Category: Government

Why Economists Used to Agree on Minimum Wage

Fast FoodThe argument over raising the minimum wage rages on, especially as cities are now looking at increasing the minimum wage above the federal level, with New York City being one of the most recent examples. While this is a contentious topic for workers and employers, the issue has historically been a big yawn for economists. Previously, it was almost unanimously agreed upon by economists that higher minimum wage laws result in increased unemployment. But they are now changing their tune. Unfortunately, this isn’t because the economic profession was wrong on the minimum wage issue. It is because economics today is erroneously being treated like a natural science, rather than a science of logic and deduction.

In 1976, a survey by the American Economic Association found 90% of its members agreed that “increasing the minimum wage raises unemployment among young and unskilled workers.” Fast-forward to 1992 and only 79% agreed; by 2000 only 73.5% agreed and, of this subset, only 45.6% fully agreed with the statement. In a recent debate at FreedomFest, New York Times columnist and economist Paul Krugman stated he has changed his position on the minimum wage issue, noting “…looking at what are very clear experiments, you cannot find evidence that raising the minimum wage reduces unemployment.”

Krugman is just one example of economists increasingly relying on empirical studies to come to conclusions about the implications of public policies like the minimum wage. These empirical studies attempt to look at the unemployment data where the minimum wage was increased and then compare it to a similar or nearby area where it was not increased. While this may seem simple and intuitive at first, this is not how economic studies should be performed.

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Windy City Debt Scenario: Blown Away Yet?

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Chicago, one of the great global metropolises, is in a world of hurt…. serious hurt; so badly mangled that if left uncorrected, the Windy City, as it is affectionately known, stands to get blown to smithereens, just like it’s fellow city to the north – Detroit.

The crux of the issue boils down to a simple phrase: fiscal irresponsibility. It’s a storm system that has been building in intensity for years. And for me, a former Chicago resident, it elicits a deep sadness for the city I truly love.

Chicagoans have a term of endearment for the frigid, sub-zero winds that come howling in off Lake Michigan during the heart of winter. They call it “The Hawk.” This term applies equally well to the cold, hard, chilling facts associated with the fiscal ‘winter’ that the city is facing. A $1 billion operating shortfall, combined with a pension crisis registering at $20 billion. On top of that, the Chicago Public School system has a cool $1 billion shortfall along with a $9.5 billion tab for unfunded pension liability.

The warnings regarding the impending financial doom have long been there. In essence, they date back to 2003, a time when Chicago’s municipal budget was adversely impacted by the Great Recession. Making a dire situation worse, former mayor Richard M. Daley engaged in a number of questionable deals that accelerated the city’s debt load. The greatest mess has been Chicago’s pension system which is heavily mired in unfunded liabilty. Closely tied to this are the chronically upside-down Chicago schools that are closing and laying off teachers at an alarming rate due to funding deficits. What makes the school issue such a joke is the position being taken by the Chicago Teachers Union; namely, let’s dig in our heels and oppose any and all fiscal reforms that might help mitigate the debt situation.

China Attempts to Keep Stock Bubble from Deflating

Last month we wrote about the Chinese stock market bubble that was being inflated, largely by delusional retail investors and easy access to margin and debt. But it wasn’t as if something was in the water – Chinese Mom-and-Pop investors were being egged on by their government to invest in the market as the central planners tried to juice economic statistics, bail-out heavily indebted state-owned firms and turn attention away from the sagging real estate market.

Unsurprisingly, the government-fueled rally is coming to an end as both the Shanghai and Shenzhen Indices have crashed over 30% in less than one month! Approximately $3.9 trillion has been wiped out, more than the total annual output of Germany and 16 times Greece’s GDP, to put it in perspective.

Over 1,400 Chinese companies have suspended trading, which is almost 50% of the market.  Some of this is due to stocks hitting maximum daily decline limits imposed by the exchange, but much is due to the companies themselves halting trading. This is because these companies were using their own corporate stock to collateralize or secure loans from banks.

A correction of 30% would actually be somewhat normal and healthy in any market that has

9 Surprising Insights On Market Economies

 

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Whether face-to-face or on the Internet, stumbling across people with cool ideas has become a regular occurrence for me; perhaps none more captivating than Alex Marshall, Senior Fellow at the Regional Plan Association in New York and author of the book The Surpising Design of Market Economies.

As a self-styled investigator with a libertarian streak acquired early in life, Alex revels in trying to figure out how the world works. His propensity for asking deep questions – and refusing to take no for an answer – comes from his roots as an urban journalist.

Through his incessant wanderings, Alex has concluded that the foundations of conventional capitalism are formed by governments. These public entities, he says, form the basis for what we think of as ‘markets’ or ‘business’.

I asked Alex to expand upon the themes covered in his book by exploring ten surprising insights on market economies. Whether you agree with them or not, my hope is that you will find Alex’s views to be thought-provoking and fodder for mindful conversation.

1) On Writing the Surprising Design of Market Economies

I have always enjoyed offering ideas on how to make things work better and I felt as though there was an aspect of the world that I wanted to tell people about because it surprised me. My book focuses on how various economic entities work. The famous poet Robert Frost said it best, “If there is no surprise for the writer, then there is no surprise for the reader.”

2) On the Necessity of Good Government

Good government is more difficult to attain in the U.S. than in many other countries because there are so many layers to the system. We have state and local government bodies combined with counties, cities, towns, municipalities, school districts, water authorities and other entities. Then we have the federal government overlaying everything. This makes it very difficult for government to be responsive and flexible government. There is no doubt that our system of government could be operated better.

3) On Healthcare

As I say in my book, healthcare should be considered a form of public infrastructure: a right like public education. Yet there are certainly so many opportunities to screw it up, whether through government or private initiatives. When you really get down to the nitty gritty requirements of Obamacare, there are certainly numerous opportunities for making things worse. Hopefully, we can have a government that is responsive enough to ensure change in the healthcare landscape. This will likely involve modifying the healthcare system and continually working at it until we get it right.

4) On Libertarianism

In my youth, I was a libertarian. That was very appealing to me at the time because like many young people, my life was all about freedom and liberty; a variation of “Don’t tell me what to do.” I read the works of Ayn Rand and other writers who were libertarian in their outlook and who espoused the notion that you can do what you want and let the market take care of everything. While that all makes sense, it falters when you really probe at its roots because in reality, a libertarian society currently doesn’t exist. I’ve now moved past libertarianism, although I’m still kind of emotionally libertarian. I still don’t like the idea of government telling people what to do or restricting them. At the same time, we are a cooperative society, one where we need to work together politically, not just in the marketplace. We’ve got to make laws and policies and do so collectively, lest we end up with a dictatorship – something most people want to avoid.

5) On Anarchy

If they really indulge in self-examination, a lot of libertarians might come to the conclusion that they’re actually anarchists. The idea of getting rid of all government in favor of a society that organizes itself without a government, sounds appealing. It’s an interesting idea, but I don’t know if it’s feasible.

6) On Socialism

There is definitely a thread of socialism in my book. Personally, I am in favor of an economic concept called a mixed economy, where some things are handled socialistically and other things privately. Libraries, for example, are pure socialism because we have collective access to free books; all you need to have is a library card. While a few libertarians have a problem with this, most love libraries and their appeal. And from an author’s perspective, libraries are actually not so bad because they purchase a lot of books, often at the full market rate. The same goes with public libraries, schools, water, and roads. We are richer as a society because of all of this public infrastructure.

7) On the Private Sector

While the current economic climate has been trending toward the public, there is an incredible environment of creativity in private business that I would hate to see squelched. That’s why I am a staunch advocate for mixed economies; private business for creativity and entrepreneurial initiatives, aligned with a government that works well and does good work also. That’s the utopia that I envision.

8) On the Notion of Free Markets

I believe that this is a false concept because markets are underpinned by governments. You can’t have people buying or selling something without government creating the basic structure and the systems that make this possible. In the end, markets don’t exist without a government setting it up, running it and regulating it. Yet an exclusively pro-government view can be awkward and sluggish because the public sector tends to wield the club rather than paintbrush.

9) On Cities as Corporations

It’s really a fascinating thing. Cities are not just considered corporations, they are corporations. Historically, corporations have functioned as an artificial body or person created by state government. Cities are one of the oldest forms of corporations and actually have a much longer history than the private corporations we tend to think of today. In a sense, Google and the City of San Francisco are both the same thing, both being corporate bodies created by the state. IBM, Apple and other private companies are descended from the type of corporations that created cities. So it would behoove us to remember that corporations are essentially government creations, created with the intent of benefitting the public. And instead of regulating corporations, the focus should concentrate more on designing them better.

Alex Marshall is a Senior Fellow at the Regional Plan Association of New York. His work has appeared in the New York Times Magazine, Metropolis, Planning, the Washington Post, the Boston Globe, Slate, Salon, and many other publications. More on his book can be found here

Michael Scott is a writer and book publicity baraista located in Denver. His work can be found at http://allthatbookjazz.com

The Problem with Capital Controls

Grexit Greece Euro CrisisGreece continues to face a potential default by the end of this month, prompting many Greek citizens to withdraw their savings from banks. This in turn has led to intensified calls for capital controls. Capital controls are seen as a necessary action by many banks and government finance ministers. However, they are not a solution to the underlying problem and will only create more distortions and economic problems the longer they remain in place.

Greece’s IMF repayment is due by the end of this month, and if a deal with their creditors is not reached they will likely default. The possibility of default or removal from the Eurozone has caused many Greek citizens to withdraw their savings for fear of bank closures or currency devaluations.

Still Waiting for a Rate Hike

federalreserveThe Federal Reserve and FOMC concluded their two day meeting on Wednesday and announced they would be keeping interest rates near zero. This was expected, of course. What is causing anxiety for market participants is the continued question of when the rate hike cycle will actually start. Today’s decision continues to drag out the anticipation and fuel the debate. In this article, we will first look at the facts of today’s announcement and then analyze the options the Fed is currently facing and the implications for the markets.

Although a rate hike was technically possible, almost all pundits and economists knew that was not going to happen. Instead, the main focus was on any indications by Fed chairwoman Janet Yellen concerning when or if rate hikes would be coming later this year. In this regard, it seems the Fed