It's the Least We Can Do

Going into the 2014 midterm elections, many Democratic Party strategists think a proposal to raise the federal minimum wage will provide a potent source of ammunition in campaigns against Republicans.  The minimum wage, currently $7.25 an hour, was last raised in 2009, and President Obama has proposed that the wage should gradually increase to $10.10 an hour by 2015; in fact, if the minimum wage had simply been indexed to inflation since the late 1960s, then it would currently be just over ten dollars an hour.  Among the electorate, the idea of raising the minimum wage enjoys broad--and bipartisan support.  Many Republican lawmakers, however, claim that raising the federal minimum will hurt small businesses.

For those GOP politicians who resist raising the minimum wage, I have a question: You claim that cutting taxes on the wealthy--supply-side economics--makes fiscal sense.  You claim that the benefits of allowing the wealthy to keep more of their own money will "trickle down" to the general population through, say, greater investment in productive activities--which leads, theoretically, to increased employment and a more vibrant economy overall.  The metaphor frequently invoked to describe this situation is that "a rising tide lifts all boats."

So my question is this: Why does this boat-lifting rising tide come only from putting more money in the hands of those who already have significant fortunes?  Wouldn't putting more cold hard cash in the pockets of those who have less similarly cause some minor flooding along the shores of the American economy? 

Extremity in the Pursuit of Moderation Is No Virtue

I give up.

For as long as I can remember--which admittedly is not very long, thanks to repeated blows to the head suffered during my last whaling expedition--at least WOS told me they were suffered during a whaling expedition--frankly, it sounds a little fishy to me. . . . Get it?  "Fishy"?  "Whaling expedition"?  Huh?  Huh?

Where was I?

Oh, yes.

For as long as I can remember, one could scarcely turn on the news or read a newspaper without finding some dire warnings about the impending societal breakdown caused by our soaring national budget deficit.  Indeed, the deficit was of such concern that it caused lawmakers of both parties to embrace draconian fiscal solutions.  Social spending slashed!  Taxes raised on the wealthy!  (Well, "as if," but still.)  Freezes in government salaries!  Layoffs in government offices!  Reduced allocations for selective enforcement of IRS laws!  (Which the more I hear about the more I start to wonder if there really is any major scandal going on there, but that's another story.)  The Republic must be saved from its own profligacy, and if some temporary pain is the price we must pay to stabilize the national budget, so be it!  So you would think today's news that the budget deficit is actually shrinking faster than expected, and that the annual deficit would actually be about $200 billion less than projections had indicated would be unambiguously good news.

Except it's not!

Economists have mixed feelings about deficit reduction based on their ideological leanings.  For some, the fact that the deficit is shrinking is less important than the fact that unemployment remains high, there being some correlation between a shrinking deficit and continued job shortages--presumably because government could do more to increase employment if it were willing to spend money, which would increase the deficit, but for ostensibly "good" reasons.  Got it?  Other economists say that any current shrinkage is but a temporary reprieve from overwhelming forces that will come crashing down upon us in some not-too-distant future, plunging us into a Mad-Maxian dystopia of widespread anarchy and rampant Thunderdome construction. 

Now, what I don't know about economics could fill a book--an economics textbook most likely.  But if deficits are bad, and reducing deficits is also bad, could somebody please tell me at what point I get to stop panicking?

And as if this economic quandary weren't bad enough, we can't even count on biological certainties anymore.  You know how you're not supposed to eat too much salt?  Well, now it turns out that a low-salt diet has no particular benefits and may even increase the risk of heart attacks!  Yes, presumably one still should not ingest excessive amounts of salt--

--and I love this commercial for a drug--I think it's Cialis--that features the disclaimer that people shouldn't "drink alcohol to excess" while taking the drug.  Are there drugs whose makers recommend excessive drinking?--

--but having too little salt in one's diet may be just as bad.

Must we constantly struggle, Goldilocks-like, to find the just-right balance in everything?  Can we not agree on the relative horribleness of anything?  Hitler, maybe.  At least he's good for something.

Wait for It. . . .

Online retailers have taken to changing prices frequently--perhaps, hourly--because why should airline passengers have all the fun of finding out they paid twice as much as someone who bought the same product five minutes after they did?

An article in today's Times reports on this practice, adopted by Wal-Mart, Target, Amazon, and other retailers.  Companies monitor each others' prices and then immediately adjust their own to undercut their competitors, sometimes by as little as two cents.  Obviously, some consumers reap significant benefits--to the extent that saving two cents on "Mario Kart" can be considered "significant"--but retailers may face a backlash from those customers irked at being gouged--to the extent that charging an extra two cents on "Mario Kart" can be considered "gouging."

Couldn't this seriously backfire on the retailers?  Once buyers get wind of this practice--i.e., now--won't they start trying to game the system?  Right now, these stores are just competing for the sake of being able to say that they provide the lowest price.  But if I'm in the market for a Bodum wok--whatever that is--and I know retailers are just going to keep lowering the price--why wouldn't I just sit back and wait?

People may not be able to do that with airline tickets: When people have to go somewhere at a certain time, then they pretty much have to accept whatever price is being offered.  But when it comes to plain old retail products?  Why buy now if the price is just going to keep coming down?  If enough people do this, prices will get so low that Wal-Mart'll just start giving stuff away--or even paying people to take it!

Job Creators

By now, you would think I'd be immune to the depredations of logic committed by the Republican Party.  But they constantly surprise.  A few days ago, WOFOS sent me a link.  Please click to get a sense of the true level of pettiness and hypocrisy subscribed to by members of this cabal:

http://www.nevinssmallbusinesspledge.com/

If you're not in the mood to click the link--or if you're afraid of exposing yourself to right-wing cookies--allow me to summarize.  The link takes you to a page where "job creators" can make the following "pledge":

"I will hire a new employee when Mitt Romney is sworn in as President of the United States of America."

You can, of course, pledge to hire as many employees as you like.

I wonder if those who sign this pledge are aware of exactly how hypocritical they sound.  Consider, these right-wingers are proud capitalists of the staunchest sort.  In their Ayn Randian worldview, "producers" create wealth and prosperity by utilizing capital in the most efficient and effective ways--and ONLY in the most effective and efficient ways.  An employer will thus only hire people when he or she needs these people to improve productivity.  By the same token, though, if a new hire will improve productivity, the employer must, according to the fundamental tenets of this philosophy, hire that worker.

Now, if these people are pledging to hire new workers, they must need these new workers--every day without them is thus hurting their businesses' productivity and thus committing an offense to the Great God of the Market.  The alternative explanation is that the "producers" don't truly need more workers but will hire them as some sort of "favor" to. . .   Well, I'm not exactly sure: Romney, perhaps, but since he'd already have been elected, I'm not sure how important that favor is.  But what will these "surplus" workers do, exactly?  Corporate busywork?  Sounds positively Keynesian to me.

Beyond the illogic, though, I can only shake my head at what this pledge blatantly reveals: Republicans will refuse to hire people until Barack Obama is no longer the President--presumably because he is the President--and then blame President Obama for the high unemployment rate.

At long last, have they left no sense of decency?

Today's Double-Speak

As part of efforts to rein in government spending, the Obama administration has declared its intention to cut the military budget.  Considering the fact that the US spends more on the military than practically all other nations combined, this makes sense.  Nevertheless, a debate has begun over the potential effects of military cutbacks.  National security is an obvious concern, but economists, politicians, and others worry that military spending cuts will increase unemployment and lead to a decrease in technological innovation, the military being a chief driver and consumer of research and development ("A Shrinking Military Budget May Take Neighbors with It").

Many economists point out, however, that military spending actually provides less "bang for the buck" than other forms of government investment:

"Military spending does not compare well economically with many other forms of government spending, some experts say. Professor [Robert]Pollin calculated in a recent analysis that $1 billion in spending on health care produced an economic benefit about 14 percent larger than spending on defense. The impact of spending on transportation, education and energy were even larger."

Case closed? Well, not exactly:

"Some economists, however, argue that such studies fail to account for the economic value of security and stability. The crucial benefit is not what defense spending provides but what it prevents, Joshua Aizenman, a professor of economics at the University of California, Santa Cruz, and Reuven Glick, a researcher at the Federal Reserve Bank of San Francisco, wrote in a 2006 paper."

So, if I understand that last point correctly, the economic benefits of military spending arise not from any increases in productivity generated by the spending, but by "savings" generated by not having to spend money on other things. But, what would these "other things" be? Presumably, the things that military spending prevents are threats to national security--which would necessitate military spending. In other words, spending money on the military reduces the necessity to spend money on the military. Makes perfect sense!

Enjoy that "peace dividend," everybody.

99% and Counting

Economists have suggested that an economic system can maximize either equity or efficiency, not both.  The free market, for example, is hailed (at least in its theoretical ideal) as a model of efficiency. But with its inevitable winners and losers--losers who may through no fault of their own find themselves homeless or starving--the market leaves much to be desired in terms of basic fairness.

Now, another economic dichotomy has become apparent: a split between equality and inclusivity.  As the United States has become ever-more inclusive--reducing or eliminating economic barriers to women, ethnic minorities, and gays--the country has at the same time become ever more unequal ("The Paradox of the New Elite").  Makes sense: As barriers to entry based on outmoded prejudices fall, the pool of prospective economic successes grows.  At the same time, there are only so many spaces at the top of the financial food chain, and more spaces don't appear simply because there are more and more qualified people to fill them.  Thus, those not in the top spots, comprising, let's say, 99% of the population, are an ever-more diverse lot.

Welcome news in its own way to be sure.  If the various "Occupy" movements around the country succeed in bringing about a bit more economic equality, though, we must make sure that such wealth-sharing does not come at the expense of this hard-won social inclusivity.

Debt Watch II

And so the United States continues its rapid descent toward banana-republic status, at least as determined by Standard and Poor's.  The debt-rating agency downgraded US creditworthiness Friday, based upon concerns about political paralysis and the ever-growing size of the national debt.  Some have complained that S&P should not base credit ratings on political (in)activity, since the rating agency has no way of knowing what the future political climate will be.  The imminent formation of a congressional "super-committee" to address the national debt will surely herald a new era of good feelings and pajama-parties between Democrats and Republicans.  Standard and Poor's demonstrates unwarranted pessimism by projecting continued political dysfunction/

Hey, it could happen.

We, however, object more to S&P's financial logic.

Standard and Poor's downgraded US credit because of the growing multi-trillion dollar national debt.  Sounds prudent enough. . . until you think about it for more than a second and a half.

Why has the debt has grown so huge?  The debt has grown enormously over the last few years at least partially because of stimulus projects undertaken by both the Obama and Bush II administrations.  Why did the administrations undertake these stimulus projects?  To counteract the worst effects of the financial crisis of 2008--and arguably they succeeded in averting a worldwide depression.  And what caused--or at least exacerbated--the financial crisis?  The collapse of the housing market.  And why did the housing market collapse cause so much pain?  Because investors had poured money into mortgage-backed securities, which turned out to be worthless.  And why did savvy investors pour so much money into impenetrably convoluted funds that turned out to be worthless?  That probably had something to do with the fact that these investors were assured that these impenetrably convoluted funds were relatively safe investments.  And what made them think this?  The fact that ratings firms like, oh, Standard & Poor's rated these funds AAA.  In other words, investing in mortgage-backed securities was promoted as being as safe as investing in the unshakable institution known as United States treasury bills.

Now, one could argue that the downgrading of US debt simply reflects the admirably chastened attitude of bond raters.  Rather than risk being burned again by overly rosy ratings of securities that are, at bottom, fundamentally unsound, Standard and Poor's has taken a more conservative approach, thereby serving their clients well.  We can't help, however, but find something at best hypocritical and at worst unethical in S&P's downgrading of debt that they themselves are at least partially responsible for causing to skyrocket.  But then, the Solipsist is just an English teacher, not a sophisticated economic analyst; what seems to us disingenuous financial chicanery must be something else.

Mustn't it?

Solipsistography
"Amid Criticism on Downgrade of U.S., S&P Fires Back"

That's the Ticket

What, exactly, is so bad about ticket-scalping?  If someone buys a concert ticket, then that ticket becomes the property of that buyer, to use, give away, or sell as he sees fit.  If one buys a ticket for an ultimately sold-out show at a cost of, say, $100, and then finds someone else who would like to see that same show and is willing to pay, say, $110 or $150, or $200, or $10,000 for the privilege, why should the original buyer not have the right to sell?  Concert tickets, of course, exemplify what economists refer to as an inelastic good: There is a fixed amount of seats available for any given show; the number of seats will not change, regardless of pricing signals sent by scalpers and their buyers (for simplicity's sake, assume that additional shows cannot be added).  The "invisible hand" of the market suggests--nay, requires--that people sell their tickets for whatever price the market will bear.

Indeed, the relaxation of laws against scalping suggests that, in principle, the public is willing to accept this idea of profitable resale.  Major (legal) online marketplaces like Stubhub have based their business model on the ability to buy and sell tickets on a secondary market.  Now, however, the Fans First Coalition, a non-profit organization supported by such music-industry titans as R.E.M. and the Dixie Chicks, is taking aim at sites like Stubhub in the name of making it easier for music fans to see their favorite artists.  This nice story becomes somewhat less inspiring when you find out that Fans First is backed by Ticketmaster, which of course has its own less-than-altruistic motives for wanting Stubhub reined in.

But let's go back to the original question of whether ticket-scalping is wrong.  We suspect most people would probably agree to some extent with the right of a ticket-holder to dispose of his tickets--his property--however he sees fit.  If someone else wants the ticket more than the original buyer, and is willing to pay the original buyer a premium for it, well, why begrudge the owner the right to make a profit.  Most people are upset not with the individual ticket reseller, but with the giant conglomerates--the organizations that buy up huge blocks of tickets with the sole intention of reselling them at exorbitant mark-ups.  The proliferation of "bots" that can snatch up entire ticket inventories within seconds of them going on sale has only aggravated the situation.  It certainly seems, if not criminal, at least unfair.

But is it?  Look, let's say Bruce Springsteen is playing the Meadowlands and tickets cost $100 apiece.  When the tickets go on sale, they may be bought up immediately by resellers, who then turn around and sell them to Boss-hungry fans for, say, $150 each, making a hefty profit on the transaction.  But here's the thing: People buy the tickets!  Bruce will surely not be playing to an empty stadium.  The fact that the tickets are resold en masse for $150 (or $200 or $500) each may in fact be unfair.  But unfair to whom?

Because the size of the resale market suggests that, if anything, the tickets were underpriced to begin with.  If people are willing to pay more than $100 for the seats shouldn't the original price have been more than $100?  The fact is that the ticket resellers are not taking advantage of the fans--who, after all, are freely choosing to buy the tickets at whatever price--but of the artists and venues.  Not that Bruce Springsteen is hurting financially, but if we spend $150 on a ticket to a Springsteen show, we'd like to think our money was going to the artist--not to people whose only contribution to the artistic experience is to try to corner the market on it.

The basic problem in the ticket-selling industry, then, is one of accurate initial pricing.  If artists knew beforehand how high the secondary market prices would go, they could simply sell the tickets for that price.  There would be no incentive for the ticketbots to snatch up and resell tickets, as they wouldn't be able to make a profit.  Let's say Springsteen knew that the highest price anyone would pay for his show was $5,000.  If tickets went on sale at that price, then those willing to spend that money would grab them.  If Stubhub and its ilk bought up all the tickets, well, so be it.  But why would they?  They would only be able to resell them for the same $5,000--since we've established that nobody willspend more than that.  And if the concert doesn't sell out at $5,000?  Prices would gradually be lowered, and, at each price point, those who wanted to pay that amount would do so, until all the tickets were gone.

Some will argue that this kind of price structure truly excludes the "average fan," who will never be able to afford the initially "overpriced" tickets, and who will find all the tickets gone by the time they reach a "reasonable" price.  As someone who would never consider spending more than, say, $29.50 for a concert ticket, we are sympathetic to this position.  Nevertheless, the fact is that, as long as there are people willing to pay exorbitant prices, then exorbitant prices will be paid--the "average fan" gets screwed no matter what.

The flaw in this model, of course, is the fact that we don't know what maximum amount people will pay until they pay it--by which point the ticket has long passed out of the control of the artist or the venue and into the hands of the resellers.  But we suspect that, with the sophisticated software that exists today, some enterprising economist could put together a model that would allow artists and their reps to devise a way to more accurately predict the demand for--and thus the price of--tickets.

Sounds like a good doctoral project to us.

Solipsistography
"Scalping Battle Putting 'Fans' in the Middle"

Bring the Funds Back Home

When corporations offer to pay taxes, consult your cardiologist: You need to take that with several grains of salt. Nonetheless, that's what some of America's biggest companies are doing.

In order to "help" with the United States' continuing financial woes, megafirms like Apple, Google, Microsoft, and others are proposing to repatriate foreign profits. Once this money--potentially hundreds of billions of dollars--is brought "home," it will be subject to taxes, providing an immediate infusion to a cash-strapped treasury. The catch, though, is that the companies are requesting a hefty tax break: Instead of paying the regular tax of 35% on these foreign profits, corporations want a one-time, one-year tax-cut--to just over 5%.

Corporate chieftains argue that this proposal is a win-win: Companies pay less tax than they would normally have to pay. The government gets badly needed funds to reduce deficits or (heaven forfend!) provide services to those in need. And businesses would increase their ability to stimulate the economy by buying goods and services and/or hiring new employees. Critics respond that similar amnesties in the past have provided less of an economic jolt than expected.

On the surface, the proposal has some merit. Apple, for example, has some $12 billion sitting in foreign banks. While it would be nice to see them fork over $4.2 billion in taxes, that isn't really an immediate option. The choice is between Apple paying a little over $600 million (5.25%) or just keeping the money overseas, in which case the government gets nothing now. The proposal looks even more attractive if--as proponents suggest would happen--Apple uses a large portion of the remaining $11.4 billion to spur investment or hiring.

Politically, the idea is distasteful: Humongous corporations receiving multi-billion dollar tax breaks looks bad when average Americans are struggling to get by. But we can swallow hard and accept the idea politically. On the other hand, we question the economics.

The potential upside of this proposal is that companies would use the money they bring back from overseas in a manner productive both to themselves and to the general economy--by buying stuff and hiring people. There are, however, no guarantees that corporations would actually do this: They could, instead, simply park the money in American banks (which wouldn't be the worst outcome as the money could then be lent out to others) or, worse, reward shareholders with hefty dividends.

Because here's the thing: The very fact that the money is now just sitting around overseas doing nothing suggests that these corporations don't really need the money; if they did, they presumably would bring the bucks back home regardless of the tax implications. Rational economic behavior suggests that Apple and Google and Microsoft and the like consider sequestering money overseas--presumably earning interest--a more productive use of capital than bringing it back home. A tax break, therefore, would seem simply to be an unearned reward for acquiring capital overseas. It also sends a dangerous message to multinational conglomerates: If you wait long enough, you won't have to pay proper taxes on your earnings.

On the other hand, the government could use tax policy to generate revenue and stimulate the economy. And while the absolute number of dollars might be smaller, the results would be more likely to generate economic growth.

Millions of Americans have 401k's or similar retirement accounts. These accounts, often tied to the stock market, have taken a battering over the last few years. Account holders, though, have been largely unable to pull their money out of these diminishing funds. That is because, as retirement accounts, these funds are supposed to be off limits until the holders reach retirement age. If someone does withdraw funds early, they face massive tax penalties.

So. . . why not substantially reduce these penalties? People struggling to pay bills or buy clothes or put food on the table would presumably welcome the chance to tap into these substantial (even if diminished) pots of cash. They would pay a small amount of tax on their withdrawals, thus, as in the corporate scenario, supplying important government revenue. Furthermore, these folks are highly unlikely simply to pull out the money and stick it under the mattress: They will use it to, y'know, buy stuff, thus stimulating demand and, perhaps, generating a need for companies to start hiring again.

Those who object that this undercuts the purpose of the 401k--to provide workers with a comfortable retirement--need to look at the state of the funds themselves: Even before the recession, it was unclear that a typical worker's 401k truly would have provided a secure retirement. Since the crash, the accounts have shrunk and are thus even less likely to provide a soft cushion for retirement.

So if the government decides to provide Google with a nice tax holiday, fine. The actual effect on the American economy will probably be negligible at worst. But if economic stimulus and popular support are the goal, the best place to start would be with the little guy.

Solipsistography
"Companies Push for Tax Break on Foreign Cash"

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Answers to yesterday's Shakespearean Insult Quiz:

The following insults were Solipsisms: Pallet jacker; Bobbin; Blue-footed booby; Randy savage; Thrice-mullioned otter (we were particularly pleased with that one); and, Spastic colon

Here's to Your Health (Update)

When District Court Judge Henry Hudson ruled yesterday that an element of the health-care legislation--a requirement that all citizens purchase insurance--was unconstitutional, he may have had a point. Certainly, the thought of government forcing people to buy something whether they want it or not goes against a certain ideal of American freedom. But does the insurance mandate actually fail to pass constitutional muster?

Hudson pointed out that the mandate to buy health insurance differed from the seemingly similar requirement to buy auto insurance because people could choose not to own cars. You don't want to drive? You don't need to buy insurance. But if you choose to have a car, you have no choice but to purchase coverage. In contrast, the health-insurance mandate would apply to everyone and people could not opt out.

The flaw in this argument rests on the economic concept of externalities. In a perfect market, when two people freely engage in a transaction, each gains some measurable benefit: You have a pizza, the Solipsist has $10. You would rather have $10 than the pizza, and we would rather have the pizza than $10. We make the exchange, and everybody's happy. If, however, the pizza causes an unpleasant gastrointestinal event, and WOS has to suffer through it, then the pizza has a negative externality: A person uninvolved in the transaction (WOS) has suffered a "loss" (in this case, of breathable air) that the price of the pizza did not reflect. That is, we imposed a cost on WOS that we ourselves did not pay for.

This is what is known as a market failure: a case where the price of a commodity does not reflect all the costs imposed on society. When markets fail, governments step in. In the example described above, WOS might appeal to her elected representatives to remedy the situation by imposing a "gas tax" on any of the Solipsist's future pizza purchases. Instead of simply paying the pizza maker for the price of his goods and services, the Solipsist might be required to compensate WOS for the negative externalities she suffers--perhaps several hundred dollars per pizza. Fortunately, WOS has little pull with our local elected representatives.

So what does all this have to do with healthcare? Go back to Judge Hudson's distinction between health insurance and car insurance. The judge points out that a person can avoid buying car insurance by choosing not to buy a car. True enough. And what about externalities? In this case, there don't seem to be any. If the Solipsist's neighbor chooses not to buy a car, it's no skin off our back. The same can not be said of health insurance.

If our neighbor chooses not to purchase health insurance, it does impose costs on the rest of society. For one thing, it may dissuade our neighbor from seeking medical care when he or she has some highly contagious but treatable disease. More importantly, though, if our currently healthy neighbor chooses not to buy insurance, figuring he doesn't need it, then the insurance rates for everybody else go up. Indeed, with the health care legislation's mandate that insurers must cover everyone, regardless of health, the costs, as economics columnist David Leonhardt points out, will be even greater: Our neighbor will simply buy health insurance when he gets sick, imposing ALL of his costs on those people who chose to buy insurance earlier.

Of course, the major problem here is our continuing conflation of health insurance with health care: We need the latter; whether we NEED the former is a matter for serious debate. As long as we keep insisting on market-based solutions for our problems, it is incumbent upon legislators to address negative externalities and other market failures.