Category Archives: Inflation

Jeb Bush, Greece Crisis, and How to Help the Workers

Jeb Bush Hillary Clinton barb

That week where you’ve obliterated all previous fundraising records and amassed a campaign war chest of $114 million, but get yourself into trouble for saying other people need to work harder.

Oh you don’t have weeks like that?

Jeb Bush did.

…[W]e have to be a lot more productive. Workforce participation has to rise from its all-time modern lows. It means that people need to work longer hours and through their productivity gain more income for their families. That’s the only way we are going to get out of this rut that we’re in.

Hillary Clinton Jeb Bush barb

Bush has clarified he did not mean full time workers needed to put in more hours, but that people looking for more work need to be able to find it. That has not stopped the campaign of newly revealed political mastermind Hillary Clinton from sending some well-aimed Twitter barbs Bush’s direction.

I have an idea.

Let’s ask Greece.

Greece is currently in the end stages of a long social experiment in massive, unprofitable jobs programs, political graft, and crony capitalism. In addition to soul-sucking tax rates, Greece also ran up colossal debt during the loose lending years of the pre-2008 boom.

Podesta Bush barbNow Greece’s foreign debt is 177% of its GDP. Its unfunded liabilities are 875%. Its unemployment rate is more than 25%, and its labor participation rate 53%.

Despite taking in 50% of GDP in taxes, its government does not earn enough to fund its basic functions. And because Greece is incapable of paying its debts, no one is particularly interested in lending it any more money.

Its national railroad loses $4 million a day. Its citizens receive free university educations, but there are no jobs waiting for those who graduate. As a result, many of its best and brightest have already fled the country.

Its banks have been closed for two weeks and no one can take more than €60 per day out of the ATMs (which due to a shortage of €20 bills results in an effective limit of €50).

Hey, I have an idea, John Podesta. Let’s just pay them more!

Greeks agree! They rejected by a decisive margin a proposal for paying back all that debt that allowed their free university education, their jobs-program national railroad, their jobs-program schools and their generous early-retirement pension programs.

Tellingly, Greek’s hard left Prime Minister Alexis Tsipras almost immediately turned around and offered the same concessions anyway.

“The ‘No’ in the referendum appears to be turning into a ‘Yes’ from Tsipras,” Commerzbank analyst Markus Koch said.

Even Tsipras has seen the writing on the wall, glimpsed the final stages of a national government that has run out of other people’s money.

What does a government do when it doesn’t “earn” enough (in taxes) to fund its basic functions, much less make payments against its overwhelming debt, and cannot find new lenders to keep that financial house of cards standing?

Not work more hours! That would be mean.

Jeb Bush mean.

Well, Greece could just default. Of course, it won’t get any more loans after that, so it would have to live within its means: only spend what its citizens can afford to pay in taxes.

That’s mean too!

They could go off the Euro and print as much as their own currency as they want. At least one economist has argued that periphery Euro-nations like Greece have been harmed by the monetary policies of the European Central Bank, and that non-Eurozone nations able to set their own monetary policies fared better during the financial crises that began in 2008.

Moving to the drachma, however, is not without its difficulties. The drachma will fall in value against the euro. The more drachmas “printed” to service the debt, the more its will fall. Greece will still face the problem of wary lenders and having to live within its means.

Printing currency to service debt or grow an economy has limitations.

Perhaps Greeks could raise taxes. On the rich, natch.

But Greeks already face punishing tax rates. In addition to paying 22-45% in income taxes and another 44% in payroll taxes, they also pay a 23% VAT.

Why even look for a job?

It turns out Bush v.3.0 might be onto something.

His focus on “hours” was regrettable only because over the long run, advances in technology, innovation and specialization should theoretically allow increases in labor outputs without corresponding increases in hours worked. But he was right that the only way to increase the wealth of a nation is to increase the outputs of labor.

Simply infusing money into a system is not sufficient.

Don’t believe it? Imagine sitting on a virgin planet with all of Earth’s gold in the cargo hold of your space ship. Or being castaway on an uninhabited island with a duffle bag full of bank notes.

Are you rich?

It is not currency that makes people wealthy, but the outputs of labor that can be purchased with that currency. Increasing the available currency relative to the outputs of labor only precipitates a rise in prices (while real wages lag).

So what would it look like for the Greeks to be more productive? Half-clad single mothers chained in mines as sweat drips down their faces and IMF overlords crack whips over their heads? Children toiling in sweat shops as flies buzz around their demoralized brows?

No.

It means getting rid of the entrenched bureaucracy, bloated government, and corrupt police and political regimes that keep investors from making investments that result in jobs that allow people to work more hours. It means lowering the effective 90% tax rate individuals pay so that working those hours is remunerative. It means fewer cartels and licensing requirements that keep would-be entrepreneur sidelined leaving no jobs for all those free university graduates. It means getting rid of the minimum wage and price controls that prevent the economy from responding to supply and demand.

I’m not sure the Greeks have the political will for any of the foregoing, or whether the ECB/IMF negotiators have the imagination to focus on the necessary fundamental reforms to the Greek economy. Without them though, there is no way out of the morass. More loans in the lean years cannot help a country that overspends in the fat years.

Interestingly, even as the Eurozone debates Greece’s future, here across the pond, the national campaign spokesperson for Ted Cruz also took a swipe at Jeb Bush:

“It would seem to me that Gov[ernor] Bush would want to avoid the kind of comments that led voters to believe that Governor Romney was out of touch with the economic struggles many Americans are facing. The problem is not that Americans aren’t working hard enough. It is that the Washington cartel of career politicians, special interests and lobbyists have rigged the game against them.”

Paging the Syriza party, paging party of Syriza.

The Greeks don’t need higher taxes, more austerity or more bailouts. What they need is a functioning economy.

Sarah Baker is a libertarian, attorney and writer. She lives in Montana with her daughter and a house full of pets.

The Minimum Wage Lie

fast-food-workers-strike-may

When “progressives” say “the minimum wage hasn’t kept up with inflation”, they’re lying.

Not shading, the truth, exaggerating, or interpreting things differently… they are flat out lying.

… And what’s more, the ones who made up the lie in the first place, know they’re lying (the rest mostly just parrot what they’ve been told).

What exactly would “keeping up with inflation” mean?

The minimum wage has been $7.25 an hour since 2009.

In 1938, when the federal minimum wage was established, it was $0.25 an hour. In constant dollars (adjusted for inflation) that’s $4.19 as of 2014.

So, not only has the minimum wage kept up with inflation, it’s nearly doubled it.

Ok.. well what about more recently?

Minimum wage 15 years ago in 2000: $5.15, or $7.06 in constant dollars

Minimum wage 20 years ago in 1995: $4.25, or $6.59 in constant dollars.

Minimum wage 25 years ago in 1990: $3.80, or $6.87 in constant dollars.

Minimum wage 30 years ago in 1985: $3.30, or $7.25 in constant dollars.

Funny… that’s exactly what it is today… How shocking.

So, for 30 years, the minimum wage has not only kept up with inflation, for most of that time it’s been ahead of it.

So, how are they lying?

The way “progressives” claim minimum wage hasn’t been “keeping up with inflation”, is by comparing today, with the highest level it has ever been; almost 50 years ago, in 1968, when the minimum wage went to $1.60 an hour ($10.86 in constant dollars).

This was a statistical anomaly.

There’s a long and loathsome tradition of lying with statistical anomalies.

At $1.60 an hour, the minimum wage in 1968 was a huge 20% spike from what it had been just 3 years before in ’65, more than 40% above what it had been in 1960, and nearly double what it had been 12 years before in 1956 when politicians started throwing minimum wage increases faster and bigger (again, all in constant dollar terms. The minimum wage at the beginning of 1956 was about $6.30 in constant dollars)

In constant dollar terms, the minimum wage today, is about the same as it was in 1962 (and as I showed above, 1985).

It just so happens that from 1948 to 1968 we had the single largest wealth expansion over 20 years, seen in the history of the nation (about 5-8% annual growth)… Which then crashed hard starting at the end of ’68.

From 1968 to 1984, the U.S. had 16 years of the worst inflation we ever saw, and the purchasing power of ALL wages fell significantly, as wages failed to come even close to keeping up with inflation (we saw 13.5% inflation in 1980 alone, which is about what we see every 4 years today).

It took until 1988 for real wages to climb back to their 1968 constant dollar level, because we were in a 20 year long inflationary recession, complicated by two oil shocks and a stock market crash (actually a couple, but ’87 was the biggest one since ’29).

However, the minimum wage was boosted significantly in that time period, far more than other wages rose, and stayed above the 1962 water mark until the end of that high inflationary period in 1984, declining slightly until 1992, then spiking and declining again until 1997 etc… etc…

By the by… household income in 1968? appx. $7,700, which is about the same as today in constant dollar terms… About $51,0000 (about 8% more than it was in 1967, at $47k). Which is almost exactly what it was in 1988 as well. Household income peaked in 1999 and 2007 at around $55,000, and troughed in 1975 at around $45,000

Of course, income was on a massive upswing from 1948 to 1968 (and in fact had been on a massive upswing overall since 1896 with the exception of 1929 through 1936). In 1941 household income was about $1500 ($24,000 constant), in 1948 $3,800 ($37,000 constant).

Like I said, it was the single greatest expansion in real income and wealth over a 20 year period, in American history.

1968 was a ridiculous historical anomaly… Not a baseline expectation.

So, From 1964 to 1984, the minimum wage was jacked artificially high (proportionally far above median wage levels), and “progressives” chose to cherry pick the absolute peak in 1968 from that part of the dataset, in order to sell the lie.

A living wage?

As to the minimum wage not being a living wage… No, of course its not. It never was, its not supposed to be, and it never should be.

The minimum wage is intended to be for part time, seasonal workers, entry level workers, and working students.

Only about 4% of all workers earn the minimum wage, and less than 2% of full time workers earn the minimum wage.

Minimum wage is what you pay people whose labor isn’t worth more than that. Otherwise everyone would make minimum wage. But since 98% of full time workers can get more than minimum wage, they do so.

What should the minimum wage be?

Zero.

Wait, won’t everyone become poor suddenly?

No, of course not. Literally 98% of full time workers already get more than minimum wage. If we abolished the minimum wage, most of them wouldn’t suddenly be paid nothing.

Wages should be whatever someone is willing to work for. If you’re willing to work for $1, and someone else isn’t, you get the job. On the other hand, if an employer is offering $10 and no-one is willing to take the job for that, they need to offer $11, or $12, or whatever minimum wage someone is willing to take.

If you don’t want to work for $7.25 an hour, don’t take the job. If nobody offers you more than that, too bad, but that’s all your labor is worth.

If you are willing to work for someone for $7.00, and they’re willing to pay you $7.00, what right does some “progressive” have to tell either of you, that you can’t work for that much?

No-one is “exploiting the workers”, if those workers took the jobs voluntarily, and show up for work voluntarily… If all you can find is a job for less than what you want to work for, you’re not being exploited, THAT’S ALL YOUR LABOR IS WORTH TO THOSE EMPLOYERS.

You may think your labor worth more, but things aren’t worth what you want them to be worth, they’re only worth what someone else is willing to pay for them.

But let’s be generous…

All that said, I don’t think we’ll be able to eliminate the minimum wage any time soon.

So, to those “progressives” who would say “let’s make the minimum wage keep up with inflation”, I agree wholeheartedly… Let’s make it $4.19.

Oh and if you don’t believe me on these numbers, they come from the department of labor, the department of commerce, and the census. If I’m lying to you, it’s with the governments own numbers… the same ones “progressives” are lying to you with. 

I am a cynically romantic optimistic pessimist. I am neither liberal, nor conservative. I am a (somewhat disgruntled) muscular minarchist… something like a constructive anarchist.

Basically what that means, is that I believe, all things being equal, responsible adults should be able to do whatever the hell they want to do, so long as nobody’s getting hurt, who isn’t paying extra

Government Spending Has Been Flat The Past 5 Years. No, Really!

Revenue and Spending 2000-2019 (estimated)

Back in 2011, I looked at some CBO projections, and said that the country was in dire straits financially. Spending seemed to be on an absolute tear, and revenue–even if it lived up to wildly optimistic projections–wasn’t going to come close to keeping up.

Essentially, the CBO projections pointed to spending occurring at absolutely unprecedented levels, and relied on completely unrealistic projections of economic growth to [not quite even] pay for it. At the time, I said:

Even with those assumptions, where does spending fall historically? Even at these rosy projections, it never falls under 22% of GDP (on par with the highest spending the country has seen since WWII), and those rosy projections came in January 2010. A year later, in January 2011, the CBO outlook got worse. It now shows spending never falling under 23% of GDP during the decade 2011-2020. Historically, spending has not exceeded 23% of GDP for a single year between 1946 and 2008.

Where has revenue been over the last few decades? Well, for the years 1991-2000, during which time we suffered one mild recession followed by the tech bubble, total government revenue averaged 18.75% of GDP. For the years 2001-2010, where we dealt with the tech bubble collapse followed by the subprime bubble and then crash, total government revenue averaged 17.07% of GDP. A sizeable drop, to be sure (the worst spots being 2009 & 2010, where the financial crash slammed revenue below 15% of GDP). But fundamentally not that far out of line with historical precedent.

Now, I hadn’t gone back to look at the numbers since then. So I was very surprised to read a Cato post suggesting that spending was stagnant and was sitting at a mere 20.3% of GDP, not the 23%+ area that the CBO was projecting. As Daniel Mitchell from Cato puts it (emphasis added):

Here are some specific numbers culled from the OMB data and CBO data. In fiscal year 2009, the federal government spent about $3.52 trillion. In fiscal year 2014 (which ended on September 30), the federal government spent about $3.50 trillion.

In other words, there’s been no growth in nominal government spending over the past five years. It hasn’t received nearly as much attention as it deserves, but there’s been a spending freeze in Washington.

I was frankly shocked. So I ended up going straight to the OMB data (note: it’s an .xls file) to confirm.
Revenue and Spending 2000-2019 (estimated)
Looks pretty legit. Spending was pushing well above 23% GDP for a few years due to the economic meltdown, the stimulus, and the continuing effects of global war.

What’s interesting, and I pulled this out of the graphic for clarity (go download the original source data if you want to confirm) is that this is NOMINAL spending. Considering there has been inflation since 2009, it’s actually fair to say that spending has decreased in real dollars over the last 5 years.

Spending is well below the CBO projections from 2010 that I used in my previous post. And frankly, revenue is WELL below their projections as well. But the spending restraint is sufficient to keep both spending as a percentage of GDP and deficits as a percentage of GDP in reasonable territory.

Now, there are always devils in the details. Mitchell points out a few in his post at Cato, and has even more to say on the subject here. But either way you slice it, the fiscal meltdown that many (including me 3 1/2 years ago) were predicting hasn’t come to pass.

Some on the left will credit Obama (even though they’ve never seen spending they didn’t like). Some on the right will credit the Tea Party (even though they spent the 8 years prior to Obama spending like a Kardashian wedding).

As for me, I’m just going to say that I’m glad my predictions–based on CBO projections–didn’t come to pass.

Tesla Whines About Protectionist Legislation for Auto Dealers While Using Government Largesse to Compete

Last week, I wrote about rent seeking auto dealers lobbying for protection from competition with manufacturers utilizing direct-to-consumer sales models. I mentioned direct-to-consumer manufacturer Tesla by name, and suggested such legislation would prevent consumers from enjoying the savings that might otherwise be realized from Tesla’s efforts to “eliminate the middle-man.”

I should have taken the opportunity to address Tesla’s own abundant receipt of government largesse.

And to be clear, “government” largesse is always paid for by the taxpayers.

In a piece entitled “If Tesla Would Stop Selling Cars, We’d All Save Some Money,” Forbes contributor Patrick Michaels details all the ways Tesla benefits from government handouts. Michaels concludes that taxpayers shell out $10,000 for every car Tesla sells.

Michaels starts with a claim that purchasers of Tesla vehicles receive a $7500 “taxback bonus that every buyer gets and every taxpayer pays.” Since the tax credit appears to be non-refundable, I would not count it as a cost to other taxpayers, as Michaels does.

But the federal tax credit is only the tip of the crony capitalist iceberg for Tesla.

There are also generous state subsidies paid by taxpayers to the wealthy people who buy Tesla’s expensive vehicles. Purchasers in Illinois, for example, can receive a $4,000 rebate from that state’s “Alternate Fuels Fund,” a $3,000 rebate to offset the cost of electric charging stations, and reduced registration fees. California likewise offers a long list of rebates and subsidies to buyers of electric vehicles.

One of the hidden costs to consumers comes in the form of the increased price tag on cars sold by manufacturers who do not qualify for California’s mandated emissions credits, which they instead have to buy from Tesla, allowing it to earn a profit despite selling cars at a massive loss. As Michaels explains:

Tesla didn’t generate a profit by selling sexy cars, but rather by selling sleazy emissions “credits,” mandated by the state of California’s electric vehicle requirements. The competition, like Honda, doesn’t have a mass market plug-in to meet the mandate and therefore must buy the credits from Tesla, the only company that does. The bill for last quarter was $68 million. Absent this shakedown of potential car buyers, Tesla would have lost $57 million, or $11,400 per car. As the company sold 5,000 cars in the quarter, though, $13,600 per car was paid by other manufacturers, who are going to pass at least some of that cost on to buyers of their products. Folks in the new car market are likely paying a bit more than simply the direct tax subsidy.

Slate’s Scott Woolley details another way in which Tesla has cost taxpayers money. In 2009, Tesla received a $465 million Department of Energy loan that allowed it to weather a financial maelstrom. Unlike Solyndra (and Abound Solar and Fisker Automotive and The Vehicle Production Group LLC), Tesla managed to repay the loan in 2013. According to Michaels, it did so by reporting its first ever quarterly profit (earned from the sale of the emissions credits), which sent its stock soaring and enabled it to borrow $150 million from Goldman Sachs, and then issuing a billion in new stock and long-term debt.

But Tesla paid the U.S. taxpayers back at a rate far below what venture capitalists would have earned on the same loan. As an example, Tesla’s CEO Elon Musk also made a loan to Tesla. Musk got a 10% interest rate and options to convert the debt to stock, which he did, resulting in a 3,500% rate of return on his investment.

In contrast, the U.S. taxpayer received a 2.6% rate of return.

In other words, in our crony capitalist system, taxpayers take the loss on bad loans like the one to Solyndra, but do not enjoy commensurate reward on good loans like the one to Tesla.

But there is still more. Tesla cannot keep earning emissions credits, which allow it to earn a profit despite selling its cars at a loss, unless it can keep selling those cars. Josh Harkinson, writing for Mother Jones, writes that:

Its first-quarter profit, a modest $11 million, hinged on the $68 million it earned selling clean-air credits under a California program that requires automakers to either produce a given number of zero-emission vehicles or satisfy the mandate in some other way. For the second quarter, Tesla announced a $26 million profit (based on one method of accounting), but again the profit hinged on $51 million in ZEV credits; by year’s end, these credit sales could net Tesla a whopping $250 million.

Tesla’s ability to continue selling the cars that earn the credits is in question. The market for $80,000 cars has a limited number of buyers. Tesla must expand its customer base with a more affordable product.

One way to achieve that would be to cut the vehicle’s range. But subsidies, credits and fuel savings notwithstanding, consumers have little taste for lower ranges—even at a much lower price. Another way for Tesla to lower the cost of its vehicles is to cut the cost of its batteries without sacrificing the range. As Harkinson observes:

That, however, may again depend on massive subsidies—in this case funding to battery researchers and manufacturers by the governments of Japan and China. Over the past five years, Japan’s New Energy and Industrial Technology Development Organization, a public-private partnership founded in 1980, has pumped roughly $400 million into developing advanced battery technologies. Tesla’s Panasonic cells also might be pricier if not for subsidies the company received to expand its battery plants in Kasai and Osaka.

When Republican Gov. Rick Snyder signed the bill reaffirming Michigan’s protectionist legislation for traditional automobile franchise dealers, auto blog Jalopnik reported GM’s position as follows:

“Competition is always healthy,” GM spokeswoman Heather Rosenker tells Jalopnik. “But it needs to be on a level playing field.”

In the context of the substantial aid Tesla receives from federal, state and foreign governments, it is easier to have some sympathy for the plight of traditional manufacturers—and their dealers.

Ultimately, that sympathy shines a spotlight on the problems created when government starts “tinkering” in the market. Inevitably, that initial, well-intentioned tinkering necessitates ever more intrusive secondary tinkering aimed at remediating the unintended side effects of its initial foray into the market.

Consider health care. Inflation in the cost of U.S. health care began to outpace the general rate of inflation when the government began subsidizing health care costs. Nobel laureate economist Milton Friedman has estimated that real per capita health spending is twice what it would be in the absence of third party payments, and that Medicare and Medicaid are responsible for 43% of that increase. The remaining portion can be blamed in large part on the third party payments from mandated employer health care coverage, further separating patients from the cost of their care and eliminating the market forces that would otherwise keep costs down. Add to the foregoing the government-enforced monopolies on health care education, leading to 22% fewer medical schools in the United States now than one hundred years ago, despite a 300% increase in population, and attendant provider shortage. All that well-intentioned tinkering created a whole host of ugly, unintended side effects, necessitating more tinkering. The federal government responded with the Affordable Care Act and its accompanying thousands of pages of new regulations.

Everywhere the pattern repeats. The cost of higher education outpaces general inflation precisely because the government wants to help people pay for it. The unintended side effect is increasing numbers of graduates with useless degrees and few job prospects, necessitating further tinkering in the form of loan relief, jobs programs and minimum wage hikes. The Federal Reserve suppresses interest rates to artificial lows in the well-intended effort to speed recovery from the bust of the dot-com bubble. The unintended (in this case, it may actually have been intended, at least by Paul Krugman) side effect is a new bubble in housing. When that bubble bursts, the government must step in to bail people and banks out of their bad investments, create new bureaucracies and new regulations making it harder for people to qualify for loans (in contrast to previous tinkering designed to make it easier).

Lather, rinse, repeat.

I am not a radical free-marketer because I dislike poor people or have a special love for corporations. I am a radical free marketer because I know no amount of tinkering ever produces results as beneficial as what the market produces, naturally and efficiently, all on its own.

Sarah Baker is a libertarian, attorney and writer. She lives in Montana with her daughter and a house full of pets.

Cost is NOT Price, and Neither Cost, nor Price, are Value

Prices Provide a Misleading Measure of Dollar Devaluation
Forbes Magazine Online – Keith Weiner

There’s not a human being alive who doesn’t know the dollar is falling. Everyone over 25 has stories of what prices were like, way back when (and younger people have heard them). I remember when gasoline was 60 cents a gallon, and my mom remembers when it was 20 cents.

Federal Reserve Chair Janet Yellen acknowledges the official objective to push the dollar down by 2 percent per year. This intention is behind the Fed’s ill-conceived loose money policy.

It’s important to measure each drop. This is not just to keep a scorecard on the Fed, but because a change in the dollar skews historical comparisons and distorts business decisions, like giving increases to workers and pensioners….

Read the whole piece, and then come back…

The thesis statement of the piece is correct, in that prices provide a misleading indicator of currency valuation (and that our weak dollar policy, as pursued by every administration since Bush 1 to some degree or another, is fundamentally wrong and destructive for that matter).

Unfortunately the author suggests that simply using a different price denomination and comparison (to gold) is a less misleading indicator… In this, he’s absolutely incorrect.

What you really want to compare is purchasing power parity (PPP) as measured by equivalent standard of living, expressed as a dollar cost in constant dollars normalized to average labor hour wage or compensation.

i.e. this item costs 5 minutes of average labor, this costs 8 hours, this costs 20 years; the cost to maintain this equivalent normalized standard of living across an aggregate population is 1940 hours of median labor wage etc… etc…

Note, this is NOT an expression of the fallacious labor theory of value, it is an explicit measure of purchasing power parity as actual cost, INCLUDING opportunity cost (in terms of time), not currency denomination.

The critical function isn’t price, and it isn’t wage… it’s cost, in this case expressed as a cost to value ratio as a normalized dollar (to make it easy to relate to wages and prices).

Cost is not price; it’s a totalized measure of inputs including resources, time, and opportunity.

I am a cynically romantic optimistic pessimist. I am neither liberal, nor conservative. I am a (somewhat disgruntled) muscular minarchist… something like a constructive anarchist.

Basically what that means, is that I believe, all things being equal, responsible adults should be able to do whatever the hell they want to do, so long as nobody’s getting hurt, who isn’t paying extra

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