“Reasoning will never make a man correct an ill opinion…”

The editors of the Washington Post take note of another study finding that a sharp increase of the minimum wage to $15 will harm the very workers it purports to aid:

According to the 146-page report by Philadelphia-based consulting group PFM, the proposed higher wage would indeed yield benefits for low-wage workers who received it, in the form of reduced stress, greater food security and better mental health. Employers, in turn, could benefit from their workers’ improved morale, in the form of higher productivity. However, there would be offsetting costs and they could be substantial: a loss of almost 47,000 jobs and $396.5 million in total income by 2022, due to workers’ being priced out of the job market by the higher minimum wage. This would spell a reduction of nearly $41 million in expected county tax revenue between fiscal 2018 and fiscal 2022; meanwhile, the county government’s payroll costs would go up $10 million.

It will, no doubt, be met by angry retorts and directed research finding the opposite. Left unstated is that there are 300 years of economic reasoning that supports the idea that in general the demand curve for labor slopes down.

However, as Jonathan Swift observed, “Reasoning will never make a man correct an ill opinion, which by reasoning he never acquired.” I don’t expect any study or even actual results will cause its advocates to relinquish their charge for a higher minimum wage.

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Cruz Missive

Texas Sen. Ted Cruz has an op-ed in the Washington Post in which he calls for several measures to curb North Korea’s progress in developing nuclear-armed intercontinental ballistic missiles:

Four years ago, North Korea’s Rodong newspaper released a photograph of Kim Jong Un sitting in front of an intercontinental-ballistic-missile targeting map depicting Washington, Los Angeles and Austin. What once may have sparked laughter is no longer a joke. Kim’s latest successful ICBM test, last week, could make the entire continental United States vulnerable to a nuclear strike from Pyongyang.

We can no longer defer our response to this crisis. North Korea has demonstrated time and again that it may upend the tenuous armistice along the 38th parallel at any moment and drag the United States and our allies into a devastating conflict. What the United States needs now is swift action backed by a realistic strategy to secure the denuclearization and reunification of the Korean Peninsula.

To his credit he does not propose war with North Korea. These are his three prescriptions:

  • expedite the development of the Space-Based Interceptor program (SBI) to vitiate the threat
  • impose sanctions on the Chinese banks that violate United Nations Security Council directives by facilitating the movement of money to North Korea
  • Transmit counter-propaganda to the people of North Korea
  • Of those only imposing sanctions on Chinese banks would have the slightest effect on North Korea’s trajectory. To those could be added sanctions against companies or countries that employ North Korean workers. The gravest offenders in that category are China, Russia, Kuwait, Qatar, and UAE.

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Encouraging Economic Growth

I hate to say it but I tend to agree with Simon Johnson’s post at Project Syndicate. The Trump Administration is mostly kidding itself (and us) about near term 3% real growth and it shouldn’t be bundling that into its budget requests:

The US economy used to grow at more than 3% per year; in fact, this was the norm in the second half of the twentieth century. Since then, however, the US has been forced to confront three major constraints.
First, the US population is aging. As the baby boom generation (born after the end of World War II) retires, the proportion of retired people in the total population increases. Over time, this demographic shift has reduced US potential annual growth by perhaps as much as half a percentage point.
The details of what will happen to health insurance remain unclear. But making it harder or more expensive for lower-income and older Americans to get health insurance is not likely to encourage people to work. The best independent assessment of these policies, produced by the Congressional Budget Office (CBO), does not predict any economic miracles – just that around 20 million fewer Americans will have health insurance.
And lurking in the background are potential policies that would restrict legal immigration. The US currently allows about one million mostly working-age people per year to take up residence and work in the country. Moreover, immigrants’ tendency to have more children than non-immigrants do keeps the US population growing faster than in other developed countries (for example, in Europe or Japan). So any move to reduce annual immigration – some Republicans are proposing 500,000 people or fewer – would make 3% annual economic growth even less likely.
The second economic constraint is the slowing rate of productivity growth. There was a major increase in average output per person in the post-World War II years, as better technology was developed across a wide range of sectors. And there were hopes in the 1990s that the information technology revolution would have a similar effect. But the impact on productivity has been disappointing. Northwestern University economist Robert Gordon’s recent book, The Rise and Fall of American Growth, argues that, despite all the hype from the tech sector, we are unlikely to see a dramatic change on this front.
The Trump administration argues that by reducing taxes and “reforming” healthcare, it can boost productivity – for example, by encouraging capital investment. But the tax cuts that will soon be on the table are likely to resemble closely those implemented by President George W. Bush’s administration, which did not lead to any kind of economic boom (a point that James Kwak and I examined in detail in our book White House Burning).
The third constraint stems from the 2008 financial crisis. One danger inherent in pushing for high growth is that it is always possible to juice an economy with short-term measures that encourage a lot of risk-taking and leverage in the financial system. Deregulation in the 1990s and early 2000s did exactly that, leading to slightly higher growth for a while – and then to a massive crash.

I think that more robust growth is possible but politically difficult. Most of it boils down to eliminating deadweight loss. The lowest hanging fruit would be bringing the business income tax rate down with OECD norms. That wouldn’t generate a huge amount of growth but it could generate little.

Regulatory reform would help a little, too. In the United States not only are their federal regulations but 50 states generating regulations of their own and thousand of cities and counties, ditto. Surely some standardization is possible and that, too, would produce a little growth.

I doubt that we’ll get much additional growth at all by tinkering with the marginal personal income tax rates but that seems to be the keystone of the administration’s tax reform policies.

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Storing Heat

I’ve posted on this subject before. We’re still not particularly good at storing electrical power but we’re actually pretty good at storing heat. That presents a potential strategy for storing the power that would otherwise be wasted from wind and solar and, as this article at Bloomberg notes, companies like Google are trying to make use of it:

Two tanks are filled with salt, and two are filled with antifreeze or a hydrocarbon liquid. The system takes in energy in the form of electricity and turns it into separate streams of hot and cold air. The hot air heats up the salt, while the cold air cools the antifreeze, a bit like a refrigerator. The jet engine part: Flip a switch and the process reverses. Hot and cold air rush toward each other, creating powerful gusts that spin a turbine and spit out electricity when the grid needs it. Salt maintains its temperature well, so the system can store energy for many hours, and even days, depending on how much you insulate the tanks.

Scientists have already proven this as a plausible storage technique. Malta’s contribution was to design a system that operates at lower temperatures so it doesn’t require specialized, expensive ceramics and steels. “The thermodynamic physics are well-known to anyone who studied it enough in college,” Green said. “The trick is doing it at the right temperatures, with cheap materials. That is super compelling.”

The real challenge is making the process practical and that’s what they’re trying to master now.

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Free Trade With Chinese (and European) Characteristics

The Trump Administration’s Secretary of Commerce, Wilbur Ross, has an op-ed in today’s Wall Street Journal in which he articulates something I wish were more generally understood. Our major trading partners are pretty darned two-faced:

Our major trading partners issue frequent statements regarding their own free-trade bona fides, but do they practice what they preach? Or are they protectionists dressed in free-market clothing?

When it comes to trade in goods, our deficits with China and the EU are $347 billion and $146.8 billion, respectively. As the nearby chart shows, China’s tariffs are higher than those of the U.S. in 20 of the 22 major categories of goods. Europe imposes higher tariffs than the U.S. in 17 of 22 categories, though the chart does show that the EU and China are much different regarding tariff rates.

The EU charges a 10% tariff on imported American cars, while the U.S. imposes only a 2.5% tariff on imported European cars. Today Europe exports 1.14 million automobiles to the U.S., nearly four times as many as the U.S. exports to Europe. China, which is the world’s largest automobile market, has a 25% tariff on imported vehicles and imposes even higher tariffs on luxury vehicles.

In addition to tariffs, both China and Europe enforce formidable nontariff trade barriers against imports. Examples include onerous and opaque procedures for registering and gaining certification for imports; unscientific sanitary rules, especially with regard to agricultural goods; requirements that companies build local factories; and forced technology transfers. The list goes on.

Both China and Europe also bankroll their exports through grants, low-cost loans, energy subsidies, special value-added tax refunds, and below-market real-estate sales and leases, among other means. Comparable levels of government support do not exist in the U.S. If these countries really are free traders, why do they have such formidable tariff and nontariff barriers?

It should be noted that a lot of the alleged labor cost advantages to be gained from manufacturing in China or hiring programmers or support center workers in India are artifacts of our labor, safety, and environmental standards.

The reality of trade is that all of our major trading partners are mercantilists and we’re crony capitalists. The United States as a whole may not benefit from our lop-sided excuse for free trade but a few companies and their managers benefit mightily.

He also touches on another point. China was admitted to the World Trade Organization about 20 years ago with the understanding that it would put certain reforms into its banking system into place. It hasn’t done it and it shows no intention of doing it. As this news report highlights, its major banks are being run like enormous family businesses and criminal family businesses at that.

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Hire Slow—Fire Fast

I’m not particularly interested in the personnel changes in the Trump White House other than to make one observation. Donald Trump appears to hold to the “Hire Slow—Fire Fast” theory of personnel management. It’s something I’ve heard articulated by managers recently. I don’t know where the idea came from.

I don’t think much of it. I’d subscribe more to the idea of hiring carefully, working with your employees to ensure you’re getting the best possible performance from them, and terminating only when that has failed. The HSFF strategy treats people as too expendable for my tastes. I don’t think that good people are nearly as easy to find as it suggest and anyway they’re cultivated rather than springing forth fully grown as from the brow of Zeus.

It sure doesn’t encourage loyalty, does it?

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View from the Top

The founder of Home Depot explains what’s wrong with the Regulatory State:

Regulations from the previous administration would have made it impossible to start The Home Depot today. The payment structure responsible for The Home Depot—which included company shares that created 20,000 millionaires overnight when we went public—would have been illegal under the Obama Labor Department’s overtime rule. It would have barred our hardworking employees in the early days from working long hours to get the company off the ground.

And the current climate of high taxes on businesses would have further crippled The Home Depot in its infancy. The marginal tax rate of 40 percent that is levied onto our nation’s small pass-through businesses would have caused our already constrained budget to expand beyond our means.

Those taxes and regulations don’t keep big businesses from making out like tall dogs. They prevent businesses from starting.

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Scarce

I may be a bit scarce around here for the next few days. Fortunately, so is the news.

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An Alternative System

What do you think of this proposal for reforming our health care system?

My opinion of it can be summed up pretty easily: I think he’s making the error that most naive commentators do. He believes in the “true price” theory of pricing.

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