Economics | The Disappointed Optimist

Does Raising the Minimum Wage Increase Unemployment?

That is the standard conservative line. Every time Democrats suggest raising the minimum wage conservatives say it will increase the cost of labor and therefore drive down employment. I did a quick chart of the increases in the minimum wage since 1980 and compared the unemployment rates in the quarter before the rate was raised and the two quarters after. Here’s the chart:

The minimum wage has been increased nine times since 1980. The results show that the unemployment rate went up five times, went down once, and stayed the same three times. That would indicate that there is no iron rule that raising the minimum wage absolutely creates higher unemployment. (There is no doubt that the numbers do indicate a tendency to increase unemployment, but it is not a forgone fact as conservatives suggest.)

The most interesting numbers are GDP, which is a measure of economic activity. GDP actually increased six of the nine times the wage was raised. This would indicate that raising the minimum wage increases economic activity.

There are obviously many other things going on, but the bottom line is that raising the minimum wage does not automatically impact the employment rate.

The Decline of the American Economy

Here’s an outstanding article from the American Prospect that describes the slow erosion of the American economy, particularly for hourly workers.

The 40 Year Slump

This is a placeholder post, and I will analyze the article in more detail later.

The Decline of Coal and Eastern Kentucky

There was a news story in today’s paper discussing the continued decline in coal mining in Eastern Kentucky. [Kentucky Coal Jobs Decline] There are a number of reasons for the decline, and the paper notes most of them, which include a move to natural gas, competition from lower cost coal from other parts of the country, a reduction in the easiest to reach coal seams, and tougher environmental regulations.

This is devastating news to the people of the region, and some politicians, like Governor Steve Beshear and Representative Hal Rogers, are trying to address the issue in a reasonable and responsible manner. [Eastern Kentucky Economic Summit] But unfortunately other politicians are willing to use this economic hardship for political advantage. Far too many use it to whip up resentment of President Obama and what they deceptively call the war on coal. If there is a war on coal, the reality is that natural gas is winning.

I do not understand what politicians think they gain by giving people false hope. Employment in the coal fields will ebb and flow, but the overall decline will continue. The main problem is the low price of natural gas, and the environmental advantages of burning gas over coal. This reality is driving the move to gas, and not environmental laws. This trend is not likely to change, and it is unfortunate that many politicians are unwilling to tell people this. I think that leadership means being honest with people, not manipulating them for political gain.

There was one other issue addressed in the Herald Leader article on declining coal jobs, and that was the declining population of many eastern Kentucky counties. Leslie County Judge-Executive James Sizemore said that with the decline in coal jobs, many people will “have to leave to get work.”

I have no doubt that that is a gut wrenching decision for people, and for an elected leader in the region it must be an emotional blow. But the reality of the world is that, since the dawn of time, people have moved to find work. Most of the people in the United States are the descendants of people who left their homes and home countries seeking work, or better opportunities, in a new land. (The exceptions are the natives who were here first, and those brought here in bondage and against their will.) Westward expansion was driven by people looking for new and better opportunities. The move to the Sun Belt after World War Two was driven by people moving to find work, to find new opportunities, and to find a better life for themselves and their families. It is unfortunate that the people of Eastern Kentucky may have to move to find work, but it is a reality as old as human history.

Economic Inequality and Policy Choices

Here’s a good analysis about economic inequality and how it is impacted by government policy choices. It is from Nobel Prize winning economist Joseph Stiglitz. I’m posting the link now without comment, but plan to discuss it in more detail later when I have time.

Inequality is a choice, by Joseph Stiglitz

The Barr Report, Sept 20

The Through the Looking Glass with Andy Edition, in which up become down, black become white, and right becomes wrong.

The Herald Leader published an Opinion piece today by Representative Barr explaining why he was voting for a budget bill that would defund “Obamacare,” a bill that would fail in the Senate, and would likely lead to a government shutdown.

The title of the article was “Obama willing to shut down government over bad health law.”

Anyone who’s been paying attention knows that the Republicans in Congress have hatched this plan to threaten to shut down the government in an attempt to force the Democrats in the Senate, and President Obama, to defund “Obamacare” as the Affordable Care Act is now called. Republicans have been threatening for months to shut down the government, but now Barr suggests that it’s Obama who’s trying to shut down the government. Does he think we’re stupid?

It reminds me of those strange news stories you read of a criminal suing the victim. I saw one a few days ago where a rapist was going to sue his victim because he contracted AIDS during the rape.

Rep. Barr says that the Republicans in Congress reflect the will of the people. But remember, the Affordable Care Act passed both houses of Congress, and was signed into law by the President. The Congress that enacted the law was elected by the people. President Obama was elected by the people, and we re-elected after a campaign where the Affordable Care Act was a major issue. If the public disapproved of Obama’s signature policy initiative they could have turned him out of office. But they didn’t.

I recognize that the public is deeply divided over the issue. But I also understand that it was properly enacted. What Republicans are trying to do now is unprecedented. Having failed to stop a piece of legislation they are now trying to stop its implementation by using the power of the purse to deny funding. That isn’t democracy, that’s an end run around democracy. But we now live in a world where words have lost all meaning. We now live in a world where a Republican votes to shut down the government, then claims that it’s his opponent that’s doing it. A strange world indeed.

The Strange Logic of Food Stamp Reform

House Republicans are considered a bill today to “reform” the food stamp program (called SNAP), which would cut nearly $40 billion from the program by tightening eligibility requirements. According to some reports this would remove roughly 3.8 million people from the program.

It’s a shameful move, and Democrats and many advocates for the poor are trying to shame Republicans for doing this.

The problem is that Republicans aren’t ashamed of this move. They honestly don’t think that they’re hurting the poor, but rather are helping them by freeing them from dependency on government programs. It may sound cracked, but it’s true. In his press release explaining his vote to cut food stamps, Representative Andy Barr said “This legislation is the most compassionate policy because it encourages people who are capable of work to move from dependency to self-sufficiency.”

This is from a Heritage Foundation editorial on welfare reform, but the same logic holds true for any government assistance program:
“Conservatives have as their end goal as few people dependent on the government as possible. In other words, we want people to be self-sufficient, thriving members of society. … Encouraging independence may not be the liberals’ goal, but it is the goal of conservatives. And that is the only goal befitting of human dignity.” Katherine Rosario, Communications Deputy, The Heritage Foundation, op/ed “What Needs to Happen Next with Welfare Reform,” January 23, 2013.

That sounds laudable, but it’s nonsense. If government assistance reduced self-sufficiency and created dependence then countries with welfare programs would have struggling economies, because the people would rather loaf and collect welfare. And conversely, countries without welfare programs would have strong and vibrant economies, because the people would be free of misguided government beneficence, and possibly because the very real threat of poverty and starvation would force people to strive, work hard, and succeed.

But how does that work in the real world? Well, most of the most successful and dynamic economies in the world are in countries with welfare programs. These are the “first-world” countries of Europe, North America, Japan, Australia, and New Zealand. Oh, and let’s not forget China, the country with the highest economic growth rate over the last decade or so. China is ostensibly a communist country (though it is more of a capitalistic dictatorship now), with a minimal level of government support for all people. So some level of government assistance doesn’t disincentivize people from working.

And what of the corollary? If welfare creates dependency does lack of support incentivize people to strive? If it does, this doesn’t show up in the economic data. The countries with the most dismal economies are also the countries without any social safety net. So, for some reason, lack of government assistance doesn’t incentivize people to work.

It is a highly complex issue, and there are many factors that determine the relative wealth of a country, and vibrancy of its economy. But there is little support for the conservative idea that government assistance creates dependency.

The Importance of Government Funding of Scientific Research

There were two excellent essays in today’s Herald Leader describing the devastating impact of cuts to government funded scientific research as a result of the budget sequestration deal. One essay was by Sharon P. Turner the Dean of Oral Health at UK College of Dentistry, and the other was by George Ward, the executive director of the Coldstream research campus.

Federal Grants Crucial in Funding Innovation

Cutbacks Hurt Oral Health Care

Many people (read conservative Republicans) act as if government funding for scientific research pays for research into strange and esoteric things. Critics of government funding for research love to point to weird examples like mating habits of insects, but the reality is that most government funded research is very practical, and often directly tied to real world issues.

Dean Turner points research into oral health infections of pregnant women, and notes that these infections often relate to low birth weight babies. Curing these diseases results in substantial savings in neonatal costs. George Ward notes that government funded research at Coldstream has created dozens of businesses, which generate millions of dollars for the local economy.

Scientific research is the foundation of the industries, and business, of the future. Cutting funding to such research may save a few dollars today, but at the expense of the economic develop, and tax revenue, of tomorrow.

Social Insecurity and Income Inequality

A recent report said that income inequality in the United States has increased dramatically since the market crash of 2008. While the wealthy lost the most in the crash, since then they have gained the most. From 2009 to 2012 the income of the “one percent” grew by 31%, while the income of the rest of us only grew by 0.4%.n Now the wealth gap in the nation is the greatest it has been in one hundred years.

LA Times Story: Income Gap Between Rich and Poor is Biggest in a Century.

I know that many conservatives believe that income inequality is benign, and merely a part of the economic environment. But the reality is that there are a number of problems associated with growing income inequality.

First, many economists note that when too large a share of a nation’s wealth goes to the wealthy it tends to reduce economic activity. That’s because the wealthy don’t spend the same share of their income as the poor and middle class. The poor spend virtually all of their income, which means that the money is recycled back into the economy. The middle class spend most of their income, and are able to squirrel away a bit. But the rich spend only a small percentage of their income, the rest goes into savings. The result is that when the rich have a bigger share of the nation’s wealth, there is less overall economic activity. We have certainly seen this over the last few decades, as the rich have grown richer the economy has slowed.

Second, income inequality often leads to political instability. People cast about for solutions to their economic woes, and look to political solutions to help deal with economic problems. But often different political parties have vastly different explanations for what happened, and hence vastly different solutions to the problems. And as economic problems persists, politics becomes more divisive and unstable. We have certainly seen this over the last few decades. Control of Congress changes hands every few election cycles, and we had massive “wave” elections in 1994 and 2006, where the incumbent party was washed out in a wave of voter disenchantment. In my opinion both the Tea Party phenomena of 2010, and the Occupy Wall Street protests a year later, are a product of our increasingly unstable politics.

Third, income inequality typically leads to social instability. Poverty and homelessness rise, drug use increases, out of wedlock births increase, and often crime rises as well. We have certainly seen a vast increase in poverty, homelessness, and out of wedlock births, but fortunately have not seen much rise in drug use or crime.

Throughout history, vast disparities between rich and poor can destabilize a nation. We are a long way from that, but the turmoil in our politics indicates that the problem is far from benign. And each day, as the disparity between the rich and poor grows, brings these problems ever closer.

Budget Cuts and the Errosion of Basic Science

Here’s a story on today’s CNN Money web site describing layoffs among research scientists due to the budget cuts mandated by sequestration.

Budget Cuts Laying Off Scientists

Some people say that this money is just government largess. (Those people would be conservative politicians.) But the reality is that government funded research has produced numerous valuable discoveries that have led directly to the creation of new technologies, new industries, and new jobs. Government support for scientific research is the seed corn of future growth, it is an investment in the future. As I have said repeatedly, science is the foundation of the modern economy. If we degrade science we will degrade the economy.

Category: Economics