Err, no

Thorstein Veblen was a cranky economist of Norwegian descent who coined the phrase “conspicuous consumption” and theorized that certain products could defy the economic laws of gravity by stoking more demand with superhigh prices.

A Veblen Good is where the high price makes it more desirable. A Giffen Good is where a higher price increases effective demand.

iPhones are not Giffen Goods.

Giggle

The decision to increase the minimum wage in Seattle may be leading to less hygienic restaurants in the city, according to a working paper from a group of economists.

A trio of professors at Ball State, Villanova, and Indiana University Purdue University Indianapolis (IUPUI) tracked the change in health code violations reported in Washington state’s King County, where Seattle is located, since the city raised the minimum wage.

The researchers told NPR on Wednesday that because different parts of King County raised the minimum wage at different times, they were able to track the violations in Seattle as the minimum wage changed in each area. Seattle’s minimum went from about $8 an hour in 2010 to about $13-$15 an hour this year.

“We find an increase in real minimum wage by $0.10 increased total hygiene violation scores by 11.45 percent,” the professors wrote.

So people economise on the employment of more costly labour, do they?

Heavens To Betsy, who would have thought it?

Sadly, Danny Finkelstein gets it wrong

Clearly and obviously wrong as he’s taking Robert Reich as a serious analyst of the economy. Paul Krugman dispensed with that error over 25 years ago.

The general idea that the rules make the market is true to some extent. What gets missed here is that if the rules end up banning some part of the market then it doesn’t disappear, it just goes off to where there are no legal rules. The drug and prostitution markets are clear enough evidence of that. Thus the argument is not true in that wider extent – the market is, the rules don’t in fact define it, they define only the legal part of it.

Which is, in large extent, Reich’s basic error, to believe that by tweaking the rules we can change the underlying market. We can’t – we can only change the legal and visible part of it and even then only at the margin.

At which point the two specific examples Finkelstein uses:

“We Conservatives said that if a minimum wage was introduced, it would cause increased unemployment but it didn’t. Why?” and “How is it that chief executives are earning amounts that are surely in excess of those necessary to do their jobs?” And if these questions seem intriguing but wonkishly irrelevant to a government in immediate distress, I’d like to explain why they aren’t.

On the minimum wage, from 2005:

Tony Blair today announced plans to cut the jobs and hours of low-paid workers.
He’s going to raise the minimum wage, from £4.85 an hour to £5.05 in October. This as the Low Pay Commission recommends in its report today; it also recommends a rise to £5.35 in 2006.
The first rule of economics, of course, says that if you raise the price of something, you’ll reduce demand. And this means shorter hours and job losses for some of the low paid.
The Low Pay Commission pretends this won’t happen. Its chairman Adair Turner says: “Our analysis suggests that previous upratings [to the minimum wage] have largely been absorbed without adverse effects.”
Can I give Mr Turner some advice? Try reading your own report matey.
In particular, appendix 3, which starts on page 213 of this pdf. It contains a survey of employers who were affected by the rise in the minimum wage in 2003. It shows that: 37 per cent of them cut staffing levels, whilst only 4 per cent raised them; 31 per cent cut basic hours worked whilst 3 per cent raised them; 28 per cent cut overtime hours; 81 per cent said their profits fell; and 63 per cent said they raised prices.

This, of course, is exactly what basic economics would predict. It corroborates this research, which shows that where the minimum wage bites hard – for example in care homes – it does reduce labour demand.

We can still go on and argue about whether this is a good idea and all the rest but what we cannot do is try to insist that the minimum wage has no effect upon employment. That basic contention that it doesn’t is simply an untruth.

As to those high wages, we also have evidence that they work:

This hypothesis is verified by results showing that US firms substantially cut down on the scale of assets and workforce to increase return on assets following leadership changes, whereas Japanese firms tend to work on reducing liabilities. Despite excelling in technologies, organisational management, and human resource management, Japanese firms seem to have lower earning power because CEOs, who are responsible for corporate management, do not prioritise profit maximisation. Such tendency leads to a loss of shareholders’ equity and inefficient usage of firm resources, causing a major negative macroeconomic impact.

US CEOs are, famously, paid rather more and rather differently than Japanese.

The essential assertions that Reich makes to bolster his case simply are not true. Which really isn’t a good logical base upon which to build a political or economic system. Finkelstein should know better quite frankly. For as Krugman has indeed pointed out Reich really doesn’t grok economics in the slightest.

Guardian economics…..

Putting the direct costs of the pay cap to public services aside, there is also the so-called multiplier effect to consider. This means when you give someone a pay rise, there are larger positive implications for the economy because it can stimulate further rounds of spending. For example, if there is a £2bn increase in wages for NHS workers and they spend just half of this in shops, then shopkeepers will also receive income.

In turn, this increase in income will mean shopkeepers are more likely to employ more people and increase salaries themselves. The treasury would then not just receive more taxes from higher wages among NHS staff, but also the VAT on extra goods sold, and on higher income taxes from jobs created elsewhere.

The multiplier effect is thought to be higher for those on low-middle incomes, as they are much more likely to spend it than save it or put it in a tax haven. According to a Unison study based on International Monetary Fund figures, every 1% increase in public sector pay would generate between £710m and £820m for the government in increased income tax. Of course, there are debates about just how big these multiplier effects are – but we must stop thinking about a pay rise as purely negative for the public purse. We all know that our public service workers are worth every penny – but these pennies go well beyond their pay packets.

It’s not economics unless you consider opportunity costs. That money has come from someone. Might be tax, might be borrowing, but those who had it would have also spent some portion of it into the economy. Even if we say that borrowing means it is obviously only coming from savings if those savings weren’t put into gilts then it would have been invested elsewhere instead.

What we actually want to know is what is the effect after this? This is known as the marginal propensity to spend (or save, the inverse). If we take tax off low paid people and give it to low paid people then the net effect is nothing. Because whatever the marginal propensity to spend of the poor is, it’ll be the same or those who lose money as those who gain it. If we take money off the rich then there will be a change. But that change is not the amount of money itself. It’s the difference between what the rich would have spent and the poor do spend. A useful rule ot thumb here is some 15%. Upper middle classes might save 15% of any marginal income, the poor 0%, that’s the amount that spending rises by.

Do also note that this only applies to tax funded increases in such wages. If it’s from what is already being saved well, those savings would have been used to invest in some other thing if not borrowed by government.

The argument is true but it’s a very, very, weak one, with nothing like the power attributed to it.

That productivity revolution

Modern, GPS-guided combines can already cut a field without the driver touching the steering wheel for much of the time, and can cut and thresh a quantity of grain in a day — enough to make half a million loaves of bread — that would have required the work of a thousand peasants in the 18th century.

Add in that 17th century grain (well, OK, perhaps more by then, this is a medieval number) got 7 grains back for every seed corn. Last time I mentioned this one of our farmer readers here said that he didn’t actually know the multiple today but it was vastly more than that.

And our economics lesson for the day – the output of the tractor is the NHS. For we couldn’t have 10% of the population producing health care if we needed a thousand peasants in the field, could we?

Idiot, idiot, stupidity

Venezuela’s government has urged citizens to see rabbits as more than “cute pets” as it defended a plan to breed and eat them – even as the opposition says this would do nothing to end chronic food shortages.

Venezuela’s so far down the pan that there’s nothing to feed the rabbits on…..

The difference here is what?

The first problem here is the term “single market”. Brexiteers and remainers alike seem to cling to a 19th-century notion of separate nations making their own products and trading them with other countries. The chief political project is then to lower or ideally abolish tariffs so that the so-called comparative advantages of free trade kick in.

Last week chief EU negotiator Michel Barnier called this view “nostalgic”, and for good reason. The EU is rapidly evolving into something far more ambitious than just a free trade area: it is in the process of becoming one huge economic zone governed by a single set of rules and standards and overseen by a single European court of justice, striking trade deals with the rest of the world and deriving its logic and coherence from the four famous freedoms of goods, capital, services and labour. Products such as cars, computers or aeroplanes are now built from components made in factories and production units scattered across the EU, with employees moving seamlessly between them. For this reason “single economy” is a far better term than “single market”.

The really great joy of this is that the author is Joris Luyendijk.

You know, the bloke who did the series about how London is just ruled by international finance and isn’t that terrible? That London does the international finance and Wolfsburg the car making being just the working out of comparative advantage inside a single economy…..

Damn price gouging!

The hurricane has already unsettled the financial markets, sending insurance stocks falling and orange juice futures surging last week. The price of contracts for November deliveries of frozen orange juice concentrate spiked as investors feared the worst after the destruction Irma wrought in the Caribbean.

Ms. Mazzucato speaks out!

There’s a difficulty with these two parts of the argument:

“But the questions are complicated and perhaps even uncomfortable for those asking them. The relief efforts needed are larger than they should be due to how these countries have been starved of tax revenue precisely because they have chosen to be tax havens.”

….

“A modest proposal would be for the countries to raise money from the companies by increasing, for example, the charges they make for offshore services, or by charging tax on the companies based in these places.”

That is, these poor places do charge companies for being there. And if they didn’t then they would have even less of an economy than they do now. They’re richer by being those tax havens already, not poorer.

We’ve an answer to this

Instead, we should talk not about the moral worth of individuals but about the moral worth of particular social arrangements. Is the society we want one in which it is acceptable for some people to have tens of millions or billions of dollars as long as they are hardworking, generous, not materialistic and down to earth? Or should there be some other moral rubric, that would strive for a society in which such high levels of inequality were morally unacceptable, regardless of how nice or moderate its beneficiaries are?

Rachel Sherman is an associate professor of sociology at the New School

Well, actually, we want a society in which the poor are rich. The relatively poor are absolutely rich that is.

That being delivered by capitalist free marketry and no other known system. At which point we’ve our answer, haven’t we?

Facepalm

The policy challenge to achieve resource productivity improvements on this kind
of scale – across multiple environmental issues – is therefore very large. But the
economic benefits are also likely to be significant. Environmental improvement
requires investment and creates demand for new goods and services, which
stimulates economic growth and job creation.

The investment and the jobs are the costs of what you’re doing, idiots.

Snigger

For the UK, the position looks particularly serious. Stagnant productivity since
the financial crisis has left the economy effectively unable to drive growth from
within. The OBR now estimates that the UK’s ‘output gap’ – the amount by which an
economy can grow in a year without causing inflation – has turned positive for the
first time since 2008, meaning that there is little slack in the economy to take up
any increase in demand.140 If fear of inflation now prevents further stimulus, there
is a real risk that the UK’s ‘lost decade’ of growth will become permanent, and GDP
will never catch up with its pre-financial crisis trend.141
It is hard to avoid the conclusion that we need a new approach. With interest rates
still at record lows, the case for public investment to drive demand is particularly
strong. Borrowing for public investment is not the same as borrowing for current
consumption: investment (assuming it is well made) generates long-term growth.

We don’t have an output gap any more so therefore we should stimulate the economy with public borrowing and spending.

Whut?

By stimulating demand, public sector investment
can ‘crowd in’ finance from the private sector.

Yep, when there’s no output gap and we’re at full employment.

Mathematics folks

Sterling’s recent depreciation may already have begun to lift the level of exports,
including in manufactured goods, although in some cases exporters appear to
have used it to raise profits (by holding their prices constant) rather than sales.124
Around two-thirds of input costs are domestic in origin, meaning that they are
priced in pounds, while around one-third are imported components, meaning that
they are purchased at world prices. As a result, a 15 per cent reduction in the value
of sterling translates into a 5 per cent reduction in price on world markets. Given
the intensity of price competition for manufactured goods, this has the potential
to improve the UK’s competitiveness.

10% I think, no?

Lies

Manufacturing output has shrunk faster in the UK than in other advanced
economies
Manufacturing gross value added (GVA) as a proportion of total economy GVA,
selected economies, 1996–2016

But manufacturing output hasn’t shrunk, has it? Absolute output is at near record levels.

Bollocks

These problems have been compounded by the structure of executive pay. Over
the last 20 years, remuneration packages for company directors have increasingly
been made up of stock options, annual bonuses and so-called ‘long-term
incentive plans’, which are in fact based almost entirely around short-term
metrics of financial performance (see figure 3.9). These are widely regarded as
having distorted incentives for company directors, encouraging them to focus on
short-term share price movements rather than long-term growth.

Equity packages tend to vest rather slowly.

Both Rex Tillerson and Gary Cohn (yes, US but still) would have got theirs over the 5 years after they left the company if they hadn’t gone into government.

We have a different banking system!

At the same time,
it has performed poorly in one of its core functions, that of providing finance
for investment in British businesses.94 Loans to UK businesses account for only
5 per cent of total UK bank assets – around a third of the proportion across
the Eurozone, with UK banks lending a much higher proportion for land and
property

The UK has an Anglo Saxon style corporate financing system. We use equity and markets much more than do the continentals. This is not an error nor failure, it’s just different.

What do you expect in a service based economy?

The UK’s finance sector is one of the world’s largest, producing over 7 per cent of
national economic output. World-leading in terms of technological innovation,
expertise and global reach, it employs around 1.1 million people across the UK;
is responsible for a roughly £60 billion trade surplus in financial services,
equivalent to around 3 per cent of GDP; and contributes more than £24.4 billion
to the Exchequer in taxation.88 Half of the world’s financial firms have their
European headquarters in London; around 78 per cent of European capital
markets and investment banking revenues come from the UK; and 46 per cent
of equity in the whole of the EU is raised in the City of London.89 This is, on any
account, a hugely successful part of the UK economy.
Yet the UK performs very poorly by international standards on investment.
Investment is the engine of any economy; it drives both productivity and income
growth. But at around 17 per cent of GDP, the rate of public and private investment
in the UK economy is around 5 per cent below the OECD average. This gap has
widened over the past 50 years; indeed, the UK investment rate has been falling
for most of the past 30 years (see figure 3.5). A similar gap exists for private
sector investment alone: corporate investment in fixed assets (not including
construction) fell from 11 per cent of GDP in 1997 to just 8 per cent in 2014 – well
below the rate of capital depreciation, meaning that the stock of business capital
is actually falling. The comparable rate of corporate investment in the US in 2014,
for example, was 12 per cent.

How many very expensive steel mills do you need to invest capital in to build the world’s premiere financial marketplace?

Are these people really this damn incompetent?

Grr

As a result of relatively weak management, UK firms have, in general, lower
take-up of new technologies and processes than in other advanced countries;
and their use of skills is poorer.82 It is often remarked that the UK has a skills
problem, but this is generally thought to be one of insufficient supply of
appropriately skilled workers. In fact, the deficiency lies as much in the demand
for skills. Many British businesses are not organising their workforces in a way
that maximises the productivity of the workers they currently have, and they do
not seek to employ enough workers with higher skills.83 A recent cross-European
study estimates that one-third of adult employees in the UK, over five million
people, are overqualified for their job, the highest proportion in the EU.84
This approach is only possible because the UK has one of the most flexible, or
deregulated, labour markets in the developed world. The World Economic Forum
ranks the UK eighth of 140 countries in terms of labour market flexibility.85 It
is now possible for an employer to take on a worker with almost no attached
responsibilities on the employer’s part, or rights for the worker, at all. From the
perspective of productivity, it has become too easy and too cheap to raise output
by adding a low-wage worker rather than by investing in new technology or
innovating in workplace organisation. It is notable that the development of the
‘gig economy’ and other forms of casualised work has occurred much faster and
further in the UK than in many other developed countries.86
One result of this is that we have a much higher employment rate than most
other countries. But this has been achieved at the expense of productivity.
The UK has effectively gained high employment through low wages and poor
working conditions. In too many sectors the UK economy has fallen into a
low-pay, low-productivity equilibrium.87 Without reform of our labour markets,
and a much stronger effort to get businesses to invest in new technology and
in workplace innovation, it is difficult to see how we can climb out of it.

Reimpose all the labour regulations so that companies hire fewer people? That’ll work well, yes?

We know how to solve this

What explains this poor record on productivity? It is not that leading British
firms are less productive than their competitors overseas. It is that we have
a ‘long tail’ of low-productivity firms.77 As figure 3.4 shows, the UK has a small
proportion of businesses with high productivity, of over £100,000 per worker; and
a very much larger number earning under £50,000 per worker. This dispersion
is considerably greater in the UK than in other OECD countries.78 The ‘long tail’
of low-productivity businesses is particularly marked geographically. There are
high- and low-productivity firms in every area of the country; but on average
productivity is much higher in London and the South East than elsewhere (see
figure 3.5). This is partly because of the different sectors that predominate
in different regional economies, but it is not explained by it: there is wide
geographical divergence in productivity even between firms in the same sectors.

Declare unilateral free trade. That is what increases firm level productivity.

Yes, this is what stopped unemployment from soaring

In fact, the productivity position is worse than this. Since the financial crisis,
productivity growth in the UK has more or less stalled altogether. This is a stark
divergence from the long-running trend (see figure 3.3), and it has occurred across
almost all sectors.76 It goes a long way to explaining the stagnation of earnings
over the past decade.

If GDP goes down by 10% should all wages fall by 10% or 10% lose all their wages? Britain’s flexible labour market meant this time around the first happened. Anybody capable of thought would consider this a success.