Friedman Fridays: Minimum Wage

Fortunately or unfortunately, I am starting to read and investigate more and more and am realizing one important truth: things are not always as they seem. Reading textbooks and bumbling around my whole life, I have generally accepted notions about the world around me instead of challenging them on an objective basis. This is partly what I am going to reveal in many of my blog posts. I approach today's topic on the minimum with a reverence because it is a very personal issue when referring to someone's wages or livelihood, but I hope to reveal some truths that many if not all people in our friend groups and in our communities have not even thought about.

The Argument

In a free-market economy, employers must bid competitively for the services of workers. If an employer attempts to pay wages lower than his workers can obtain elsewhere, he will lose his workers and thus be compelled to change policy or go out of business. If an employer pays wages above the market level, the higher costs will put him at a competitive disadvantage in the sale of products or services, and again he will have to change policy or go out of business. Here is an important truth: we must stop looking at employers as greedy or inhumane. Employers do not lower wages because they are cruel, nor raise them because they are kind--not made on a whim.

Since the start of the Industrial Revolution and capitalism, wage rates of steadily risen because of the economic consequence that inevitably comes with rising capital accumulation, technological progress, and expansion, not central planning or mandates by government bureaucrats. The free market allowed for an ever-widening market for labor which increased the demand and competition for worker's services, thus driving wage rates upward. Henry Ford was offering 5 dollars a day wage rates at a time when his competitors were paying 2 or 3 dollars a day, not because he was kind, but it was in his economic self-interest for productivity.

The Consequences

As a result of government intervention into private markets by mandating a minimum wage, employers cannot afford to hire new workers, curtailing production and capital accumulation that is the main driver of economic growth. Thus, one group of workers obtain unjustifiably high wages at the expense of workers who are unable to find jobs at all. Unemployment is a direct result of forcing wage rates above their free-market level.

The Congress passed one of the biggest increases in the minimum wage between 2007 and 2009 from $5.15 to $7.25 and have seen unemployment rise to levels we haven't seen in decades. Most people will argue that that has been the result of the overall unemployment going up, but you cannot deny the percentage gap between the teen unemployment and regular unemployment.




The fact is that the minimum wage is hurting the vary people that it was most intended to help. Instead of letting a low-skilled or uneducated person be employed at a rate to suit the employer like $5 an hour, they government has made that practice illegal and is forcing a business to employ them at $7.25 an hour. The government is effectively denying low-income folks and teens an opportunity to gain experience and some cash flow that could lead to a more stable life and potential opportunities in the future.

The argument is that a family cannot be supported on the minimum wage or anything less, but the facts just do not support this argument. According to the Department of Labor, only 1.1% of Americans who work 40-hour weeks earn the minimum wage. Thus, 99% of full time workers earn more than the minimum wage because teens are 5x as likely to earn minimum wage than adults and are nearly always first-time or part-time jobs. The fact is that these jobs are taken primarily by those who do not have a family to support.

Conclusion

The notion that producers or employers can just "absorb" wage increases and mandates by taking them "out of profits" is a faulty notion. For what does expansion and future production come from than out of the profits of employers. It is economically naive to believe that the effects are not detrimental. At any rate, my man Milton can do a far better job describing this than me. But, I am sure this will spark a heated debate. I look forward to it.

Blake

Arizona and Illegal Immigration

Feel free to call this a lazy post but I want to throw the topic out there and see if anyone will care to comment or share an opinion on the matter.




Tomorrow the Arizona Immigration Law, is set to become enforceable law. However, today, at the last minute, a federal judge blocked the heart of the Arizona law and if nothing else, added fuel to the immigration fire.

Tomorrow the debates will intensify and the two sides of the argument will stand for their reasoning on behalf or against the immigration law.

So a couple of questions:

• Does the law promote racial discrimination?
• What benefits will the law induce?
• What negatives will come from this law?
• Are politicians politicizing the issue?
• What are the political implications of the law?
• Will there be any economic impact stemming from this new law?

And my favorite,

• Does Federal Law supersede State Law?

I would love to hear some opinions about this issue, even from a certain poster (no names will be mentioned but there is only two posters on this blog), who is for full illegal immigrant amnesty.

Friedman Fridays: Subsidizing Failure

Is that my man talking about bailing out Chrysler in 1979? Surely, we didn't bail them out again in 2009 did we?

"You could put a democracy in charge of the Sahara Desert. Soon the sand itself will become scarce." -- Milton Friedman

Blake

What Do You Think?

Scenario

To understand the economic environment we live in, it is useful to imagine the case of a physician trying to treat an ill patient. The patient presents herself in terrible shape; the physician has never treated a condition with symptoms quite like hers before; and the causes of the ailments are unclear. The doctor remembers reading about a similar case in medical school — and, trying to recall as much of his training as possible, he endeavors to come up with a theory as to why the patient is sick and to determine what will make her better.

In an ideal world, the doctor would run a controlled experiment: He would assemble 100 patients with similar symptoms, but the doctor does not have 100 patients — he has only one. So, based on his assessment of what is causing the patient's troubles, and the most likely remedy, he takes a risk and administers the medicine.

The patient, however, returns a few weeks later; this time, her symptoms are worse. What, then, should the doctor conclude? He might decide that he gave the patient the wrong medicine. Or he might determine that the patient was even sicker than he originally thought, and thus that the medicine should be administered at an even higher dosage. What do you think?

Stimulus Spending

President Obama is now faced with this scenario. Change approaches or go for a higher dosage? It looks like he is going higher by advocating that the unemployment rate would have been "15%" if not for his package or that "we staved of another depression." He is making the push for more stimulus in the form of jobless benefits and bailing out municipalities. In regard to the ill patient, the Administration is saying that the dose itself was not big enough. VP Biden admitted to it in this video. However, we should not just focus on "The Stimulus," but I should also remind you that we have had no less than 4 stimulus packages in the past 2 years:

1. 152 Billion -- Jan 2008. Unemployment Rate 4.9%
   
2. 61 Billion----Sept. 2008. "Stimulus for Main Street." 6% rate
3. 862 Billion---Feb. 2009. Supposed to keep rate below 8%
4. 30+ Billion--Nov. 2009. Programs like Home Credit. Rate 10.2%
   
5. Other measures bring the total to 1.085 Trillion on Stimulus Spending > Iraq War and Afghanistan War combined.
   

To be fair, a couple of these measures had bipartisan support as well as President Bush's signature, so both parties are at fault here. But, over 1 trillion was spent and unemployment still reached 10%. Germany only spent 100 Billion in stimulus money when we did, and they are entering into a v-shaped recovery and less unemployment. The debate today hinges on the ability for Americans to choose which type of economics you want to believe in.

The Question

President Obama and the Democrats subscribe to the Keynesian theory that during periods of high unemployment and slow growth there is a decrease in aggregate demand, which can be replaced by government spending. Here is the question:

• If aggregate demand in the economy is weak and the problem, then why are profits so strong?
  

Fortune 500 companies have over 1.8 Trillion in cash reserves. This is well above the high mark in the past 30 years and above their cash flow needs. Harley Davidson, to take one example, saw its profits quadruple in its last report, and it is a company that is very much dependent upon American buyers. Other firms, from Pepsi to Mattel to Ameritrade, have seen very strong profits of late. Analysts have remarked that, in terms of profits, this is one of the strongest recoveries we’ve seen in a good long while.

Profitable businesses are the most sure way of creating jobs for the long-term compared to temporary government stimulus jobs. I would rather have a job working for a Harley factory than depend on a iffy stimulus proposal like: the purchase of a polar icebreaking ship ($87 million) or new subsidies for beekeepers and fish-farmers ($150 million).

Every dollar misspent by the government is one less dollar to be spent in the private sector or saved to provide sureness to the banking system. I could spend the next 24 hours trying to talk about multipliers and what the economic models say about government spending per dollar to GDP, but I will just leave it at that.

The Real Reason: Uncertainty

The profits for businesses are there for a v-shaped recovery, so why is it not happening? Uncertainty created by government bills and intervention is the answer. Whether it is the coming Health Care Bill, Financial Regulatory Bill, Bush Tax Cuts expiring, Cap and Trade, or just anti-business rhetoric, businesses would rather stay put than risk hiring. I am going to end my post here with a comment I read about why there are no jobs right now:

• I am a building designer, used to have employees and wanted to grow my firm to about 8 people. No longer. I will be more likely semi-retired by choice from this point on because:

  Cost of Employees way up: Workman's Comp, Unemployment insurance, Health Care is up by nearly $ 8 per hour over 3 years. Health care alone now costs $4 an hour if they are young, over $5 per hour if over 50.

  Business Regulation - every purchase over $ 600 needs a 1099 form, meaning I have to get the address and the tax ID of the power company, the insurance company, Office Depot, etc. I will be going from 4 1099's to over 100.

  Health Care - I will now have to track where my employees go in the event of HazMat exposure. Did the government office they measured in for a few days contain lead or asbestos. Duh - yes, but it is supposedly safe for government employees why not mine.

  Security - I must have lots more records on my employees keyed to their SS#, but if somehow I lose my laptop I am a crook.

  I could go on and on, but my reward is:

  My marginal tax rate jumps in 2011, about 30% more than before.

  the FICA income limit keeps rising, that is 15% of net for the self employed on the marginal increase.

  It is obvious that there will be a lot more taxes coming. So my risk is way up, but the government now TAKES over half of any marginal increase. I would rather fish.

I say we change doses. What do you think?

Blake

(Thanks to the National Review, Greg Mankiw, and other articles for inspiration).

Keynesian Rhapsody

My boy Bo"Its pronounced cane-sian not key-knees-ian"Hogg enlightened me with this little tidbit of pure economic joy.

Friedman Fridays: The Free Lunch Myth

This video on the adverse and sometimes not even thought of effects of taxes on business is very important for the time we live in today. I have some more thoughts about taxes and the coming debate that I will address in an update to this post later. For the mean time, enjoy another installment of my man, Milton Friedman.

Comments welcome.

Blake

Yankees vs. Rams: The Estate Tax

Yankees vs. Rams

My condolences go out after the death of long-time owner of the New York Yankees George Steinbrenner. But, the death of the Yankee's mogul brings an important topic of debate into the arena: the Estate Tax.

In 2008, the owner of the St. Louis Rams Georgia Frontiere died and left the organization and her assets to her two children. Valued at over 900 million, the heirs were required to pay over 300 million in taxes to the Federal Gov. With obviously no way to pay the money required, the two sons had to sell the team to just pay the taxes for their mother leaving it to them!

Same thing has happened to the Kansas City Chiefs, the New York Jets, and the Miami Dolphins.

Compare that to the deceased George Steinbrenner. Bought the Yankees for 8.8 million in 1973 and has now grown it to be valued over 1 billion dollars. Due to the Tax Cuts in 2001, the estate tax is 0% this year. Fortunately for the sons of Steinbrenner, they will not have to pay 500 million in taxes to the Feds and get to retain ownership of the team.

Lets get into some specifics:

People of all political persuasions and centuries have been debating the validity of a tax on property or assests. Here are a couple comments:

President Teddy Roosevelt: "The man of great wealth owes a peculiar obligation to the State, because he derives special advantages from the mere existence of government."

Former Treasury Secretary and Advisor to Obama Lawrence Summers: "the evidence put forth by lawmakers advocating the repeal of the tax is as bad as it gets. There is no other case than selfishness."

NY Times Writer Paul Krugman: "It is a moral issue"

Harvard Economist Greg Mankiw: Consider the story of twin brothers – Spendthrift Sam and Frugal Frank. Each starts a dot-com after college and sells the business a few years later, accumulating a $10 million nest egg. Sam then lives the high life, enjoying expensive vacations and throwing lavish parties. Frank, meanwhile, lives more modestly. He keeps his fortune invested in the economy, where it finances capital accumulation, new technologies, and economic growth. He wants to leave most of his money to his children, grandchildren, nephews, and nieces.

Now ask yourself: Which millionaire should pay higher taxes?... What principle of social justice says that Frank should be penalized for his frugality? None that I know of.

My Take on the Foundation Issues

The intent of the estate tax was to render to the government a "tax" on the transfer of property or wealth to their children or heirs. Some of the big arguments centered on the fear that wealth would get concentrated in a couple families in the country and that wasn't fair. All the questions in your head can be reduced down to one simple question: Who has the right of property?

It is my opinion that the right of property is the right of use and disposal: just as a man who produces wealth has the right to use it and dispose of it in his lifetime, so he has the right to choose who shall be its recipient after his death. No one else is entitled to make that choice. The right goes to the original producer of the wealth. Others claim that the heir did not work to produce the wealth, so he has no inherent right to it. That may be true. But, if the future heir has no moral claim to the wealth, except by the producer's choice, neither does anyone else--certainly no the government or "public."

Policy Solutions and Issues

I know I have already written a very long blog post, but I think it highlights a greater issue at play: government's goals of redistributing wealth and addressing income inequality. Many wrongly see the tax as a mode of redistribution from the wealthy to the not-so-wealthy. But in reality, the death tax punishes middle and low-income Americans by discouraging new hiring and stifling new growth.

I support the full repeal of the tax on a couple grounds:

1) It kills small businesses and potential for hiring.
Here a couple testimonials:
General Contracting Co.
Grande Harvest Wines

2) Create 1.5 million jobs
Former CBO Director published a study

3) Only affects 2% of Federal Revenue
It could actually be negative revenue because families pass down fortunes early that are then taxed at much lower rates. This study outlines it.

Conclusion

I have a feeling that lots of people will disagree with me, but that is what the "Arena" is for. I would love to talk about the foundational issues of property or the policy implications of a certain tax rate or full repeal. In the words of my man Milton Friedman:

He told a young man once: "The challenge of my generation was to build an intellectual defense for freedom...The challenge of your generation will be to keep it."

Blake

Friedman Fridays--Education

Let's talk Education!

Lets assume, for many years, the government had undertaken to provide all the citizens with shoes on the grounds that they are an urgent necessity. If someone was to suggest that this field be turned over to private enterprise, he would probablybe told something like: "What! Do you want everyone except the rich to walk around barefoot?"As a result of the fact that education has been tax supported for such a long time, most people find it hard to consider an alternative. Yet, there doesn't seem to be anything unique about education that distinguishes it from many other human needs, like shoes, that are filled by private enterprise. The shoe industry seems to be doing its job with immeasurably better than public education is doing its job.

Admittedly, I have never thought much about how education is administered. Hey! I had a really good experience in public schools. But, as I spent time inside inner city Jackson and in the Delta, I experienced the crisis of public education. I decided to looked at my public education objectively, and it didn't make sense:

I almost had to move schools in middle school because the back of my neighborhood was being redistricted into Brandon. Thinking back on that experience... My educational future was not based on my intellect or choice, but on my geography. Luckily for me, Brandon schools were not much different than Northwest. But, what if I lived in Jackson? New Orleans? the Delta? This led me to ask a couple questions... Should the government be permitted to remove children forcibly from their homes, with or without the parents consent, and subject the children to educational training and procedures of which the parents may or may not approve? Should citizens have their wealth expropriated to support a failing education system and children who are not their own? Seems to be counter-intuitive to America's ideals of individual rights. The fact remains: most parents are compelled to send their children to State schools since they are taxed to support these schools and cannot afford to pay the addition fees to send kids to private schools.

The solution is to bring education into the marketplace. When educational institutions have to compete with one another in the quality of training they offer--when they compete for the value that will be attached to the diplomas they issue--educational standards will certainly rise. When they compete for services of the best teachers, the teachers will attract greatest number of students, then the teachers salaries will certainly rise.

Our industry has followed this model through our history--our education should be permitted to do so. Unfortunately, our governmental solutions to education have hurt the very people they were intended to help (much like other government initiatives like the minimum wage--more on that later). It should be turned over to private competition and enterprise not because education is unimportant, but because it is crucially important.

Charter schools, vouchers, and a free-market approaches are amazing success stories and should serve as model on how to combat poverty and education reform.

Washington D.C

Harlem Children's Zone

New Orleans

Even Haiti!

Education shouldn't be a partisan issue. This issue is so important to the future of our nation. I think this could be the right track.. what do you think?

Blake
(credit to Ayn Rand's Capitalism: A Unknown Ideal)

Laffer Curve and Higher Taxes

The Democrats want to raise taxes as a way to grow government and allow for increased spending. I think this could be bad policy for a multitude of reasons. First off, increased tax rates do not necessarily translate into more government revenue. Higher tax rates on income decreases the incentive to work while higher tax rates of goods leads some consumers to forgo those particular goods. Higher rates also leads people to cheat on taxes or find loopholes. Let me explain:

In 1991, as a way to shift tax burden towards the rich, a 10% luxury tax was passed to be tacked on to purchases of things such as boats costing more than $100,000, cars over $30,000 and other “luxury” items. Key Democratic figures, the likes of Ted Kennedy and George Mitchell, patted themselves on the back for delivering the law that would force the wealthy to pay a heftier portion of government revenues. It was Republican President George Bush who signed the law, so I can safely say both parties worked together, against common sense, to hurt the economy with this tax. What was the effect of this law?

Welp, when the tax went into effect, luxury yachts sold in the United States fell by 77% in the first year. The wealthy that wanted yachts either forwent the purchase or bought the yacht overseas where the tax could not be tacked on. The 10% tax effectively ruined the American yacht building industry. Within the first 3 months of the tax becoming law, zero yachts were sold in the US. Zero! Not a single yacht. Because yachts were not saling, 25,000 workers in the industry lost their jobs. A law put into place to increase the tax burden on the “wealthy” yielded a grand total of nothing in the first few months. The advocates behind the tax promised equality because the rich would pay more, but in reality, the middle class felt the full brunt of the tax. Fortunately, the tax was repealed in short order.

Nearly a decade later, in 2000, Patrick Kennedy (notice the last name) proposed a tax credit for those who buy boats longer than 50ft. What had history taught this young democrat? A tax break for the wealthy might not be that bad of an idea. Why though? His district in Rhode Island builds a lot of yachts and if the wealthy have an incentive to buy more luxury yachts, his district would benefit tremendously in more jobs for the middle class. Weird. He realized a common sense idea. While I’m not exactly for this kind of political bending of the tax code because it skews the free market system (maybe I’ll hit that up later, got plenty of thoughts on the housing credit), a tax break/credit, can oddly enough, be good for everybody.

Introducing the Laffer Curve.

(I made this graph with no particular reference, for example only)

The Laffer Curve illustrates the economic impact of tax rates and how they relate to total tax revenue. The case of the yachts helps explain. We can all agree that if the tax rate is 0%, the government would receive no tax revenue (the government would not function, anarchy would take over, the country would fall to third world status, everybody would die. Not good). But, if the tax rate was 100%, the government would also receive no tax revenue because there would be zero incentive to work (the government would not function, anarchy would take over, the country would fall to third world status, everybody would die. Not good). So, as the diagram will show, the tax rate should be somewhere between 1% and 99% to generate tax revenue, but where? If the rate is 95%, while workers will keep 5%, there is very little incentive to work and the government would receive very little in tax revenue because only a small percentage of the population would be willing to work. On the opposite side, if the tax rate is 5%, nearly everyone would be willing to work but the government would probably not have enough tax revenue to provide its basic functions and would be ineffective. Too far to either extreme is problematic. Looking at the chart you can see that there is one point were government revenue is maximized, if the tax rate increases from that point, total government revenue will actually fall (not only is there a problem with a high tax rate decreasing someone’s incentive to work, but it also leads to more tax cheats, either way, revenue falls.) If the tax rate is on the downward slopping side of the curve, a decrease in tax rate would actually increase tax revenue. I could spend a good deal of time explaining why the government does not need to be at the point of maximum revenue but I have already probably lost most. Sorry that I am completely incapable of being short and sweet.

TAX RATE * TAXABLE INCOME = TAX REVENUE

Even John Maynard Keynes once said, “….taxation may be so high as to defeat its object, and that, given sufficient time to gather fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”

I’ll let you decide how this little tidbit of economics can be attributed to policy decisions in Washington today.

Really?

President Obama has recess appointed Donald Berwick to head the Center for Medicare and Medicaid Services (CMS). Obama announced him in April, but was going to be subject to filibuster. Because of his radical ideology on medical care, Republicans were strongly opposed to the nomination. Even Democrats were nervous about a vote on him. But, now, with this maneuver, there is nothing politicians or the American people can do to stop this man from running over 1/3 of our health care system. To claim that he is doing this over partisan game-playing is ridiculous--the Finance Committee never set up a hearing for him! The NY Times isn't even buying this explanation. To be fair, Bush engaged in same practice of recess appointments. I do not like any president engaging in this practice.

I did not get upset when the President called the opposition crazy last year when we talked about socialized medicine and rationing. If he was trying to mask his views, then this has permanently outed himself. Here are some videos of our new leader of 1/3 of health care:




I guess it really isn't a secret anymore why Obama's approval rating is down to 38% among independents. I hope this post did not seem too harsh, but health care in this country affects every American. I think it is prudent to know who will be leading it.

Blake