Category: Economics

PhD-level thinking in economics

by philg

“Fed researchers: $15 minimum wage in Minneapolis and St. Paul boosted pay — but cost jobs” (MinnPost.com):

The push to raise the minimum wage to $15 an hour in both Minneapolis and St. Paul has successfully boosted the average worker’s hourly pay in both cities, but it has also led to sharp drops in the numbers of available jobs and hours worked, new research from the Federal Reserve Bank of Minneapolis has found.

Note that this is consistent with what I learned from fast food restaurant owners in Maskachusetts. Workers aren’t stupid so they cut their hours to retain eligibility for free housing, free health care, free food, and free smartphone. (See Fast-food economics in Massachusetts: Higher minimum wage leads to a shorter work week, not fewer people on welfare)

Here’s my favorite part of the article:

“Somebody who loses their job because of a minimum wage increase is going to find another job,” said UC Berkeley economist Michael Reich. “Probably not right away, they’re going to work fewer weeks per year — but they’re not going to be permanently unemployed.”

Professor Dr. Jill Biden, PhD’s colleague Professor Dr. Reich, PhD posits the existence of someone who wasn’t worth $15/hr to Employer A. In the superstar academic’s opinion, this person will be, after a period of unemployment spent playing Xbox, drinking beer, and watching TV, worth more than $15/hr to Employer B. (The worker has to produce at least some amount over $15/hr in order to be worth hiring at $15/hr.) A combination of unemployment and increased age will make the worker more valuable.

These are the technocrats pulling the levers of the U.S. economy…

Full post, including comments

Measuring income inequality in a centrally planned economy with income-based pricing

by philg

We are informed that income inequality is one of the biggest problems facing Americans, but I wonder if the activities of central planners is going to make it ever-tougher to get accurate measurements. Looking at gross cash income is relatively easy. Adjusting for federal, state, and local income taxes is also relatively easy. It gets tougher when we want to factor in the value of means-tested welfare programs such as housing subsidies from a housing ministry, Medicaid, SNAP/EBT, and Obamaphone, but some valiant attempts have been made in this area (see “Is rising income inequality just an illusion?” (The Hill, 2021) for a description of some of the efforts).

I’ve noted here that spending power for cultural activities is actually infinite in many states for those who are on welfare (see “Why you want to be on SNAP/EBT“) because the price of museum or garden admission, for example, is reduced to $0.

California’s central planners are adding an interesting wrinkle with income-based electricity pricing. “PG&E monthly bills could jump for many customers due to new state law” (Mercury News, April 12):

Customers for California’s three major power companies — including PG&E ratepayers — can expect to see some big changes in their monthly electricity bills in the coming years as compliance with a new state law begins to unfold.

PG&E, Southern California Edison and San Diego Gas & Electric, the three major California utilities whose services include electricity, have filed a joint proposal with the state Public Utilities Commission that sketches out proposed changes in monthly bills.

At present, those bills are primarily based on how much electricity and gas customers consume.

A new proposal would add a fixed monthly charge that would be based on the household income levels of the respective customers.

PG&E says many customers would ultimately pay less for electricity — although the distinct possibility remains that an unknown and potentially significant number of more affluent customers might wind up with even higher electric bills.

The new law creates a need for a new government ministry of income verification:

It also appears that a formal effort will be made by state officials to confirm the household income declarations of utility ratepayers.

“The proposal recommends a qualified, independent state agency or third party be responsible for verifying customers’ total household incomes,” PG&E said in an emailed statement.

California is usually the leader in new ideas for expanding government. As more states adopt programs like this, I wonder if it will become practically impossible for academics to estimate spending power inequality in the U.S. (the relevant measure; if you can spend $200,000 per year on housing, health care, food, etc., what does it matter if your earned income is $0?).

This reminds me to relive some happy California memories. From Queer Ecology at Muir Woods (November 2020; San Francisco schools were closed, but youngsters could go to the forest (reservations required) and learn):

San Diego trip report and Meet in San Diego tomorrow or this weekend? describe my June 2022 trip to the Golden State:

Related:

Full post, including comments

Silicon Valley Bank and Moral Hazard

by philg

Dedicated to diversity and regulated/supervised by a San Francisco Fed that was dedicated to diversity (see also “San Francisco Fed elevates a gay woman — its vice president — to the top job” (LA Times, 2018)), Silicon Valley Bank is being described as a casualty of its own wokeness. A friend who used to run a multi-$billion investment fund sent me this article by an economist, which attributes the need for an FDIC bailout… to the existence of the FDIC. Some excerpts:

The wrong way to think about moral hazard

Deposit insurance gives bank executive an incentive to take socially excessive risks. In some cases the risks won’t pay off. But that doesn’t mean executives don’t have an incentive to take excessive risks.

Things didn’t pan out for SVB. But that doesn’t mean their executives made an unwise gamble. It’s very possible that SVB’s strategy had a very high expected payoff, and they were simply hit by bad luck (rising interest rates.) Of course from a social perspective their decisions may have been bad, but not necessarily from a private perspective. “Heads I win, tails part of my losses are borne by taxpayers”. Of course I’d take more risk with those odds.

… back in the 1920s people cared a great deal about bank safety. Banks knew this, and managed their balance sheets far more conservatively than do modern banks. That’s why big city banks used to look like massive Greek temples; they had to convince depositors that they had the capital to survive hard times. The vast majority of big banks survived the Great Depression. US GDP in 1929 was about $100 billion and deposit losses during the Great Depression were $1.3 billion. Today, a 50% fall in NGDP (as in 1929-33) would wipe out almost our entire banking system. Modern bankers are far more reckless “despite” regulation. The negative effects of deposit insurance are far more important than the positive effects of regulation.

How do we get to Yglesias’s utopia [of more big banks]? Abolish deposit insurance (he wouldn’t agree). You’ll see a massive shift of deposits toward the larger, more diversified banks, making our system resemble the Canadian system.

FDR opposed deposit insurance, as he (correctly) feared it would create moral hazard. Unfortunately, Congress refused to listen to his good advice.

“FDIC fees are not a tax on the public.” Yes, they are.

“We aren’t bailing out bank executives”. No, we are not bailing out SVB executives, but we are (implicitly) bailing out their competitors.

I disagree with that last statement. The executives at SVB got to keep all of their big earnings from the big years that they had due to their aggressive risk-taking. Mary C. Daly gets to keep her $500,000+/year (including benefits) SF Fed compensation from incompetently supervising SVB. When things fell apart, none of these people had to pay anything back to the FDIC. It is the chumps with low-interest accounts at conservative banks who are left to pay.

Separately, I’m shocked that McKinsey wasn’t involved somehow in SVB! How can there be a group of elites robbing the peasants without McKinsey’s assistance? At least one of the usual suspects was there… “How Goldman’s Plan to Shore Up Silicon Valley Bank Crumbled” (WSJ):

Silicon Valley Bank executives went to Goldman Sachs Group Inc. in late February looking for advice: They needed to raise money but weren’t exactly sure how to do it.

Soaring interest rates had taken a heavy toll on the bank. Deposits and the value of the bank’s bond portfolio had fallen sharply. Moody’s Investors Service was preparing for a downgrade. The bank had to reset its finances to avoid a funding squeeze that would badly dent profits.

While few could have predicted the market’s violent reaction to the SVB disclosures, Goldman’s plan for the bank had a fatal flaw. It underestimated the danger that a deluge of bad news could spark a crisis of confidence, a development that can quickly fell a bank.

Goldman is the go-to adviser to the rich and the powerful. It arranges mergers, helps companies raise money and devises creative solutions to sticky situations of the financial variety—a talent that has made the firm billions.

Yet, for SVB, Goldman’s gold-plated advice came at the steepest possible cost. SVB collapsed at warp speed in the second-largest bank failure in U.S. history, setting off a trans-Atlantic banking crisis that regulators are working furiously to contain.

How big was the failure compared to the investments that are needed to build things with silicon? SVB’s pre-coronapanic/free-money-shower value was about $13 billion. A single Samsung fab is on track to cost 25 billion Bidies: “Samsung’s new Texas chip plant cost rises above $25 billion” (Reuters). The bump due to inflation in this one factory, according to the Reuters article, is in the same neighborhood as the SVB market cap, at least in nominal dollars.

We’re not hearing much about Signature Bank’s failure. For 8 years up to and including its seizure by the FDIC, Barney Frank was on the board: “Barney Frank defends role at Signature Bank: ‘I need to make money’” (FT):

FT says that Barney Frank made about $2 million by serving on the board of failed bank. None of that will be clawed back by the FDIC…

Full post, including comments

Why do we have trouble maintaining infrastructure if we’re richer than ever? (Death Valley examples)

by philg

We are regularly informed by politicians and their media allies that the United States is the best and richest country in the world and that Americans have never been richer. And nobody is richer in the U.S. than the federal government, which can and does literally print money (soon to mint a $1 trillion coin because the best way to address a financial problem is never to work harder or spend less?). Here are photos from Death Valley National Park, owned by the federal government, from December 2022:

What was built as a wheelchair-accessible path will no longer work for our disabled brothers, sisters, and binary-resisters because the pavement is so deteriorated. How about at the local airport? A core mission of the federal government is making sure that U.S. airports are functional and this one is actually owned by the Feds.

The runway at Furnace Creek Airport, L06, is described as being “In Failed Condition”. The aspiration for the airport, lowest in North America at 210 feet below sea level, is greatly reduced from 1954, when it had a jet-capable 5,500′ runway. Airnav says “UP TO 4 INCH SALT HEAVE ARND RWY CRACKS. COULD DMG ACFT WITH WHEEL FAIRINGS OR CAUSE A POTENTIAL TO BLOW OUT A TIRE.” The National Park Service, whose job it might be to keep this airport in decent condition, says “poor condition; numerous cracks, bumps, ruts, and areas of crumbling asphalt over the entire length of the runway. Consider treating like a gravel/unpaved surface, and use caution at takeoff and landing.”

Pilots in California and Nevada used to meet at this airport to socialize and play a round of golf. Now it is useless except to helicopters and maybe a few taildraggers with tundra tires.

How can we square the myth (we’re richer, smarter, and better than ever) with these facts on the ground of infrastructure that we were once rich enough to create but are no longer rich enough to maintain?

The news is not all bad if you’re a member of the laptop class in Death Valley. Not only did the working class have to pay $7,500 toward your electric car (plus any wealth transfers ordered by a state), but the working class also has to buy you free electricity in Death Valley at public chargers (we plugged in our rented BMW hybrid). The working class member’s gas-powered dinosaur must be filled at $5/gallon within the park:

Full post, including comments

The folks who borrowed $31 trillion did not destabilize the American financial system…

by philg

… it is the folks who don’t want to borrow another $31 trillion who are guilty of destabilization.

October: “U.S. National Debt Tops $31 Trillion for First Time” (nytimes)

This month: “Speaker Drama Raises New Fears on Debt Limit” (nytimes)…

Representative Kevin McCarthy of California finally secured the House speakership in a dramatic vote ending around 12:30 a.m. Saturday, but the dysfunction in his party and the deal he struck to win over holdout Republicans also raised the risks of persistent political gridlock that could destabilize the American financial system.

Economists, Wall Street analysts and political observers are warning that the concessions he made to fiscal conservatives could make it very difficult for Mr. McCarthy to muster the votes to raise the debt limit — or even put such a measure to a vote. That could prevent Congress from doing the basic tasks of keeping the government open, paying the country’s bills and avoiding default on America’s trillions of dollars in debt.

The only way to stabilize our economy and currency is to borrow and spend more!

Speaking of the economy, here are a few photos from my old neighborhood in Cambridge, Maskachusetts. The marijuana stores are thriving while the bicycle shop went bankrupt:

Full post, including comments

How are the Europeans doing with their Cheat Our Way to Economic Prosperity plan?

by philg

Back in September, the Europeans decided to deal with energy price inflation by cheating. They’d hide the market prices from consumers by borrowing (printing?) money. “Germany will borrow nearly $200 billion to cap consumers’ energy bills” (CNN, 9/29/2022):

The German government announced plans to borrow €200 billion ($195 billion) to cap natural gas prices for households and businesses. That’s a bigger price tag than the £150 billion ($165 billion) the UK government is expected to borrow to finance its own price cap.

Germany, Europe’s biggest economy, is trying to cope with surging gas and electricity costs caused largely by a collapse in Russian gas supplies to Europe. Moscow has blamed these supply issues on the Western sanctions that followed its invasion of Ukraine in February.

“Prices have to come down, so the government will do everything it can. To this end, we are setting up a large defensive shield,” said German Chancellor Olaf Scholz on Thursday.

The package will be financed with new borrowing this year, as Berlin makes use of the suspension of a constitutionally enshrined limit on new debt of 0.35% of gross domestic product.

Lindner also said the steps would act as a brake on inflation, which has hit its highest level in more than a quarter century.

Consumer prices rose 10.9% in the year through September, provisional data from the country’s statistics office showed on Thursday.

As in the U.S., when the government spends more, inflation is guaranteed to come down (our “Inflation Reduction Act”). It’s been a few months How has the decision to pretend that gas prices didn’t go up gone? This December 14, 2022 report says that inflation across Europe is typically in the double digits. How about in Switzerland, where they deny the Science of printing money? From December 1: “Swiss inflation steady at 3.0% in November as expected”. The U.S. Congress and Federal Reserve have proven that there is no need to work harder in order to become richer and yet the Swiss reject this proven scientific result.

At least back in October, inflation wasn’t keeping folks in Paris from partying:

What about our own stagflation? “Home Depot co-founder says ‘socialism’ killed motivation to work: ‘Nobody gives a damn’” (New York Post, 12/29/2022):

The 93-year-old billionaire co-founder of Home Depot blamed “socialism” for Americans lacking the motivation to work and warned that the future of capitalism is in danger.

Bernie Marcus — who along with Arthur Blank built Home Depot into a nationwide empire from just two stores founded in Atlanta in the late 1970s — told Financial Times on Thursday, “Nobody works.”

“Just give it to me. Send me money. I don’t want to work — I’m too lazy, I’m too fat, I’m too stupid,” Marcus said about what he perceived as the attitude permeating the country.

“Nobody gives a damn.”

The longtime Republican backer ticked down a list of people he blamed for standing in the way of private enterprise, including President Biden, “the woke people,” the news media, Harvard graduates, MBAs, lawyers and accountants.

“I’m worried about capitalism,” said Marcus, whose net worth is estimated by Bloomberg at $5.25 billion. “Capitalism is the basis of Home Depot [and] millions of people have earned this success and had success.”

Billionaires can’t buy this Bernie because he already is one!

Full post, including comments

One year from unionization to shutdown for a Maskachusetts sandwich shop

by philg

My old neighborhood in Harvard Square was home to a 30-year-old sandwich shop whose workers took advantage of the coronapanic labor market to unionize in the fall of 2021. After 9 months of union bliss, they responded to Bidenflation by demanding higher wages. The employer’s counter-offer was to shut down entirely:

From the Harvard Crimson (November):

The popular Boston-area coffee chain Darwin’s Ltd. announced plans to close the store’s original Harvard Square location at the end of the month, prompting some workers to stage a protest at Cambridge City Hall on Sunday denouncing the move.

Darwin’s United — a union representing the chain’s employees — responded by organizing a protest at City Hall, where workers rallied on Sunday before gathering outside the Darwins’ Cambridge home.

“We have been offered no guarantees of jobs for those who want to stay, no guarantee that workers will have an income going into winter,” the union wrote in a Twitter statement. “We will not back down, we will not take this.”

At the rally, union members called on the Darwins to keep workers at the Harvard Square store employed if they wished to stay on and reiterated past demands for $24 per hour wages, three weeks paid time off, and zero-deductible healthcare for employees.

“We know that Steve has long been considering selling the business, but the timing really couldn’t be worse,” said Sam White, a Darwin’s United representative. “We’re telling him to come back to the bargaining table and respond to our proposals.”

A majority of workers at the four Darwin’s locations voted to unionize in September 2021 and began negotiations with management for a new contract for workers. Since then, talks have stalled, according to White. In March, workers at all four locations staged a mid-morning walkout to raise pressure on the owners.

Maybe things are more harmonious on the West Coast? The academics at UC Berkeley claim that they know what workers are entitled to and how to redress inequality in the United States. Yet their own workers had to go on strike to try to force the university to pay a fair wage. “University of California workers continue strike amid threat of arrests” (Guardian, December 10, 20220):

Tens of thousands of academic workers throughout the University of California are currently on their fourth week of striking for a new union contract and the situation is intensifying amid the threat of arrests after direct actions by some strikers.

The strike of 48,000 academic workers, including graduate workers, academic researchers, postdoctoral scholars and teaching assistants, began on 14 November and is the largest in the history of higher education in the US.

About 12,000 postdoctoral researchers and academic researchers reached a tentative agreement with the University of California on 29 November, which included pay increases up to 29%, but have continued striking in solidarity with other academic workers still pushing for a deal and while the agreement is put to the membership for a vote.

Graduate workers at UC have reported issues in affording rent, food and basic necessities in the cities they work and live in on salaries averaging about $23,000 annually.

If the politicians and academics in California are experts on fairness, why did their workers need to strike? University of California professor Robert Reich, for example, is fond of scolding America’s evil capitalists for underpaying workers. Why didn’t he pay his own slaves fairly?

Full post, including comments

The Brits don’t love the world’s best health care system

by philg

From a bookstore in Kensington:

A Guardian review says it is all about the death panels:

Side Effects forces us to face up to – rather than ignore or deny – the realities of balancing the vast sums that can be spent on a single, seriously ill patient against the “distressing conditions in which many frail and elderly people live out their final years, often as a result of lack of adequate funding”. It is all too tempting, Haslam recognises, to dismiss as abhorrent the act of attaching a price tag to a person – as though their worth can be measured in pounds and pence. A human life, surely, is priceless? No amount of mere money or stuff comes close? But anyone who is actually involved in the real, messy world of healthcare knows full well this is nothing but rhetorical posturing.

Later that afternoon I was talking to a guy who is married to an emergency medicine doc in London. With the cost of living adjustment, she can expect to earn 80,000 pounds per year (i.e., $80,000!) after 15 years of slavery for the NHS (age 40). “A train driver will earn more,” he noted, “because their union is actually effective.”

Who is smarter than the Brits for running a universal health care system that doesn’t bankrupt everyone? Africans! “Middle class Nigerians who need any kind of advanced medical treatment will come here on a tourist visa,” my friend explained, and go straight from Heathrow to an NHS hospital. Once they’re in the system they get treated just like anyone else. After consuming what might be hundreds of thousands of pounds in services and recovering, they go back to Nigeria.”

What else did they have in the bookstore? It’s “smart thinking” to fight structural racism:

An American hero who inspires Biden voters can also inspire the British:

Although the age of consent in the UK is 16 (e.g., a 16-year-old could consent to have sex with a rich guy after a Gulfstream flight to somewhere luxurious) and prostitution is a legal career for an 18-year-old, the British are apparently shocked about what Jeffrey Epstein was allegedly up to:

Anyone who isn’t a cisgender heterosexual white male is in trouble:

England was saved from German invasion by women of color who were willing to risk their lives in combat while white men relaxed in the safety of their country homes:

Despite the fact that some heroines exist, the entire Earth is, literally, toast because of those who Deny the Science (i.e., unlike World War II, this is not a war that can be won by women alone):

An entire section of the front of the bookstore was devoted to a personage who by right should have been King of England and was denied this position purely on account of her gender ID:

Circling back to the British health care system… if we aren’t willing to use death panels or at least a quality-adjusted life year calculation the way that the Brits do, how are we going to keep health care from growing to consume 25 percent of American GDP (a shrinking quantity in the aggregate and, since the population continues to grow via immigration, an even more dramatically shrinking quantity on a per-capita basis)?

Full post, including comments

Wile E. Coyote looks down (U.S. economic downturn has begun in earnest?)

by philg

There’s a sports car dealer next to our favorite taco place here in Jupiter. Their lot was jammed with cars, seemingly twice as full as in the summer. From their perspective, the car market turned about 30 days ago. They’re now paying only MSRP for nearly-new (500-mile) C8 Corvettes. What do they turn around and sell them for? It’s a little unclear because they say “We haven’t had a call for a Corvette in 3-4 weeks. The interest rates have killed demand.” (Note that this is contrary to my theory that we have enough deficit spending and inflation-indexed spending to have inflation even if nobody does any borrowing; see Can our government generate its own inflation spiral? and Economist answers my question about high interest rates and high deficits.)

How about real estate? There’s a house in our neighborhood (built by the MacArthur Foundation for middle-class and upper-middle-class people!) whose $3.35 million asking price in April 2022 seemed aggressive, particularly since there was no pool and the new owner would have to lease it back to the sellers until October when the sellers expected their new-built house to be ready.

Here’s the “value history”:

In June 2022, there actually was a greater fool who agreed to pay $3 million for this albatross. But then it seems that this person disappeared or wised up and the closing price was $2.4 million (last week):

If you’re depressed because you forgot to sell all of your assets in March 2022, this message from the taco place might be useful:

If you’re depressed because you were dumb enough to buy a house early in 2022 at early-2022 prices (looking in the mirror is painful!), you can be comforted that you don’t live in San Francisco, which MSNBC uses as shorthand for a truly crummy and crime-plagued urban environment (the MSNBC interviewer says, regarding a higher-crime Manhattan, “We’re worried this could be San Francisco”):

Readers: What are you seeing? Did we run off the cliff a few months ago and not notice until now?

Full post, including comments

What kind of economic advice is Joe Biden getting?

by philg

Joe Biden’s economic policy seems to follow the same logic as that used by my 88-year-old mom’s circle of friends. These women are generally innumerate, despite having enjoyed elite educations, because they took their last math class in high school and, as stay-at-home wives, could enjoy afternoons at the theater rather than reviewing accounting reports or doing the other tedious stuff with numbers that is required to earn money. They believe that the U.S. has an infinite supply of wealth, partly because Asians are inferior to Americans in creativity and, therefore, cannot truly compete with us. Due to the fact that our wealth is infinite, there shouldn’t be any limit to what the government can spend. Any spending program that might help at least one American, therefore, should be approved.

Joe Biden seems to hold similar beliefs, but what about the professional economists who have been advising him on his Inflationary Journey? Jerome Powell, chair of the Federal Reserve, must be one of the world’s leading experts on macroeconomics, right? Wikipedia says that his/her/zir/their degrees are in “politics” and law. I.e., there was no formal training in economics behind “Fed’s Powell says high inflation temporary, will ‘wane’” (AP, June 2021).

The Chair of Biden’s Council of Economic Advisors is Cecilia Rouse. In May 2021, she characterized inflation as “transitory” and “temporary” (Reuters). Here she is in June 2021 doubling down:

And then in December 2021… “Top Biden Economist: ‘I Really Do Believe’ Inflation Will Ease” (Bloomberg):

“As supply chains ease, as people get back to work, as we normalize our economy, the price pressures will start to ease,” said Rouse, who’s on leave from her post as a Princeton University economics and education professor.

Rouse called the coronavirus the biggest, ongoing threat to the U.S. economy — one that could upend Americans’ willingness to take jobs, travel and spend money on activities like dining out. It’s still too early to know the ways in which the new variant called omicron could affect the U.S. economy, she said.

(It is not politicians ordering lockdowns and school closures that are threats to the economy, but SARS-CoV-2 itself.)

She’s 58 years old so at least has the potential to not be senile. On the other hand, Cecilia Rouse seems to be a specialist in labor economics, a potentially irrelevant specialty given a country where the long-term trend is people preferring not to work:

Google Scholar shows this top advisor’s papers. A sampling:

  • “Orchestrating impartiality: The impact of blind auditions on female musicians” (possibly flawed; see also this critique)
  • “Diversity in the economics profession: A new attack on an old problem”
  • “Constrained after college: Student loans and early-career occupational choices”
  • “The Costs and Benefits of an Excellent Education for All of America’s Children” (Science says that the obvious answer is to close schools entirely for 12-18 months, particularly anywhere that Children of Color are to be found)

None of these seem to relate to the central questions of our day: Can the government borrow and/or print $31 trillion without causing hyperinflation? If everything that the government spends is indexed to inflation, can the government itself cause an inflation spiral?

Is it possible that the central planners are completely unqualified for the job that they’ve given themselves?

Full post, including comments