PolicyMic says There's a Good Reason Why Everyone's Criticizing Peter Schiff.
Jon Stewart's Daily Show mocked Schiff in an amusing video interview Wage Against the Machine. The video allegedly explores "the devastating economic effects of raising the minimum wage to the poverty level."
Schiff's opponent in the interview was Barry Ritholtz at the Big Picture blog. Before the show aired, Barry explained How I Ended Up On The Daily Show.
The feedback against Schiff was enormous. Ritholtz has the details in Follow Up: Daily Show Blowback.
Political Correctness Points
I am no fan of Schiff. We have radically different views on the inflation-deflation debate. And I do find the way he stated his case to be very distasteful.
That said, it's clear the Daily Show was out to score political points, not explore economic reality.
Given that Schiff was purposely displayed in the worst light possible and Ritholtz the best light possible (Ritholtz admits retake after retake) it is not shocking in the least to see all this blowback.
Merits of the Debate
Political correctness or not, I want a sound discussion of economic principles.
In a Shades of France Socialistic Proposal (my title), Ritholtz states "The most radical idea is bit of pure fantasy: Guarantee every person in America a minimum salary".
Indeed, let's hope that remains a fantasy because it's already proven if you give things away free, people able to work, will stop working.
Here's an important corollary: If you make people work, you end up with work that has no economic justification.
Campaign for a Bigger Paycheck
On January 2, a New York Times editorial, Campaign for a Bigger Paycheck, stated 'When you raise the price of employment, guess what happens? You get less of it,' said Speaker John Boehner, espousing a party-line theory that most economists agree has been discredited.
Someone Please Help New York Times With Econ 101
Actually, it's the New York Times editorial board that's discredited.
Caroline Baum, in one of her last articles at Bloomberg (she has gone on to other things and I wish her well), blasted that New York Times "discredited" fiction sky high.
Here is the pertinent snip from Someone Please Help New York Times With Econ 101.
This is one of the more outrageous political statements dressed up as economic theory from the editorial board of the New York Times. They should be ashamed of themselves.
If you learned anything from your Econ 101 class in college, hopefully it was the law of supply and demand. Lowering/raising the price of a good or service increases/decreases the quantity demanded. Similarly, producing less/more of something will raise/lower the price.
Isn't it about time opinion writers stopped using economics to justify a moral issue? Our hearts go out to those who can't earn a decent living, find a job, get laid off for no good reason or find themselves in harm's way. If we, as a society, want to provide support to those in need, fine. But the paper of record does a disservice when it makes wild, unsubstantiated claims about basic principles of economics.
Theory vs. Practice
Caroline Baum stated economic theory to perfection.
Let's now look at the economic law of supply and demand in practice as opposed to a biased political correctness in the way things were stated.
Annual Job Growth Rates Minimum Wage States vs. Non-Minimum Wage States
Here is a chart from the Institute for Research on Labor and Employment by UC Berkeley.
The chart shows lower job growth rates in states with higher minimum wages.
Bias Towards Believing Myths
I am sure you can find studies that allegedly prove or disprove anything, but things change over time and wages tend to go up over time so there is an inherent bias towards believing myths.
Europe and Excellent Backdrop for Discussion
Europe provides an even better look at the debate because of wide country-to-country variances.
Here is a rock-solid study of actual data by economist Steve Hanke, For Europe’s Youth, Minimum Wages Mean Minimal Employment.
Yesterday, in the wake of Tuesday’s State of the Union address, I poured cold water on President Obama’s claim that a hike in the minimum wage for federal contract workers would benefit the United States’ economy, pointing specifically to unemployment rates in the European Union. The data never lie: EU countries with minimum wage laws suffer higher rates of unemployment than those that do not mandate minimum wages. This point is even more pronounced when we look at rates of unemployment among the EU’s youth – defined as those younger than 25 years of age.
In the twenty-one EU countries where there are minimum wage laws, 27.7% of the youth demographic – more than one in four young adults – was unemployed in 2012. This is considerably higher than the youth unemployment rate in the seven EU countries without minimum wage laws – 19.5% in 2012 – a gap that has only widened since the Lehman Brothers collapse in 2008.
Comedy is Comedy, Reality is Reality
Hanke concluded with a piece of wisdom from Nobelist Milton Friedman: "the minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills. That’s what the law says."
I conclude with: Let's judge an argument based on merits, not on bias against the person stating it.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Via translation from Libre Mercado, the city council of Barcelona, Spain proposes €100,000 Fine on Owners of Empty Homes.
The City Council will fine owners of empty homes up to 100,000 euros. The proposal by the City Council commits the government to detect unused homes, starting with the banks.
The statement also reflects the Council's commitment to initiate disciplinary proceedings which could end up with three fines "of up to 100,000 euros" if homes remain empty. The municipality of Barcelona draw "Inspection Programs to detect, check and effects pointing this statement, in order to guarantee the right to housing of the population and to address the housing emergency."
With this measure, Barcelona joins other municipalities that have already approved the proposal of the PAH as Gerona, Tarrassa or Santa Coloma de Gramenet.
Scramble For Renters On
To get around this idiotic law, banks and other landlords will either have to tear down houses or quickly dump them at distressed prices. Both of those things will compound the difficulties of already stressed banks.
Alternatively, banks, other landlords, and owners of vacations homes will enter a mad scramble to find renters, at any price, to get around the occupancy restriction. An avoidance maneuver of that kind would stress rent prices and rental landlords.
Clearly, this is another one of those too stupid to make up ideas.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
As reserves run dry, demand for dollars soars in emerging market countries, prompting inane economic actions.
Via google translation from Libre Mercardo, please consider Argentina Cerntral Bank Bans Imports Due to Lack of Dollars.
The fourth day of falling reserves has the Argentine central reeling. This Wednesday reserves fell by 180 million and this month reserves declined by $2 billion. Due to demand and the low level of foreign exchange reserves, the central bank has stopped payment of imports, according to Argentine newspaper La Nacion.
"Almost all the customers who went to the bank did so to hoard dollars," claimed the cashier of a national bank to the southern newspaper.
"Today almost no imports were approved import" confided the head of the table of a major bank in the nation.
Argentina to Apply "Iron Fist" to Those Who Raise Prices
Via translation from El Economista, please consider Argentina Threatens to "Get Tough" on Businesses that Raise Prices.
Economic war has moved to Argentina. The Argentine government said it will apply an "iron fist" against the shops and businesses that raise prices following the sharp devaluation of the local currency last week, hoping to avoid tripping high inflation in the country.
Argentina has one of the highest inflation rates in the world, which in 2013 was around 25% according to private estimates.
Prices of products with imported components such as appliances and vehicles rose immediately after the devaluation. Moody's expects a devaluation of the Argentine peso 50% in 2014.
Before the devaluation, the Government launched a plan to fix maximum prices on about a hundred products sold in supermarkets. But the incentive is limited and includes products that are hard to find on the shelves.
Simple Rules
Fix prices too low and there will be no supply. Stores will not sell at a loss. Set prices too high and sellers will come out of the woodwork.
For an example of the latter, please see China Abandons Disastrous Cotton Stockpiling Program; Lessons Not Learned; What About Stockpiling Money?
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Here is an interesting video regarding the effects of Obamacare on all the employees at at Simonetta's auto repair shop in Pennsylvania. The video was made by a local TV station.
A couple premiums dropped, but most went up, some by huge amounts. In every case deductibles soared. Every person involved is worse off than before.
Link if video does not play: Employees in Pennsylvania Company Learn of Increased Health Costs Due to Obamacare
Partial Transcript
Jeff and Dave used to have a $1,250 deductible. Since Obamacare went into effect, it's now jumped 60 percent to $2,000. That's nothing compared to Brian, Kristi, and Judy who have kids. they are going to pay twice that, four grand."
"I don't know how President Obama thinks he's helping us because we can't afford this, we can't afford to pay these co-pays, to pay these deductibles on what we're making," says one of the workers.
Another worker adds, "They call it the affordable health plan. There's nothing affordable about it. I can't afford it."
Winners and Losers
Obamacare shifted the winners and losers.
A small number of people gained big (those with no insurance, those with preexisting conditions, and those who get free Medicaid). To pay for that, a large number of people lost, to varying degrees.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
A friend of mine who wishes to remain anonymous claims the following:
- Walmart employees (as a group) are often the biggest recipients of federal and state aid within each state.
- McDonalds employees are up there as well.
Specifically, my friend asks "Why are Taxpayers Subsidizing Big Mac buyers?"
His proposed solution is to raise the minimum wage to the poverty level, about $23,550 for a family of four.
My friend claims the employer, not the taxpayer will pick up the tab.
Seen and Unseen
My otherwise bright friend is not bright enough to examine the seen and the unseen costs and benefits of his proposal.
It's a given that those who are employed by McDonalds and WalMart will be better off, provided they retain their jobs.
That's a pretty big "provided". But it's far worse than that. Here are 10 things I came up with (and it only took a few minutes to do so). I am sure my list is incomplete.
- There are no proposals to reduce food stamps or any other government subsidies if minimum wages rise. Money allocated on food stamps and other subsidies will still be spent unless Democrats agree to cuts.
- Prices at WalMart and McDonalds will rise
- The higher the wages, the more pressure there will be on businesses to reduce the overall number of employees by other methods, including hardware and software robots
- The higher the overall costs (of which wages are a huge component), the fewer the number of store that will be built
- When corporations don’t open stores they otherwise would have, construction jobs are lost, shipping jobs are lost, merchandising jobs are lost, corporate income taxes do not rise as they would have, and property tax collection does not rise as it would have.
- Marginal stores will be shut.
- Employees at those marginal stores will be laid off .
- Shut stores pay no corporate income taxes or property taxes.
- Vacant stores are a form of blight. They reduce property tax collection and lower rent prices.
- Marginal store closings and refusal to open new marginal stores will most likely happen in the very neighborhoods most desperately in need of jobs and services.
Moreover, for all the bashing of WalMart, please note that it pays one of the highest corporate tax rates in the country.
Other Problems With Minimum Wage Laws
Minimum wages impair the liberty of workers and employers to freely enter into voluntary contracts. They are extremely unfair to unskilled and low-skilled workers, many of whom will either lose their jobs or no longer find any.
Young entrants into the labor force won't even have a chance to improve their lot by gaining job experience because they won't be allowed to offer their labor for less than the minimum wage, even if they want to. Instead they will become dependent on handouts.
Issue of Fairness
The government cannot wave its hand and order nature around. Economic laws will remain valid regardless of legislation and regulations. And that means that all those whose labor is simply too expensive at the new minimum wage will be priced out of the market, typically the lowest skilled and poorest workers. It matters not if anyone thinks that is 'fair'. It is simply what is going to happen.
Please consider points number five, nine, and ten one more time:
When corporations don’t open stores they otherwise would have, construction jobs are lost, shipping jobs are lost, merchandising jobs are lost, corporate income taxes do not rise as they would have, and property tax collection does not rise as it would have.
Vacant stores are a form of blight. They reduce property tax collection and lower rent prices.
Marginal store closings and refusal to open new marginal stores will most likely happen in the very neighborhoods most desperately in need of jobs and services.
The above points should be so obvious, my friend should be embarrassed with his simplistic "hike the minimum wage" solution.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Emerging markets continue to crumble, and the spillover on major economies is obvious. Problems always start somewhere, usually at the periphery.
Via translation from Lanacion, please consider Credit Is More Expensive.
Following the peso devaluation and sharp hike in interest rates by the central bank, interest rates on loans increased as much as 11 percentage points.
For a personal loan, private banks now charging at least 44% per year. Factoring in fees and other administrative expenses (up to 11 percentage points), the total financial cost exceeds 65% annually.
Public banks have with nominal rates for personal loans in pesos that range from 32% to 44%, with a total financial cost up to 55% annually.
Banks also shortened their terms and revised installments on credit cards
Is 65% a Good Rate?
If Argentina is in the midst of full-blown hyperinflation, then any loan rate is a good rate, because the peso will soon become worthless.
If banks believe that is likely, they may publish rates, but credit will completely dry up.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
