Daily Clips: May 26th, 2015

Warren Buffett’s Good Idea on the Earned Income Tax Credit Is Bad for Progress
New Republic – Danny Vinik.

Last week Warren Buffett took to the Wall Street Journal to advocate increasing the Earned Income Tax Credit (EITC). The core of his argument can be summarized through this excerpt,

“I may wish to have all jobs pay at least $15 an hour,” Buffett writes. “But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.” He continued, “The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers.

While his statement that raising the minimum wage would “reduce employment in a major way” is a dubious claim (check out Goldy’s latest piece on this subject), he nonetheless presents an attractive political alternative to the minimum wage. As I have noted in my series on basic income and negative income tax, we may be arriving at a stage in US history where the government will have to provide a minimal level of subsistence for its populous.

Yet, the practicality of implementing such a policy are slim (even for such a watered-down basic income policy like the EITC). Vinik commends Buffett for thinking outside of the box on the issue, but he points out,

[The EITC is] a policy that has no chance of passing Congress and thus no chance of helping those workers. The policy analysis of it may be correct, but the politics of it are wrong—and that makes it counterproductive.

Liberals are enjoying a comeback: “That’s right: A large chunk of Americans recently decided to come out as ‘liberal’ — socially liberal, to be specific. As a result, for the first time on record, self-proclaimed social liberals are no longer outnumbered by their conservative counterparts.”

Liberalism needs better politicians, not better ideas:  In an op-ed for Al Jazeera, Paul Kahn examines how the “left” in America, the UK and Israel are all scrambling to find attractive political candidates to promote their respective brands of liberalism. He concludes that the recent defeats for the left in the UK and Israel should be a warning sign to Democrats:

What the liberal left needs is not so much new policies but better politics. It is not the message but the messenger that has been failing.

Obama’s favorable rating up: In his best numbers since September 2013, Obama’s favorable ratings stand at 53% – up 4% from March of this year. As Gallup rightly clarifies, “a president’s favorable ratings are distinct from approval of his performance; job approval ratings generally tend to be lower.”


Successful Entrepreneurs Will Adjust to a $15 Minimum Wage (Because That’s What Successful Entrepreneurs Do)

You gotta give Bloomberg View columnist Megan McArdle credit: in declaring that “A $15 minimum wage will hurt workers in long term” (reprinted in yesterday’s News Tribune), she may be spewing totally fact-free speculation, but she spews it with an air of persuasive authority:

When the minimum wage goes up, owners do not en masse shut down their restaurants or lay off their staff. What is more likely to happen is that prices will rise, sales will fall off somewhat, and owner profits will be somewhat reduced. People who were looking at opening a fast food or retail or low-wage manufacturing concern will run the numbers and decide that the potential profits can’t justify the risk of some operations.

Some folks who have been in the business for a while will conclude that with reduced profits, it’s no longer worth putting their hours into the business, so they’ll close the business and retire or do something else. Businesses that were not very profitable with the earlier minimum wage will slip into the red, and they will miss their franchise payments or loan installments and be forced out of business.

Many owners who stay in business will look to invest in labor-saving technology that can reduce their headcount, like touch-screen ordering or soda stations that let you fill your own drinks. These sorts of decisions take a while to make. They still add up, in the end, to deadweight loss – that is, along with a net transfer of money from owners and customers to employees, there will also simply be fewer employees in some businesses.

The workers who are dropped have effectively gone from $9 an hour to $0 an hour. This hardly benefits those employees. Or the employee’s landlord, grocer, etc.

As a thought experiment, I suppose that is one possible scenario. But it is only a thought experiment. It may seem counterintuitive, or even weird, but the truth is, there is no empirical evidence that past minimum wage hikes have had an adverse impact on net employment. Given a large enough minimum wage hike, I suppose employers may behave the way McArdle says they “will” behave. Though to quote McArdle from earlier in her piece: “This is wildly beyond what that evidence shows, or could show.”

In fact, what evidence there is suggests the opposite. While the minimum wage hikes we’re seeing in cities like Seattle, San Francisco, and Los Angeles are atypically large, they are not without precedent. In fact, right here in Washington State, we jacked up the minimum wage for tipped employees by 85 percent over two years, from $2.30 an hour in 1988 to $4.20 an hour in 1990. And despite all the dire predictions at the time of shuttered businesses and lost jobs, how did Washington’s restaurant industry respond to this wage shock? By growing employment faster than the state economy as a whole!

Admittedly, that’s not exactly a thorough economic analysis. But if there’s a dystopian nightmare buried somewhere in this economic data, minimum wage opponents have yet to unearth it.

So why don’t minimum wage hikes show the negative employment effects McArdle’s neoclassical models say they will? Well, obviously, because the models are wrong. Or at least, way too mechanistic and simplistic. For example, higher wage workers are simply more productive and loyal, resulting in lower turnover, lower training costs, and other cost savings. And for all her efforts to depict the transfer of money from employers to employees as a zero sum game, that’s just not the way the real economy works. Low-wage workers simply spend more of their income than their higher-income employers—in fact, they tend to spend all of it—and most of it locally. That’s money that help’s generate consumer demand in the local economy rather than being extracted in the form of profits to corporate headquarters at McDonald’s, Burger King, and Walmart.

But perhaps most significantly, successful entrepreneurs are creative, flexible, and resilient. When rent goes up, they figure out how to adjust. When fuel, food, or other costs go up, they adjust. Wages are no different. Most businesses owners will adjust. And those that don’t will go out of business and be replaced by more innovative entrepreneurs with business models better suited toward this new, higher wage environment. And no, “innovation” is not a synonym for “automation.” There are many opportunities to innovate one’s way to profits in the face of higher wages short of replacing one’s workers with robots.

Just because most service workers lack the bargaining power to secure higher wages, doesn’t mean that low wages are somehow sacrosanct or preordained. Costco chooses to pay its workers an average wage of $21 an hour. Warehouse rival Sam’s Club will no doubt figure out how to compete if forced to pay its workers a minimum of $15.

Of course, I’m just speculating. Like McArdle, I don’t actually know what will happen in the long term. But I do know that there is absolutely no empirical evidence to suggest that $15 isn’t an experiment worth testing… and unlike McArdle, I have faith in our entrepreneurial class to figure out how to make these new higher wages work.

Daily Clips: May 22nd, 2015

Seattle no longer America’s fastest growing big city
Seattle Times – Gene Halk.

Seattle’s reign as the fastest growing city in America lasted little more than a year. Austin, Texas, is now back in the top spot among large cities, as it had been before Seattle’s brief surge.

Sure, Seattle’s rate of growth slowed, but just a little bit. The new figures show the city grew by 2.3 percent from July 1, 2013, to July 1, 2014 — down from 2.8 percent growth the previous year. That slight decline was enough to drop us back into third place, tied with Fort Worth, Texas, among the 50 largest U.S. cities. Denver is now No. 2.

This comes as welcome news to many Seattleites. But as noted above, Seattle has hardly stopped growing. In fact,

Seattle grew 77 percent faster than surrounding King County in 2014. This marks the third consecutive year that Seattle has outpaced its suburbs. In fact, half the county’s population growth occurred within Seattle city limits.

College doesn’t need to be free: I don’t really know where to begin with this piece. Charles Lane’s article reeks of upper-class privilege. This excerpt is all you really need to read to understand his elitist argument:

A financial stake encourages students to study hard; it encourages families to monitor their kids’ schools and hold them accountable. By contrast, “free” tuition, regardless of need, may breed entitlement, indifference or both.”

By this logic, we should get rid of free, public high schools as well. After all, this would get rid of those haughty high schoolers who feel so entitled to receiving an education.

Seven years later, Wall Street hasn’t learned a thing: Wait. So you’re telling me if you don’t punish someone for their criminal actions, they’ll just do it again? A new report by the University of Notre Dame has some alarming numbers to about the ethical culture of Wall Street. Out of 1,200 people surveyed in the financial-services industry,

23 percent reported personally observing or having firsthand knowledge of misdeeds. That number jumps to 34 percent when looking only at those earning more than $500,000, suggesting that enhanced status and earnings bring a higher likelihood of witnessing wrongdoing.

Congress gets a bad report card: Less than six months into the Republican-controlled Congress, and the American people are not impressed with their body of work so far. And that goes for voters in both parties. Today, just 41% of Republicans approve of the job their party’s leaders are doing in Congress.

The Case of the Million Missing Entrepreneurs

"Entrepreneurs? I don't see any entrepreneurs around here. Try the gated community down the street." Image courtesy of imagerymajestic at FreeDigitalPhotos.net

“Entrepreneurs? I don’t see any entrepreneurs around here. Try the gated community down the street.” Image courtesy of imagerymajestic at FreeDigitalPhotos.net

The Washington Post‘s Jim Tankersley breaks down a new paper by an economist at the World Bank with a dramatic premise. The paper tracks the rate of entrepreneurship from the 1970s to today. The author found that small business creation rates increased through the decades until they stagnated in the early 2000s, and, “after the Great Recession, the rate fell. If the trends of the previous 30 years had continued, the nation would have seen 1 million more entrepreneurs over the last decade than it actually did. For some reason it did not.”

That’s a startling figure. What happened? The paper “traces it largely to families earning between $41,000 and $151,000 in today’s dollars (a very broad definition of middle class, it should be noted), who constitute 60 percent of all business-owning households, but who flatlined on their rates of new business ownership after decades of growth.”

The paper says that the middle class suddenly stopped creating small businesses at a time when wage stagnation and income inequality took hold. How do we get back on track? The good news is that raising the minimum wage will definitely help by pumping more money into the local economy. But we need a broader array of progressive policies to ensure that money flows through the whole economy and not just the top one percent—overtime reform, protection of benefits, some way to deal with the pernicious contracting of the American worker.

In the end, an insecure middle class is a middle class that shies away from small business creation. We can’t have a vigorous economy without those new businesses spending money and hiring workers and encouraging local businesses to invest in the community. We need to coax those million entrepreneurs back out onto the playing field, or else the economy will continue to stagnate.

Human Being Benefits from Increased Minimum Wage—Will the Media Care?

Sushi made this man richer. Well, sushi and an increase in the minimum wage. I guess it's important to include that part. (Image courtesy of Rob Wiltshire at FreeDigitalPhotos.net.)

Sushi made this man richer. Well, sushi and an increase in the minimum wage. I guess it’s important to include that part. (Image courtesy of Rob Wiltshire at FreeDigitalPhotos.net.)

We already know that the local media here in Seattle loves to publish unsubstantiated fear from restaurant owners when covering the minimum wage, and we also know that the national media loves to pick up on those poorly sourced stories.

So I’ll be curious to see if the national media also picks up on the Guardian‘s excellent first-person account from Freeman Ryan, a low-wage worker who has already seen benefits from the increased minimum wage. Ryan, a recent transplant from Minneapolis, got a job at a Whole Foods that paid what he earned in his old job, but Seattle’s high cost of living meant that he had much less spending cash. He had to cut expenditures down to the bone. Then the minimum wage increase happened:

My increase translated to about $120 more a month. Before this, I didn’t have a smartphone, and I was able to put that extra income towards purchasing a phone through my family’s plan. That purchase was actually key to obtaining a new job as a delivery driver at a local sushi restaurant in March 2015, where I earn more from tips, because I was able to use that phone as a GPS to navigate around Seattle.

Go read the whole account. I understand that anecdotal evidence isn’t proof of widespread change, but it’s heartening to read an account of how one life was definitively improved by this change. This is a nice antidote to the one-sided minimum wage scare stories we see every day around the internet.

Daily Clips: May 21st, 2015

Why history suggests that today’s wage stagnation is temporary
Vox – Timothy B. Lee

One does not have to venture far to find dire, dystopian predictions about how automation is going to destroy more and more jobs. James Bessen, a man who studies the economics of innovation and technology, argues against this prevailing narrative in his new book, where he highlights how it is, in fact, not surprising to find stagnant wages in a time when there has been a disruptive technological breakthrough (like the Internet).

So when will wages start to rise again for average workers in America?

Bessen’s theory suggests that it depends on how long it takes for new technologies — like online publishing and supply-chain management — to mature and standardize. Once that happens, it will become easier for ordinary workers to gain skills, for schools to teach them, and for workers to earn a living from them over long periods.

Ultimately, education is the common denominator for success after technology has ‘matured’ and ‘standardized’. In order to prepare our population for the effect of new technologies we need to ensure our citizens have the proper access to skills and knowledge which enable them to economically thrive in a 21st century economy.

Inequality in America is worse than you think: As the Washington Post reports, the wealthiest 10 percent of U.S. households have captured a whopping 76 percent of all the wealth in America. And that number is substantially higher than in other wealthy countries, as the chart below shows.

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21,000 gallons of oil spills off of Santa Barbara coast: The oil slick spread four miles across the California coast, putting greater scrutiny on the already contentious Shell Oil drill rig, Polar Pioneer, which has stopped in Seattle as it makes its way up to the Arctic.

Critics were completely wrong about the minimum wage: Danny Vinik from the New Republic admits that he was wrong in dismissing the Fight for $15 movement. He was wrong for two reasons, he says: 1) He “ignored the movement’s ability to influence policymakers at the state and local levels” and 2) the economy has improved since he last wrote his dismissive article in 2013.

Our Dystopian $15 Nightmare Continues: Seattle’s Jobless Rate Drops to 4.3 Percent

Strike Poverty

The Seattle-Bellevue-Everett area jobless rate dropped to 4.3 percent in April (1.1 points below the national average), and if minimum wage critics are going to point to the closing of a single pizza restaurant as proof of the job-killing impact of Seattle’s $15 minimum wage ordinance, then I’m going to point to our city’s robust job market as proof of the opposite. So there.

Of course, neither is proof of anything. Indeed, as today’s strongly-worded editorial in the New York Times makes clear, for all the dire warnings from righty doomsayers, prior minimum wage hikes have left us with little or no evidence of the dreaded so-called “employment effect”:

Opponents of higher wages — generally, business groups and their political allies — have raised the same objections in Los Angeles that have been raised since the dawn of the federal minimum wage in 1938: that higher pay will lead to layoffs and business closings or business migration. But experience and research involving actual minimum wage increases indicate otherwise: The added cost of higher wages is offset by savings from lower labor turnover and higher labor productivity.

The editors describe Los Angeles’s $15 as a “bombshell,” but the editorial itself—both in tone and in content—is just as momentous in how it embodies the economic paradigm shift that is taking place among our nation’s opinion leaders.

Of the powerful restaurant industry, the editors argue that we must “stop coddling an industry that has come to regard itself as entitled to special dispensation.” Of Democratic calls for $12 federal minimum wage, the editors describe it as “adequate, if a bit on the low side.” And of opponents’s warnings minimum wage hikes in Seattle, San Francisco, and LA will push businesses to move to low-wage areas, the editors argue just the opposite: “Businesses, especially in service industries, would prefer to be where customers have money, and that’s likely to be where wages are rising.”

Workers’ share of the economic pie has been shrinking for decades as the gains from labor productivity have flowed increasingly to profits rather than pay. A result has been an economy that is less resilient and more unequal. Low-wage workers who have been demonstrating for higher pay are leading politicians where they need to go, and the real leaders among those politicians are following the workers.

It was a bit easier to dismiss these arguments when they were coming from fast food strikers and Trotskyist council candidates and the odd self-loathing plutocrat. Coming from the editorial board of our nation’s paper of record, not so much.

Raising the Minimum Wage Means the End of the Fast Food Subsidies


And besides, fast food is bad for you. You should probably eat something healthy instead, anyway. Are you getting enough nutrients? I worry about you.

You’ve got to read this Bloomberg View article by Barry Ritholtz about why the fast food industry is fighting so hard against raising the minimum wage to $15 an hour. Basically, it’s because up until now, “more than half (52 percent) of the families of front-line fast-food workers are enrolled in one or more public programs,” meaning that our taxes have paid to subsidize the fast food industry’s low wages, to the tune of “about $7 billion a year.”

What’s happening now in Los Angeles is a course correction. The American public has decided to stop subsidizing fast food profits. I’ve seen this argued before on many occasions, but Ritholtz’s post is the most elegant, easy-to-understand articulation of this case. Read it, share it, and post it when you see someone spreading the usual “businesses will close” scares on social media.