Wednesday, October 30, 2013

Why South Dakota Should NOT Raise Its Minimum Wage to $8.25/hour

This is the text of the comments I gave at the "Augie After Hours" event tonight at Monk's, a local tavern. ************************************************************************************************************************* I oppose raising the minimum wage for the simple reason that we can’t fix a broken nation by breaking it further. Minimum wage laws hurt the very groups of people that they purport to help. It would be nice if public policy problems could be solved merely by passing a law but human nature and human institutions are too complex to bend to simplistic policies like minimum wage laws. The key to understanding my position is to realize that the median worker now receiving $7.25 per hour is NOT worth $8.50 per hour to their respective employers. Let me repeat that: the median worker now receiving $7.25 per hour is NOT worth $8.50 per hour to their respective employers. I can assert that without reservation or qualification because if the median worker was worth $8.50 per hour an unexploited arbitrage opportunity would exist. In other words, somebody could form a company, pay say $8.25 per hour, attract all the employees currently earning less than $8.25 per hour, then lease those employees back to their original employers at $8.50 per hour and pocket the difference. To state the matter yet another way, if the only thing suppressing wages is that employers enjoy pricing power over workers, a labor monopolist could arise and eliminate the employers’ bargaining advantages. That no for-profit company has arisen, and that Professor Nesiba does not form a non-profit organization to engage in such an activity, suggests that no arbitrage opportunity exists and that the median minimum wage worker is NOT worth substantially more than $7.25 to his or her employers. So that means if the minimum wage is raised to $8.50 per hour, $1.25 per hour per worker has to come out of somebody’s hide. You might think, as the proponents of this policy recommendation apparently do, that the money will come from business owners and that they can well afford it. Both presumptions are dangerous. Implementation of a higher minimum wage could well put marginal firms out of business and their employees out of work. Well-situated businesses, on the other hand, will be able to pass some or all of their cost increases onto consumers, including y’all, but you won’t be able to take a tax deduction for what amounts to an act of forced charity. Still other businesses will undercut the law by exploiting its many loopholes. For example, a fast food joint might change into a fast service diner and actually decrease their worker’s minimum wage to $2.13 per hour, plus tips. Or, it might promote a number of workers to salary status, which is also exempt from the minimum wage requirement. Others will switch to piece rates and pay by the burger served or by the course or book, as colleges do with adjuncts and publishers do with authors. Still others will turn their hourly employees into independent contractors or require lengthy unpaid apprenticeships or internships. Others will eliminate worker perks like employee discounts. I suppose supporters of a minimum wage increase could create a very complex law that would attempt to stymie such obvious work arounds but the ingenuity of business people trying to save their companies or maintain their own incomes will likely outmatch their best efforts. Moreover, complex regulation of business is not a South Dakota thing. We attract and retain businesses by keeping things as easy as possible. A complex minimum wage law would drive away small businesses, the very heart of our economy, which is thriving under current law by the way. Moreover, even under the most oppressive regulatory regime imaginable, employers will still always have two options open to them, increased use of technology and wage compression. The former eventually will occur anyway but if enacted the proposed minimum wage hike will speed the process. Already in the East, it is possible to order, pay for, and pick up a sandwich without interacting with a human being. Even in Sioux Falls we have already seen self-checkout lines at retailers like Walmart. As technology costs fall and wage rise, low skilled jobs will be lost, just as they were in farming and manufacturing in the nineteenth and twentieth centuries. So is it better to be unemployed or to have a job that pays $7.25 per hour? Instead of letting individuals decide, the proposed policy would answer the question for them: $8.50 or bust. Moreover, wage compression will occur when and where there are no other alternative work arounds for employers. What that means is that it will take much longer for workers to get a raise above minimum wage. In effect, more productive workers will subsidize the wages of less productive workers, weakening the incentives of both. In other words, more employers could afford to pay $8.50 an hour to older, sober, reliable, hard-working employees if they did not have to pay $7.25 to Slacker Joe and the stoned teenager who reports to work when she feels like it. But no, because in 1938 the same moron president who burdened us with Social Security and corporate health insurance provided through employers also inured us to the notion of a minimum wage for a narrow group of workers. So, again, we know for certain that today’s minimum wage workers are not worth $8.50 an hour to their employers or there would be a market solution to the problems that Professor Nesiba has identified. Any artificial attempt to raise workers’ wages to that level, however, will decrease the quantity and/or quality of employment by inducing business failures, increased use of technology, job reclassification, loss of perks, wage compression, and higher prices for consumers. A gigantic irony looms over this entire discussion: most of the people earning minimum wage are the products, or should I say the victims, of failed public school systems and broken public welfare policies, including grotesquely suboptimal Native American policies begun under the administration of that moronic president I mentioned just a moment ago. Broken educational and motivational systems are the heart of the problem and that is what we should be addressing, not slapping a feel good band aid on a severed artery. Until we can fix the root causes of an unproductive workforce, I suggest that we help the laboring poor via private charity: give food, clothing, and money when you can and take your just reward in the next life and the next fiscal year, don’t try to help the working poor by hurting employers, consumers, and other low paid workers. ********************************************************************************************************************** Prof. Nesiba "won" the event 10 to 2 ... lest there be any misunderstanding, 60+ people attended and 43 consistently voted, anonymously, using a text message polling site. The 10 to 2 tally was the number of people who switched sides or moved from undecided to a "for" or "against" raising the minimum wage between the initial poll, the halftime poll, and the final poll. Because the methodology was announced beforehand, however, the results might have been skewed as it doesn't take a rocket scientist to figure out that the way to get a "win" for your side is to vote undecided in the initial poll and then "switch" to your real position in the later polls. Of course "my" side knew the rules too but we were outnumbered 2 to 1 in favor to begin with and my opponent, who has been here several decades, is better connected with the alumni community. (I felt particularly aggrieved by the presence of two students who I recently failed on a project.) It is astonishing to hear the arguments that people will use rhetorically to support their position, which included Henry Ford's pay policies a century ago and rural electrification! The next round is in Minneapolis in a few weeks, where I expect more of the same. It was still a good time, though, even if I don't drink alcohol anymore. Augie needs to do more of this sort of thing and to be more inclusive about it too.

Tuesday, October 15, 2013

When the Manhattan Company Saved New York's Honor

I haven't been blogging much about the debt crisis because I've been tied up doing interviews on the subject for local media, WSJ's Market Watch, The Fiscal Times, and so forth. Plus, I've said it all before, back in 2011. (See my earlier blog posts about the unconstitutionality of deliberately defaulting, origins of the debt ceiling, etc.) I'm also up to my eyeballs writing the histories and compiling the corporate genealogies of America's largest 50 bank holding companies, which should come out of Columbia University Press's biz imprint in 2015. (Don't confuse that project with Corporation Nation, which will be out this December from UPenn. Go ahead and pre-order it. I dare you.) 

Anywho, I just ran across the following letters in Lester W. Herzog, 150 Years of Service and Leadership: The Story of National Commercial Bank and Trust Company (New York: Newcomen Society in North America, 1975), 6-7 and wonder aloud if any of the big banks that received bailouts in 2008, including JPMC (the M stands for Manhattan, i.e., the bank below), would lend the federal government money, without authorization from Congress, to prevent a U.S. government default?

S. E. Church, Comptroller of the State of New York, to C. O. Halsted, President of the Manhattan Company, Albany, May 30, 1859:

I regret to be compelled to inform you that the Legislature at its recent session, neglected to provide any means to pay the interest on the new canal debt of $12,000,000. ... The amount  required for the October and January interest will be $355,000, making an aggregate of $385,000, necessary. ...

I have ventured to write this note for the purpose of inquiring whether, in view of the unexpected and extraordinary omission of the Legislature, and the disastrous consequences which it would produce, your bank will not advance the amount required for this object, and thus save the State from the disgrace of having its obligations dishonored. ...

I possess no authority as a public office to borrow the money, or bind the State to repay it; nor can I tender any other security than the expression of the entire confidence in the integrity of the people. ...
C. O. Halsted, President of the Manhattan Company, to S. E. Church, Comptroller of the State of New York, Albany, June 2, 1859:

Yours of the 30th ult. received, and its contents noted. It is deeply to be regretted that provisions should not have been made for the payment of the interest on the new canal debt of $12,000,000. That the credit of the State should be protected is a matter of vital importance. ...

The high credit which this State so deservedly enjoys, both in this country and in Europe, and which has always been regarded with just pride by its citizens, must be preserved untarnished and its obligations must not be dishonored. If you as the Comptroller possess no authority to make a loan for the payment of the interest, and no other means can be made available, relying upon the ability, the honor and the faith of the State to repay the money, this institution will advance the necessary amount.

Very respectfully,
Your obedient servant [that was a stock sign off back then, btw]

According to, $385,000 in 1859 is the equivalent of about $1.4 billion in 2012 so this was no small favor but rather the actions of a public spirited institution also interested in protecting the value of the state bonds it held on its balance sheet at secondary reserves. Hint, hint holders of Treasuries.


Thursday, October 03, 2013

Banning Political Parties, Allowing Reverse Eminent Domain, and Other Constitutional Amendments Suggested by the Government Shutdown

Well, parts of the federal government remain shutdown with no end in sight. I think both parties are culpable and should be banned, along with all other political parties, by a Constitutional amendment. The Framers didn't want political parties. Look it up. So why not ban them?

We should also pass a Constitutional amendment that would ban gerrymandering by limiting Congressional districts to six sides at most (unless a state, like SD, has only one Rep, in which case no gerrymandering is possible). Of course if parties were effectively eliminated there would be much less pressure to contort district boundaries to create safe districts for extremists.

A third Constitutional amendment would ensure that Congress and the heads of the Executive branch would not receive any salaries, offices, benefits, or other perks if the federal government shuts down or if any default occurs on the national debt. Better yet, let those events trigger immediate elections with all the current incumbents ineligible to run for national office ever again.

Finally, and once again, we need some sort of reverse eminent domain, some way for private entities to buy or lease government assets. A shutdown would be a nice triggering device. So, say, Yosemite would be leased to the highest bidder for 30 plus years. The bidder would not be able to change the park but would collect admittance fees in exchange for amenities upkeep. Ditto on the panda cam and heck the entire National Zoo.

And we don't really need NASA anymore, except maybe to look for collision threats in space, and I am not even entirely sure about that. If we could credibly commit to sending a private company's CEO and largest stockholders to any comet or asteroid they miss on a last ditch, Bruce Willis-type mission I think it would do the best job technologically possible. Not sure the government can make such a commitment when it comes to its own employees ...

It's all about incentives people and right now the incentives in Washington are FUBAR.