Increasing the Minimum Wage

The off year elections are over. Chris Christie of New Jersey stokes his Presidential
prospects by cruising to a win as Governor of New Jersey. Bill DeBlasio, an unabashed
tax and spend liberal, kicked the stuffing out of his Republican opponent to become
mayor of New York City.

The most interesting election result to me, however, was a referendum in the city of Sea-
tac, Washington. Seatac is in the Seattle metropolitan area. It gets its name from the
Seattle-Tacoma airport (Sea-Tac), which occupies about 25% of the land area of the city.
Seatac has what is described as a working class population. This probably means that
housing is cheap, so households in the bottom half of the income distribution can afford
it. The tradeoff is that every time a jet lands the windows shake.

The good people of Seatac just passed a law mandating a $15 per hour minimum wage,
the highest in the country. Seattle’s current minimum wage is $9.19, while the Federal
minimum wage is $7.75 an hour. So fast food workers at the airport who live in Seatac
just voted themselves a 63% raise.

The activists behind the campaign to increase the minimum wage were tactically brilliant.
The increase is limited to airport related businesses, and restaurants with more then 10
employees. This means most of the increased costs are being shoved onto travelers who
can presumably put the bills on their expense accounts. Since the area around Seatac is
already pretty built up, businesses will have a hard time relocating to just outside the city
limits to avoid the higher wage costs.

This is a classic union organizing tactic: target a large, immobile concentration of capital
assets. If the capital can’t move, then labor can organize to capture a larger percentage of
the economic value created. In the ‘30’s it was steel mills. Now, the capital asset is the
airport.

This will be a large scale experiment on the effects of a big increase in the minimum
wage. We should see a flow of marginally higher skilled workers across the boundary
of the city line, as better workers apply for the higher paying jobs, and businesses eject
less skilled employers in favor of superior applicants. Some of the Seatac residents who
voted for the increase may find themselves on the losing end of that transaction. Be
careful what you wish for.

We should also see a decrease in the number of employees, as businesses work to reduce
their higher labor costs. One of the most interesting results to watch will be the effect of
the higher minimum wage on people who now make between $10 and $20 an hour. If
you are making $12 dollars a hour today, do you accept your $3 raise and go on? I think
it far more likely that you go back to your boss and demand a bigger raise.

I can hear the conversation now: “Why should I work this (fill in the blank) job. I can go
to McDonalds and get the same money.” And because businesses have to compete for
even moderately skilled workers, wage scales will increase from top to bottom. What
I don’t know is whether the push back will be based on a fixed dollar gap or a fixed
percentage gap.

In other words, does the guy who is making $15 an hour today ask for a 63% increase to
$24.45? Or will he settle for a $7 increase up to $22.

One thing is for sure: I'm glad I don't own a business in Seatac

Obamacare and Private Insurance

Despite being repeatedly told that you can keep your health insurance coverage if you like, hundreds of thousands, if not millions of Americans are getting cancellation notices in the mail.  It turns out that a lot of health insurance in the private market doesn't meet the definition of what the political appointees at HHS consider adequate coverage.

Maybe the problem is that it does not cover what the regulators think it should.  Because everyone, and I do mean everyone, needs maternity coverage.  If you don't believe me, just ask them.

Or maybe the deductible is too high.  The news coverage I have read is that the limit is $6000.  Higher deductibles than that are being outlawed.  I guess if you have $6000, and are in perfect health, that doesn't really matter.  You can't accept that risk in exchange for lower premiums.  Because someone in Washington decided they knew better than you.

Predictably, many of the people whose policies are being cancelled are finding out new coverage will cost considerably more going forward.  However, they're being told they shouldn't complain, because their new coverage is better, even though it costs more.  It covers more conditions, and kicks in earlier.

This reminds me of what the cable company tells me when they raise my price every year.  "Sure, our price went up 6%.  But look how many more channels you are getting."  News flash for you, buddy: I neither need nor want twelve versions of the Golf Channel.  Golf Grudge Match channel: this time it's personal!  What's up with that?

That's what you get when you hand things over to a monopoly.  And at least I can understand the reasoning of the cable company.  They're trying to maximize their profits.

But Obamacare was advertised as the way to lower prices.

Further Thoughts on the Shutdown

There has been a lot of news coverage of the terrible “costs” the government shutdown imposed on the US economy. The number I have been seeing the most is $24 billion. The ratings agencies have tossed out an estimate that the shutdown reduced 4th quarter growth from a 3% rate to a 2.4% rate. The subtext of all these reports is clear: “Evil Tea Party Republicans! Bad Republicans! Bad! Bad!”

 Let’s just do some back of the envelope calculations. The overall size of the US economy is around $16.6 trillion, or around $45 billion a day. Over the sixteen days of the shutdown, $24 billion works out to $1.5 billion a day. So whoever came up with the $24 billion number figured that a partial shutdown eliminated 3.3% of the American economy during that period.

 When you dig further into the numbers, the estimate for lost economic activity seems to boil down to two factors: reduced travel bookings, and the shutdown of the national parks. It does not include lost wages for Federal employees, because they were given back pay. Some contractors presumably had some lost time, but I have not seen those numbers broken out. The big enchilada is the reduction of business at the national parks. Now, the local communities undoubtedly suffered a loss of business during the shutdown period. But what the analysis ignores is the substitution effects caused by the park closures.

 The simplest way I can explain substitution effects is through an example. Have you ever gone to the multiplex to see a movie, only to find out that the movie you went to see is sold out? Every time this has ever happened to me, I pick another movie to see. I substitute one product for another. Notice, from the point of view of the hit movie producer, they have lost a sale. I didn’t go see the hit movie. But from the point of view of the producer of the plan B movie, they gained a sale. From the economic point of view of both myself and the movie theater, there was no change at all. The theater sold a ticket, and my wallet was lighter by the same amount.

 In this example, there were winners and losers, but the overall amount of economic activity was unchanged. Even if you don’t choose another movie, you’re already out of the house. You may go to a bar. You may go out to eat. You may go shopping. A rational person would conclude that consumers will substitute an alternative form of entertainment for the lost opportunity to see the hit movie.

Tourism, like all forms of entertainment, is a redistributive form of economic activity. No new wealth is created. Instead, wealth is transferred from those who have it (the tourists) to those who want it (the vendors). Change entertainment venues, and you have different winners and losers. But the net amount of wealth remains the same. Government statistics do not measure wealth; they measure activity. But even on the activity side, without an accurate measurement of the substitution effects, it is not possible to blithely announce that the economy suffered a significant loss because of the shutdown.

Thoughts on the Shutdown

Well, the government shutdown is over and the debt ceiling has been raised.  This was an unmitigated defeat for the Republicans.  What the Democrats got was Obamacare is being funded, and the expansion of Medicare is going to be a reality.  What the Republicans got was a drubbing in the court of public opinion.

The conventional wisdom is now that the party that shuts down the government, or does not agree to raise the debt ceiling, will end up the loser in the fight.  The Democrats will now use this to expand the scope and scale of the Federal government.  It will work like a ratchet: whenever possible, the Democrats will create a new entitlement.  Then, to be fiscally responsible, taxes will have to increase to pay for it.  If you don’t want to be fiscally responsible, that’s okay, because the Chinese will be happy to loan us the money to pay for the goodies.  What could go wrong with that?

Since we are going to go through this again in three months, the Republicans are going to have to change their game plan.  One possible change is that they just go along with whatever the Democrats suggest.

But I think they could learn from their defeat.  On a tactical level, here are the things I think the Republicans could do the next time around:

1)    Hook together raising the debt ceiling with defunding entitlements.  Fiscally responsible people don’t default when they don’t have to.  The Republicans thought that threatening default increased their leverage.  Instead, it worked the other way around.  Next time, make the Democrats reject the extension of the debt ceiling, and precipitate the real crisis.  Remove the entitlements, and the debt will take care of itself.

2)    Redefine the National Park Service as an essential government service, just like the military and the air traffic controllers.  The primary means of inconveniencing the public during the shutdown was the closure of the parks.  Keeping them open makes it really hard for media stories about how bad the shutdown is to gain traction.  What is they gave a shutdown, and nobody outside of DC noticed?  After all, it was really only a partial shutdown.

3)    Resist the urge to retroactively pay furloughed workers.  That way, you can shape the narrative into how much you are saving the taxpayers every day.  The message is “We saved over $1 billion today.  Did you miss anything you really needed?”  

The philosophical divide between the two parties is deep and profound.  The Democrats want to increase the size of government, and increase taxes to pay for it.  The Republicans want to shrink the government, and use the money saved to cut tax rates.  We are going to dance this dance again.

The Government Shutdown and Obamacare

The current Federal government shutdown is due to House Republicans unyielding opposition to Obamacare.  This desire to repeal the law is so strong tat they are willing to shut down the government to force the issue.

What the Republicans have not done is present a clear case for why their opposition is so strong.  Lacking that clear communication, the story that has emerged is presented as mere partisan bickering.  The Republicans just say no reflexively to everything the administration proposes; that’s the way the story runs.

But maybe “just say no” isn’t the whole story.  Maybe there is a reason to think that Obamacare should be opposed, and that the implementation should not go forward.

Let’s try this: Obamacare is going to create a gigantic new entitlement program, and massively increase the size of the Federal deficit.

We all know that the Federal government spends vastly more than it takes in (hence the upcoming fight over the debt limit).  Most of us know that funding demands on existing entitlement programs like Social Security and Medicare are going to grow, as the baby boomers age out of the workforce.  Solving these problems of sustainably funding entitlements is a huge political mess, largely because there are big segments of the electorate who are feeding at those troughs.  Among the list of sure fire ways to get elected, you will not find cutting benefits for the people who cast votes.

Knowing that the government is already overcommitted with unfunded mandates makes it a colossally bad idea to add on another unfunded mandate.  When you have dug yourself into a hole, the first step toward getting out of the hole is to stop digging.

Obamacare requires everyone to buy health insurance.  However, for people with lower incomes, there will be subsidies from the government.  Those subsidies were originally supposed to be funded through a series of revenue raising functions and cost saving changes in the health care system.  This article from Real Clear Politics details how many of the revenue enhancements and cost savings are already falling apart.

The bottom line is that it is increasingly apparent that full implementation of Obamacare is going to accelerate the growth of the Federal deficit.

Obamacare.  ‘Cause when a shovel is too slow, try digging with dynamite.

Turning of the Tide

Last year a major milestone for the global economy passed, all but unheralded.  In 2012 the working age population of China peaked.  This population is defined as the number of Chinese between the ages of 16 and 60.  There is a smaller pool of workers this year than there was last year.  That number will decline again next year, and every year after that for the next couple of decades.

This decline is the inevitable result of the one child per family policies put in place decades ago.  And the process is unstoppable.  Even if the Chinese government were to relax its population control policies tomorrow, and Chinese women to immediately react by having more kids, it would be at least 17 years before that increased fertility would begin lifting the number of workers.

This is a major milestone because China has become the world’s go to location for manufactured goods.  Export of manufactured products has powered the unprecedented growth of the Chinese economy.  However, two processes are about to collide.  As  the Chinese economy gets bigger, it is starting to generate more internal demand.  At the same time, the pool of labor is beginning to get smaller.  More demand for a scarcer resource inevitably means the price of that resource gets bid up.

We are already seeing that process starting.  In the southern coastal regions, which have been the major manufacturing areas, wage increases of 10% to 24% have been reported.

For the last ten years, powered by a seemingly inexhaustible supply of cheap labor, Chinese manufacturers have taken market share away from domestic producers.  Chinese made products have taken over whole industries.  This has been great for consumers, who have benefited from low prices, but for American manufacturers, it has meant layoffs and plant closings.  There are now signs of this process reversing.  Motorola has opened a factory in Texas to start making cell phones.  And Apple Computer has announced plans to begin making some computers in the US again.  GE is moving more production of appliances back to the heartland.

Of course, China is not the only low wage country out there.  Vietnam, India, the Philippines—the world is awash in low cost labor.  Also, if Chinese workers decide to stay in the labor force past age 60, the erosion in the size of their labor force will stop.  Still, as an American manufacturing manager, the last ten years have been like watching the tide go out, with every year bringing tighter margins and fewer opportunities.  So I can be forgiven for taking Chinese demographics as a hopeful sign.

Maybe we’re seeing the turning of the tide.

Defining Poverty

There is a great deal of discussion in this country about the poverty line, and the percentage of the population that lives below the poverty line.  In the debate about increasing the minimum wage, the issue is often couched in terms suggesting that the minimum wage should be high enough for a single wage earner to earn over the poverty line for a family of four.

In an earlier post, I pointed out that with current Federal antipoverty programs, one wage earner can get a family above the poverty line.  In this post, I want to look at a different question: where does the poverty line come from?  We say that a family of four that has less than $23,450 of annual income is living in poverty.  How do we make that determination?  It turns out it is not hard to find that information.

In 1963-64, an economist with the Social security Administration, Mollie Orshansky, made the first official definition of poverty.  Her methodology was simple.  She took a Department of Agriculture economy food plan that listed how much a person should eat during a week (3 lbs. of milk and cheese, 2 lbs. of meat, 5 eggs, etc.).  This amount of food was added together for various family sizes, then the cost was calculated.  Orshansky then multiplied the dollar cost of the food by a factor of three.  That was the definition of the poverty level adopted in 1965. 

Where did the factor of three come from?  In 1955, the Department of Agriculture did a survey that showed families of three or more persons spent about a third of their after tax income on food.

In 1969, this poverty line was indexed to changes in the consumer price index (CPI), so that it increases with inflation.  Other then minor changes regarding issues such as the distinction between farm and non-farm families, the formula has remained constant since then.  You can find this history here.

The problem with a static definition of poverty is obvious.  It does not take productivity growth and technological change into account.  Long term productivity growth means you can buy more stuff with less money.  For example, in 2011 Americans spent only about 8% of their income on food, tobacco, and alcohol combined.  That number reflects a remarkable shift in spending patterns over the last 50 years.  The money not spent on food is deployed in other ways.  For example, only 18% of household below the poverty line do not have air conditioning, and some of those people live in Alaska.  Television ownership is almost universal in our society.

Those in favor of more government intervention in the economy often cite poverty statistics to demonstrate that the government needs to do more giveaways of other people’s money.  I would argue that a bad definition of poverty leads to bad policy making. 

After all, if “poor” people are 50 pounds overweight, and walking around with smart phones, TVs and iPads, doesn’t that indicate that the “war” on poverty has been pretty much won?  Maybe we can declare victory and go home.

Unemployment Statistics

The official jobs number came out last week.  The news about employment was so-so at best.  The economy added about 170K jobs lat month, but the number for the previous two months were revised downward, meaning total employment didn’t increase by all that much.  Meanwhile, another 50,000 people dropped out of the workforce, presumably because they were discouraged by their inability to find a job.  The official unemployment rate declined to 7.3%, still too high a rate for anyone to start uncorking the Champaign.

The anemic recovery in the job market has spawned a host of commentary over the unemployment rate and how it is measured.  Most of the commentary focuses on how the statistics are under counting the unemployed.  I have seen estimates that calculate the unemployment rate as high as 16%.  To reach that number you have to include everyone who is working part time, everyone who has dropped out of the workforce, and everyone who considers themselves to be paid less than they think they are worth.

Against all the statistical hand wringing I can only counterpoise a couple of anecdotes.

I have a relative who graduated from college a little over a year ago.  He worked for a few months on a political campaign.  After the election, he spent a couple of months at a nonprofit, then followed that up with an internship.  None of these paid much more than minimum wage.  However, he landed a position with a retail company a few months ago.  The initial reports are that he is hitting his stride in his first real full time job.

In my church, I knew a senior manager who lost his position when his plant closed.  Despite excellent qualifications, he struggled to even get interviews.  But recently, he let me know that he had just started a new job as the second shift plant manager at a local company that is expanding.  It is not the equivalent of his old job, but it is stable employment, even if it is a step back down the career ladder, probably till the end of his career.  He spent over a year on the unemployment line.

Finally, I ran into a friend last month, who let me know about her husband’s job search.  He has just started at a new company, in a similar position to the one he lost two years ago.  He has a longer commute, but reckons that a small price to pay to be back in the game.

One of the threads that connect all three of these stories is persistence.  None of them ever gave up, despite all of he discouragement that a modern job search entails.  The other thread is flexibility.  All three made compromises of one form or another to get the job.

I guess the arguments about the proper way to measure unemployment are important.  But is seems to me that what is really important is whether you have a job.  And in getting one of those, persistence and the willingness to accept what the market is offering trumps any discussion of whether it is a “good” job market or a “bad” job market.

Skills Development

My company is adding some new product lines in the next couple of months.  Preparatory to starting production, I was entering all of the components and assemblies into our inventory database, and creating the codes that will manipulate that inventory.  It was a task that combined the need for exacting precision with mind numbing tedium.

Since I am fairly high up the food chain where I work, that got me thinking about whether the task I was working on fit the category of “highly skilled” work.  I concluded that it was.  Although the actual data entry was clerical in nature, navigating the systems and knowing what to input raised the skill profile.  I certainly could not have off-loaded the task to a clerk.  This led me to consider more generally the question of what constitutes a skill?

My model for skills involves the interaction of three separate components: education, talent, and experience.  Education includes everything from literacy and numeracy, through higher education.  It also encompasses task specific training.  This can range from simple job instructions like “Push this button.  Then when the green light flashes, open the mold, pull the part out and put it in the bin.” to brain surgery. 

Experience is the second part of skills.  Often times, training will cover the simplest and most basic scenario for a given task, or set of tasks.  Experience is what you get from the myriad variations that arise over time.  Also, experience provides the repetition that pounds home and cements the gains that training initiates.  The broader the range of experience you can build around a given task, the higher your skill level can get.

Talent is the wild card for skill development.  I could train with a coach for ten years, and never get within a million miles of NBA caliber basketball play.  We’ve all seen bad actors, and we’ve all seen actors who seem to effortlessly create memorable characters.  Talent is the difference.  But talent applies to every field, not just athletics or creative work.  I’ve seen factory maintenance mechanics who can take apart a piece of equipment, figure out what is wrong, and solve a problem, all without ever having worked on that particular piece of machinery.  I’ve known plenty of other mechanics who will work on equipment all day long, without ever actually solving the problem, if they’ve never had that particular problem arise before.  The difference in their work performance is due to that ineffable something called talent.

Talent also encompasses personality traits.  Part of my stock in trade is that I am willing to accept responsibility for the work that other people do.  A lot of people will not accept that responsibility.  That lack makes it tough for them to manage other people.

What does any of this matter?  Well, in an ever-changing economy, the only job security we can muster is by constantly upgrading our skills.  You can’t really do much about your talents.  You either have them or you don’t.  But you can know your talents.  If you combine that knowledge with ongoing education, and seek out an ever wider range of experiences, you can keep increasing your skills throughout your career.

Minimum Wage and Poverty

President Obama is supporting a significant raise in the minimum wage, currently $7.25/hour.  The President is advocating an increase to $9.00 an hour, a 24% increase.  The applause line in his speeches on the subject is “no one who works a full time job should have to live in poverty.”  Cue the cheering.

This is actually a claim that can be numerically checked.  So let’s run the numbers.

If you work 40 hours a week for 52 weeks, that comes to 2080 hours.  At $7.25 per hour, you would receive an annual income of $15,080.  But really, nobody gets through a whole year without missing a little work.  Let’s use a more realistic 1800 hours a year for our calculations.  That gives a minimum wage income of $13,050.

Next, let’s check what the official poverty level is.  A quick search provides the following numbers for 2013:

Family of 2: $15510

Family of 3: $19530

Family of 4: $23550

On the face of it, things look like the President may have a point.  Based on the information presented so far, a single mother with even one kid could work full time at minimum wage and still live below the poverty level.

Before we concede the point, however, we need to consider the impact of Federal tax policy, specifically the Earned Income Credit (EIC).  This is money the government gives to low income people, like those making minimum wage.  With $13,050 in wages and one child, the EIC pays out $3169.  With two children, the EIC payout is $5236, and with three children it tops out at %5891.  Things aren’t looking so bleak for our single mother anymore.

But as the old Ronco informercials used to say “Wait, there’s more!”  We haven’t considered the Additional Child Tax Credit yet.  This Federal benefit pays $1000 per child for up to three children.  Once we add the Federal benefits in, the picture changes completely:

Family of 2: $13,050 + 3169 + 1000 = $17,219

Family of 3: $13,050 + 5236 + 2000 = $20,286

Family of 4: $13,050 + 5891 + 3000 = $21,941

The single mother with three children is still below the poverty level, but with one or two children you are now above the line.  Once you plug in food stamps, and maybe even child support (after all, our single mother wasn’t alone when the children were created), and I think you can call the President’s myth busted.

I’m not saying that it wouldn’t be tough to try and make ends meet when you’re close to the poverty line.  I am saying that the claim that you can work full time and still be below the poverty line does not hold water.

You Want Fries With That?

A series of small strikes occurred in several major cities last week.  Strikes is probably too strong a word, since they were more like protests.  The targets of the demonstrations were fast food outlets.  The demonstrators were employees of fast food restaurants.  The object appears to be both trying to organize unions, and to protest for higher wages.  The target wage desired was an eye-popping $15 an hour.

If by some bizarre chain of circumstances these strikers would actually gain their chief demand, they might not like the consequences of their “victory.”  I have seen estimates for the fast food industry that claim labor costs run from 25% to 50 % of the total cost of operation.  Doubling labor costs would require a substantial increase in prices.  Good-bye dollar menu items.

Axiomatically, when you increase the price of a good, volume sales for that good drop off.  If something costs more, fewer people will decide that it is worth buying.  Economists call this shifting upward on the demand curve.  Now, a drop off in demand for fast food maybe a good thing for society as a whole.  With the obesity epidemic, we could all stand to eat more salads, and fewer French fries.

A good thing for society, in this case, would be a disaster for the fast food restaurants, and by extension, their employees.  If you are selling fewer hamburgers, you don’t need as many hamburger flippers.  Hours would be cut and positions eliminated.  Maybe the demonstrators don’t care.  Maybe they figure that they’ll still be ahead, even if they work less, because of the increase in wage rate.

The next shoe to drop would be management’s response to higher wage rates.  When the cost of a production input rises, a prudent response would be to start working on ways to use less of it.  In Australia, where the minimum wage is significantly higher than over here, McDonald’s is already using touch screens for ordering, eliminating the need for cashiers.  They may bring those over to America anyway, but higher wages improves the case for a faster rollout.  When they arrive, not everybody protesting would survive the ensuing cutbacks.

Certainly demand for fast food workers would drop if wages were to shoot up.  But another factor that I don’t think the protestors have considered in making their demands is that the supply of ready workers would also increase.  Anytime you increase the price paid for something, like an hour of labor, the number of providers willing to supply increases.  Shifting upwards on the supply curve is the exact opposite of shifting upward on the demand curve.  Increasing the price offered leads to a drop in demand.  Increasing the price taken leads to an increase in supply.

Fast food restaurants are both the entry level job and the employer of last resort.  No education beyond the most basic level, and no special skills are required.  The work is not particularly physically demanding.  Increased experience does not benefit you in performing the job.  Flexible scheduling on the part of the employee is allowed and even expected.  All of these factors have allowed fast food employers to keep wages low.  The current fast food employees are the beneficiaries of the low job requirements.  What I am saying here is that these people are working at fast food jobs because they cannot get better positions with other firms.

If you increase wages sharply, however, lots of applicants who would not consider fast food jobs now would give it a second look.  People with better education, better work ethic, higher capabilities.  Now ask yourself: if you were an employer, would you want to retain employees with low capabilities when you could replace them with better employees?  Or would you begin looking for pretexts to trade up?

I don’t know that new employees would squeeze existing fast food workers out if they did get the big raises they’re asking for.  But I’ll bet the demonstrators never considered the possibility.

You really need to be careful what you ask for.  Sometimes you won’t like it so much after you get it.

Cheating Malthus: Egypt

It has been disheartening to watch the news from Egypt over the last couple of weeks.  The elected President Muhammed Morsi was deposed by the military.  The generals have installed a caretaker government, and promised new elections in the near future, but the lesson is clear: any new President has to keep the generals happy.

A friend asked me how things fell apart so fast, after the hopes raised by the Arab Spring movement that toppled the Mubarrek government, and allowed for free elections for the first time.  My response is that democracy doesn’t necessarily solve problems.  The question for me is whether any form of government can solve Egypt’s underlying problems.

The population of Egypt is around 84 million people, and the land area of the country is about the size of the state of Texas.  That would lead to a high population density, but it does not really tell the story.  Most of Egypt’s land area is desert, with almost no one living there.  Instead, the vast majority of the people live in the Nile valley and delta.  The arable land area of Egypt is only about the size of Maryland.

Egypt does not produce enough food to support itself.  Without significant natural resources or manufacturing industries, the primary means of raising foreign currency to buy food on international markets is tourism.  Even if all the recent unrest hadn’t caused tourism to tank, it still does not pull in enough wealth to support the population.  In recent years, as numbers have increased, the slices of the economic pie shared by the poor have continued to shrink.  Unemployment is rampant, and a significant percentage of Egypt’s population spends up to half their income on food.  The phrase “your daily bread” has real significance to many Egyptians.

This deep and worsening poverty is the true root cause of the political unrest in the country.  The hope was that, by electing a new government, more economic opportunities would arise.  The problem is that although governments can redistribute wealth, they are not very good at creating wealth.  Expectations were high, and the Morsi administration failed to deliver.  Although Morsi made significant missteps, it is hard to see what another administration would have done differently on the economic front.

One of the truisms of foreign policy is that you can’t solve political problems through military means.  It seems every generation of leaders has to relearn this lesson, as we have found to our sorrow in Afghanistan and Iraq.  I want to suggest a corollary for domestic policy.  You can’t solve economic problems by political methods.  With the miserable track record of stimulus spending and quantitative easing that we have seen in this country, that should be no surprise.  The Egyptians, to their sorrow, appear to be learning that lesson themselves.

It is disheartening to watch the democratic gains of the Arab Spring falter.  But it is not surprising.

Why Stimulus Fails

Entropy is the tendency for ordered systems to become disordered over time.  The second law of thermodynamics says that entropy affects all closed systems over time.  Clocks wind down.  Batteries go dead.  Fires eventually burn themselves out.  The amount of useful work that can be performed is always less than the stored energy available at the starting state.

What is true in physics is also true in economics.  In economic terms, wealth functions as a kind of stored energy.  As wealth is deployed, some of it is continually lost to entropic effects.  This sounds more complicated than it really is. 

Consider your weekly grocery shopping.  When you buy food, you are converting wealth from one form (money), into a different form (groceries).  At the end of the week, however, you have less wealth, since you no longer have either the money or the groceries.  Where did that wealth go?  You ate it, of course, and the food was burned off in your metabolism.

I think entropy has a lot to do with why unemployment is still so high, and the economy so fragile, even though we have had massive government stimulus through transfer payments during this recession.  Government programs like food stamps, extended unemployment benefits, Medicaid expansion and the like have all gone straight into consumption.  No new wealth is being created by any of these programs.

Once the stimulus is removed, economic activity drops off again.  In order to have lasting effects at growing the economy, the government should be focusing on creating wealth, instead of merely propping up consumption.

Not a lot of votes in that, though.

Graduation Speeches

The last couple of weeks have been the season of college graduations, and we all know what that means: commencement speeches.  A number of schools will score high profile speakers from the worlds of entertainment, media, and business.  Sometimes the speaker has mastered all three (see Winfrey, Oprah).  Many of these high profile speakers will provide career advice along the lines of “follow your dreams” or “do what you love to do, and the money will follow.”

What a load of malarkey.

If we all followed advice like that, the job market would collapse, and society would soon follow.  Nobody grows up dreaming of the day they’ll be able to go to work washing dishes in a restaurant.  Yet every restaurant needs somebody to wash dishes.  Conversely, the number of video game testers is ludicrously small.  Yet there are legions of youngsters whose passions are sleeping late, playing video games, and drinking beer.  Plenty of those individuals are doing what they love, having moved back in with their parents after college.  We don’t need to be advising the most recent set of graduates to join them.

The job market exists to match what people are both willing and able to do, with what employers need, and are able to pay.  The idea that we are going to be a nation of entrepreneurs ignores the fact that the vast majority of new businesses fail, leaving behind nothing but the debts incurred to raise start up capital.

Here’s my advice to graduates:

Get a job.  Any job.  It is easier to get hired for a new position if you already have a paying gig.  Work hard, and focus on making your boss happy.  If you consider that “selling out,” too bad for you.  I consider it smart.  After a couple of years, start looking around for a new position that suits you better, either inside or outside of your current employer.

While you are paying your dues, learn as much as you can in as many areas as you can.  For the remainder of your career, continue to increase and update your skills.  That is your stock in trade to sell in the job market.  Meanwhile, take advantage of your 401K, and save, save, save.

For most of us. It’s hard to indulge your dreams without a ready supply of cash.

Winter is Coming

I recently started watching the hit HBO series Game of Thrones. I’m watching it on DVD, starting with season 1, episode 1, and working my way forward. The series concerns the dynastic struggles of a series of noble houses, set in the fictional kingdom of Westeros, a medieval fantasy realm.


One of the noble houses, the Starks of the North, have the familial motto “Winter is Coming.” In the context of the series, the constant awareness of a cold, bleak future engenders a certain dourness of outlook, a dogged determination to perform one’s duty without joy.

But it occurs to me that as mottos go, when could do far worse. For Winter is coming! Not just the season of snow and cold. But the metaphorical winter that periodically comes to all of us. We are all subject to the unexpected illness, the unplanned breakdown. All of us occasionally face family emergencies. On the career side, very few of us escape winter’s storms. A plant closing or big layoff catches us. A market shift or technological change can doom or current career, and make our skill set obsolete.

Winter is coming, and the time to prepare is during the more verdant seasons of our lives. Spend less than you earn, and invest the difference. Keep a cash reserve, to help weather the storms. One of the most neglected ways to prepare is to invest in ones self. Education is a lifelong process, and we should all be trying to both stay current with rapidly advancing technology and acquire new skills in areas that may be far away from our current careers.

Winter is coming. But the actions we take as individuals have a lot to do with how long winter lasts. By our own efforts we can protect ourselves from the worst of winter’s ravages, and bring about an early spring.

Regulating Ahead of the Facts

Three weeks ago a horrific accident occurred in the US. This was the massive fire and explosion at the fertilizer plant in West, Texas that killed 14 people. Most of those killed were fire fighters and other first responders who were fighting the blaze just before the explosion occurred.


This accident is being investigated, and as of this writing a cause has not been identified. In the case of the fertilizer explosion, there has been considerable commentary indicating that at the heart of the disaster was some sort of regulatory failing.

I have to disagree with this perspective. Three weeks of investigation have not revealed the cause of either the fire or the subsequent explosion. Although there were large quantities of ammonium nitrate at the plant, ammonium nitrate alone is not explosive. Typically it is mixed with diesel fuel to create the conditions for a bomb. Even then it requires a detonator.

If you don’t know what causes a problem, it is difficult to guard against the problem before it occurs. This fertilizer plant was in operation for at least forty years before the accident, and it is one of many scattered across the country. In the last 60 years, this is only the third unintended explosion of this type to occur in the US. When you operate for tens of thousands of man-hours between incidents it is difficult to make a case that underregulation is to blame.

More government is not always to solution to every tragedy.

Oregon Medicaid Study

A couple of years ago, Oregon decided to add people to their Medicaid rolls.  However, the state didn’t have enough money to add everyone who was uninsured, but wanted to get Medicaid coverage.  So in the interest of fairness, Oregon held a lottery.  The winners of the lottery got access to Medicaid coverage.  The losers continued on without insurance coverage.

It turns out that this is a perfect experiment to test the theory that having insurance coverage leads to better health outcomes.  The idea is that with insurance, people will have better access to physicians.  This access will increase monitoring and counseling.  Also, there will be less emergency rooms visits, leading to lower cost healthcare overall.  To test this theory, you would need a randomized group trial that would control for all the possible factors that would differentiate a population that already had insurance from a population that did not.

The lottery is what makes this a perfect experiment.  It separated the participants into two randomly selected groups: a control group with no insurance, and a test group with Medicaid insurance.  A randomized trial is the gold standard of experimental design.

At the end of three years, a study was published tracking the health results of the two groups, insured and uninsured.  The primary findings of the study:

• Heath care utilization increased for the insured group.
• Rates of depression were 30% lower in the insured group.
• There were no statistically meaningful differences between groups in several measures of health: blood sugar, cholesterol, and blood pressure.
• Hospital admissions and emergency room visits were statistically similar for both groups.

Liberal commentators are focusing on the first two bullet points: “Isn’t it great!  We’ve found a way to make poor people happier!”  “At last poor people can get the health insurance that is their birthright.”

Conservative commentators have focused on the last two bullet points.  “If your use of primary care goes up (by over a $1000 per person on average), but you don’t cut hospital and emergency room visits, aren’t you just pissing away the money spent on primary care?”  “More medical care does not lead to improved outcomes?  Then why are we expanding Medicaid?”

One of the interesting points is that even though the use of diabetes drugs increased in the insured group, their blood sugar (actually, glycolimated hemoglobin) did not drop.  This would not surprise anyone who has ever seen someone swallow a blood sugar pill, and then wash it down with a Mountain Dew.

Ultimately, I think this study shoots down the theory that the key to good health is going to the doctor regularly, which is kind of a silly idea when you think about it.  Healthy people don’t go to the doctor regularly.

Three Up. Three Down.

There have been three high profile criminal cases in the news in the last month.  Although very different, all three were prominent because of the element of randomness involved, as well as the potential to be terrorist incidents.

First was the shootings of two district attorneys in Texas, two months apart.  Both were shot at home.  Media speculation centered on the possibility that the Aryan Nation prison gang was attempting to intimidate prosecutors.  The second case was letters containing ricin, a poison.  These letters were mailed to both a Mississippi senator and President Obama.  The sending of poisoned letters recalled the anthrax scare of 2002.  Finally, of course, there was the bombing of the Boston Marathon.

In all three cases, the anonymity of the criminals was a major factor in the prominence of the case.  That you could be at home, or at work, or walking down the street, and violence could strike you, is an unnerving prospect.

This week all three cases were solved.  In the case of the Texas prosecutors, it was not assassination by free members of a prison gang.  It was the far more mundane and tawdry story of a justice of the peace, who had lost his job because he was caught stealing computer monitors.  The two prosecutors had worked together to convict the man, who lost his job as a result.  After arresting the former justice of the peace, police connected the man’s wife to the crimes.  She broke down and confessed her role in a single interrogation session.

The poisoned letters was a case that was cracked even more quickly.  The FBI traced the letters back to a man in Mississippi, and scooped him up.  It didn’t hurt the investigation that the sender put his initials at the bottom of the letters.  After his arrest, his family came forward with the revelation that they had been trying for years to get the obviously mentally ill man committed before he hurt someone.  In the best detail of the case, it turned out that the perpetrator had worked on more than one occasion as an Elvis impersonator.  You just can’t make that stuff up.

Finally, the case of the Boston Marathon bombing was cracked within three days.  Police were aided by the plethora of closed circuit cameras in the area, as well as the cell phone pictures and video that spectators provided.  As we all now know, one of the two bombers was killed in a shoot out with police, while the other was found after a lockdown search of a suburb of Boston, and is currently in custody.  Turns out they were just a pair of young immigrants who had failed to assimilate in the US.  Their own uncle, a successful immigrant, assigned the proper label to these two: losers.

The big lesson from these three cases is that in the post 9/11 world, the government has a lot of extra resources and tools for catching criminals.  If the case is big enough, they will use those tools to find the criminals.  It really is a CSI world out there.

The Ideology of Equality

It has been interesting to watch the ideology of equality take hold over the last couple of years. Occupy Wall Street and their cries against “the 1%” were part of this movement. Aside from the street theater level of the Occupy movement, the topic of inequality is having more and more media coverage devoted to it.


The evolution of the fixation on equality starts with the concept of a social safety net (unemployment insurance, disability programs), progresses on to socialist concepts like a guaranteed minimum income, or extensive government services (free child care, government paid health care), and in the latest incarnation, has proceeded on to attacking higher incomes themselves.

After all, in a country where 70% of adults are overweight to obese, it is hard to argue that there is a true problem with hunger. When 99% of households have televisions, and over 90% have air conditioning and cell phones, it shifts the definition of poverty. So now the problem isn’t the lack of food, clothing, or shelter. Now the problem shifts to the supposition that some people have too much money; more than their fair share.

Personally, I don’t worry that 1% of the households in this country hold 40% of the wealth. Instead, I worry a lot about whether I will have enough wealth to retire when I choose to. Since I don’t get a lot of transfer payments from the government, higher taxes in exchange for more government services does nothing for me. Mostly I would like the government to leave me alone.

Naked Emperors

Last week Matt Yglesias at Slate.com posted an article entitled "Print Money.  Mail Everybody a Check."  The hypothesis of the article was that the solution to our economic woes would be for the Federal Reserve to print up a whole bunch of money, and then follow up by sending the money out to everybody in the country.  The policy was pretty much encapsulated by the headline.

Amplifying on the original concept, Yglesias goes on to explain that giving everyone free money will stimulate the economy.  People will use their free money by going out and spending it.  In spending the money, business will see increased demand, and hire more workers.  Those workers, once hired, will get paychecks, and spend them.  The paycheck spending will stimulate more demand, leading to more hiring.  A virtuous circle of spending and hiring will take place until the economy is back at full employment.

This is pretty standard Keynesian thinking.  The only problem is that it would not work.  As long as they were receiving the free money, spending would continue.  Once the free money stop arriving in the mail, the stimulative effects would dampen out quite quickly.

I  know this is true, because we have just finished trying it.  Twice.

The most recent round is just finishing up.  We call it "tax season."

Think about it.  The way the tax and withholding system works in America, most people get a refund.  I know I did.  The lower the income level, the more likely you are to receive a big refund, largely because of the Earned Income Credit and Additional Child Tax Credits.  The majority of households received those refund checks from mid February through the end of March.  You may have noticed that stores and restaurants were a little fuller during that time period.  You may have also noticed that there was no great surge in Help Wanted signs appearing.  Once the free money disappears, the stimulative effects decline rapidly.

Back in December was the previous time we tried stimulus spending.  It was called Christmas spending.  Once the spending stopped, the seasonal hires started to get pink slips.  No long term beneficial results in terms of increased hiring by businesses.

Standard Keynesian economics holds that the problem of modern industrial economies is a lack of demand, and that the government can increase demand by deficit spending.  All of the various pump priming schemes put forth are variants of that basic idea.  Now, maybe in the '30's that idea worked, although evidence is emerging that it didn't work as well as originally thought.  But in the new millennium,  deficit spending has proven to be a colossal failure.  Our economy is structured to absorb big deficit spending without reigniting long term economic activity.

So I'll go out on a limb here, and just say it: Keynes was wrong.  Too bad, so sad, sucks to be us.

To find an alternate policy approach, we need to stop deifying the approach that is not working.  The emperor isn't wearing any clothes.  And frankly, there's shrinkage.