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A Joey-Esque Rant

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6/18/2015 4:13:06 PM
Posted: 3 years ago
I just finished a debate on the minimum wage - and, unfortunately, my opponent forfeited, so he likely won't be able to see this thread. I'm not intending this as a call-out toward him, but rather a public admonishment toward everyone (and this applies much more broadly than economics): be careful about you're sources. If you're citing an opinion piece from an already biased source, be careful that the author diligently and copiously documented his sources so that things like this won't happen.

A few links before I rip this source apart.

The debate:
The article:

There was a specific line in this article which completely butchers GDP numbers and attributes causation where it doesn't actually exist, but I'm going to line by line it, as though I were debating this guy. The first red flag is that (a) this comes from Forbes and (b) the website is literally dissociating itself with anyone this guy has to say. To the left, we see "Opinions expressed by Forbes Contributors are their own." In other words, in much the same was Fox dissociates itself with Hannity and O'Reilly by telling us that they're "opinion commentators" (in English, that means they need not fact-check anything they say), Forbes is telling us that any mistake made by these contributors, as deliberate and flagrant as it may be, is his own. Therefore, you'd probably *not* want to site this as the crux of your argument in a debate, especially when your opponent is matching you with meta-studies.

Anyway, let's go through this crap. This may take a few posts.

Disclaimer: I'm on the fence about the MW (my reading of the literature suggests that expanding the EITC would be a far better palliative for these harms), though I enjoy taking the Devil's Advocate position. This isn't an attack *on my opponent*, but on the author of this disingenuous Forbes piece.

He begins:

"The minimum wage is a major anti-jobs policy. Ten states have announced an increase in their minimum wage effective January 1, mostly because their legislation requires an adjustment to the Consumer Price Index inflation measure."

You'd think the first line - an extreme claim - would require extreme evidence, but alas I see none. The second line I fact-checked, and it generally checks out: the 10 states point is right, and six states that I know of have their MW indexed to inflation. So far so good.

"Some political jurisdictions take it further, San Francisco has a minimum over $10 per hour and the state of Washington is above $9 on average. Supporters hail this as a victory for "fairness" and a benefit for poor people. This, it is alleged, will provide more income to support spending and stimulate the economy."

This is a bit of a red herring, because the serious proponents of the MW - i.e., not political pundits - actually don't make the case that it will be stimulative. Much of the literature that's pro-MW posits that it has *no* effect on employment. The benefits, rather, are from greater efficiencies and reducing income disparities, so at most the effects are indirect. I've seen one (reputable - a.k.a study from Dube, Lester, and Reich out of Berkeley) study find positive effects, but the vast majority find either no effect or slight negative effects, so it comes down to a balancing act. Anyway, since this guy is a political pundit at best, and a charlatan at worst, I'll give him a pass on using political hackery - because it isn't quite a "strawman" if he's addressing liberal hacks proclaiming that there are *positive* employment effects from the MW.

"If it works that well, why not make the minimum $50? This would provide someone working 2,000 hours a year an income of $100,000, eliminating poverty and stimulating the economy. Obviously, $50/hour would be detrimental to employment as is $7/hour, it"s just a matter of degree."

Ah, I love this argument! It's a classic reductio ad absurdum, and the second someone raises it, you come to realize that they aren't a serious person, especially if the debate is over the mere *existence* of the minimum wage.

I'll break this down with a fun analogy, just to reduce some of the redundancy.

Let's say you go to the doctor because you aren't feeling well, and he prescribes for you an antibiotic that you are to take twice a day. The reason that you are to take it twice a day is because (a) that's all you actually need and (b) taking more could be harmful to your health. But that it is harmful to your health in absurd portions - i.e., if you chug the whole bottle at once in a stupid attempt to front-load the life of the intake - *does not mean* that in reasonable, controlled and modest amounts that it would be harmful, nor does refuting this extreme case refute the base case. It is reasonable to argue for or against a small increase in the MW without resorting to this ridiculous extremes, and I urge anyone who has ever made this argument to toss it in the wast-paper basket where it belongs. There are *far* better arguments. Use them.

"The President of the Greater New York Chamber of Commerce suggested that the higher labor cost could be offset by eliminating waste in other aspects of the business. Really? So employers are wasting money that they could eliminate and add to the bottom line but they chose not to, to earn less than they could if waste was eliminated. But, with a higher minimum wage they will suddenly eliminate that waste to cover higher labor costs, adding nothing to the bottom line? This is the kind of absurd thinking that leads to bad policy."

He didn't actually link me to the statement or quote it - so I'm not going to go through the trouble of trying to dig up one statement that one guy said that this jackars is probably strawmanning, anyway - but let's just evaluate the argument for its merits. Could the MW conceivably cause a business to reduce waste? Of course it could. The MW could act as a negative shock such that they need to either find some way to foot that bill or risk laying off employees, the latter of which may be difficult in the face of rising demand (i.e., in the face of an already stable economy). In other words, the assumption of rational expectations in the face of rapidly evolving technology is silly. Not to mention, the real argument he *should* be addressing is the efficiency wage hypothesis: that higher wages can basically pay for themselves through lower labor turnover, higher productivity, improved morale, etc. That isn't, of course, to endorse that argument, though it's far more palatable and borne out by reality than this one isolated argument - but, like a typical political pundit, he isn't going to engage, or in fact is unaware, of the *actual* arguments in favor of the MW.

I'm almost out of characters, so I'll continue this in a second post.

DDO's Economics Messiah
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6/18/2015 4:48:59 PM
Posted: 3 years ago
"As a poverty program, raising the minimum wage is like killing flies with a shotgun, not very well targeted. About 60% of the officially poor don"t work, so the only thing raising the minimum wage does for them is to make it harder for them to get a job if they ever decide they want one."

The first line isn't exactly wrong: it's true that some benefits of the MW aren't well-targeted and may go to teenagers, which is why - I would argue - the EITC is a far superior measure.

For the second remark, consider the context: the 60% figure does come from the Census, and it's not wrong, though it was taken *during a year the economy was plagued by a financial crisis.* As I'll discuss later in this rant, this guy hasn't much of a sense of cause and effect, though asserting that the poor are constitutionally incapable or unwilling to work is just false. In some cases, there may be disincentive effects - i.e., losing Medicare coverage - but I see that as an argument for changing *those* laws, not for making this frivolous assumption about the work ethics of poor people. In fact, many work two jobs, and there's a substantial amount of evidence that the federal government pours copious amounts of money into subsidizing these people - $7 billion on just fast-food workers, according to Algretto et al. out of Berkeley. Not to mention, via very basic Macro, increasing the minimum wage would actually *encourage* people to work - i.e., shift out labor supply - which is generally the case as you widen the spread between accrued benefits and earnings, so this point is just silly if his intention is to get people to work more.

"Workers must bring at least as much value to the firm as they are paid or the firm will fail and all jobs will be lost (no GM bailouts are available to our 6 million small employers that employ half of our private sector workforce). Raising the minimum wage raises the hurdle a worker must cross to justify being hired."

Oh, yes, ALL jobs will be lost! Apocalypse will strike, bunnies will no longer be bunnies, the sky will fall, etc.

I'm not going to deny - especially because this is still DA - that raising the wage may in fact invite hurdles to low-skill workers and that some people may in fact be priced out of the job market, ceteris paribus. However, it's disingenuous to assert something like this anecdotally, ignoring the vast array of empirical literature telling us otherwise and the rationale for that (efficiency wage hypothesis), and to assert that productivity is (a) tangible, (b) static, (c) the primary mechanism that determines pay or hiring, when in reality there are a multiplicity of other factors which bear on the risk calculus - and, not to mention, even in a purely rational-expectations model, employers would want to calculate the present value of the discounted future cash flows that worker will bring in. That's much harder to do if the efficiency wage theory, which this guy ignores, were to hold to any degree.

"It is estimated that less than 15% of the total increase in wages resulting from an increase in the minimum will go to people below the poverty line and less than a third of those receiving the minimum wage are families below the poverty line."

Who estimated it? Where's the source? The other of that study? Was it a think tank? Why should I take it seriously? What's their sample period, their methodology, their R^2, etc.?

This is another big problem - don't give me a source that himself doesn't cite his sources He literally could have pulled this from an abstract of a paper from some dipsh1t Heritage Foundation paper, without factoring in or disclosing (a) the check they cut him to cite their crap and (b) the flurry of assumptions made throughout.

From the CBO:

"The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO"s estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold, CBO estimates."

So, sure, many of the gains would go to people above the poverty line, but (a) that's not necessarily a bad thing, because those people are (1) still in need of a raise and (2) still have high MPC's and (b) it concedes that there are actually tangible gains - i.e., that the MW actually accomplishes, at least to a large degree, what it seeks to do.

"Most minimum wage workers are from above median income families. So, most of the people benefiting from the minimum wage are not the intended targets of the "anti-poverty" aspect of raising the minimum wage."

Completely belied by the CBO evidence, but nevertheless this is still a BS claim for the above reasons. Even if the MW isn't as well targeted as it ought to be - and it isn't - this is an opportunity to propel the EITC, not to shoot down the MW, because he's again *conceding* that there are tangible positive impacts.

Now, this next piece is really where my blood starts to boil....

"As a jobs program, raising the minimum wage is a real loser. Congress raised the minimum wage 10.6% in July, 2009 (know of anyone else getting a raise then?). In the ensuring 6 months, nearly 600,000 teen jobs disappeared, even with nearly 4% growth in the economy, this compared to a loss of 250,000 jobs in the first half of the year as GDP growth declined by 4% Why? When you raise the price of anything, people take less of it, including labor. The unemployment rate for teens remains unacceptably high. Workers of all ages that are relatively unskilled are adversely impacted by this policy."

First, the MW increase in 2009 was part of a three-step, incremental increase approved of 2007. Second, "even with nearly 4% growth" point is bullsh1t, because that's referring (1) to a single quarter of growth at the end of a horrid year that contracted 0.24% in real terms and (b) employment tends to lag output changes. Third, these job losses took place amid the worst financial crisis since the Great Depression. This entire argument is post-hoc-ergo-propter hoc, and he's putting his credibility on the line by even rendering such an unbelievably horrid point.

Not to mention, the "nearly 4% growth" point was real, not nominal - and it was for one quarter, at the END of the year, which was probably a slight correction. Nominal was far worse because from March 2009 to September 2009, the U.S. was undergoing *deflation* via the headline PCE index. Deflation pushes up real wages because of downward nominal wage rigidity and thus induces hiring, especially because of the massive leftward shift in AD, and the myriad of research (Rogoff and Reinhart 2009, Romer and Romer 2015) finding that recessions following systemic banking crises have lasting and prolonged effects, primarily because of the ongoing deleveraging cycle. So this point is, again, bullsh1t.

Almost done. One more post ought to do it.

DDO's Economics Messiah
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6/18/2015 5:03:31 PM
Posted: 3 years ago
"Another argument in favor of the minimum wage is that it is a stimulus, introducing new income and spending into the market. But was there more income to spend in 2009 when nearly 600,000 teen jobs were lost? Common sense says that every dollar a minimum wage worker receives must have come out of somebody else"s pocket, either small business owners or their customers. The money for a higher minimum wage does not come from thin air."

Again, the stimulus argument is bullsh1t, and hardly anyone actually makes that claim unless they're arguing that the boost to consumption offsets possible layoffs, and thus the net effects nulls out. Again, the job loss point is stupid and correlation isn't causation - trust me when I say that it was the subprime mortgages, stupid - and he ignores the efficiency wage hypothesis point when it comes to labor costs, and that corporate retained earnings have actually been quite high. Since the bulk - 2/3 - of MW workers come from large corporations, it's unlikely that this would actually have *sharp* negative disemployment effects, so indexing the wage to some measure of market share may be appropriate.

Now, if he wanted to raise the point that *youth* unemployment rises much more than overall unemployment - and it did, and this problem is pervasive in virtually every large industrialized country, sans Germany, which has no MW - then I'm willing to listen and to cede, but he didn't.

"Consider a community based pizza parlor selling 100 pies a day for 360 days at $10 each. Total revenue is $360,000. It employs 10 minimum wage workers earning $7 per hour, working 2000 hours a year, making labor costs $140,000. Assume rent, utilities, equipment, depreciation, insurance, supplies, licenses, and food costs come to $170,000 per year, leaving a profit of $50,000 for the owner and his/her family. Raising the minimum wage $1 would raise labor costs by $20,000 (paying more for the same amount of labor) and reduce profit to $30,000. The owner must either move into a smaller house or raise prices, which reduces the demand for pizza, resulting in the loss of a worker. So, the full increase in the wage cost of an increase in the minimum wage comes out of the pockets of customers or the owner"s family, and the one person who loses a job. There was no net gain in income to increase spending in the community served as every dollar the minimum wage workers received came out of someone else"s pocket in the community."

Interestingly enough... I recall this exact anecdote. I guess my opponent was unable to actually use quotation marks. But, anyway, this is wrong because it's inherently ceters paribus - he isn't accounting for the *net change in labor costs*, the efficiency adjustments, or even the adjustments that large companies like Walmart could make to dividend payouts to weather this storm. Again, this jackars is opining on things he doesn't actually understand, and the addition of numbers only fools the unsuspecting, ignorant reader.

"Supporters of raising the minimum cite poorly done studies by agenda driven "research" groups that allege to show that raising the minimum doesn"t harm employment. This defines common sense and is not supported by good academic research. The Law of Demand always works: the higher the price of anything, the less that will be taken, and this includes labor."

Oh, the irony in this is rich. I don't cite the EPI, or the Center for American Progress, or the Agenda Project, or other such bullsh1t - and if I pay you that respect, don't cite Heritage, Cato, or the American Enterprise Institute. I can give you actual, tangible studies - and my debate has many of them - from MIT, Berkeley, the NBER and elsewhere finding no net effect, so this disingenuous hypocrite need not lecture *me* on what qualifies as a genuine study. The irony of this is looming large, especially since he won't even cite his own sources.

"Firms cannot pay a worker more than the value the worker brings to the firm."

Already addressed - not tangible, productivity isn't static, assymetries of bargaining leverage, etc. Next.

"Raising the minimum denies more low skilled workers the opportunity to get a job and receive "on the job" training."

Bullsh1t, it improves turnover such that it *encourages* businesses to to hire, to maintain, and to train otherwise unqualified workers.

"The impact of raising the minimum wage in 2009 on teen employment makes it very clear that this is especially harmful for young teen workers looking for their first opportunity to have a job."

You mean the numbers you cherry-picked amid a fcking financial crisis? Yup.. those don't say what you think they say.

Sorry if I'm getting more crude and less thoughtful in my critiques. I didn't think this rant would go on for this long, lol.

"Raising the cost of labor raises the incentive for employers to find ways to use less labor."

Extremely simplistic, especially if there are indirect gains. A large body of research suggests otherwise.

I should probably link to some recent work Krugman and Dube did on this in the econ blogosphere, but I'm too lazy. Someone else can find it, or I'll link to it later.

"Most minimum wage earners are not in poverty, yet their employment opportunities are impaired as well as those who are."

100% false - MW workers are, by definition, in poverty because the MW pays starvation-level wages. Whether welfare benefits or the EITC push them out of poverty is irrelevant. Not to mention, he spoke earlier of the *benefits* from the MW, not of overall MW workers. The benefits are far broader than simply people earning the current value of the MW.

"This is but one of the poorly designed policies that are created by politicians who have little or no understanding of how business works."

Ironic, considering that this guy is opining on something - economics - that he has no actual understanding of.

"They promise higher legislated wages or other benefits to constituents who don"t understand the true economic impact in order to gain votes."

I do understand them, and I can show you the research. That's much more than you've done in disingenuous, hypocritical, highly fallacious piece.

/ end rant

DDO's Economics Messiah