Mail 812 Thursday, February 27, 2014
This mail will essentially be on the minimum wage issue. Because of the way blogs work now as opposed to my old log before the changeover to this new and improved system it would have been easy to link to the previous discussions on Ron Unz and his Conservative Case for Minimum Wage;( http://www.ronunz.org/2014/02/03/the-conservative-case-for-a-higher-minimum-wage/ ) now you‘ll just have to scroll down and look for them. They’re in the last couple of VIEW columns, and do understand, Ron Unz is no fly by night newcomer. He has serious arguments which need to be thought about even if you do not agree with him – I don’t agree, but I admit some of his evidence is pretty good.
This mail will be largely about his theory.
‘You want a higher minimum wage? Turn off the spigot of low-wage workers pouring in to the U.S. and it will rise on its own through the iron law of supply and demand.’
This is the nearly automatic argument. Whether it politically makes sense in 2014 is not so clear. We have had the political debate over stopping the influx of low wage workers for thirty years, with the result that the inflow is not stopped, and the benefits which the Courts discover must constitutionally be paid to the incoming illegal aliens – or undocumented workers, or immigrants, or migrants as you choose – goes exponentially upward, no matter which Party has a majority in Congress or holds the White House. Unz argues that a higher minimum wage would allow better enforcement of laws restricting employment to landed immigrants or documented workers or whatever, and the lack of employment would then restrict the spigot of undocumented migrants. It would also tend to lower the number of citizens and legal immigrants receiving welfare and other benefits, greatly lowering the pressure to pay such benefits and making it easier to identify those illegally receiving them. He has more to say on this.
One may fervently wish we would do this, but we fervently wished that would happen as part of Mr. Reagan’s amnesty program. The result was not what he expected. And the fence has never been completed although it was dictated by Congress decades ago, and the Courts have held that the Border States can’t do their own enforcement. But they must pay the benefit.
China, Taiwan, Korea, and the minimum wage
China is not going away. The Chinese build empty Potemkin villages in order to fill the pockets of politicians and their cronies with public monies skimmed from construction. Their factories churn out poor copies of Western consumer goods and Russian military hardware. Unlike Ford, for the Chinese, quality is not job one. Hell, it’s not even job twenty-seven.
Despite these and other problems, China keeps rolling along. In the words of David Byrne "same as it ever was." I see no significant difference between China under the Emperor and China under the current leadership. They may call themselves Communists for a thousand years, but their gov’t bears no resemblance to any system outlined by Marx or Lenin.
The Taiwanese love to trade with China. It seems they believe they can play with the dragon without harm. I don’t think so. One day, China will bring Taiwan into the fold. Firm US military and diplomatic support of Taiwan can delay that happening, but it cannot prevent it. And I do not believe that the US gov’t can be firm about anything over a span of decades.
The surprise is Korea. Right now, China props up the North. Without Chinese support the North collapses. Would such a collapse hurt China? No. Already China commands the majority of South Korea’s import and export trade. The South is allied with the US now, but Koreans know their history. They look upon China as the older brother which means they will follow the Chinese lead.
The North will collapse and a generation later Korea will realign from a US ally to a Chinese ally.
I think the economic variables are too intertwined to attribute any effect solely to an increase in the minimum wage. The problem is that we cannot run experiments that permit us to make comparisons. Suppose Idaho were to raise its minimum wage but Nevada did not. Could we wait a year or ten and compare results? No. The job market in Idaho differs from that of Nevada.
Unfortunately, the minimum wage is not an economic issue. It is a political one. That means the issue will not be decided by rational debate but by emotion and power.
Live long and prosper
h lynn keith
And yet there were data on states with and without minimum wages and their effects on unemployment and they were fairly unambiguous. But yes, it is very much entwined with politics and particularly of immigration reform.
I’m thinking through about three pounds of blue mush right now (thanks for the sinupulse, without which it would be about six pounds of blue mush 🙂 but I don’t think you need to be rethinking the minimum wage just yet.
Certainly not without some changes to additional economic assumptions.
I’ve done some analysis and when I get the round tuit I need to pull up more data and look at it monthly, but increases in the minimum wage are ALWAYS accompanied with increases in unemployment (one exception in the 80 year history of the minimum wage, and that was the modest increase by Clinton after the minimum wage remained static for twelve years under Reagan and Bush 1, such that employment was high and the number of minimum wage workers low), and ALWAYS accompanied by inflation which wipes out the wage increase (no exceptions).
Given that even a casual review of the numbers shows that a large element of the current economic malaise was the increase in minimum wage passed by the Pelosi-Reid Congress in 2006 and signed into law by Bush 2, from which we’ve not recovered, another minimum wage increase at this time will destroy what recovery we have had and leave more people unemployed besides. The combination of that increase and the soft-money policies have contributed to the significant inflation in food prices over the past five years, which is hidden in the CPI both by changes in the formula by which it is calculated and by the soft money policies, which are what has engendered the increases in stock prices at the effect of the rest of the economy.
The last thing we need is a minimum wage increase until the economy has stabilized.
That would be my view; were it anyone less worthy of listening to than Ron I would tend to repeat that and end the discussion. But the fact is that we are on a cycle of illegal immigrants, loss of jobs as people stop looking for work and see the jobs they might get taken by those who will work for less, and court ordered benefits along with demand for “immigration reform” which means open borders.
If something cannot go on forever it will stop, but you may not like the stopping point. This cannot go on forever, but I don’t see how it stops.
A Canadian Case History from a very long time subscriber:
Dear Dr. Pournelle,
Recently, British Columbia raised its minimum wage. Here is my take on what that affected. First, I think we can all agree that people who are paid minimum wages can be termed as “working poor”. They don’t make enough money to save, or invest, and therefore are condemned to live paycheck to paycheck. With that agreement in place, I will continue.
My son works in the restaurant trade, and was earning $10/hr, a full $2 higher than the minimum wage of $8/hr. He knew he wasn’t making great money, but he wasn’t at the bottom of the pay scale either. He felt good about that. Not great, but good. Then the incumbent government got into a bit of a scandal and decided that buying votes would be a good idea, so they raised the minimum wage to $10.25/hr. Hurrah and huzzah, they care about the working poor! It worked, not too surprisingly. They won the very next election, even increasing the number of seats in the legislature, after being written off in the polls as sure losers. Oh, and they added a new statutory holiday, forcing businesses to either gift a day’s wages to their employees, while reducing their earning potential by one day, or if they stayed open, insured that the cost of doing business would overwhelm any chance of profit as workers who are “forced” to work on a statutory holiday earns time and a half.
So, my son received his two-bit raise, with other employees receiving the full raise of $2.25/hr. The restaurant had to either increase the prices of the food (actually, what happened was smaller portion sizes, which amounts to the same thing), or force a cut in hours to the staff. In reality both happened. There was an immediate increase in other costs: gas, groceries, clothing, as the inflation rate went up. Employees contribute to items like EI (Employment Insurance) and CPP (Canada Pension Plan) based on a percentage of wages. So those items increased in cost to the worker. In BC, we also pay a Medical Services Premium (MSP), which is $65/mo for a single person. A paltry sum, if you are not the working poor. It’s quite the bite out of your income, otherwise. If you make under a certain amount of income, that payment is forgiven on a sliding scale. That amount was not increased, so more people are paying either a larger percentage or the full cost of MSP.
The rest of the hourly paid workers in the province, who were already earning a higher wage per hour, did not receive any wage increases at all, so the increased inflation reduced their disposable income. At the lower end, it eliminated it entirely. Creating even more working poor. And there have been many small businesses that ended up shutting the doors, causing unemployment to go up. You’re entirely correct in being worried about start-ups. So far, I haven’t seen any new businesses in my town, but I do see more empty storefronts. Well, that’s not quite true. The Tommy Hilfiger store at the local mall closed, but is being replaced by Old Navy. And Zellers was bought out by Target, who just posted a billion dollar loss. I can foresee some of their stores being closed in the near future, creating even more unemployment, which will force the government to either cut benefits or raise rates.
The only winner is the governments, both provincially and federally, who collects the income taxes, CPP, EI and MSP. Those revenues are up, all on the backs of the working poor, of which there is now a far greater number. Oh, and the feds fiddled with the EI rules, reducing the length of time covered and forcing people to accept any jobs that pay 70% of their former wage, or lose their benefits entirely. Creating even more working poor.
Somehow, people are convinced that they can fight poverty and narrow the gap between rich and poor, by raising the minimum wages of the working poor. I am not so convinced and this recent increase in minimum wage hasn’t altered that conviction. I think if a CEO of a corporation is paying himself $5 million per year, that raising the minimum wage to $10, $20 or even $50 an hour won’t narrow that gap by any appreciable amount.
What I think the world needs more is a Maximum Wage. Say twenty five times the lowest paid employee, including perks, benefits and stock options. That way, if the CEO wants his $5 million paycheck, he would have to pay his lowest paid employee $200,000/yr or $96.15/hr (based on 2080 working hours per year). Or, since the corporation’s stock holders will insist on paying the legally mandated minimum, the CEO could only make $256.25/hr (based on $10.25/hr) or $533,000 per year. This still won’t eliminate the gap, and people will still complain how much more the CEO is earning, but at least it forces the gap to remain constant. I’m no economist, and I can certainly see that either method causes inflation to go up, but I think my maximum wage concept will cause a smaller spike overall.
In reality, what we really need is a largely reduced government, but we both know that isn’t going to happen without a revolution, and even then, it would just be a matter of time before the government grew every bit as large or larger. Your Iron Law is irrefutable.
Thank you. That would certainly be my expectation.
Comment on raising the minimum wage
You asked for comments about raising the minimum wage. I believe that a better alternative to raising the minimum wage is to provide a Unconditional Basic Income (UBI) and eliminate the minimum wage and all other poverty programs altogether. If for example we provide $1,000/month to every US citizen that would raise a single person or a couple with 2 children above the federal poverty limit. As this payment is independent of any means testing we could completely eliminate the minimum wage. If you work flipping burgers at $1/hour that would be income in addition to the UBI and more money in your pocket. We would also eliminate Food Stamps, Unemployment benefits, Student Loans, Social Security, HUD, etc. We would dismantle the entire bureaucracy. As these payments would only go to citizens, it would reduce illegal immigration as citizens would be willing to work for a lower wage. I know that there is no chance of something like this getting through Congress, if for no other reason than Congress would no longer be able to pick winners and losers but I think it is the right direction. More info on this idea
That is fairly close to Milton Friedman’s scheme. If we are going to provide safety nets, leave as much freedom and employ as little bureaucracy as possible. Yes, some will take their benefits and drink and smoke and dope themselves to death: how much must we spend to protect them from themselves, and how much ought we to spend on that? Should that point even be debated?
But I fear your political reservations are well conceived.
on raising the minimum wage
"But of course there was a hidden assumption in that premise about minimum wages: it was that the difference between the minimum wage and “a living wage” would not be made up by a public payment of tax money, and that this payment could not be denied to anyone including minimum wage earners."
"And Ron is certainly correct in pointing out that the great financial gains made since the crash and the Great Recession have not gone to the working class or the middle class. They have gone to stock holders and no one else, and they don’t contribute all that much to middle class tax relief."
Both great points. The first is a side effect of the progressives. The second is also intertwined with employee stock compensation. In the 80’s, policy papers pushed the idea of employee participation in company success via stock options. Great idea, but it morphed into something a little different. When I started at Intel in 89, Intel did everything itself. There were Intel employees who worked in the mail room, cleaned the place, and fed everyone in the cafeteria. Within a few years, however, all the non-engineering functions started to get contracted out. No more blue badge mail room workers for example. So a company comes in and contracts to run the mail room, pays the former Intel employees much less money and benefits and no stock options. The whole valley follows suite. Now entire groups of middle class people become a lower sub class and don’t participate in a company’s success.
Now take silicon valley startups. When Adobe was founded, Warnock’s wife insisted that they give their first secretary 50,000 shares of stock. That does not happen much anymore. Startups are usually a group of engineers who work for little or nothing, are young, and have few responsibilities. A lot of the lower paid jobs are staffed by unpaid interns. If the company makes it, most of the stock goes to the investors and founders. There is little left over for the later hires. This creates massive concentration of wealth and skews the system even more. And it doesn’t help that more and more the young engineers are brainwashed by liberal "elite" colleges before they get here.
I have always thought like you, that you pay someone what they are worth and what you can afford to pay. However, what does a billionaire 30 something know about such matters?
Successful Silicon Valley Software Engineer entrepreneur
more on minimum wage
I completely agree with you on trust busting. Out here everyone in the EDA world starts a company expecting to be acquired by one of two companies, Synopsis or Cadence. The startups get absorbed into the collective and innovation ceases. The founders leave after the golden handcuffs come off and start another startup which gets acquired and the cycle repeats.
Test equipment is another area. Tektronix and Agilent are the big two. They desperately maintain their price points even though equipment is no longer expensive to build. The 70MHZ scope is exactly the same hardware as the 300MHZ scope, it’s just crippled. So instead of great equipment on every engineer’s desk, it’s still limited to a shared expensive device in a lab.
I think we need an amendment that defines what is too big to exist. If we did that, Enron’s would not happen and we would not get saddled with syburn oxly’s.
= = =
And Yet Some More
And yet there are areas where innovation is relentless. Process technology for example. 12 nm fabs are coming on line around the world. On the other hand, wafer starts (the cost to begin production of a chip once you have the design) are about 4 million US. This cuts out all the garage shops and little startups that want to make a chip.
In the aerospace world, you have seen the industry go from many smaller companies to the big one in commercial (Boeing) and the big two in government (Boeing and Lockheed….). You probably also have a good idea in that industry what a good size is for a company.
The other point I wanted to make is when you have a giant company eating all the little companies, at least in the tech industry, you get large collections of followers and a tendency to keep the gravy train rolling rather than building new products. Throw in cheap tech labor from the 3rd world and it gets even worse.
A successful Silicon Valley software engineer entrepreneur
Understand, this is the world that Ron Unz lives in and has become a multimillionaire in. We had some of this discussion with Ron at my kitchen table. He deserves a hearing. And yes, I know damned well the issue is very complicated, and it is very much rolled in with the reality of entitlements, welfare benefits, the notion of deserving and undeserving poor, work habits, and education.
And as you say, the robots are coming. Innovation is relentless. Moore’s law was an S curve, not an exponential, but the usual result of a flattening out of an S curve – not that we are there yet with Moore’s Law – is the beginning of another S curve with newer technology.
And the Marx-predicted concentration of capital and the ownership of the mean of production continues just as relentlessly.
An American’s case for boosting the minimum wage
I’m all in favor of boosting the minimum wage. I also favor the various gun grabs, taxes, EPA mandates and other crippling measures being demanded by the "Progressives" currently in charge of this country and economy.
Compare this to a plane losing airspeed because of a crippled engine, propeller windmilling and creating drag. When the plane gets down to a certain speed, the wings stall. If the stall break takes place with sufficient altitude, there is a brief excitement, then recovery. Put the nose down, trade altitude for airspeed, and that energy allows controlled descent. A series of these can get you to a safe landing, or sometimes even get the engine running again.
However, if the stall takes place below a certain altitude but not quite low enough. all that results is complete destruction. Worse, incompetent actions by the pilot — even at an otherwise safe altitude
— can result in development of a flat spin, where nothing that anyone does can bring recovery.
The engine is economic and political power. If we’re going to have a stall, let’s stall NOW, let people recognize the incompetence of our political leadership (both D and R), and take back the controls before it’s too late.
My great fear is that things will continue to stretch out, like taffy, and then the inevitable disaster begins, it will be too late for the survivors to recover. The necessary resources are being legislated out of existence and those with the skills to produce and use them are being suppressed.
We have descended so far down that the only remaining options may be to give in to Fascism, or (as Churchill put it) fight with all odds against us "and only a precarious chance of survival." Dear God let us avoid the last option in that progression, and if the only way to do so is to encourage the "stall break" now, then I’m all in favor.
The alternatives to the concentration of wealth are few. One is to encourage the concentration and turn each into a regulated public utility – remember The Phone Company. Or control them through a Grand Council of Fasces as Mussolini sought (recall that some of his ministers were Jews until he was forced to ally with Hitler; he was a Socialist and his original Fascism was political not racial. Authoritarian, but of course tending to totalitarianism. See the Ignacio Silone novel Bread and Wine; it is worth your time.
Another alternative is, as David McCord Wright noted, the intent of the Sherman Anti-Trust act and its descendants. Do not allow the concentration: require competition even if that appears to lower efficiency – it probably will not lower efficiency because as there is less competition there is more Bureaucracy, and Pournelle’s Iron Law of Bureaucracy will take hold and efficiency will go to hell. Schumpeter also has much to say on this.
Too big to fail is an invitation to disaster. Concentration of wealth is an invitation to disaster. But confiscation of wealth merely fuels the government and builds even larger bureaucracies and stifles innovation. I would think that obvious, but it seems obvious only to me.
Distributism is an extreme form of reducing concentration and raises moral and ethical questions. Anti-trust actions have been proven to work in the past. Why have we abandoned them in the siren song of increased efficiency? And are uncompetitive giants actually efficient? Or when they become too big to fail what happens?
The attached, taken from government data (sources below) accessed c. 2004, and analyzed very crudely (as appropriate to annualized data) clearly illustrates the correlation between increases in the minimum wage, unemployment, and inflation. One of these days I hope to find monthly data and do a more precise analysis, if I can get the "round tuit."
Minimum Wage (as of 1 Jan of year) http://www.dol.gov/esa/minwage/chart.htm
Inflation Rate ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
Which gives a range of discussion items. It is late now and I am going to bed. I doubt this discussion is ended. Unz is saying that raising the minimum wage will address a number of problems including entitlement and unrestricted immigration of people willing to work at slave wages; that it will make immigration control easier by making employment control easier. Of course employment control is not desirable per se; it is an imposition on freedom and a restriction on economic growth. The German Economic Miracle came about when Proconsul Lucius Clay allowed Konrad Adenauer to essentially abolish all employment restrictions and regulations: hire anyone who will work for you at any wage they will accept; build, create, produce! And Germany went from bombed out ruins to a hypermodern economy, while next door East Germany slowly descended into the economic muck despite the similarity of population and war destruction. An experiment we do not take note of any longer.
Freedom is not free. Free men are not equal. Equal men are not free.