Tag Archives: Economics

Commentary

Basic economics: what’s wrong with raising minimum wage rates?

7 Comments
Economist Thomas Sowell
Economist Thomas Sowell

From Investors Business Daily, an article by famous economist Thomas Sowell.

Excerpt:

Political crusades for raising the minimum wage are back again. Advocates of minimum-wage laws often give themselves credit for being more “compassionate” towards “the poor.”

But they seldom bother to check what are the actual consequences of such laws.

One of the simplest and most fundamental economic principles is that people tend to buy more when the price is lower and less when the price is higher.

Yet advocates of minimum-wage laws seem to think that the government can raise the price of labor without reducing the amount of labor that will be hired.

[…]Switzerland is one of the few modern nations without a minimum-wage law. In 2003, the Economist magazine reported: “Switzerland’s unemployment neared a five-year high of 3.9% in February.”

In February of this year, Switzerland’s unemployment rate was 3.1%. A recent issue of the Economist showed Switzerland’s unemployment rate as 2.1%.

Most Americans today have never seen unemployment rates that low. However, there was a time when there was no federal minimum-wage law in the United States.

The last time was during the Coolidge administration, when the annual unemployment rate went as low as 1.8%. When Hong Kong was a British colony, it had no minimum-wage law. In 1991 its unemployment rate was under 2%.

[…]Most people in the lower income brackets are not an enduring class. Most working people in the bottom 20% in income at a given time do not stay there over time. More of them end up in the top 20% than remain behind in the bottom 20%.

There is nothing mysterious about the fact that most people start off in entry-level jobs that pay much less than they will earn after they get some work experience.

But when minimum-wage levels are set without regard to their initial productivity, young people are disproportionately unemployed — priced out of jobs.

In European welfare states where minimum wages, and mandated job benefits to be paid for by employers, are more generous than in the United States, unemployment rates for younger workers are often 20% or higher, even when there is no recession.

Unemployed young people lose not only the pay they could have earned but, at least equally important, the work experience that would enable them to earn higher rates of pay later on.

Minorities, like young people, can also be priced out of jobs. In the United States, the last year in which the black unemployment rate was lower than the white unemployment rate — 1930 — was also the last year when there was no federal minimum-wage law.

Inflation in the 1940s raised the pay of even unskilled workers above the minimum wage set in 1938. Economically, it was the same as if there were no minimum-wage law by the late 1940s.

In 1948 the unemployment rate of black 16-year-old and 17-year-old males was 9.4%. This was a fraction of what it would become in even the most prosperous years from 1958 on, as the minimum wage was raised repeatedly to keep up with inflation.

A survey of American economists found that 90% of them regarded minimum-wage laws as increasing the rate of unemployment among low-skilled workers.

Harvard University economist Greg Mankiw puts the agreement level at 79%. This is not controversial. This is one of the most widely-accepted facts in economics. Generally, if you raise the price of domestic labor, without any increase in worker productivity, then it reduces demand for domestic labor and causes companies to reduce hiring and retention, possibly looking elsewhere for labor. Compassionate-sounding policies actually cause negative results like outsourcing and layoffs. The very people who agitate the most for a “living wage” cause higher unemployment – especially among youth and minorities.

The only sure way to help workers is to give them marketable skills and job experience – that’s what really draws higher salaries and better benefits. And that means advocating for smarter policies: fewer regulations on job creators, lowering the employer portion of payroll taxes, merit pay for teachers, vouchers to encourage competition between schools, making work pay more than collecting welfare for doing nothing. And so on. That would actually solve the problem of people not having work.

Commentary

Thomas Aquinas on law, economics and government

4 Comments

I found three posts at the AEI Values and Capitalism blog authored by a recent graduate of Grove City College.

Here the 3 posts:

I’m going to snip the most interesting parts from each of the 3 posts.

First post talks about the Bible and private property:

What, if any, role does government play in defining, bestowing and taking private property? This question underlies many modern-day political debates, but it’s actually an issue scholars have debated for centuries. At the heart of this debate is the tension between private property and government confiscation: Does private property exist? If so, does government have the authority to take it from the citizens it governs?

[…]“It is false to say that human beings are not permitted to possess their own property,” he writes, implying that individual human beings have a right to the external goods they own and no one else may possess ownership over their goods. The eighth commandment—”Thou Shalt Not Steal”—assumes the principle of private property. God, by commanding man to refrain from stealing from his neighbor, assumes that man can and does own material goods.

[…]In his book “Foundations of Economics: A Christian View,” Dr. Shawn Ritenour of Grove City College puts it quite simply: “Our property is God’s gift.” The socialist idea that property rights come from government is false. Property rights come from our Creator.

So that’s the first thing to get clear. The Bible assumes the concept of private property.

Second post talks about when the government is justified in taking the property of citizens:

Theft is not justified on an individual level or a state level. Stealing is stealing. But if this is true, does government commit theft when it taxes its citizens? According to Aquinas, not quite. “If rulers exact from their subjects what is due them in justice in order to maintain the common good,” he writes, “there is no robbery” (emphasis mine). Government may justly take from its citizens their God-given property only if it promotes justice for the common good of society.

But this criterion is vague. The common good may be defined in a variety of ways. But Aquinas does not leave the reader without qualifying his statement:

But public authority is committed to rulers in order that they may safeguard justice. And so they are permitted to use force and coercion only in the course of justice, whether in wars against enemies or in punishing civilian criminals. (emphasis mine)

Government may take from its citizens, i.e. taxes, for the two-fold purpose of defended them from foreign enemies and convicting domestic criminals.

So the government can take money from citizens for defending them from external threats and internal threats. But what about helping the poor? Who is going to help the poor, if it’s not government’s job?

Third post talks about whose job it is to help the poor:

We must help those in need directly, through private institutions and through the church, not allowing government to become a substitute for our individual responsibility of loving our neighbor. Aquinas writes:

But because many persons are in need, and the same things cannot assist everybody, the dispensing of one’s own goods is committed to each individual, so that each may out of them assist those in need. (emphasis mine)

Because of the magnitude and specificity of each individual’s needs, the government cannot adequately provide for every one of its citizens. As Christians, we must work to provide for our neighbors in accordance with the command in Scripture to love our neighbor as ourselves.

Property is a gift from God—not government—to his people for the purposes of self-preservation and assisting those in need. When private institutions, churches and individuals fulfill their mandate to love our neighbors as ourselves, no need for government involvement exists.

Just a helpful reminder to everyone about what one of the pillars of the Christian faith thought about fiscal policy and the role of government. By the way, if you’re thinking about studying economics and you’re a Christian, I recommend Grove City College.

Christianity and economics

Here’s an interview with Dr. Shawn Ritenour, economics professor at Grove City College. The interview is conducted by Dr. Paul Kengor.

Excerpt:

Kengor: …it seems that the very foundation of economics, not to mention the American republic in some respects, is the right to private property. Do you agree? If so, is that Scriptural?

Ritenour: The foundation of economic activity and policy is private property. All action requires the use of property and all economic policy is about how people can legally use their property. To benefit from the division of labor, we must be able to exchange our products, which requires private property. Private property is definitely Scriptural. The Bible explicitly prohibits theft, fraud, moving property barriers, debasing money, violating labor contracts, as well as coveting. These prohibitions apply to both citizens and rulers. In my text, I apply this conclusion to issues such as confiscatory taxation, government subsidies, business regulation, and monetary inflation.

Kengor: I find it very telling that Karl Marx was first and foremost against private property, not to mention against God as well. In the “Communist Manifesto,” he wrote plainly: “the theory of the Communists may be summed up in a single sentence: Abolition of private property.” And yet, there are some religious left Christians who claim that the Bible, especially in certain Old Testament passages, preaches a form of socialism and even communism. A student of mine had a teacher at a private Christian school in Ohio who instructed the class that as Christians they should be communists. Can you address this argument?

Ritenour: Communism can be condemned strictly on the basis of the Christian ethic of property (among other reasons). Nothing in Scripture either commands or implies that the means of production should be controlled by the state. There are passages in the early chapters of Acts that are often cited as promoting “Christian communism,” but, in fact, actually illustrate Christian sharing. The various Christians still owned their property, but were generous in sharing whenever they saw a need. When Peter rebukes Ananias in Acts 5, he explicitly says that both the property that Ananias and Sapphira sold and the monetary proceeds from selling it were theirs to do with what they wanted. That is not the gospel according to Marx.

Kengor: I like the way you turn the religious left’s thinking on private property on its head. You note that “God prohibits our coveting the property of others.” With that being the case, isn’t it wrong for the government to use the mighty arm of the state to forcibly remove property from one person to give it to another?

Ritenour: I see no other way around that conclusion, especially when we realize that, in our day of mass democracy, the state usually accomplishes policies of wealth redistribution by inciting envy and covetousness among the populace.

Kengor: What about profits? Reconcile the profit motive with the God of Scripture. We have people in this society who portray profits as greedy or unjust.

Ritenour: Profit is the reward entrepreneurs receive for more successfully producing what people want. This is no easy thing to do. Entrepreneurs must invest in present production of goods they sell in the future. Neither entrepreneurs nor government bureaucrats know exactly what future demand will be. Therefore, production necessitates bearing risk. If the entrepreneur forecasts future demand incorrectly, he will waste resources and reap losses. If he forecasts the future correctly, he serves his fellow man by producing goods people want. It seems only right that such producers are rewarded with profit. In a free market, the only way entrepreneurs earn profits is to serve customers better than anyone else.

If you would like to learn more about the relationship between Christianity and economics, then I recommend “Money, Greed and God” and “Indivisible” by Jay Richards. The former is about what the Bible says about economics, the latter is about developing a Christian worldview of fiscal and social issues. If you really want a comprehensive assessment of the Bible and politics, then I recommend Wayne Grudem’s “Politics According to the Bible“.

Further study

News

Stephen Moore: Obama’s failing economy has hit his supporters the hardest

1 Comment

From the Wall Street Journal, a must-read.

Excerpt:

Each month the consultants at Sentier analyze the numbers from the Census Bureau’s Current Population Survey and estimate the trend in median annual household income adjusted for inflation. On Aug. 21, Sentier released “Household Income on the Fourth Anniversary of the Economic Recovery: June 2009 to June 2013.” The finding that grabbed headlines was that real median household income “has fallen by 4.4 percent since the ‘economic recovery’ began in June 2009.” In dollar terms, median household income fell to $52,098 from $54,478, a loss of $2,380.

What was largely overlooked, however, is that those who were most likely to vote for Barack Obama in 2012 were members of demographic groups most likely to have suffered the steepest income declines. Mr. Obama was re-elected with 51% of the vote. Five demographic groups were crucial to his victory: young voters, single women, those with only a high-school diploma or less, blacks and Hispanics. He cleaned up with 60% of the youth vote, 67% of single women, 93% of blacks, 71% of Hispanics, and 64% of those without a high-school diploma, according to exit polls.

According to the Sentier research, households headed by single women, with and without children present, saw their incomes fall by roughly 7%. Those under age 25 experienced an income decline of 9.6%. Black heads of households saw their income tumble by 10.9%, while Hispanic heads-of-households’ income fell 4.5%, slightly more than the national average. The incomes of workers with a high-school diploma or less fell by about 8% (-6.9% for those with less than a high-school diploma and -9.3% for those with only a high-school diploma).

To put that into dollar terms, in the four years between the time the Obama recovery began in June 2009 and June of this year, median black household income fell by just over $4,000, Hispanic households lost $2,000 and female-headed households lost $2,300.

The unemployment numbers show pretty much the same pattern. July’s Bureau of Labor Statistics data (the most recent available) show a national unemployment rate of 7.4%. The highest jobless rates by far are for key components of the Obama voter bloc: blacks (12.6%), Hispanics (9.4%), those with less than a high-school diploma (11%) and teens (23.7%).

This is a stunning reversal of the progress for these groups during the expansions of the 1980s and 1990s, and even through the start of the 2008 recession. Census data reveal that from 1981-2008 the biggest income gains were for black women, 81%; followed by white women, 67%; followed by black men, 31%; and white males at 8%.

[…]Mr. Obama has often contemptuously, and wrongly, branded the quarter-century period of prosperity beginning with the presidency of Ronald Reagan as a “trickle down” era. For many in the groups that Mr. Obama set out to help, a return to the prosperity of that era would be a vast improvement.

The Census Bureau data on incomes include cash government benefits, such as unemployment insurance, disability payments and the earned-income tax credit (but excludes Medicaid and food stamps). Most of the cash programs have surged in cost during the Obama presidency, yet incomes have still declined for the lowest-income eligible groups. This suggests that wages and salaries from employment have shrunk at an even faster pace than the Census data show. The shrinking paychecks of the past four years are consistent with two unwelcome anomalies of the recovery: a swift decline in labor-force participation to 63.4% from 65.5% during that period and a rise in part-time employment.

What all of this means is that the stimulus-led economic revival that began officially in June 2009—Vice President Joe Biden’s famous “summer of recovery”—has only resulted in lower incomes for at least half of Americans, the very ones who were instrumental in electing Mr. Obama twice.

Guess what? Borrowing trillions from future generations to spend on Democrat-run sham companies like Solyndra doesn’t stimulate the economy. Shocking, I know. And yet that’s what we voted for.

Investors Business Daily explains how the President’s own policies are causing the troubles that his supporters are facing.

Look:

More than 250 employers have cut work hours, jobs or taken other steps to avoid ObamaCare costs, according to a new IBD analysis.

Mind the data have been the refrain from the White House as it downplays anecdotal reports of employers limiting workers to fewer than 30 hours per week.

But the anecdotes are piling high enough that they now constitute a body of data that can help gauge the impact of the Affordable Care Act’s employer mandate.

IBD is introducing ObamaCare Employer Mandate: A List Of Cuts To Work Hours, Jobs — a compilation of employers who have opted to restrict work hours to limit new liability for employee health coverage.

As of Sept. 3, this list has reached 258 — including more than 200 public-sector employers.

Almost all of those employers have cut the hours of part-time workers to below 30 per week — the point at which ObamaCare’s insurance mandate kicks in.

A few have cut payrolls to steer clear of ObamaCare’s 50 full-time-equivalent-worker definition of a large employer subject to employer fines. A few others have reduced staff while contracting with employment services firms to limit their ObamaCare exposure.

The Wall Street Journal explains how health care premiums, which Obama promised to LOWER by $2500, are up $3000.

Excerpt:

Central to ObamaCare are requirements that health insurers (1) accept everyone who applies (guaranteed issue), (2) cannot charge more based on serious medical conditions (modified community rating), and (3) include numerous coverage mandates that force insurance to pay for many often uncovered medical conditions.

[…]We compared the average premiums in states that already have ObamaCare-like provisions in their laws and found that consumers in New Jersey, New York and Vermont already pay well over twice what citizens in many other states pay. Consumers in Maine and Massachusetts aren’t far behind. Those states will likely see a small increase.

By contrast, Arizona, Arkansas, Georgia, Idaho, Iowa, Kentucky, Missouri, Ohio, Oklahoma, Tennessee, Utah, Wyoming and Virginia will likely see the largest increases—somewhere between 65% and 100%. Another 18 states, including Texas and Michigan, could see their rates rise between 35% and 65%.

While ObamaCare won’t take full effect until 2014, health-insurance premiums in the individual market are already rising, and not just because of routine increases in medical costs. Insurers are adjusting premiums now in anticipation of the guaranteed-issue and community-rating mandates starting next year. There are newly imposed mandates, such as the coverage for children up to age 26, and what qualifies as coverage is much more comprehensive and expensive. Consolidation in the hospital system has been accelerated by ObamaCare and its push for Accountable Care Organizations. This means insurers must negotiate in a less competitive hospital market.

Although President Obama repeatedly claimed that health-insurance premiums for a family would be $2,500 lower by the end of his first term, they are actually about $3,000 higher—a spread of about $5,500 per family.

So, every cloud has a silver lining, and the silver lining to this Obama-cloud is that at least the people who voted for socialism are facing the consequences of their own economic illiteracy. I hope they learn. But if they don’t learn now, then they’ll learn when the welfare and entitlements run out. I hope that the people who voted for our American Idol president will take a Thomas Sowell book out of the library and learn something about economics for a change.

UPDATE: From Ian B.: 40,000 Longshoremen (union workers) quit the AFL-CIO union. Socialism hurts employers? It’s all so unexpected! How could reality not match honeyed words and good intentions?