Raise that Teenage Unemployment Rate

If one were to read only Paul Krugman's column and blog, the reader would find many interesting things about economics. That would include things like governments make economies grow by printing money (we call that "creating demand"), only government regulators can accurately read price signals (and know the future), and that the U.S. economy as a whole behaves exactly as an alleged babysitting co-op in Washington, D.C.

Today, however, we find yet another gem in the Krugman lexicon: forcing wages above the market level not only will have no effect on employment of low-skill workers and raises real wages overall, but will be an overall plus to the economy because...it supposedly "corrects" a glitch in the earned income tax credit. Oh, and forcing up the minimum wage is "good economics."

To his credit, Krugman does not rely on the fallacy of confusing marginal measurements for total measurements, something I have heard on NPR and read in various editorials and columns. (That fallacy is to assume that if the government raises the minimum wage, then it has raised overall income, which gives people more money to spend, which creates prosperity. Yes, people have been making that argument, which is based upon the Fallacy of Composition, but I think Krugman understands that if he does try to do that, he would be jettisoning the entire Diamond-Water Paradox explanation of value which has under-girded neoclassical economics since the late 19th Century.)

In fact, Krugman anticipates the Reductio ad absurdum response by declaring:

Well, Economics 101 tells us to be very cautious about attempts to legislate market outcomes. Every textbook — mine included — lays out the unintended consequences that flow from policies like rent controls or agricultural price supports. And even most liberal economists would, I suspect, agree that setting a minimum wage of, say, $20 an hour would create a lot of problems.

Now, I am not sure why $20 an hour would be bad, at least if one depended upon the reasoning I have heard on NPR, the NY Times, and from other pundits, if they are insisting that it increases aggregate demand. The obvious reason -- and Krugman does not want to stray altogether from an a priori view of the laws of economics -- is that $20 an hour would have the same effect as a big agricultural price support but instead of there being a huge surplus of wheat, there would be a huge surplus of low-skilled workers not being able to find legal employment. (I am sure that my mentioning of a priori analysis is going to set off the Usual Suspects who want us to believe that there is no Law of Scarcity at all because government can do away with scarcity simply by printing and borrowing, but we should face it that when Krugman does allude to real supply-and-demand functions and how they behave, he is engaging in a priori.)

Instead, Krugman is trying apparently to make the claim that the present $7.25 an hour minimum wage probably is below true market levels and that employers are able to hire on the cheap. He declares:

First of all, the current level of the minimum wage is very low by any reasonable standard. For about four decades, increases in the minimum wage have consistently fallen behind inflation, so that in real terms the minimum wage is substantially lower than it was in the 1960s. Meanwhile, worker productivity has doubled. Isn’t it time for a raise?

There are a couple points I need to make here. First, he is saying that inflation effectively cuts wages, something nearly every economist, including John Maynard Keynes, would say and Keynes even advocated inflation precisely for its wage-cutting effects. However, Krugman in recent years also wants us to believe that inflation has a wealth-enhancing effect in that it "stimulates" economic activity and actually is necessary for economic growth.

We have a logical disconnect here. If the very thing that helps to bring about economic growth also has the bad effect of putting whole classes of workers behind, then we need to ask if economic growth is occurring at all, or if people are better off without the growth, or if economic growth as we know it is nothing more than a transfer of wealth from lower-income people to higher-income people.

Time and again we have read not only from Krugman, but also from many other "liberal" sources that over the past 30 years, income inequality has increased demonstrably and that (according to Krugman's statements on numerous occasions) real wages for the vast majority of Americans have fallen relative to where they were before 1980. For that matter, Krugman makes that argument here, along with implying that the minimum wage workers of 30 years ago are the same people working minimum wage jobs now.

So, we are left with an interesting chicken-and-egg question: does economic growth occur because of this increase in inequality, or does it occur despite the advent of economic growth? If it is because of the former, then economic growth by itself would be deemed immoral by any standards of human decency. If it is the latter, then the only logical conclusion one can reach is that overall standards of living have risen, but that the very wealthy benefit more from growth than do others.

In order to make the argument using the first point of view, one would have to demonstrate that since the advent of capitalism more than 200 years ago, standards of living for the vast majority of people have fallen, given we have seen nothing more than a wealth transfer from the poor to the rich. Not even Paul Krugman is willing to make that argument.

For that matter, he would have to say that standards of living (as measured by real wages) for the vast majority of Americans have fallen in the past 30 years ever since the top federal income tax rate was moved from 70 percent (a rate Krugman personally told me in 2004 was "insane") to 50, then 28, then 33, then 39.6, then 35, then 39.6 percent. I'm not sure that Krugman is going to try to claim that most Americans actually are poorer than they were three decades ago, but from what I see, that is his only logical conclusion. Since Krugman has argued elsewhere that the various economic "classes" in this country are rigidly stratified, and that there is little economic mobility, I don't see how he gets out of this jam.

If he uses the second argument I presented -- that overall living standards have risen, but the class of wealthy people has done better than everyone else -- then he simply is trying to say that we have had economic growth, but it has been somewhat uneven, and that goes against his own liberal sense of "fairness." But elsewhere he and others (especially Robert Reich and Joseph Stiglitz) have argued that inequality has blocked economic growth, so we are in a quandary, as Krugman and others have tried to argue against themselves -- but manage to get away with it because they are the darlings of the current political classes and their adoring media.

I have no idea how Krugman can justify logically holding to conflicting and mutually-exclusive viewpoints, but in the end he does not try to do so. Instead, he uses both arguments and expects the readers to believe both.

His second point is while logic might propose that raising the minimum wage above market levels would increase unemployment, we don't see that happening, which means that arguments against raising the minimum wage are wrong:

Now, you might argue that even if the current minimum wage seems low, raising it would cost jobs. But there’s evidence on that question — lots and lots of evidence, because the minimum wage is one of the most studied issues in all of economics. U.S. experience, it turns out, offers many “natural experiments” here, in which one state raises its minimum wage while others do not. And while there are dissenters, as there always are, the great preponderance of the evidence from these natural experiments points to little if any negative effect of minimum wage increases on employment.

Why is this true? That’s a subject of continuing research, but one theme in all the explanations is that workers aren’t bushels of wheat or even Manhattan apartments; they’re human beings, and the human relationships involved in hiring and firing are inevitably more complex than markets for mere commodities. And one byproduct of this human complexity seems to be that modest increases in wages for the least-paid don’t necessarily reduce the number of jobs.

What this means, in turn, is that the main effect of a rise in minimum wages is a rise in the incomes of hard-working but low-paid Americans — which is, of course, what we’re trying to accomplish.

His explanation (seen in the second paragraph) is a non sequitur. Yes, human beings can be complex, but either the Law of Demand, the Law of Opportunity Cost, and the Law of Scarcity hold or they do not. If a government edict calling for a rise in the minimum wage essentially can eliminate opportunity cost, then we have discovered the pathway to riches.

For that matter, if his "humans-are-complex-creatures" explanation is valid for explaining away why "studies" have shown raising the minimum wage -- even "modest" ones -- has no effect on unemployment, then why not $20 or $50 or even $100 an hour instead of the measly $9 an hour? If Krugman makes an appeal to the Law of Demand and supply-and-demand functions, then the only logical explanation would be that American employers are paying less than market wages and getting away with it.

If that is the case, then he needs to explain why they can get away with it. Instead, he offers mutually-exclusive explanations and expects readers to be awed by them, and in the last paragraph of his quote, he then tries to use the "it-raises-overall-incomes" argument. Again, this makes sense only if the current minimum wage is less than the market or "equilibrium" rate or if the current employment situation is such that the current demand for low-wage labor is inelastic.

Should current demand for that labor be elastic, then forcing up the minimum wage would result in lower overall incomes for those unskilled workers making that lowest wage. However, the current state of the economy is such that it is hard to make an argument that the demand for current labor is inelastic, for if that is the case, then there would have to be another explanation for the high levels of unemployment we see in this country.

Again, Krugman simultaneously is trying to argue two mutually-exclusive points and claiming both are true. His next argument says that raising the minimum wage has a synergistic effect with the Earned Income Tax Credit, making it work better:

Finally, it’s important to understand how the minimum wage interacts with other policies aimed at helping lower-paid workers, in particular the earned-income tax credit, which helps low-income families who help themselves. The tax credit — which has traditionally had bipartisan support, although that may be ending — is also good policy. But it has a well-known defect: Some of its benefits end up flowing not to workers but to employers, in the form of lower wages. And guess what? An increase in the minimum wage helps correct this defect. It turns out that the tax credit and the minimum wage aren’t competing policies, they’re complementary policies that work best in tandem.

This is not an economic argument, because it does not say whether or not the EIC has economic merit or not. He only says that since people of both parties support it, then it must be a good thing, which is an appeal to the ad populum fallacy. Furthermore, when one examines his argument, he is saying that something that might harm an employer is good for the worker, but that assumes that workers and employers are in competition with each other, which violates another basic tenet of economic analysis.

Moreover, there is nothing in the EIC argument that would mitigate the Great Wonders of imposing a significantly higher minimum wage than $9 an hour. If a little bit of harm to employers is a good thing, then would not a great amount of harm be great?

Unfortunately, he then comes up with a fourth argument, one that is tried-and-true in the NYT: We should raise the minimum wage because evil Republicans hate low-wage workers and are trying to keep them in poverty. He writes:

So Mr. Obama’s wage proposal is good economics. It’s also good politics: a wage increase is supported by an overwhelming majority of voters, including a strong majority of self-identified Republican women (but not men). Yet G.O.P. leaders in Congress are opposed to any rise. Why? They say that they’re concerned about the people who might lose their jobs, never mind the evidence that this won’t actually happen. But this isn’t credible.

For today’s Republican leaders clearly feel disdain for low-wage workers. Bear in mind that such workers, even if they work full time, by and large don’t pay income taxes (although they pay plenty in payroll and sales taxes), while they may receive benefits like Medicaid and food stamps. And you know what this makes them, in the eyes of the G.O.P.: “takers,” members of the contemptible 47 percent who, as Mitt Romney said to nods of approval, won’t take responsibility for their own lives.

This is not an economic argument. Instead, it is yet another cheap political appeal that is based on any number of logical fallacies. His syllogism works as such:

• Premise A: Republicans hate nearly everyone, and they especially hate low-wage workers;
• Premise B: Republicans are against raising the minimum wage to $9 an hour;
• Conclusion: Therefore, raising the minimum wage to $9 an hour won't increase unemployment of low-wage workers. 

He second syllogism operates this way:

• Republicans are evil;
• Republicans oppose raising the minimum wage to $9 an hour;
• Therefore, anyone who opposes raising the minimum wage to $9 is evil, or at least one's belief that it is a bad thing is motivated by evil.

This is the kind of logic one expects to hear from a politician on the stump, not economic analysis from an academic economist who has received the highest honors his profession can give. However, there is even more, as economist Robert Murphy has demonstrated.

Murphy's Law?

Robert Murphy, in a couple of blog posts, takes issue with Krugman on two fronts. In this post, he notes that a Krugman vs. Krugman battle presently is brewing, as it seems that Krugman not long ago was making essentially the classic economic arguments against raising the minimum wage. (That must have been the John Bates Clark winner Krugman, which only could mean that he no longer holds to the economic views he believed when he won that award.)

In a second post, Murphy looks at the empirical arguments claimed by Krugman and others: that states that have raised their minimum wages above the national level have not experienced any problems in unemployment of low-wage workers. Murphy's post includes the unemployment rates for people in the 16-19 age bracket (and who most likely would qualify for minimum-wage jobs), comparing the rates in those states that have wage minimums above federal minimum, and those that do not.

Interestingly, of the top eight states in teenage unemployment, six have higher-than-national minimum wages, led by California. Now, one has to be careful with simple empirics like this because one cannot assume that minimum wage is the only factor in teenage unemployment, but certainly one would assume that it would be statistically significant.

$8.50 an hour? Why be stingy? What about $85 an hour? $850 an hour?

Once upon a time, the editors of the New York Times used to editorialize against the establishment of the minimum wage, as they appealed to the arguments centering around the Law of Opportunity Cost. However, soon after Paul Krugman joined the NYT team as a columnist, the paper reversed its stance and decided to champion government-set price floors on wages.

Thus, the NYT today has demanded that the state of New York raise its minimum wage to $8.50, a measure the paper says should "not be controversial." Why? Because when it comes to minimum wage, according to the paper, opportunity cost does not exist. The editorial declares:

Gov. Andrew Cuomo supports an increase, as does Mayor Michael Bloomberg. Only Republican state senators are resisting, using the same stale argument that a minimum wage increase is bad for business. The Senate Republican leader, Dean Skelos, argues that the measure “could be a job killer rather than a job promoter.” That contention has been proved wrong time and again.

There is plenty of evidence showing than an increase can actually help the economy, because people with lower incomes spend a larger share of their paycheck immediately on clothes, food and other goods and services. That money often goes right back into the local economy.

I guess that the editors of the NYT think so highly of themselves that they don't have to adhere to the rules of logic; the use of logical fallacies is perfectly acceptable when the fallacies are employed to promote something the editors (and Paul Krugman) support. So, let us take a look at what is being said.

The first is the fallacy of Appeal to Authority. Hey, Mayor Bloomberg and Gov. Cuomo support this, so it has to be good! Now, unless these two men are omniscient and never wrong about anything, it is irrelevant to whether or not they support the measure, and since neither makes minimum wage, neither person has to worry about being priced out of the market.

The second argument -- that Republicans oppose it, so it must be bad -- is another version of the Appeal to Authority. Democrats support it (conversely), so it must be good. Again, this is fallacious reasoning, although I realize that the NYT editors believe that they are incapable of such foolishness. (Yes, this is an ad hominem, and I mean every word of it.)

Republicans, according to the NYT, are using a "stale argument that a minimum wage increase is bad for business." Actually, not. They are saying that raising the minimum wage will jack up the price of unskilled labor, and that at the margin, some workers will lose their jobs. This is not a "bad for business" argument, but rather a "bad for some workers" statement. Nonetheless, why is this argument "stale"? Is mentioning the First and Second Laws of Thermodynamics "stale," or referring to the Law of Gravity? Of course not, but then why is the Law of Opportunity Cost a "stale" argument? Because the NYT says it is.

It gets even better. In the next paragraph, the editors commit the Fallacy of Composition when they declare that raising the minimum wage will raise the income of workers, who then will spend it and make all of us better off. Sorry, but it does not work that way, for the NYT editors (like Paul Krugman) are mistaking a marginal increase in pay for some workers (who don't lose their jobs) as a total increase in pay for all workers currently making minimum wage.

In other words, government by fiat can raise the total real income of all workers just by ordering it to be so. If that is the case -- and one can draw only that conclusion from the editorial -- then why stop at $8.50 an hour? Why not $85 an hour or even $850? If government can make small increases in total income by fiat, then why not large increases?

Now, if the editors wish to say that an increase to $8.50 would not cause economic harm but that an increase to $85 would, what would be the source of their explanation? If the Law of Opportunity Cost is off the table -- and that generally is the case on the NYT editorial page -- then what would substitute?

But what is an editorial from the NYT without piling on more economic fallacies? In the last paragraph we read:

Mr. (Sheldon) Silver (NY Speaker of the House) said he also plans to expand tax reductions for married couples earning less than $30,000 a year as another way to give incomes a boost. But he is starting with a minimum wage increase because, as he puts it, “People who work full time should not be poor.” That makes good sense for working families and their communities.

What is the definition of poor? Furthermore, is Silver saying that work causes poverty? Would a lot of these people be better off not working at all?

One would like to see all occupations being productive enough to where anyone who worked could live comfortably off that pay, but that never has been the case in all of human history, and I doubt seriously that the State of New York by fiat can change economic history, at least for the better. Again, we see the fantasy world that exists at the NYT. It really is the perfect home for Paul Krugman.

Wages and Unemployment

While Paul Krugman now has switched to promoting environmentalism again (and the fraud of "green energy"), I want to deal today with another problem that he and his friends have helped cause: teenage unemployment rates.

The other day, the NYT editorialized about what teenagers face this summer when they look for temporary work:

Mayors across the country are rightly worried about Congress’s failure to provide money for the summer jobs that keep teenagers off the streets while giving them sorely needed work experience. Unless the Senate acts quickly, this will be one the bleakest summers on record for youth employment. That raises the very real danger that it could be a violent summer as well.

Furthermore, the NYT even sees the "solution," which at best could be described as a "workfare" program:

The House has approved $600 million for summer jobs for teenagers. The Senate has failed to act. Senate Republicans have blocked a separate proposal by Patty Murray, Democrat of Washington, that would have committed $1.3 billion to create 500,000 summer jobs for the young.

I did the math, and found that such a program (which I doubt seriously actually would employ that many people) would cost $3,000 per job. To people like Krugman and his employer, that might be called an "investment," but to an economist who sees labor as a factor of production, it is called a cost.

There is a dual problem here that goes to the heart both of economic theory AND economic policies, and that problem is that Keynesians like Krugman and True Wooly-Headed Liberals as populate the NYT editorial board (and newsroom) believe that production and consumption are separate and unequal entities. In this viewpoint, the end of production is not necessarily consumption; instead, consumption is what is needed to clear inventories so people can produce more goods and, thus, stay employed.

For example, when Hillary Clinton went to China last year, she essentially told the Chinese that they have to continue to purchase U.S. Government debt so that Americans could use that debt to buy more Chinese goods which, in turn, would "give" Chinese workers their jobs. This viewpoint essentially is the Keynesian position as well.

To these people, all jobs are "welfare" programs at heart, as there is no real connection between production and consumption, and that is a destructive doctrine, for it undermines the ability of people to produce those things which help fulfill our needs. Let me explain.

In a free-market economy, exchange is a voluntary act in which all parties engage because they believe that all will be better off after the exchange takes place. This may not always be the case, as people might be engaging in exchange because of faulty information, but nonetheless, we do trade with one another to improve our own welfare, and that improvement in our welfare is wealth-creating.

In fact, production itself is an act of exchange. When a person works in a free-market setting, that individual generally is creating more wealth than he or she will consume from that act of production. To put it another way, it adds a "surplus" to the economy. Marx believed that "surplus" was "captured" by the capitalists, who did not deserve it.

However, we find that in a free market, that "surplus" adds to overall wealth which then results in more and more goods and services being made available to people who previously would not have been able to afford them. The competition to make better goods also means that over time, the quality of the products should improve. (The computer industry is a prime example here.)

Thus, it is crucial that when one is employed, that the worker is able to be paid according to his or her marginal productivity, or, to use economist-speak, the discounted marginal value product (DMVP). When minimum or "living" wage policies force up wages, the laws of economics still are not repealed (no matter what politicians or the NYT might tell us).

If the law forces up wages past the DMVP, then what happens is that it costs the employers more to have the lower-productivity workers on the job than they can produce. In that situation, the workers lose their jobs.

For all of the Keynesian trickery, unemployment, in the end, ALWAYS is a DMVP issue, so when the government forces up nominal wages, it will create unemployment.

Even Keynes recognized that fact, but his "solution" (which Krugman accepts) was to employ inflation as a means for cutting wages. (Read Keyne's own words in the General Theory in which he says that workers won't recognize that their real wages are being cut by inflation.)

There is another false argument that Krugman gives, in which he argues that raising the marginal wage would result in greater consumption and, conversely, allowing the marginal wage to fall to where it equals the DMVP would result in MORE unemployment. In his own words:

So let me repeat a point I made a number of times back when the usual suspects were declaring that FDR prolonged the Depression by raising wages: the belief that lower wages would raise overall employment rests on a fallacy of composition. In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary.

Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.

But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?

What is the problem? Krugman confuses marginal with total. Furthermore, he cannot conceive of wages being anything but arbitrary amounts of money being given to people in hopes that they will spend and keep the perpetual motion machine known as the Keynesian economy running.

Thus, because he misunderstands employment at the very fundamental level, Krugman cannot get the rest of the equation correct, either. What Krugman does not understand is that the minimum wage, while not only helping to create record unemployment rates among teenagers, also further distorts the structure of production of an economy and makes things worse over the long run.

True, Keynesians argue that "in the long run, we all are dead," but their policies are helping to put our economy in the grave.