The Minimum Wage Seems To Affect Teenagers

See Let’s review the adverse effects of raising the minimum wage on teenagers when it increased 41% between 2007 and 2009 by Mark Perry. Excerpt:

"During the 2002-2007 period when the minimum wage was $5.15 per hour, teenage unemployment exceeded the national jobless rate by about 11% on average. Each of the three minimum wage increases was accompanied by a 2 percentage point increase in the amount that the teenage jobless rate exceeded the overall rate, from 11 to 13% after the 2007 increase from $5.15 to $5.85 per hour, from 13% to 15% following the second hike to $6.55 per hour, and from 15% to 17% following the last increase to $7.25. The 17.5% “excess teen unemployment” in October 2009 was the highest on record, going back to at least 1972, and was almost 5 percent higher than the peak teen jobless rate gap following the last recession (12.7% in June 2003)."

The Myth of a Stagnant Middle Class

See Donald Boudreaux and Mark Perry: The Myth of a Stagnant Middle Class: Household spending on food, housing, utilities, etc. has fallen from 53% of disposable income in 1950 to 32% today. From the 1-23-2013 WSJ. Excerpts:

"It is true enough that, when adjusted for inflation using the Consumer Price Index, the average hourly wage of nonsupervisory workers in America has remained about the same. But not just for three decades. The average hourly wage in real dollars has remained largely unchanged from at least 1964—when the Bureau of Labor Statistics (BLS) started reporting it.

Moreover, there are several problems with this measurement of wages. First, the CPI overestimates inflation by underestimating the value of improvements in product quality and variety. Would you prefer 1980 medical care at 1980 prices, or 2013 care at 2013 prices? Most of us wouldn't hesitate to choose the latter."

"Second, this wage figure ignores the rise over the past few decades in the portion of worker pay taken as (nontaxable) fringe benefits. This is no small matter—health benefits, pensions, paid leave and the rest now amount to an average of almost 31% of total compensation for all civilian workers according to the BLS.

Third and most important, the average hourly wage is held down by the great increase of women and immigrants into the workforce over the past three decades. Precisely because the U.S. economy was flexible and strong, it created millions of jobs for the influx of many often lesser-skilled workers who sought employment during these years.

Since almost all lesser-skilled workers entering the workforce in any given year are paid wages lower than the average, the measured statistic, "average hourly wage," remained stagnant over the years—even while the real wages of actual flesh-and-blood workers employed in any given year rose over time as they gained more experience and skills."

"No single measure of well-being is more informative or important than life expectancy. Happily, an American born today can expect to live approximately 79 years—a full five years longer than in 1980 and more than a decade longer than in 1950. These longer life spans aren't just enjoyed by "privileged" Americans. As the New York Times reported this past June 7, "The gap in life expectancy between whites and blacks in America has narrowed, reaching the lowest point ever recorded.""

"...dramatic fall in the cost (and rise in the quality) of modern "basics" is that, while income inequality might be rising when measured in dollars, it is falling when reckoned in what's most important—our ability to consume. Before airlines were deregulated, for example, commercial jet travel was a luxury that ordinary Americans seldom enjoyed. Today, air travel for many Americans is as routine as bus travel was during the disco era, thanks to a 50% decline in the real price of airfares since 1980."

"Today, the quantities and qualities of what ordinary Americans consume are closer to that of rich Americans than they were in decades past. Consider the electronic products that every middle-class teenager can now afford—iPhones, iPads, iPods and laptop computers. They aren't much inferior to the electronic gadgets now used by the top 1% of American income earners, and often they are exactly the same.

Even though the inflation-adjusted hourly wage hasn't changed much in 50 years, it is unlikely that an average American would trade his wages and benefits in 2013—along with access to the most affordable food, appliances, clothing and cars in history, plus today's cornucopia of modern electronic goods—for the same real wages but with much lower fringe benefits in the 1950s or 1970s, along with those era's higher prices, more limited selection, and inferior products."

Entrepreneurs Are Heroes

Read my paper on this The Creative-Destroyers: Are Entrepreneurs Mythological Heroes? (Presented at the annual meetings of the Western Economic Association, July 1992)

There is also a shorter version The Calling of the Entrepreneur (Published in The New Leaders: The Business Bulletin for Transformative Leadership, November/December 1992.)

The Law Of Increasing Opportunity Cost And The Problem Of Big Government

Imagine a country that produces two kinds of goods, public goods and private goods.

Public goods are things like national defense. They benefit everyone and it is hard to stop non-payers from getting it (it would be hard to stop a non-payer from getting defended).

Private goods are those that only one person can enjoy and you can keep non-payers from getting it. A Big Mac for example. If you don't pay, you don't get it and if I eat a particular Big Mac, no one else can eat it.

What I am going to show is that as government gets bigger, it will actually get more expensive in terms of what we have to give up in the private sector. The bigger government gets, the more costly it is.

Now also imagine that this country has 5 workers. Some are better at making private goods (their skills are more entrepreneurial) and some are better at making public goods (their skills are more bureaucratic). The table below shows how much of each good each worker can make in a day if they only produced that good.

Notice that worker I is very good at making private goods, but not so good at making public goods (so he is more entrepreneurial and not so bureaucratic). Worker V is the opposite.

These kinds of numbers make sense-we know in the real world people don't all have the same abilities. There is a best plumber, a best doctor, etc. The best doctor is not likely to be a good plumber and vice-versa.

The next table will show all the combinations of private goods and public goods that we can produce if we are at full-employment. That is, if we use all workers.

If we started with all workers making private goods, we make 25 (and 0 public goods). But if we want to make some public goods, we need to move a worker. The best move is to have worker V start making public goods. We give up only 3 private goods and we gain 7 public goods.

If we want more public goods, we would then move worker IV, then worker III and so on.

But each time we do this, we give up a different and increasing number of private goods for each public good gained. The next table shows this.

At first, the cost of each public good is .429 private goods (3/7). We lose the 3 private goods that worker V makes and gain the 7 public goods he can make. But then when we move worker IV, we give up 4 to get 6. So that cost .667.

The more public goods we produce, the more costly they will be in terms of the private goods we have to give up. This is what makes the growing size of government so alarming. We can't see this so easily in the real world. Notice that the last public good costs 2.333 private goods, much more than the first one.

Here are some basic terms that economists use to discuss this issue:

Opportunity Cost-The value of the best foregone alternative. There is no such thing as a free lunch. If we want to build one more skyscraper, we may have to give up one submarine, since there may not be enough steel to go around (steel is scarce!).

The law of increasing opportunity cost-As more of a particular good is produced, the opportunity cost of its production rises. Why is the law of increasing opportunity cost true? Different resources are better suited to different productive activities. This is just about the same as saying people have different abilities, like some are more entrepreneurial and some are more bureaucratic.

Cut government spending to boost economy

This was by me and was printed in the San Antonio Express-News today. Here is the link: Cut government spending to boost economy. Here is the article in case the link does not last very long.

Re: “Laffer Curve a tool to help avoid fiscal cliff,” Other Views, Dec. 10:

Mickey Roth, the president of Intercontinental Asset Management, seems to think we need higher tax rates. I disagree.

He correctly explained the Laffer Curve, which relates tax revenue and tax rates. His reading of the historical record leads him to say the high tax revenue and budget surpluses of the late 1990s were due to raising the top tax rate to 39.6 percent in 1993.

We must realize that maximizing the federal tax revenue is not an official policy goal. The goals are low unemployment, low inflation and high GDP growth. Now if tax revenue is spent wisely on things like education and infrastructure, it can help the economy grow. But this is not always the case.

Higher tax rates hurt economic incentives. Investment decisions are made at the margin, based on after tax income.

As tax rates rise, some investments are no longer viable. Less investment, less growth. A slight change makes a big difference in the long run. For example, in 2010, liberal economist Paul Krugman mentioned that the per capita GDP since 1980 had grown 1.95 percent annually in the U.S. and 1.83 percent in the European Union, hinting that their higher tax rates were not a problem. But, if per capita income was $20,000 in both the U.S. and the E.U. in 1980, the per capita income now would be $1,372 higher in the U.S. at those annual growth rates. After 100 years, the U.S. income level would be 12 percent higher.

The harm taxes do to economic efficiency is called “deadweight loss.” It grows exponentially; more harm is done in raising rates from 35 to 40 percent than in raising rates from 30 to 35 percent. If the Bush tax cuts expire, some Americans in states like New York (which has its own income tax) will pay marginal tax rates of over 50 percent, if you include additional taxes to pay for Obamacare.

Roth says we should take a lesson from the 1990s. But in 1997 President Clinton agreed to cut the capital gains tax to 20 percent It is possible that the high tax revenue of the late 1990s was due to a fast growing economy which in turn was caused by the high tech boom and low oil prices.

Economist Alan Reynolds has said, “The unexpected revenue windfalls in President Bill Clinton's second term were largely a consequence of lower tax rates on capital gains.”

William McBride of the Tax Foundation found in a survey of studies that “lower-tax economies are more productive and that raising taxes has negative dynamic effects on revenue collection.”

Spending may be a bigger issue than tax revenue (Roth did call for less spending). As former World Bank Group president Robert Zoellick recently said, “Federal spending has traditionally been about 18-19 percent of the U.S. economy. It has now surged to 23-24 percent.”

Leszek Balcerowicz, the former central banker of Poland, says that countries grow rapidly out of recessions when they cut spending since this increases confidence in markets. Let's give that a try.

Cyril Morong, Ph.D., is an associated professor of economics at San Antonio College.

Words of wisdom from Bono

From the WSJ

""Bono has learned much about music over more than three decades with U2. But alongside that has been a lifelong lesson in campaigning—the activist for poverty reduction in Africa spoke frankly on Friday about how ...his views about philanthropy had now stretched to include an appreciation for capitalism.

The Irish singer and co-founder of ONE, a campaigning group that fights poverty and disease in Africa, said it had been "a humbling thing for me" to realize the importance of capitalism and entrepreneurialism in philanthropy, particularly as someone who "got into this as a righteous anger activist with all the cliches."

"Job creators and innovators are just the key, and aid is just a bridge," he told an audience of 200 leading technology entrepreneurs and investors at the F.ounders tech conference in Dublin. "We see it as startup money, investment in new countries. A humbling thing was to learn the role of commerce.""

Words of wisdom from George McGovern

From the Wall Street Journal

"McGovern was an honest, good-humored man, and one of our memories involves an op-ed he wrote for the Journal in 1992 on the perils of running a small business. After retiring from the Senate, he fulfilled a lifetime ambition to buy and operate the Stratford Inn in Connecticut. The inn failed, in part due to a recession that was more severe in New England than elsewhere, but also because of the burdens imposed by government.

"My business associates and I also lived with federal, state and local rules that were all passed with the objective of helping employees, protecting the environment, raising tax dollars for schools, protecting our customers from fire hazards, etc.," he wrote.

"While I never have doubted the worthiness of any of these goals, the concept that most often eludes legislators is: 'Can we make consumers pay the higher prices for the increased operating costs that accompany public regulation and government reporting requirements with reams of red tape.'" The entire op-ed is available on OpinionJournal.com.

McGovern conceded that he had come to this wisdom late in life, but it's a wisdom that his liberal party heirs could profit from today."