those files.”)  That the scale and scope of business and government should trend in opposite directions is nonsensical, and ultimately bad for both.

That said, there are still monumental dysfunctions in the way the federal government operates.  Early attempts at inter-country governments like the European Union or even the United Nations demonstrate that we are a long way from knowing how to govern effectively at scale.  The key point being that we have to set our collective mind to finding a way to make this scope of government work, and give up on the foolish notion that we can live in a 21st-century capitalist world, ruled by a 19th-century political system.