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Home > Politics
Book Review: Myths, Lies, and Downright Stupidity: Get Out the Shovel--Why Everything You Know is Wrong
by Bob Powell, 7/1/06
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Even though I haven't read this book, I did hear the exchange between Stossel and David Sirota discussed at Sirotablog: "Debating a pathological liar on CNBC." Because Stossel's beliefs about the minimum wage are so wrong, I'm compelled to comment.

John Stossel has a such a superficial, invalid, and partisan understanding of economics -- and of how the world works -- that he should not have exposure on national television for his propaganda. It's a public disservice.

In Stossel's E-mail June 22, 2006 he writes about David Sirota:
"He's one of Al Franken's socialists, convinced that government can make everyone richer simply by raising the minimum wage. Ignorant. And Arrogant."

That Stossel would call Sirota "one of Al Franken's socialists" is itself a ridiculous, ignorant and arrogant statement. He reveals he doesn't know what socialists are. Socialists they believe government should own and run all businesses. Liberals don't believe this. Liberals like Al Franken and David Sirota are not socialists; they are the liberal middle

Turning to the main point, what he calls a "minimum wage myth" isn't a myth at all. His "debunking" relies on his belief in Economics 101. That would be OK, but much in the world does not obey the simplistic rules of Economics 101 espoused by economic conservatives and libertarians.

Below I explain why liberals are absolutely correct that such a low minimum is unfair and why one is even called for.

He contends that a minimum wage is an interference in the "free market" and that raising the price of labor means that demand for it will be reduced. That would be true were there a free market for labor. But there is no free market for labor because there is already prior, and higher-level, interference in the "labor market."

Here's how it works. Employment depends on the overall macroeconomic environment.  It depends in the short run on aggregate demand (which might be reduced by increased price of labor). But over the long run it depends on the NAIRU (Non-Accelerating Inflation Rate of Unemployment) assumed by the Federal Reserve. The latter is governing.

When the Fed thinks unemployment is too low or employment too high, it raises interest rates to "cool" the economy, reduce demand, and head off what they perceive as an incipient "wage-price spiral."

The tragedy for so many is that they do this no matter what the cause of inflation, which is most often speculation or shortages of oil or ... , not increasing wages. Besides putting people out of work, it uses a sledge hammer on interest-sensitive industries such as homebuilders and vehicle sales.

The other aspect of this Fed policy is that the "official unemployment" number (U-3) they compare to their NAIRU target (usually considered to be in the range of 4% to 6%) is a vast understatement of true unemployment. Official unemployment is 4.8% (U-3). Effective unemployment, which includes those the Bureau of Labor Statistics (BLS) considers "marginally attached" and "part-time for economic reasons," is on the order of 8.5% (U-6).

The BLS considers people who want jobs but don't have them and who have sought work in the past year but not in the past month to be "marginally attached" to the labor force, whatever their reason for not looking. Those who give an economic reason (for example, they were previously unable to find work in their field, they feel they need more training, or they suffered discrimination in hiring) are considered "discouraged workers," a subset of the marginally attached.

If one also includes jobs needed to keep up with population growth, unemployment is over 11% (... this "not keeping up with population growth" consideration is related to what's referred to as lower "labor force participation"). Note this "over 11%" does not include the large number of underemployed, so slack in the labor market is much greater, somewhere between 10% and 20%, maybe more.

(Note: See The State of Colorado Employment, showing graphs of "actual" vs. "official" unemployment documenting the percentages above and see also myths about Fed Policy, NAIRU, and the "Phillips Curve".)

So what's the effect of this Fed game of "musical chairs?" It keeps at least 10% slack in the labor market all the time, which means that the added value of that 10th worker, and indeed of any one worker, is zero. So wages at the bottom approach somewhere between subsistence level and zero ... effectively where the minimum wage is now. This depresses all wages, not just those at the bottom.

One doesn't have the well-behaved, gently-sloping supply-demand curves illustrated in Economics 101. Wages drop off precipitously.

This game of "musical chairs," is described in the book, Co-opetition by Brandenburger and Nalebuff, on applications of game theory to business strategy in the section on Game Theory, pp. 40 - 44. In the following pages they describe how to change the game: negotiate as a group ... "change the game by banding together" (p. 47). For the labor market this means unions are the only way to overcome the Fed's fixed game and stand a chance against "unions of capital": corporations.

The minimum wage is a band aid on the symptom and does not address the root cause of low wages: Fed policy. For more detail, see There's no "free market" for Labor. (That said, offshoring, H-1B visas (link, link) for importing highly skilled workers, and illegal immigration also play a role in reducing wages by even further increasing supply relative to demand.)

The Growth Facts of Life describes how this "managed" labor market affects growth, infrastructure backlogs and poverty. Because there are too few jobs, states compete for the jobs there are with lower taxes & regulations. So similarly, the added value of any one region is zero. This creates an escalation structure that leaves not enough taxes for infrastructure anywhere ... the nationwide infrastructure backlog is $1.6 trillion. Many people are poor (10-20%) for the same reason you get stuck in traffic: Fed policy.

A higher minimum wage to partially make up for the Fed's labor market manipulation would actually stimulate the economy.

The reason why is related to where the economy is in what's known as the "long wave" cycle. The origin of the "long wave" from a system dynamics perspective is described in the paper by John Sterman of MIT on the Long Wave Decline and the Politics of Depression (pdf, 21.1Mb) ... see the graph In the Long Wave TroughA Systems Thinking Perspective on Manufacturing & Trade Policy has excerpts (... no, the long wave is not a myth, please read the excerpts and explanation before calling it one).

In short, since 1973 the US has been on the downslope of the long wave and we're now in the trough of the long wave when there's a glut of production capacity and supply. When this is the case, cutting taxes to promote investment is the opposite of what's needed. There will be no investment without demand. That's why the tax increases of 1993 on higher incomes and lower taxes on lower incomes produced the longest economic expansion in history despite the dire warnings of conservatives. 

Those like Stossel have probably forgotten about them now, but here are some of the comments from conservatives about the Democrat’s 1993 tax increase (passed with zero Republican votes):

  • Sen. Pete Domenici (R-NM): “April Fool, America. This Clinton budget plan will not create jobs, will not grow the economy, and will not reduce the deficit.”
  • Stephen Moore, Cato Institute, predicted: “Clinton’s plan will torpedo the economy”.
  • Newt Gingrich: “The tax increase will kill jobs and lead to a recession and the recession will force people off of work and onto unemployment and will actually increase the deficit.”
  • Sen. Phil Gramm (R-TX), economist: “I want to predict here tonight, that if we adopt this bill the American economy is going to get weaker and not stronger, the deficit four years from today will be higher than it is today and not lower… When all is said and done, people will pay more taxes, the economy will create fewer jobs, the government will spend more money, and the American people will be worse off.”
  • Rep. Dick Armey (R-TX), economist: “a job killer”.
  • Rep. John Kasich (R-OH): “This plan will not work…. If it was to work, then I'd have to become a Democrat…”

Perfect thinking according to Economics 101. But exactly wrong.

It's been truly pathetic and dishonest that conservatives used the same logic in pushing for Bush's tax cuts on the wealthy, knowing they were wrong before. Conservative ideology ignores reality, which makes them incapable of admitting when they're wrong.

What should have been done was to cut taxes for those with lower incomes and to raise taxes on those with very high incomes.  The economy would again be booming had that been done.

Even some Republicans realized this.
Split in Ranks of Business and G.O.P. on Tax Cuts
11/29/02 By EDMUND L. ANDREWS ... excerpt:

... a growing number of business and political leaders, including at least one influential industry group, want to funnel more money to lower- and middle-income taxpayers in an effort to generate more demand for goods and services. ...
The Business Roundtable, an organization of chief executives from large corporations, startled many of its normal allies last week by arguing that tax breaks for individuals would be more helpful than tax breaks for business.
 
Indeed, the Roundtable’s top recommendation was one favored by many Democrats: bolstering tax relief for low- and middle-income families by temporarily cutting payroll tax contributions for Social Security and Medicare.
 
There is substantial overcapacity in the economy, so we don’t need more capacity right now,” said John J. Castellani, the president of the Business Roundtable. We felt it would be more prudent and effective to stimulate consumption.” ...

No kidding. And this is why Bush's tax cuts have produced such anemic results and so much less investment than conservatives expected ... no demand, no investment.

However, they have done a lot for increasing profits and return to capital. Productivity has soared, but wages are stagnant. For example: "Productivity of U.S. companies rocketed at a 9.4 percent annual rate in the third quarter [of 2003], the best showing in 20 years, offering an encouraging sign that the economic resurgence will be lasting."

This has increased return to capital, but not return to labor: "Using official Bureau of Labor statistics, Johns Hopkins University economist Arnold Packer calculates that employees' share of the value added in the U.S. economy has fallen to its lowest point since records were first kept in 1947 -- and the rate of decline is accelerating. "The real damage is not the number of jobs, but their pay and quality," Packer says."

More job training and education won't fix the problem. That's because even if everyone would get job training, college degrees, even Ph.D.s overnight, there would still be 10% or more in poverty due to Federal Reserve labor market manipulation that assures always more people than jobs.

And what's worse, many tens of thousands who did get retrained in information technology and other technical fields have seen their jobs go to India and China. Since Jan. 2001 Colorado lost 40,000 manufacturing jobs, 20,000 telecommunications jobs, and 35,000 information technology jobs and the trend is still downward. It was only in Feb. 2006 that Colorado's total non-farm jobs recovered to the level in Jan. 2001. (See the graphs in the files at Manufacturing Task Force on Loss of Manufacturing 6/3/06, KZNT 1460: Scott Stafford's Business Initiative Show.)

What conservatives call "free trade" is destroying America because it's mostly not "trade" at all ... it's "transfer of the factors of production" ... or "labor arbitrage." See The Trade Deficit and the Fallacy of Composition.

Many conservatives promote the idea that the U.S. just has to move up the technology chain and leave the low-skilled jobs to other countries. Now that's a myth that ignores reality. The trade deficit in Advanced Technology Products went from an almost $40B surplus in 1991 to a $42B deficit in 2005! (See the graph at the link above.) The earning potential of those with and without education are being undermined.

The minimum wage is opposed on the grounds that it's interference in the "free market" and socialist redistribution. But there are two types of socialism ... one at each extreme: redistribution of income at the socialist extreme and redistribution of costs at the laissez-faire capitalism, privatize-everything extreme, which is what libertarians advocate and pretty close to where this country is now. Stossel, with his libertarian beliefs, is a "socialist on the cost side," redistributing costs to those with lower incomes.

As an example in the Growth Facts of Life I explain how developers and home builders socialize the long-term costs of growth onto the public, causing anti-tax backlashes across the country.

Libertarian "free market" and "free trade" beliefs have been shaped by Economics 101. For them this is religion: faith-based economics.

This has led Stossel to be the one who is ignorant, arrogant, and blinded by simple-minded, pathological libertarian ideology. His "Libertarian Menace" is far more dangerous to our democratic republic than the "Communist Menace" ever was as I describe in Explaining Liberal Principles.

URL: http://www.exponentialimprovement.com/cms/mythslies.shtml

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