Estimating The State of Labor Markets (Unemployment Statistics vs. Economic Realities)

Here is my elaboration on the work I mentioned here.

Let’s begin by downloading historical monthly official unemployment rates according to the St Louis Fed website. We’ll be using the series UNRATE, M0892AUSM156SNBR, M0892BUSM156SNBR, and M0892CUSM156NNBR. The first thing we want to do is turn these into a single, monthly series. To begin with, we will take M0892AUSM156SNBR for granted in the early part of the data. Subsequently, when it overlaps with M0892BUSM156SNBR, we will favor that latter series. During the first month of the latter, the two series agree, but they diverge thereafter. It’s not clear why, but M0892BUSM156SNBR seems more realistic. Finally, we have the issue that no seasonally adjusted series covers the year 1947. M0892CUSM156NNBR covers that year, but is full of seasonal noise. Fortunately, M0892CUSM156NNBR overlaps with UNRATE, so it is possible to estimate a seasonal cycle in M0892CUSM156NNBR and remove it. By removing the estimated average monthly differences, I can bridge the gap between the series. Now, using the series GPDIA and GDP data, I can find out what portion of spending in each year, back to 1929, was investment. This is significant because during normal times, there seems to be an inverse relationship between changes in the unemployment rate, and changes in the “investment rate.” As it turns out, this works fairly well through the entire period, except for one glaring discrepancy:

investmentrateunemploymentrate

Four years, from 1942-1945 inclusive, fall off the general pattern of this relationship. Why? Simple. During World War II, the forcible removal by conscription of ten million able bodied young men (I assume they would have been young men?) from the labor force into the armed forces, the volunteering of many more who wished to avoid the high likelihood of assignment to infantry associated with the draft, the movement of people into draft exempt war production industries, all naturally led to a reduction in the official unemployment rate. To quote Robert Higgs:

Between 1940 and 1944 unemployment fell by either 7.45 million (official measure) or 4.62 million (Darby measure), while the armed forces increased by 10.87 million. Even if one views eliminating civilian unemployment as tantamount to producing prosperity, one must recognize that placing either 146 or 235 persons (depending on the unemployment concept used) in the armed forces to gain a reduction of 100 persons in civilian unemployment was a grotesque way to achieve prosperity, even if a job were a job.
So, clearly, the unemployment rate during those years does not accurately reflect the actual state of the economy and the ability of people to get a job-it was easier for those not fighting in the war to get jobs only because the supply of labor was artificially contracted. Based on the above relationship, the level of private investment at the time would have supported an unemployment rate of about 20%. But that relationship is a little noisy, I mainly mention it because it fairly starkly illustrates the unreliability of the unemployment rate during that period. I used such relationships with investment and the the private economy’s deviation from long term trend, to estimate, with a multiplicative adjustment, and an additive adjustment, what the unemployment rate would have looked like had there not been so many people simply removed from the labor force. With respect to the investment rate, I appear to have made a conservative (in the sense of err on the low side for an upward adjustment) estimate. I only menti0n this because I cannot, unfortunately, remember exactly how I arrived at the adjustment? I realize this is the sort of comment to invite a great deal of skepticism. I can only comment that I recall that I had some method at the time, and there are defensible methods whereby I know I could arrive at an even stronger answer. I was reconstructing work I did a couple of years ago in the course of writing this post. If you’re disappointed that I couldn’t reconstruct the origin of this adjustment, your disappointment cannot match my own. I think it was based on the private output gap? Either way, you can trust me or not on my final numbers for this period, I’ll leave that up to you. Now, I end up with a monthly record like this:
unemploymentandadjustment
But…Something kind of extraordinary is going on at the end there. During the alleged recovery from the recent recession, the labor force and the working age population, between the ages of 16 and 64, have diverged in a noticeable way:
workingagepopulationlaborforce
We see that, in spite of the growth of the working age population, the labor force began to stagnate in 2008. If we assume an alternate scenario, in which the labor force, but not the number of people actually employed, had continued to grow from 2008 on at the 2000-2007 linear trend, the following happens to the unemployment rate:
unemploymentandadjustment2
I can go further, though, and estimate annual unemployment rates for the US back to 1790. Using my estimates of the private economy and it’s deviation from it’s long term trend, accounting for mismeasured inflation during WWII, based on the relationship between the two:
unemploymentoutputgap
I chose a quadratic curve to prevent the formula from outputting negative values, and the point at which the relationship would output values going in the “wrong” direction, never occurred in the historical private output gap data. This allows me to extend unemployment estimates back to 1790:
unemploymenthistoricalestimate
It is on this basis that I find that the unemployment rate was lower, significantly so, during the Classical Gold Standard, than it has been recently, under the Federal Reserve.
Ceterum censeo Subsidium Foederati esse delendam.

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The Money War

The Conservative and Libertarian movements in the United States today seem to be experiencing something a bit like the Democratic party did in the late 19th Century, when, bafflingly, they went from one election running the sound money Goldbug, small government candidate Grover Cleveland to, a mere four years later, nominating William Jennings Bryan, who advocated for the inflationary insanity of Bimetalism, which was just the beginning of his out and out Socialism. The key word here is seem, because the way I’ve just stated it is a bit of an unjustifiable overstatement. Sure enough, beneath the notice of most of the public I imagine, there is an at times vitriolic dispute over the basic question of whether we should have more or less inflation, and many questions which amount to this exact same question phrased in a different way. Sure, it’s disturbing as hell to me to see guys like James Pethokoukis wage jihad against the gold standard, repeat Hoover’s libel of his own Treasury Secretary, falsely insinuating there is an ounce of daylight between “pre war” and “post war” Austrian thinking, and complaining that inflation isn’t high enough…actually, holy shit does reading the things he writes lately scare the crap out of me. Reading the comment sections (to say nothing of the posts) on blogs of certain Monetarists (who shall remain nameless) is guaranteed to give one a strong sense of dyspepsia. The only thing that makes it better, in a perverse sort of way, is the counterbalancing effect of the Rothbardian Internet Neckbeard Troll. For these guys, banking is fraudulent, an embezzlement scheme masquerading as warehousing. And one strongly suspects that much of the unpleasantness coming from the likes of the inflationist right is, in part, the result of pushing too hard back against these types, albeit on the wrong points. That being said, I think both sides are missing one another’s points to a significant extant. Let me see if I can summarize, in briefest possible terms, what I think the strongest arguments seem to be for “we need more inflation” and “we don’t.”

First, the pro-inflation side: People’s current plans for future economic activity are based on an expectation of a certain level of inflation. To the extent that actual inflation falls short of that, people will make errors in their decisions about allocation of resources: in short, it hurts the economy.

Second, the anti-inflation side: There is no long term benefit to increasing the supply of money above and beyond the quantity demanded. There are, in fact, significant long term costs.

As I see it, there is no obvious inconsistency between these two points. In the short term, demand to hold money may be such that maintaining real growth requires that the Central Bank err, at least temporarily, on the side of inflation-it’s at least possible that we may have little choice, in the short term, to accommodate people’s already formed expectations. But in the long term, economic stability is best fostered by eliminating the authority that is required to so err in the first place. Ceterum censeo Subsidium Foederati esse delendam. Let’s be clear on one thing though: the argument for growing NGDP back to it’s prior long term growth path, is not that Monetary Equilibrium requires this. It’s the view that labor market discoordination is more important at this stage than the coordination of savings and investment. What’s required for the former is keeping long term labor contracts (to a lesser extent, extant long term debt contracts) for fixed nominal wages (fixed nominal interest rates) consistent with market clearing real wage rates (or, in the case of debt contracts, consistent in the sense that, if they’d known how prices were going to behave, people would still have agreed to the debt contracts). What’s required for the latter, on the other hand, is fixed nominal spending-that is all. These two goals cannot be simultaneously achieved, not at the moment. Economics is like that, though: it’s about choosing between options, not having everything you want. Outcomes are scarce, just as resources are (while writing this, I discovered someone (A guy at George Mason who I haven’t heard of before) in fact uses the term “policy possibilities frontier!”). But some scarcities are artificial, and others are natural. It’s my view that the downward rigidity of wages largely reflects the rational belief of typical workers that inflation that has been going on for many decades now almost uninterrupted, and that, essentially, there is no reason to think it won’t continue in perpetuity. This rational belief is essentially equivalent to the the knowledge that one lives under a Central Bank that manages fiat currency. Note that the rate of average nominal hourly earnings growth is almost exactly the same as the rate of price inflation the Fed claims to be aiming for-2%. Of course, the Fed aims for 2% in a particular index, and thus 2% weighted average of a certain subset of prices-the “Personal Consumption Expenditures” index. There are other measures of inflation, for example the index published by MIT’s “billion prices project” which tracks online prices in real time. By that measure, the inflation rate is already above 2%, but then, it’s measuring prices, evidently, that the Fed implicitly wants a greater than 2% inflation rate in. Which should given one pause about the whole idea of targeting a rate of inflation, frankly: the fact that different indices show inflation at different rates means that the phenomenon of price inflation is not something for which an objective measure exists.

But, having said that there might be a basis for thinking there may be continued, short term grounds for more inflation, I’m still inclined to think otherwise. But, you may ask, isn’t it true that unemployment is still higher than a frictional, natural level? Isn’t it true that the official unemployment rate actually understates this? And, couldn’t a little bit of inflation help that? I’d answer maybe, yes, and no to those questions. For the second question: it’s true that since 2008, whereas the working age population (16-64) increased by 3.4%, the labor force grew a mere 0.8%-effectively, more people retired early, remained in school, left the work force for the welfare rolls, and so forth, than the actual increase in people below the retirement age and above the age of 16. An aging population cannot explain that. If the labor force had grown as it had between 2000 and 2008 after 2008, but as many people were working today as are, the unemployment rate would be 11.3%, not 5.9%-not much of an improvement over an adjusted peak of 12.8% versus an unadjusted peak of 10.0%, and worse than any official rate since the great depression. So aren’t we clearly somewhere on the short run Phillips curve where a higher rate of inflation could, at least temporarily, decrease the unemployment rate? Well, that depends on whether the issue of the remaining unemployment is one of labor demand or labor supply. And I don’t think that that extra 5.4% can be considered a demand problem per se (there are problems that primarily impact labor demand, but they don’t really relate to insufficient spending: for example, strictly speaking, labor is demanded in hours, not persons, and Obamacare has disincentivized hiring people for full time work. Of course, that doesn’t actually impact the unemployment rate, adjusted or not.) rather, the problem, for people who have given up on finding work entirely, seems more likely to be for one, that even if they would be willing to work for lower wages, they lack the skills that employers now want-during the boom, people were drawn into certain industries, and became specialized to those particular lines of work, and now the composition of labor demand has shifted, employers now want workers with different sets of skills…but the skill sets of people have a significant inertia to them. In short, the problem is not that there is insufficient labor demand period, but rather that the kinds of labor demanded don’t match the kinds of labor that could presently be supplied. Another labor supply end issue is the fact that, labor being onerous, increased government benefits, including extended unemployment insurance, among other things, raise the level of compensation that would be necessary to make labor more attractive than leisure for many individuals. If one has to choose between working for a check, or a check of equal or greater value without having to do any work, there are people, I think it should be obvious, who would choose the latter. Saying this usually elicits cries of outrage at the mere suggestion that anyone, anyone prefers leisure to labor, no matter how unpleasant the labor and how unsatisfying the compensation is. But if you’ve ever met anyone who has complained about their job, I suggest you shut up: that’s who I’m talking about. If that person is at all sincere in being dissatisfied with the amount of work they do and how much they are compensated for it, then all it would take to get them to quit would be to offer them a more favorable trade off between effort and reward-which, if the effort on on offer is zero, merely requires you to find the minimum compensation for doing nothing they would accept to quit. If they’re sincere in not liking their job, the level of compensation they would accept to quit will be less than what they presently receive. To say that some people will take various forms of welfare instead of working is not even to say that much, because benefits may potentially exceed, for some individuals, what they could get for the labor they are able to offer. I can’t believe I have to defend such an obvious notion, but people have a knee jerk reaction to this issue. Okay, but coming back to the question, to which I answered maybe, isn’t the (portion of remaining unemployment that is not a structural supply issue) above the long run rate of frictional unemployment? My answer is “maybe” because it’s hard to say what that level actually is, and whether it has perhaps shifted higher as a result of the poor performance of the economy. This is important because one could hypothetically move on the short run Phillips curve to a lower level of unemployment, without merely causing a shift to a higher short run Phillips Curve, if one managed to hit the long run Phillips curve. Remember that the lesson of the 1970′s was that the long run Phillips curve is a vertical or nearly vertical positively sloped curve-there was no permanent tradeoff between the rate of inflation and the rate of unemployment. The average (official) unemployment rate in the last 20 years has been about 6%. If that represents where the long run Phillips curve currently lies, we are already as low as we can go-lower, in fact-in terms of unemployment, without simply causing the Phillips curve to begin to shift upwards. And this is why I’m inclined to answer in the negative to the question, “couldn’t a little bit of inflation help with the unemployment situation?” In fact, in some work I will probably elaborate on further later, I find that in the history of the United States, the period of the best economic performance, in terms of growth, estimate unemployment, and price stability, was during the “classical gold standard”-during which, in fact, there was in fact very little long term change in the price level, and alternately a low deflation rate and a low inflation rate in the first and second halves of the period, respectively. The average employment rate I estimate over the entire period? 3.3%. That’s better than we see during peaks of housing bubbles these days. This was the Long Boom-except that’s not quite right, as that implies this was an inherently unsustainable level of growth. The point is that at one point in our history, we were able to do a lot better than presently with, first of all, better policy on the supply side (no income tax, among other things), a small, limited Federal Government, and monetary policy effectively set automatically by the Gold Standard. Which brings me back to what I was talking about at the start of this post: In the late 19th century, the Democrat party went from supporting all of those things, to opposing all of them, in the span of one Presidency. And most especially, they came to oppose the monetary policy that insured the stability of the economy of the time-in spite, I would add, of destabilizing banking regulations being responsible for most of the actual problems, what little there actually were.

So is the Republican Party in danger of undergoing a similar transformation? Hardly, I think. Oh, to be sure, I worry about the inflationists, especially in the long run. And sure, you could say, the Republicans today are not exactly as pro Laissez Faire as their rhetoric might lead you to sometimes believe. But what else is new? Remember that a couple of generations ago, Newt Gingrich was considered radically right wing, just because he was not content to wake up in the morning and repeat the Bob Michel mantra “You’re going to be a loser” in front of the mirror. A few generations ago, Nixon and Ford attempted to fight inflation by “breaking the thermometer”-instituting wage and price controls! The Mitch McConnells and John Boehners of the modern day are a far cry from that. But that’s no reason to be complacent. There are also the Jeb Bushes, the Mitt Romneys, and the Crass Crustys out there. And I begin to understand what Hayek meant by rejecting the label “conservative” (in favor of “Old Whig“) and seeing “conservatives” as averse to change, when I think of the Paul Ryans of the world, who don’t want to dismantle the welfare state, regardless of what the left says, but to preserve it from itself. I’m not a conservative of that sort, either. This, I must say, is why I am 100% behind Rand Paul as my #1 choice for the Republican Presidential nominee. If any of the Republicans would be open to a principled case for monetary Laissez Faire, it’s unlikely to be anyone else.

EDIT: I was quite remiss in failing to point out, having started a post about Monetary Policy discussing the battle over that issue in the late 19th Century, and in particular William Jennings Bryan’s role in that battle, to neglect to mention his role in the creation of the Federal Reserve. Please forgive this, I think, or hope, uncharacteristic oversight.

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Rationale for Freedom in Banking

I thought after obliquely mentioning it in my last post, the concept of Freedom in Banking deserves more elaboration. I initially became enthusiastic about the idea based on a simple idea, which we may call a principle of economics:

Free and voluntary exchange, coordinated by an unrestrained system of prices, is the most effective way to bring production of goods and services-the ends of suppliers-into harmony with consumer demand.

If one holds that this is true for all “ordinary” goods and services, it becomes very strange indeed to simultaneously maintain that the provision supply of money to meet the public at large’s demand for money holdings, and a medium of exchange, is somehow best served by a government sponsored monopoly. That being said, most economists have tended to take for granted the need for regulation of the banking system, and government control of the money supply-Even Milton Friedman, who once remarked that the if the government were put in charge of the Sahara Desert there would be a sand shortage in a few years, generally took central monetary control for granted. Rothbardians, because they believe fractional reserve banking to be fraud, want de facto regulation of banking through a private court system-Any bank holding less than 100% reserves against it’s outstanding liabilities would be prosecutable as criminal. (As an aside here, most Austrians seem to believe fractional reserve banking is the inherent problem (that is, the root cause monetarily induced business cycles) but the Rothbardians distinguish themselves by believing it to be criminal. For Mises, fractional reserve banking was a creature created by government intervention, so in terms of policy he favored laissez faire. While he was almost certainly wrong to believe fractional reserve banking would not survive under free banking, he got the remedy right anyway. For my part I favor the views of those more like Larry White or George Selgin, who would have it that monetary instability comes from central banking, not fractional reserves per se) And it should go without saying that the Left, especially those who belong to the Conspiracy School of Economics, favor government reflexively.

Despite such opposition from practically all sides, I still defend the case for monetary laissez faire. Why? Let’s sketch a brief outline:

1. To begin with, not only is it not clear that a Central Bank, a government created monopoly, is an improvement over freedom in banking, it isn’t clearly an improvement even over a system like that which immediately preceded the creation of our current one in the United States-itself an un-free system, with restrictions on branching and taxes and regulations that basically limited note issue to what could be backed 100% with a particular kind of Government bond.

2. A so called “demand side recession” can only occur if there is an excess-that is, unmet-demand by the public to hold money balances. Otherwise, the observation of Jean-Baptiste Say applies: people supply goods and services only because they want to acquire money to purchase goods-that is, only because they they want to demand things: Supply creates it’s own demand. The virtue of a free banking system of competitive note issue is that it automatically achieves this monetary neutrality, ie monetary equilibrium. How, exactly? Without getting into too much detail, essentially: for a given quantity of reserves (the quantity is determined by the base regime. A stable quantity would be easy to achieve, we could have monetary policy set by a computer, or we could even close the Fed’s open market operations entirely, and freeze the monetary base-something Milton Friedman favored later in his life), banks will expand and contract lending to maintain a constant nominal income MV-to put it another way, the Banking system accommodates increases and decreases in the public’s desire to hold inside money. In loanable funds market terms, the supply of loans increases in response to an increase in voluntary savings and contracts in response to a decrease-thus achieving the Wicksellian Natural Rate of Interest, the displacement from which is at the core of the Austrian Business Cycle Theory. In other words, competitive forces automatically achieve two results which different economic schools of thought consider necessary to avoid or ameliorate business cycles, without the need for government intervention at all; One which Monetarists and certain Keynesians would be keen on is automatic “rule” that amounts, essentially, to NGDP targeting, Austrians should like that it should maintain the interest rates that would clear credit markets on the basis of voluntary savings-and thus prevent systematic malinvestment of capital. Essentially the only recessions we’d have to worry about any more would be “real shocks” of the sort a modern, large economy is not particularly susceptible to-but which, at any rate, no government policy could ever avoid, for the same reason even a completely free economy could not avoid them: they’re just bad luck. The theoretical basis for these arguments can, if anyone is interested, be found here.

Also, the question could be raised, since I mentioned it above, what the “optimum” monetary base regime is. Monetarists would tend to favor, generalizing here, anything from a Monetary base growth rate that would maintain 0% consumer price inflation, to a small positive rate of consumer price inflation. I tend to lean away from this view as excessively inflationary, but I demur on how much productivity and growth based deflation is optimal. I will simply observe that if population is stable, Selgin’s productivity norm converges to the frozen base proposal. To the extent that we may expect our population levels to stabilize in the future, we can treat the productivity norm as a transitionary regime towards eventually freezing the base.

EDIT: Some of the above requires some alteration from a more detailed examination of the “math” behind the logic linking freedom in banking to a “stable” nominal income. I was a bit mislead by almost interchangeable use of “stability” and “constancy” of MV when the monetary base is frozen. Strictly speaking the growth rate of MV is only zero under certain other assumptions, or families of sets of assumptions, about interest rates versus penalties for reserve shortages, the number of banks, and the ratio of number of clearing transactions of a certain “real” value to the number of equivalent transactions of a particular “real” value in the economy. That being said, it would be relatively trivial to write a computer program to manage the size of the monetary base to maintain an approximately fixed nominal income. Which means you could close the Fed and the FOMC.

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Neo-Free Soil

In 1848, Salmon P. Chase coined a simple slogan for the Free Soil Party, which later became a core part of the Republican Party.

Free Soil, Free Speech, Free Labor and Free Men

I believe that something similar is in order today. In fact, many of these very same brief summaries of positions would be adaptable to present day policy debates in parallel with past ones, and naturally align with the American Conservative/Right-libertarian positions, with a few additions:

Free Soil

The Government lays claim to large swaths of land in the American West. Their claim to property rights over this territory is theoretically dubious; indeed, from a Lockean perspective, it is totally illegitimate. As such, while it might be pragmatic to pay down the debt by selling off public land, it is bad law to do so. My suggestion would be to pass a new Homestead Act, whereby this property could transition to private ownership from non-ownership, through use. Economic activity on and development of this land would be encouraged by temporary exemption of all State, Local, and Federal taxation therein. Some portions could be set aside for the establishment of private parks and nature preserves, with the provision for ownership changed from any use, to exclusively use as parks where the owners would be free to charge whatever fees for access they see fit, on condition that they maintain the land well (Not that they attempt to keep the land in a static state, it must be said) . Legal authority (ie law enforcement jurisdiction) within the territory is to belong solely to the States or the relevant Local Government, but all property rights are to be private, and certain state regulations are to be considered abrogated within the property at least for the duration of the development period. This is a program that not only restores the right notion of property rights to our laws, but will also spur economic development and growth, as reopen the once closed frontier.

Free Speech

Freedom of Speech is under assault in America, make no mistake about that. Whether it be Harry Reid and his ilk seeking broad, sweeping power to ban the use of money by corporations to give the views of the people they are composed of a platform-including, it must be noted, all media corporations, between which there is no legal distinct or distinct of substance-or be it the effective nullification of anti-SLAPP laws for anyone who dares speak against a publicly funded High Priest of the New Religion, or State sponsored Universities have explicit or implicit speech codes and whereby in the latter case aggressive intimidaters can force Universities to suppress anyone from speaking there that they don’t agree with. American Conservatives/Right-libertarians must stand against all this, in favor of absolute, unequivocal freedom of speech.

Free Labor

We should favor the elimination immediately of the minimum wage-a barrier to entry in the labor supply market for unskilled, inexperienced workers. We should favor the elimination of most if not all occupational licensing. We should abolish the National Labor Relations Board that supports labor supply cartelization that could not survive in the market otherwise. We should pass a national right to work law forbidding and abrogating all closed shop clauses in labor contracts. The labor market must be competitive and free, as should be all other markets.

Free Banks

Banking has been substantially regulated in the US from it’s very earliest days. Monetary Laissez Faire was never allowed to prevail, even during the “free banking” era. Economic theory and historical experience both favor a free system of competitive note issue (historically, under a commodity standard, ie Gold) has produced far greater economic stability than a Central Bank could hope to achieve-indeed, Central Banks are the cause of much monetary disequilibrium and thus economic and financial instability. Scotland, the home nation of Adam Smith, offers particularly strong historical evidence in this regard, but the experience of our Canadian neighbors to the North are also especially informative, where during various periods Canadian banking was not subject to certain regulations and restrictions that were often plaguing the US, and escaped many of the associated problems. This amounts to a proposal for the eventual privatization of the Money Supply. As we recognized, the demand for a good is best met when competitive, private forces supply it to the public, meeting Demand for it by finding the appropriate price to clear the market. At present, however, a monopoly over meeting demand for money by the Government means that Supply is essentially arbitrary, and unsurprisingly shortages and surpluses result as always when the Government attempts to control the provision of a good. In this case it is the good that stands in for all others, or more precisely when we speak of money demand (that is, to hold, not spend, money, where the immediate demand is for money for it’s own sake, that is, for forgoing present consumption in favor of future consumption), the present good that stands in for future all possible future goods. Equally unsurprisingly, all manner of mischief results from this central planning of the Money Supply. A system of free, unregulated banking would all but eliminate business cycles caused by monetary disequilibrium, leaving only those cycles caused by real shocks, which are unavoidable no matter what the economic system. It would accomplish this by stabilizing nominal income (MV), and implicit monetary rule far superior to any difficult to implement Federal Reserve policy. And while historically these systems have involved Gold or other commodity standards, it would be possible to implement gradually and without having to first define statutorily the dollar as redeemable in gold-banks would, of course, be free to write contracts of that sort, but high-powered or base money could be used as reserves in the meantime-with the stock thereof being frozen. In the previously linked book on the Theory of Free Banking, economist George Selgin outlined how this could all be achieved, in addition to the many reasons such a program would be a great reform for our monetary system.

Free Markets

Myriad subsidies, taxes, bailouts, handouts, and other Government interventions in the marketplace should be ended. We must liberate the economy from the controls that are holding it back, the interferences that get in the way of real progress. If we are to restore our economy to a healthily growing state, this is an imperative.

Free Trade

End the Export Import Bank and unilaterally repeal all protective tariffs. Restricting free exchange of goods across an arbitrary boundary is just bad economics.

Free Men

Whether it’s government intrusion on our civil liberties, like listening in on all our phone conversations and storing massive amounts of information on us using illegal writs of assistance, or claiming upwards of half of our earnings in some States, and half our wealth upon death, or compelling us to purchase health insurance on penalty of prohibitive fine-sorry, “tax”-which must be paid or else one is a criminal, it is clear that our Government no longer sees us as citizens, but as serfs. The leaders of both parties seek to enfranchise the foot soldiers of an invading army of a hostile country-the so-called ally who teach their children that half of our country belongs to them, who continue to keep an American as a prisoner of war-effectively erasing our own right to vote by cancellation-and have the unmitigated cheek to accuse attempts to counter this of disenfranchisement! We must reject and reverse this. The people should be free, free to keep the fruits of their labor, and retain their basic freedoms from Government control and intrusion. And free to determine the form of their own Government, and not have it decided by enemy combatants given access to the ballot box.

So that’s my simple slogan, and what it means to me. Free Soil, Free Speech, Free Labor, Free Banks, Free Markets, Free Trade, and Free Men.

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Rand Paul’s Criticism of Reagan Is Unfair, Misplaced.

Recently-although not that recently, since I can’t work and keep totally on top of everything that happens in the world-Senator Rand Paul criticized the record of President Ronald Reagan on spending, comparing him unfavorably to Carter. I’m obviously saddened to hear this, as I’m actually a fan of Paul, and more obviously, and fan of Reagan. But I’m not afraid to criticize people I generally like when I think they’re wrong, even if their going astray really is a rare miss. Rand Paul cites statistics that are, as a matter of literal fact, accurate. However, Paul has fallen victim to a dangerous political myth: that of the All Powerful President. It is wrong to give all of the credit, or all of the blame, to the President of the United States for everything that happens during their term(s) in office. It is especially wrong to do so when the Congress is controlled by the opposition party. Although Republicans controlled the Senate from January 1981 to January 1987, at no point during Reagan’s Presidency-and indeed at no point from 1953 to 1995 did Republicans control the House of Representatives at all. You should consider that last point for a bit, also: the House of Representatives was at one point controlled by Democrats for forty two years. It is Congress, not the President, which ultimately possesses the power of the purse. And the House in particular is important in this regard. Measures for raising revenue-which in practice generally means the entire budget-must originate in the House of Representatives. So under the Reagan administration, a significant degree of the blame for increased spending should fall on Congress, with only a relatively small portion of the blame falling on Reagan for not fighting hard to restrain spending. Cynically, it is likely that doing so would have insured a Mondale Presidency-who would have basically run the country into the ground, to be perfectly frank. Similarly, Bill Clinton does not deserve the credit he is given for the restrained of Government growth in the 1990′s-the fact that Republicans regained control of the House for the first time in two generations-that’s 21 elections!-and fought impressively for an agenda today’s GOP wouldn’t dream of achieving, actually succeeding in achieving most of their ambitious goals. Clinton fought this every step of the way, but not quite to the bitter end the way Obama has proven frighteningly willing to. It is remarkable enough that Reagan managed to achieve as much as he did, in fact it’s likely that much of his agenda had to be achieved by giving spending to the House Democrats. But there is much, in retrospect, that we have learned from the Reagan years. Certainly not the lessons many people think we ought to have learned. But perhaps Paul has mostly learned the right lessons. For example, we have learned that deals to cut spending, traded for higher taxes, lead to higher taxes and higher spending-hence the familiar left wing talking point about how many times “Reagan raised taxes” (which, again, and even more strongly, is the responsibility of Congress and in particular the Democrats running the part of it from which revenue measures must originate. We have learned that “comprehensive immigration reform” meaning deals cut to secure the border traded for amnesty for illegal aliens, results in more illegal aliens and no actual border security-and leads, gradually, and unfortunately inevitably, to the demographic suicide of the United States of America. In short, we’ve learned what we should have known all along. The other side is evil and not to be trusted. You don’t compromise with the devil (speaking metaphorically here, butthurt atheists).

If you fault Reagan for anything, as a Conservative, or a True Liberal (rather than these Pre-Liberals who call themselves “Progressives” who would advance society by advancing an agenda to reconstruct Medieval society) it is being too compromising. Too willing to reach across the aisle and work with the other side. The struggle between individualism and collectivism is a fight between right and wrong, a moral battle. So I’d be quite pleased if, say, a President Paul would be unwilling to compromise in this fight. But be fair. Intellectually, I believe Reagan understood that. But unfortunately it is difficult to act like this in practice. The Leftists are our friends, our neighbors, our countrymen. As much victims of their own hateful, repugnant ideology as they are perpetrators. And Reagan was sentimental, and friendly to a fault. A man who could write, privately, of JFK being, underneath the boyish haircut, still old Karl Marx, but who never the less considered his adversary in Majority leader Tip O’Neill a friend. Hate the sin love the sinner, better Christians would say. These days it is easy to criticize that sort of sentimentality. The stakes are too high these days, to be that way anymore. Still, I really do think that Paul has erred, and done a disservice to Reagan and to history, with a criticism that is not really fair.

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Filed under Conservatism, Fiscal Policy, General, History, Liberals, Republicans

The Streets are not paved with hundred dollar bills.

Which is just a colorful way of saying, easy profit making opportunities do not sit unexploited for long. If there is a hundred dollar bill on the ground, someone will pick it up, certainly before the dropped bills can coat the road like fresh asphalt. This seems trivial, but it has important implications because many people don’t seem to grasp the lesson this obvious fact offers.

For example, many people actually believe that employers get away with paying women only about three quarters of what they pay men to do the same work-and on the basis of believing this, they advocate making it easier for women to sue employers over alleged pay discrimination. But consider what it would mean if this were actually true: the cost of employing a man to do a job rather than a woman would amount to a massive forgone profit by any employer. The streets could be paved with the hundreds of dollars employers supposedly willingly give up for the sake of employing men! An entrepreneur could build a successful business model on the singular idea that he will only hire female employees-or at least, hire female employees to do the hire paid positions, it might raise eyebrows if he employed that many more women than men in total. At the very least, though, at the margin, when considering whether to hire an additional employee or not, women would have a distinct advantage in terms of the probability they would get the job over a male candidate for the same job.

Of course, obviously none of that is actually the case. What gives? Well what gives is that the claim that there is a massive employer gender discrimination epidemic is a big fat lie. It’s a big fat lie that women make much less money for the same work. In point of fact, the average woman makes significantly less money than the average man (working full time). This raises the interesting question: what is an average job? How do you take the average of a doctor and a retail sales worker? You can take the average of their pay, but you can’t take the average of the jobs themselves. There is no average job. But if there was an “average job” it would not entail the same work for the average man as it would for the average woman. Like it or not, men and women tend to go on different career paths, and men tend to go into career paths that will ultimately compensate them more than those chosen by women. It’s entirely possible that this is a result of discrimination of a kind. But the discrimination does not take place during a job application. It takes place, if it does at all, during the woman’s education at a young age almost certainly in a public school. It makes no sense to say a woman ought to be able to sue an employer because her teachers encouraged her to go into a lower paying career. Of course, they wouldn’t-they currently have the ability to sue, in fact, the proposed legislation is actually to extend the statue of limitations, as I understand it, but it’s already illegal to discriminate in pay on the basis of gender. But because they wouldn’t, lawsuits won’t do much to reduce the pay gap, since very little of it might actually be due to discrimination. Most of it is explained by different educational and career paths, different choices about how much work to do, whether to leave work and have children-which in turn requires different choices of about one’s career path and negatively impacts one’s work experience relative to men. It’s telling that even without accounting for different jobs, there is a significantly smaller gap in pay between men and women that were never married and have no children than all men and women. Accounting for many of these factors will typically, in the literature, narrow the gap from 23 cents on the dollar to just 5 cents. 5 cents are left to possibly be due to discrimination, and possibly due to other factors that are difficult to account for or quantify. I know it seems an outlandish, blasphemous possibility to those who believe it to be an absolute fact that women are every bit the perfect equals and substitutes for men in all ways, but you know? It’s actually possible women are just 5% less productive than men! Horror of horrors. But considering that discrimination is already illegal, I’d offer another possibility. Ironically enough, employers may pay men more because risk of getting sued makes female employees a liability. I can’t really say which of these suggestions, or other possibilities, is the most likely explanation. I do think, however, that this is an incredibly flimsy case to build legislation to make it easier to sue employers on.

Another example would be the theoretical case people build the possibility of a minimum wage actually improving employment on. The idea is that there is widespread “monopsony” power in the labor market. Monopsony is basically a market imperfection opposite of a monopoly, where instead of one person on the supply side of the transaction and many on the demand side, there is one person on the demand side and many on the supply side. It should be quite obvious that a literal monopsony can’t prevail in any labor market, since there are clearly multiple employers for basically any job. But some proponents of a hire minimum wage argue that it does, in effect prevail in low and unskilled labor markets. As it turns out though, if this actually were true, it would in fact constitute another case of foregone profits! Why? Because implicitly, the employees of a monopsonist are paid less than their marginal product. While this may be a way for the monopsonist to increase his profits-but only if those are not competed away in his role as a supplier of the output, in the form of correspondingly lower output prices-a prospective competitor can take advantage of the situation by picking off underpaid employees from the monopsonist, by hiring them at wages that are slightly higher-keep in mind that all of them have marginal product greater than their marginal cost currently by assumption, so you should be able to profit all the way up to paying them their actual marginal product. In other words, people who believe this monopsony problem exists, could get into business and make good money, at the same time as doing good for the low skilled workers they claim to care about. One doesn’t need a law to mandate higher wages in such a case, they could do it themselves. And yet, tellingly, they decline to do so. Equally tellingly, no entrepeneurs seem inclined to capitalize on this “knowledge” even if they would be in a better position than the academic who believes this to be true-and be sure that there are people who could start such businesses, or own existing businesses, who must be aware of this alleged “fact.”

Belief in either, but especially belief in both of these things, amounts to a belief that the streets are paved with hundred dollar bills. But it’s just common sense that this isn’t the case.

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Filed under Common Sense, Economics

Minimum RAAAAAAAAAAAGE!

So, according to the Keynesians at the CBO, raising the minimum wage to $10.10 cents an hour would cost 500 thousand jobs. That’s not some right wing talking point, that’s what they actually claim:

Effects of the $10.10 Option on Employment and Income.
Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects. As with any such estimates, however, the actual losses could be smaller or larger; in CBO’s assessment, there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers (see Table 1).
Now, for the record, the report itself is actually quite nuanced. You can decide for yourself, for example, if it is worthwhile to increase the income of “many more” families, and the expense of those whose incomes you reduce to zero-I personally doubt they know either of those numbers with the precision necessary to say one is actually a larger number than the other. They’re still Keynesians.
But for what it is worth, it doesn’t seem like the left wing position should be that we should redistribute wealth from the very poor, to the slightly less poor.
But that is the left wing position. At least if we keep in mind that the left is not entitled to their own facts.
Predictably, the Keynesians at the CBO came under attack for their apostasy. But they are standing by their findings. Well, good on them, someone really ought to push back hard on the Administrations asinine lie that economists don’t believe that the minimum wage reduces employment for low to unskilled labor. The real truth is that since the 1990′s, a handful of econometricians-not economists but statisticians who study economic data-have published a handful of studies suggesting little such effect occurs empirically. The actual case for what happened “empirically” is not clear. But one would not be justified in throwing out textbook economics on the basis of a few studies claiming that the laws of supply and demand are magically suspended in low to unskilled labor markets. The reaction of economists should be not unlike the reaction scientists would have to someone claiming to have created a perpetual motion device: “No, you’ve obviously done something wrong.”
Let’s review, though, lest you think me some heartless ideologue, let’s review what the very laws of economics tell us the consequences of a minimum wage and raising it are.
First, what is a minimum wage? A minimum wage is a price floor. It outlaws any employment contract-with certain exceptions, which we will discuss-where the hourly wage rate is below a certain nominal value. If this floor is above the wage that would clear a labor market, then that labor market won’t clear, at least legally. The last bit is kind of an important point, which some commentators miss. It is already illegal, for example, to hire an illegal alien. However, it is not like you are doing something that will get you in significantly more trouble as an employer if you also pay illegal aliens below the minimum wage. There are no jobs Americans won’t do-there are jobs Americans aren’t allowed to do. Or more specifically, there are employment contracts Americans aren’t allowed to agree to. But I am digressing a bit. What does it mean to say that a market “won’t clear?” Well, those on the short side of market can deny trade to those on the long side, or attach conditions to trade. Or, in English, employers can refuse to employ people at the non market clearing wage. Because demand curves slope downwards and supply curves slope upward (mathematically, the derivative of quantity demanded as a function of price is less than zero, the derivative of quantity supplied as a function of price is greater than zero) there will be a large gap between the people willing to accept work at the new wage, and the actual amount of work available at the new wage. This is called “unemployment”-or at least it is, as long as the surplus labor doesn’t get the message that they might as well give up on getting a job altogether, in which case we just pretend it isn’t a problem because we suddenly no longer call it “unemployment.” It’s worth noting that certain groups will be over represent amongst those whose labor is still demanded, and those whose labor is not. Those who will be better represented in the former group: secondary/part time workers from multi-income families, entry level workers with clear potential for advancement, and young workers from working class households will probably still, mostly, see their labor still demanded. The latter group will have would be workers from the lowest income families, victims of discrimination, and single parents with young children overrepresented. In other words, the minimum wage hurts most those it is intended-or at least, claimed to be intended-to help. It cuts off the bottom rungs of the economic ladder, needed more than anyone else by the most disadvantaged. The total income earned by all such workers may initially increase-it depends on the elasticity of labor demand-but it will be a redistribution of income within those in that labor market. But over time firms will substitute skilled labor and capital for unskilled labor-labor demand will become more elastic-and as a result, ultimately the total income earned by unskilled workers will go down. Now, this effect is the effect on the unskilled and some low skill labor markets, at least those which are subject to the minimum wage price floor. But actually, not every labor market for unskilled or low skilled labor is subject to the price floor. Tellingly, there is a legal exception for farm labor. This has the effect of driving those driven out of other unskilled or low skilled labor markets, into the market for farm labor-the supply curve for farm labor shifts rightward, which means that the market clearing wage for farm labor is now lower. This means that not only does the minimum wage drive many out of the unskilled and low skilled labor markets, it has the particularly perverse consequence of driving down farm wages. But this is the only way to avoid the politically unpalatable level surplus of labor that would be created if an exemption for farm labor did not exist. But the effects on other labor markets are equally telling. Unions generally support raising the minimum wage-even though union workers typically earn well above the minimum wage already. This might seem strange, since there should be no direct effect on their wages. However, union labor is typically skilled labor, and skilled and unskilled labor (or more skilled and low skilled) can be substitute inputs, which means that the imposition of or raising of a minimum wage, should increase demand for skilled labor-the demand curve for skilled labor shifts rightward. Both employment of skilled workers and their total income increases as their wages rise. In other words, higher earning skilled labor, including most union labor, gains at the expense of low earning unskilled labor. In a parallel story, because of regional cost of living differences, and because a Federal minimum wage does not factor these in, areas where prices-including wages-tend to be higher, for example, more Northern states versus Southern ones, those regions with lower wages will have the direct effect of a high minimum wage impose increased labor costs on them, but those regions with higher prices and wages will not. As such, Northern labor acts as a substitute for Southern labor, demand for the labor of higher cost of living areas increases, the total income, and the wage rate in those areas rises. But migration also shifts, as the Southern or low cost of living area workers can move more to the North or high cost of living areas (or more likely, fewer people move away from higher cost of living areas). This shifts the supply curve for high cost of living area labor rightward, somewhat offsetting both the increase unemployment in the low cost of living areas, and the income gains in the higher cost of living areas. But in net, higher cost of living regions are expected to gain at the expense of lower cost of living areas. This lines up rather well, generally, with elections maps-it’s a redistribution of income from Red States to Blue States.
Now, maybe you really think all of the above effects sound great. I certainly don’t. I find them perverse, and immoral. But then, that’s why I vehemently oppose the minimum wage.

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Filed under Common Sense, Dumbasses, Economics, Liberals