Posts tagged with: Macroeconomics

TipsMillions of Americans who work for tips have now been dragged into the political battle over the federal minimum wage and whether it should be raised to $10.10 per hour. Since 1991, the federal minimum wage has been adjusted 5 times, increasing three dollars to its current $7.25. These changes have been made while the minimum wage for America’s largest workforce, tipped workers, has remained unchanged at $2.13 for 23 years.

Although tips are meant to be a gratuity that shows appreciation for good service, they have become the difference between poverty and a living wage for nearly 20 million Americans. Saru Jayaraman, founder of the labor advocacy group Restaurant Opportunity Centers United, says that abolishing the tipped minimum wage in favor of one fair wage will help reduce poverty, especially in families.

But the National Restaurant Association has a different view. In response to a study on tipped wages by the left-leaning Economic Policy Institute, the NRA states:

Ninety percent of restaurants are independent or franchisee owned and operate on razor thin profit margins. Drastic increases to the minimum wage will only hurt restaurants ability to continue to create jobs and provide real opportunity to young people looking to step into the workforce and those who are finding their economic footing.


gaplogoThe furniture store Ikea has announced they will begin to base their minimum pay on what’s considered to be a “living wage” in each local area, rather than on what competitors are paying. Similarly, the clothing retailer Gap says it will set $9 as the minimum hourly rate for its United States work force this year and then establish a minimum of $10 next year.

This makes good business sense — but will lead to a lot of bad economic reasoning.

A prime example is the latest column by Slate’s business and economic writer, Jordan Weissmann:

Notably, Ikea isn’t raising prices on its furniture to pay for the raise. Instead, the company’s management says it believes the pay hike will help them compete for and keep talent, which is of course good for business. The Gap used a similar justification when it announced it would raise its own minimum to $10 by 2015.

Which I think hints at something about what would likely happen if the U.S. raised the federal minimum. Conservatives who argue that higher pay floors kill jobs tend to assume that businesses are already running at pretty much peak efficiency, and so forcing them to spend more on labor will lead to less hiring. But left-leaning economists see it differently. They tend to argue that increasing wages can lead to savings for business by reducing worker turnover, for instance, and forcing managers to make better use of their staff.

Both the conservatives and the left-leaning economists are largely correct. Higher pay floors do tend to kill jobs and increasing wages can lead to savings for business by reducing worker turnover. But where Weissmann and other liberals go wrong is in assuming that businesses can still prevent worker turnover when the minimum wage is increased.

In 1820, America’s per capita income averaged $1,980, in today’s dollars. But by 2000, it had increased to $43,000. That economic growth has benefited the rich, of course. But it has also transformed the lives of the poor — and prevented many more from becoming or staying poor.

In this superb short video, the American Enterprise Institute briefly explains the moral value of economic growth.

bratI had a chance to talk with Michelle Boorstein yesterday about David Brat and a bit of his work that I’ve been able to become familiar with over the past few days. She included some of my comments in this piece for the Washington Post, “David Brat’s victory is part of broader rise of religion in economics.”

I stressed that Brat’s research program, which in many ways emphasizes the relationship between Christianity and capitalism, has at least two basic features. First, he’s focused on increasing theological awareness of economic realities: “I never saw a supply and demand curve in seminary. I should have.” This kind of increased economic sensibility would help the church to be a positive factor for social cultural change: “The church needs to regain its voice and offer up a coherent social vision of justice and rationality.”

But on the other hand, Brat has a message for economists as well. He challenges the mainstream assumption of economics as merely a positive, value-free science that can provide objective answers to questions without the trappings of morality or religion. A comment on Boorstein’s piece illustrates this important aspect of Brat’s work:

Dave helped me understand the essentiality of the links between capitalism (voluntary exchange that serves both parties’ interests) and theology (man’s obligation to serve God through work and use gain to carry out Jesus’ admonition to help the poor). At first, I thought he was joking. Surely one did not have to embrace a theological perspective to be a good capitalist. But he was not joking. I now have a much more nuanced and mature understanding of the “moral foundations of capitalism” than I did before I met Dave.

Brat’s faculty page includes portraits of John Calvin, Adam Smith, Friedrich Hayek, and John Maynard Keynes. Obviously there’s a lot to David Brat and I look forward to becoming more familiar with him and his work.

Amid all of the bad reportage out there on Brat, and there is so much that it is hard to keep up, here are a few other pieces that I have found to be helpful:


Note: This is the latest entry in the Acton blog series, “What Christians Should Know About Economics.” For other entries in the series see this post.

The Term: Money

What it Means: In economics, money is a broad term that refers to any financial instrument that can fulfill the functions of money (more on that in a moment).

There are three basic ways to exchange goods and services: gifting (e.g., I give you a banana, expecting nothing in return); barter (e.g., I give you a banana, in exchange you give me an apple); by using money (e.g., I give you a banana, in exchange you give me $1). Money was invented (and reinvented in every culture) because it makes exchanges easier than the barter system.

What Money Is: Money is a shared belief system used to simplify exchanges of goods and services. To be used as money people have to share a belief that the item —whether paper, gold, rocks, etc. — can perform three main functions: be a store of value, be used as a unit of account, and serve as a medium of exchange.

In the next section we’ll examine these functions. For now, here are two examples of how money serves as a shared belief system:

milton_friedman2The Book: Milton Friedman: A concise guide to the ideas and influence of the free-market economist by Eamonn Butler

The Gist: As the subtitle suggests, this short book provides a concise overview of the ideas and influence of the late economist, Milton Friedman

The Quote: “[T]he supporters of tariffs treat it as self-evident that the creation of jobs is a desirable end, in and of itself, regardless of what the persons employed do. That is clearly wrong. If all we want are jobs, we can create any number—for example, have people dig holes and then fill them up again, or perform other useless tasks. Work is sometimes its own reward. Mostly, however, it is the price we pay to get the things we want. Our real objective is not just jobs but productive jobs–jobs that will mean more goods and services to consume.”

The Good: The book includes numerous direct quotes from Friedman . . .

The Blah: . . . but far too many of the quotes are taken from an interview in Playboy magazine rather than from Friedman’s own writings.


Terminator-2-Judgement-Day-posterI oppose implementing Skynet and increasing minimum wage laws for the same reason: to forestall the robots.

It’s probably inevitable that a T-1000 will return from the future to terminate John Connor. But there is still something we can do to prevent a TIOS from eliminating the cashier at your local McDonalds.

In Europe, McDonalds has ordered 7,000 TIOSs (Touch Interface Ordering Systems) to take food orders and payment. In America, Panera Bread will replace all of their cashiers with wage-free robots in all of their 1,800 nationwide locations by 2016. There is even a burger-making robot that can churn out 360 gourmet hamburgers per hour.

I, for one, welcome our new fast-food robot overlords. I’m just not ready for them yet.

mcdonalds“Clean up your own mess. Your mother doesn’t work here.”

That was a sign, printed on dot matrix printer paper, which hung in the breakroom of the McDonald’s where I worked. While that was nearly thirty years ago, I suspect that same sign is still there (though probably reprinted on a laser printer). But the idea behind it has changed. Your mother may not work at McDonalds, but the company—and others that hire low-skilled employees—are increasingly taking on the role of in loco parentis.

Lessons in basic life skills that were once taught by parents—such as punctuality, self-direction, basic personal hygiene—are increasingly being provided by the shift manager at the local fast food restaurant. That is why it’s absurd to claim that companies that are willing to hire people who are unqualified for the labor force are somehow getting over on the American taxpayer.

As Reihan Salam,

Seattle-mystWhen I was growing up I had a buddy—let’s call him “Bob”—who was constantly asking, “What happens if we do . . . ?” Bob’s curiosity, however, only led him to wonder about foolish actions. He never pondered, for example, what would happen if we all volunteered at the senior citizens center. Instead, his thinking ran more along the lines of what would happen if we jumped off the senior citizens center.

The reaction of me and the rest of my friends was always, “Let’s find out!” But we were more prudent than Bob (or maybe just more cowardly) so we’d encourage him to try whatever reckless idea he had in mind so we could learn from his experience. We learned, for instance, that if jump off the 3-story senior citizens center, a stack of cardboard boxes will not be enough to sufficiently break your fall.

Bob’s shenanigans would daily provide for us what social scientists would call a “natural experiment.” A natural experiment is a study of the effect of an independent variable, which has not been planned or manipulated by the researchers, on a dependent variable. (The word ‘natural’ in the term natural experiment therefore refers to an event that is not planned by the researchers.)

The city of Seattle is about to pull a Bob, by foolishly raising the minimum wage to $15 per hour. The effect on the citizens of Seattle will be almost entirely harmful. But it will provide a natural experiment on the effect of raising the minimum wage laws that the rest of American can learn from. Anyone who isn’t already convinced that increasing the minimum wage has a detrimental impact on employment and harm minority workers will, in a few years, have solid proof. We will all be able to look to Seattle to see the difference between good, albeit naive, intentions and sound economic policy.

Here are some of the effects I predict the policy will have in the next three years:

The following is a letter written in response to a post from my friend Brad Littlejohn on the topic of the minimum wage

Dear Brad,

Thank you for your thoughtful and substantive engagement on the question of the minimum wage. I don’t think the conversation we had on Twitter earlier did justice to your work here, so I’m offering this response in hopes of furthering the conversation. I hope you find it fruitful. I certainly have. I should also note that I have been assuming the context of policy proposals to increase the minimum wage at the federal level in the United States. There are certainly aspects of what we’re discussing that apply to a greater or lesser extent in other contexts and at other levels of government, but at the level of individual states, for instance, the stakes are somewhat reduced and ameliorated by the realities of federalism.

You write that you “want to reflect a bit more fully on what’s wrong with one of the common conservative arguments against the minimum wage: that the laborer is only worth his productivity.” I have significant concerns with equating someone’s worth with the economic value of their labor in the marketplace. I do not argue that the laborer is only worth his or her productive work. I argue that a worker’s work is only valuable in a market setting insofar as someone is willing to pay for it. I agree that there is a subjective element to work that is in some ways intimately identified with and inseparable from the person doing the working. But I do maintain that the worker and the work can, and indeed must, be distinguished. Perhaps what we disagree about is that you think the wage someone is offered is primarily a signal about how much that person is valued. I think that the wage someone is offered is primarily a signal about how much that person’s work is useful to others.