A note on the minimum wage in the US in historical perspective

A couple of weeks ago (16 October) in his blog, I noticed that Greg Mankiw gave some data about the growing importance of the minimum wage in the U.S. He writes:

The minimum wage has a much larger role now than it did three years ago, in large part because of the legislated increase in the minimum wage from $5.15 to $7.25 an hour.  For example, comparing the 2010 data with the 2007 data, one finds the following:

• The percentage of all hourly-paid workers paid at or below the minimum wage rose from 2.3 to 6.0 percent.

• The percentage of part-time workers paid at or below the minimum wage rose from 5 to 14 percent.

• The percentage of teenage workers paid at or below the minimum wage rose from 7 to 25 percent.

Question for class discussion:  In light of what is occurring with the overall economy during this period, how would you evaluate the policy change regarding the minimum wage?

Of course he's hinting that the 'right answer' is that raising the minimum wage was a bad idea in a time of rapidly falling demand.

Mankiw forgets to mention the timing of the increases: it was already $6.55 in July 2008 two months before the financial meltdown, so post-meltdown only 70 cents was added to raise it to $7.25 in July 2009. As well, a bit of historical perspective might help students too in thinking about whether the minimum wage is unreasonably high.

I found this nice summary at a webpage at Oregon State University:

According to these calculations, the federal minimum wage was actually higher in real or inflation-adjusted terms back in the mid-1950s. It was higher or about equal to the current level for the entire period from 1956-1983.

RH

30 Ways To Be An Economist

I stumbled on this page of interviews at the Institute for New Economic Thinking after listening to one of them --  Philip Mirowski on the story of where the so-called "Nobel Prize" in Economics came from and the effects it's had.

Philip Mirowski

Professor Mirowski was a member of the Department of Economics and Policy Studies at Notre Dame until that department was disbanded by the university and its members scattered in the winds so that orthodoxy could reign supreme in the (other) Department of Economics. If you don't know the sad story, you can read a brief account of how the original economics department split in two in 2004 here, an argument (in the form of a petition) for a continuation of heterodox courses at Notre Dame (as the shadow of the axe was seen), and finally accounts of the ax falling in 2010 (in the Chronicle of Higher Education with some blog comments here and here).

Perhaps that thing that's most unusual about the purge at Notre Dame is that there were so many heretics there in the first place.

RH

Textbook happyface: Unemployment as leisure?!

With unemployment so high in so many countries -- and set to get worse because of misguided policies -- it's worth thinking for a moment about the way that unemployment gets portrayed in the textbooks. I was reminded of this recently when I read a paper by Lars Osberg, a labour economist at Dalhousie University in Halifax, Nova Scotia. In "Why Did Unemployment Disappear From Official Policy Discourse in Canada?", Osberg contrasts the condemnations of unemployment and the vivid descriptions of its social and psychological costs that appeared in widely used textbooks forty years ago with the modern textbook:

Modern labour economics texts (e.g. Benjamin, Gunderson, Lemieux and Riddell, 2007) are shorn of any hint of moral outrage at unemployment, or empathy for the unemployed. ... there is little sense that unemployment is socially destructive.

Much of the typical text is taken up with models of voluntary unemployment: the labour-leisure choices of individuals, and micro model of optimal search behaviour. Osberg writes "Major attention is paid to the debate on how the 'incentives' of unemployment insurance in Canada may have influenced behaviour." The great deal of attention paid to these topics could give the impression that we'd better give priority to watching carefully for people gaming the system and creating large costs by sitting at home collecting pogey (as it's called here in Canada) while pretending to look for work.

"I heard there might be a vacancy..."

If as much attention were given to the subjective, psychological costs of unemployment, a rather different impression might be given to students. Osberg (pp.149-152) has a good review of the current evidence from studies of subjective well-being. He quotes the German economist Rainer Winkelmann, who has done important work in this area:

It is also clearly understood that the negative effect of unemployment on well-being goes well beyond the effect that the income loss associated with unemployment can bring about. Indeed, the non-pecuniary cost of unemployment seems to exceed the pecuniary cost by far.

You might be thinking that perhaps it's unfair to criticize micro approaches to employment because involuntary mass unemployment is more of a macroeconomic phenomenon and a symptom of the system's dysfunction at that level. Unemployment is indeed seen as costly because less stuff is produced, but (believe it or not) it's also accompanied by the benefit of greater leisure.

For example, here's Daniel Thornton writing on "The Costs and Benefits of Price Stability"  in the Federal Reserve Bank of St. Louis Review (1996, Vol. 78, No. 2). He explains (pp.25-26) that lower inflation in the future brings benefits in the form of higher future output, but at a cost of lower output today (as high interest rates induce a recession). "[T]he costs and benefits [of this policy] could be adequately represented by output gains and losses", which is "common in much theoretical and virtually all applied work," but there are "[t]wo important limitations on this practice". The first is the imperfect measurement of production, such as the omission of home production. The second is that "output does not include the utility individuals obtain from leisure." Incredible, yes, but that's what he wrote.

Another important finding from many studies of subjective well-being is that the entire population is affected by high unemployment, as rising economic insecurity permeates the society. This is actually the largest single well-being cost of high unemployment. (Osberg cites an important new paper by John F. Helliwell and Haifang Huang, "New measures of costs of unemployment: evidence from the subjective well-being of 2.3 million Americans".)

Ten years before Thornton wrote what I quoted earlier, Willem Buiter and Marcus Miller, in a 1985 paper ("Costs and Benefits of an Anti-Inflationary Policy: Questions and Issues" in Inflation and Unemployment. Theory, Experience and Policy-Making, edited by V.E. Argy and J.W. Nevile) commented with apparent exasperation: "Overwhelming empirical evidence on the importance of work (i.e. of being employed, of having a job) for most people's well-being, happiness and even sanity has not made much of a dent in the ‘extended holiday’ approach to unemployment." 

This seems to be another zombie idea that staggers around in economics, causing damage and refusing to die.

RH

Twill Magazine reviews The Economics Anti-Textbook

Twill, Issue #14, has Economics as its theme. While most of it is in Italian (except for a piece by James Galbraith), it also has a brief review in English of The Economics Anti-Textbook and a four-page excerpt.

RH

Howard Zinn Memorial Lecture Series @ Occupy Boston

The lectures here, including one by Noam Chomsky last Saturday. As he says, it's a shame Howard Zinn didn't live to see it.
RH

A look at Greg Mankiw's blog

Rather than work on what I'm supposed to be working on this Sunday afternoon, I found myself having a quick look at Greg Mankiw's blog. (As everyone knows, he's the author of a widely-used principles textbook.)

Strange stuff. On 8 October, for example, he offers this quote without any comment:

A major factor behind the weak recovery and gloomy outlook is a climate of policy-induced economic uncertainty. An index we devised shows U.S. policy uncertainty at historically high levels.

Does Mankiw actually think this is the case? The quote is taken from a piece  that Paul Krugman demolished in just a few sentences in his blog.

A few days before that, on 5 October, in "Obama versus Clinton on Tax Policy", he writes

You can agree or disagree with that policy choice.  But the facts are clear.  President Obama's policy preferences are more focused on income redistribution (aka "class warfare") than President Clinton's tax policy ever was.

So "income redistribution" in the form of a slightly more progressive income tax is "class warfare"? For a more reasonable interpretation of class warfare in the United States, it'd probably be better to listen to Warren Buffett:

"There’s class warfare, all right,” Mr. Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”

In his entry for today, Mankiw links to his piece in today's Sunday New York Times. Again, more strange stuff as Mankiw offers a whirlwind tour of the economic experience of Zimbabwe, Greece, Japan and France. He writes:  "Each illustrates a kind of policy mistake that could, if we are not careful, presage the future of the United States economy."  Uh, Zimbabwe with its hyperinflation? Mankiw writes:

Some may find it hard to imagine that the United States would ever go down this route. But reckless money creation is apparently a concern of Gov. Rick Perry of Texas, who is seeking the Republican nomination for president.... Mr. Perry is not alone in his concerns. Many on the right fear that the Fed's recent policies aimed at fighting high unemployment will mainly serve to ignite excessive inflation.

Rick Perry takes aim at Ben Bernanke

What does Mankiw think? Is Perry a buffoon and an ignoramus like Paul Krugman seems to think? He doesn't say directly (Mitt Romney is Mankiw's candidate) but gives the hyperinflation scenario some credence with his introductory remark quoted earlier about what would happen "if we are not careful".

Then Mankiw turns to the case of Japan, where he cites the views that the policy response to bubbles bursting there in the early 1990s was not sufficiently strong to prevent a long stagnation, hence the attempts at active monetary and fiscal policy in the United States. Incredibly, he writes:

The more we rely on deficit spending to keep the economy afloat, the more we risk the kind of sovereign debt crisis we have witnessed in Greece over the past year. The Standard & Poor's downgrade of United States debt over the summer is a portent of what could lie ahead.

So there's at least one person in the world who still takes Standard & Poor's seriously; others (like Krugman) dismissed it as an obvious political ploy that seemed to be ignored by the markets.

Next comes the "get our fiscal house in order" stuff: "To maintain current levels of taxation, we will need to substantially reduce spending on the social safety net...", already minimal in comparison to most other industrialized countries. Note, no mention here of the bloated military and intelligence establishment, corporate welfare or the pilfering of the public purse that David Cay Johnston has written so much about.

Finally, Mankiw comes to the supposedly scary story of France where taxes are a far higher portion of GDP and GDP per capita is considerably lower because of fewer work hours (not lower productivity per hour). He hints that there's possibly a connection, although "economists debate" this. Warning that Americans could end up with 5 weeks of paid vacations (compared with zero currently) is apparently the best argument he can muster against European levels of taxation. Bring it on!

"Je suis en vacances."

RH

Drug companies

We pointed out in The Economics Anti-Textbook that the standard textbook assumption of consumers having perfect information misses some important aspects of reality. Among other things, we gave the example of the use and marketing of prescription drugs (pp.83-85). 
  I was reminded of that a couple of days ago when the CBC [Canadian Broadcasting Corporation] reported that the American Academy of Pediatrics had issued some new guidelines recommending that "Four-year-olds showing debilitating signs of attention-deficit hyperactivity disorder should be evaluated by doctors".

Nothing a spanking pharmaceutical company can't fix

The report went on to say:

The revised guidelines suggest doctors first prescribe behaviour therapy for preschoolers, and that methylphenidate or Ritalin may be prescribed if that does not significantly improve “and there is moderate-to-severe continuing disturbance in the child’s function,” the group’s 14-member committee said.... [And, finally, at the end of the article:] Some of the guideline authors said they have consulting relationships with companies that sell ADHD medications.

 The pharmaceutical companies' influence on and corruption of parts of the medical profession should be a serious concern to everyone. I highly recommend the essays and book reviews in the New York Review of Books by Marcia Angell of Harvard Medical School.


RH

Milton Friedman's pencil: reality check

Dani Rodrik has a good comment about Milton Friedman and his pencil. This duo appeared on the cover photo of Milton and Rose Friedman's book Free To Choose. In the first chapter of the book, the Friedmans tell a story of how the invisible hand of the market wondrously produces pencils without the need of any central direction.

"I'll bet those Commies can't make pencils like this!"

As Rodrik notes (and the Friedmans footnote), the pencil story was taken from a piece by Leonard E. Read, "I, Pencil", written for the libertarian propaganda publication The Freeman, published by an outfit called the "Foundation for Economic Education" [sic]. (Anyone who has read the Wealth of Nations will recognize that its real inspiration is Adam Smith;s tale about a linen shirt at the end of the chapter one.)

Rodrik remarks that

The Friedmanite perspective greatly underestimates the institutional prerequisites of markets. Let the government simply enforce property rights and contracts, and – presto! – markets can work their magic. In fact, the kind of markets that modern economies need are not self-creating, self-regulating, self-stabilizing, or self-legitimizing. Governments must invest in transport and communication networks; counteract asymmetric information, externalities, and unequal bargaining power; moderate financial panics and recessions; and respond to popular demands for safety nets and social insurance.

Indeed. More ironically, with regard to pencils, Rodrik asks where pencils are now made and why....

A modern-day Friedman might want to ask how China has come to dominate the pencil industry, as it has so many others. There are better sources of graphite in Mexico and South Korea. Forest reserves are more plentiful in Indonesia and Brazil. Germany and the United States have better technology. China has lots of low-cost labor, but so does Bangladesh, Ethiopia, and many other populous low-income countries.Undoubtedly, most of the credit belongs to the initiative and hard work Chinese entrepreneurs and laborers. But the present-day pencil story would be incomplete without citing China’s state-owned firms, which made the initial investments in technology and labor training; lax forest management policies, which kept wood artificially cheap; generous export subsidies; and government intervention in currency markets, which gives Chinese producers a significant cost advantage. China’s government has subsidized, protected, and goaded its firms to ensure rapid industrialization, thereby altering the global division of labor in its favor.

RH

Indoctrination begins in the principles course and is hard to undo

A new review of The Economics Anti-Textbook, written by John Barry of Queen's University, Belfast, appears here in the Marx & Philosophy Review of Books along with a review of Mary Mellor's The Future of Money: From Financial Crisis to Public Resource (Pluto Press, London, 2010). 

Professor Barry writes: 

What Hill and Myatt reveal in their book is on many levels frightening. The almost ‘full spectrum domination’ of the teaching of economics by the neo-classical paradigm means that every year hundreds of thousands of students across the world who read and learn about ‘economics’ from the many neo-classical economics textbooks that are available and set as required reading are effectively indoctrinated. Students reading these textbooks and taking associated economics courses are systematically denied any exposure to alternative forms of economic analysis ... [S]tudents almost cannot but come to the view that there is only ‘one’ or ‘true’ way of thinking about economics. That is of course that the free-market, capitalist status quo is not just the ‘best’ way to think about and organise the economy, but actually the only way.

He also adds an important comment that prompts the rest of this entry:

A telling and very interesting point raised by Hill and Myatt – though insufficiency explored in my view – is that while more advanced postgraduate texts and monographs within the broad neo-classical economics paradigm (and indeed by some of the same authors of the standard undergraduate textbooks), do acknowledge (some of) the deficiencies of the simplistic textbook presentation of the free market model, these are all routinely absent or downgraded within the textbook presentation. 

 He's quite right that we didn't explore this; the statement was more of an aside, but it does require further exploration and thought. That same assertion of ours prompted this question from a reader in recent correspondence:

If advanced level economics is so different, why are economists happy to engage in the teaching of what they must understand to be pernicious lies? In school chemistry classes they teach you things about electrons that are later revealed to be wrong, but what they teach you at school is not dangerous. It is not going to cause you to decimate your society.

A few years ago, Tony Myatt and I were at a session of a conference where (in response to our paper) someone cheerfully admitted that he lied to his students. We were shocked, but I guess he didn't see the consequences of that as 'pernicious'.

So how are advanced level courses and their texts different? And why, if they're different, doesn't it matter to the indoctrination (to use Professor Barry's term) that students have received earlier in their training? I'll try to briefly set out some preliminary ideas.

Here's an example of what we had in mind: Everyone is familiar with the crude treatment of the gains from free trade set out early in the typical micro principles text. (See pages 28-30 of the Anti-Textbook). As we note in our critique of that (starting on p.43), if one looks in an undergraduate trade text (typically studied in 3rd or 4th year by economics majors) one finds facts about international trade that are tactfully omitted from the principles account because they're inconvenient. Most trade takes place between apparently rather similar countries and often in very similar goods (with countries both importing and exporting cars, for example). The Ricardian comparative advantage story, with its focus on differing production possibilities and trade in different goods looks beside the point.

The trade texts also quickly discard the Ricardian model in favour of models that examine the effects of trade policy on income distribution (in the form of changing factor prices). It becomes easier to see in such models that being in favour of 'free trade' is also being in favour of a particular change in the distribution of income. That might lead one to think about whether that change is desirable in terms of social welfare and to the perennial question of how we judge whether a society is better off or worse off after any policy change.

If one throws into the mix, the effects of changes in the terms of trade (ie. a change in the relative prices of the goods a country exports compared with what it imports), it's even possible that total incomes fall for a country after free trade.

Comic relief

The logo of one of the typical whines of the right-wing propaganda machine that pretends that American universities are full of lefty profs indoctrinating the young.

So do these kinds of analyses reverse whatever 'indoctrination' took place earlier? (For 'indoctrination', you can substitute 'adherence to overly simple models learned early on'.) For some people who have the strength to think for themselves and not run with the herd, it could. Some are undoubtedly less susceptible to indoctrination than I was. But from my own experience as a student, I found that my value judgments about the outcome of 'trade liberalization' were somehow set very early on and I placed undue weight on the possibility of potential Pareto improvements. In other words, it was enough for me that total incomes might be likely to grow. It took a surprisingly long time to shake this off.

What I'm suggesting is that what we learn early on sets the framework for our thinking and that framework can get selectively reinforced by incorporating later learning into it. One more thing before I wind up this overly long note...

A well-known textbook author wrote to us that

One interesting thought that I would like to see checked out is that first year texts have more contact with the real world and less with the imaginary world of perfect competition and optimality than second year books that are usually highly abstract with most real world applications stripped away.

Clearly the abstraction just gets more extreme in senior undergraduate and in graduate level texts. As happens in any cult, the devotees are led step by step into a world of increasing craziness and detachment from reality, with those unable to stomach it leaving the group for other pursuits. 


But it seems to me that the "contact with the real world" in the first year texts is, to some extent, pernicious in itself. Perhaps in a bid to sell the 'relevance' of the theory while glossing over methodology, the micro principles texts try to make that connection too hastily. 


I think student should be told from the beginning that we are studying an "imaginary world" that they should, in no way, confuse with the real world. Instead, they have to think carefully about how or whether any of the imaginary worlds we'll construct on the board has relevance to the real one, and how we make that judgement. 
RH

A Case Study in Plutocracy for the 'Occupy Wall Street' crowd

"What, me pay taxes?! Surely you jest! Heads, I win, tails, taxpayers lose!"

The Center for Public Integrity's iWatch News has a nice report today entitled "How an Obama fundraiser turned Oklahoma into a personal tax haven". The bagman in question is Tulsa billionaire George Kaiser (pictured above). It seems Kaiser has used every trick in the book to avoid taxes (the iWatch report links to a chapter in a 2001 book, The Cheating of America with details) while making piles of money. Yet when his investment in Solyndra, a firm making solar panels, went belly up, it was taxpayers who were on the hook -- for $535 million in loan guarantees. 

That's how plutocracies should be run, of course, and plutocracy's numerous hirelings heap scorn on the idea that things could be any different. But some people, like those in the "Occupy Wall Street" protests and their supporters, have other ideas of what a good society looks like...

RH

Corporate welfare: the case of the Spanish fishing fleet

In The Economics Anti-Textbook (pp.165-166), we briefly point to the on-going destruction of the world's fisheries, carried out at public expense. Here are some good new reports on the subject, looking at enormous EU subsidies to the Spanish fishing fleet (and misbehaviour by the industry). The source, the International Consortium of Investigative Journalists, is well worth keeping an eye on, given the dearth of investigative reporting in the corporate media.

RH

Accounting for Pollution

An entry about the costs of pollution in Paul Krugman's blog yesterday had the title "Markets can be very, very wrong". Indeed. A point we wanted to make in The Economics Anti-Textbook was that, for all the talk about Pigouvian taxes and tradeable permits in the microeconomics texts, the textbooks spend little or no time pointing out that governments often don't actually impose the taxes the textbook says they should to improve efficiency.

Perhaps pointing out the obvious would raise 'controversial' questions (Why don't they use such taxes? Whose interests are served by allowing excessive pollution?). Controversy is something to be avoided in Textbookland, where the goal seems to be to maximize the share of the market and not annoy potential adopters of the textbook.

The paper Krugman was writing about was "Environmental Accounting for Pollution in the United States Economy", the lead paper in the August 2011 issue of The American Economic Review, the flagship publication of the American economics profession. The authors, Nicholas Muller, Robert Mendelsohn and William Nordhaus, attempt to compare the gross external damages caused by production in various sectors with the value-added in the sector that is traditionally measured in the national accounts. The idea is that the national accounts should measure the net output of a sector, so that external damages are netted out from the estimate of its value added to get "each industry's net contribution to national output" (p.1672). They conclude that "Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added." (p.1649)

A coal-fired power plant whose pollution damage exceeds the value of its output at market prices according to Muller, Mendelsohn and Nordhaus's paper

They remark (p.1672) that "this does not necessarily imply that these industries should be shut down." [After all, where would ordinary folk take their yachts if there were no marinas?!] "On a formal level, it signifies that a one-unit increase in output of that industry has additional social costs that are higher than incremental revenues. At an intuitive level, it indicates that the regulated levels of emissions from the industry are too high."

Krugman suggests that those opposing greater regulation of pollution are "operating from some combination of knee-jerk defense of the haves against the rest and mystical faith that self-interest always leads to the common good." The promoters of that "mystical faith" have huge resources and are engaging in a long-term campaign of ideological warfare in which the university campus is a key battleground. If you can stomach it, check out the website of "Students for Liberty", funded, it seems, by the usual suspects...

RH