Inequality for All = An Inconvenient Truth

Yesterday evening (2/20/14), my college showed Robert Reich's documentary Inequality for All to interested students, faculty, and members of the community and had the good sense to ask me to join a post-viewing discussion panel. The format was not shared with me beforehand so I brought a variety of props (one of which I threw across the stage at one point but not at anyone). I can't reproduce the discussion here, but I can share the remarks that I prepared (and did not have the opportunity to read). In short, Reich's name is very Dickensian as he has produced a (albeit liberal) propaganda film and narcissistic memoir best relegated to Billy Joel's "discount rack like another can of beans."

In his new documentary, Inequality for All, Robert Reich, who is no relation of mine by the way, is trying to match the success of Al Gore’s 2006 documentary An Inconvenient Truth. The documentaries are similar in important ways. Growing income inequality, like global climate change, is undisputable and both are clearly problems, by which I mean outcomes that policymakers should strive to mitigate rationally. The magnitude of both problems, however, remains unclear and, more importantly, the causes of both problems remain contested. The causes are the crucial thing because they lead to policy recommendations and possibly to actual policies with real world repercussions. Policymaking is tricky business even when the causes of a problem are clear. When policymakers have the causes wrong they are almost certain to develop the wrong prescriptions. I think Reich’s analysis is off the mark because instead of following the evidence in a nonpartisan manner, as he promises early in the film, he leans heavily on liberal causes. That was a double entendre by the way.

Please allow me to provide an exaggerated example so there is no mistake here. Reich is doing the equivalent of pointing out that sometimes grain mills explode. Sure enough, that is the case, though he exaggerates the extent of the problem by not dropping mills destroyed by military action or other external causes from the data. Then, Reich ascribes grain mill explosions to an excess of bilious humors that increase the amount of phlogiston to the point that an explosion is inevitable. If you have never heard of bilious humors or phlogiston, good for you as they were concepts long ago abandoned by scientists because they were nothing more than conceptual black boxes that could not predict when grain mills would explode or anything else for that matter. Reich has done something analogous here by pointing to a real problem, income inequality, but exaggerating it somewhat and, more importantly, attributing the wrong causes to it.

First, the exaggeration. Reich uses data on Real Wages, which have indeed stagnated since the 1970s. Real total compensation, however, has continued to increase. The difference is fringe benefits, especially healthcare.  Here is the chart, right from the St. Louis Federal Reserve’s FRED data system:

The core problem on the bottom end of the distribution, then, is not the demise of labor unions or low marginal tax rates on the rich but rising healthcare costs. Reich probably blames healthcare costs on quote unquote markets but in fact the core problem is a hybrid of government and market failures, of which the most important are government tax rules, first implemented during World War II, that encouraged the development of health insurance provided via employers. That led to a whole host of problems, including runaway costs and large numbers of uninsured individuals. I analyze the healthcare crisis more fully and offer solutions in two books, Mutually Beneficial and Fubarnomics.

Real wages have stagnated and real compensation increases have slowed because of globalization, which is just jargon for competition. The 1940s, 50s, and 60s were so sweet because the U.S. emerged from World War II not only unscathed but with tremendous productive capacity and hence was able to extract monopoly rents from the rest of the free world and even from the Soviet bloc to some extent. Unions waxed over that period because there was plenty of free money to go around. By the 1970s, however, the monopoly was gone as evidenced by the disintegration of the Bretton Woods system of fixed exchange rates, and Americans had to compete against Europeans and East Asians at both home and abroad. That competition was a good thing for the U.S. economy as it forced Americans to work harder and smarter but it also meant that the expectations of many Americans, especially those who assumed, for reasons that I’ll never quite understand, that an easy life was their birthright, were more Dickensian than Great. (I sincerely hope that you are enjoying the delectable word stew I have created for you today.)

Of course the disappointment of poorer Americans is relative: better to be in the bottom quintile of incomes in the U.S. than in the middle class, even the upper middle class, in most of Latin America, Africa, Central Asia, or Micronesia. But Reich doesn’t want to consider world income distributions even though there is a wonderful little book out about it, The Haves and the Have Notes, by Branko Milanovic, who points out that the global Gini coefficient, a widely used measure of inequality, is 70, far higher than the 45 that the U.S. currently registers.

The Gini coefficient in South Dakota, by the way, is 33, tied for the lowest in the entire nation and similar to that of the western European democracies that left leaners so love. Clearly, there is more to income distribution than just politics but you don’t hear that from Reich, who wants to concentrate on real wages in the U.S. because that allows him to pull out his Keynesian jargon about consumption and the need for a strong middle class, whatever that is. It’s all as much economic voodoo as trickle down economics ever was. Producers have a good idea what the income distribution in their markets is like and respond accordingly. Where income inequality is high, for example, they target a high margin luxury niche and/or make their wares as affordable as possible in a low margin mass niche. Check out C. K. Prahalad’s The Fortune at the Bottom of the Pyramid for details.

            Another inconvenient truth, unitalicized and uncapitalized of course, about Inequality for All is that Reich also fails to adequately explain the movement at the top of the distribution, to wit why the rich are getting richer. Globalization is at play here, too, at least when it comes to top actors and athletes, who now reach audiences that number in the billions. That is just market forces at work and taking Reich at his word that he is not a socialist there is nothing to be done there. Of course the title of the documentary, Inequality for All, belies Reich’s real views. The Pledge of Allegiance reads “with liberty and justice for all” and says nothing about equality. Reich can’t mention liberty, however, because his policies restrict it and he can’t rely on justice because we can’t agree on what it means.

In any event, when it comes to CEOs, market forces are not at play. Reich can’t see that because he conflates markets with corporations, a mistake that many left-of-center thinkers make. Corporations interact with other corporations and with consumers in markets but within themselves corporations are essentially governments and hence subject to politics and power plays. Due to a combination of market and government failures that I explain in detail in my new book, Corporation Nation, the ability of stockholders to minimize managerial rent seeking has waxed and waned over time. Most importantly, it waned after the Great War and after the Fall of the Wall, leading to increased rent seeking by CEOs and other top executives, variables that Reich is completely oblivious to in his infamous bridge graphic. Let me be perfectly clear here: inequality in the U.S. is rising in part because stockholders and governments have, once again, allowed CEOs to determine their own compensation without effective checks or balances.

            The same loss of checks and balances has made Washington rich as it sucks resources from the rest of the nation into its gaping maw. Suburban Washington now boasts several of the counties with the highest per capita incomes in the nation because they are chock full of high level government officials and government contractors. Reich claims that Americans at all income levels don’t want to pay taxes. I counter that Americans happily pay taxes when they know it is going to provide services that they actually need and in a relatively efficient way. Reich wants to restart his so-called virtuous cycle, which by the way is full of non sequiturs and other half truths, by taxing the rich instead of by trimming back government spending. We don’t need to throw more cash into DC, we need a government that uses what it already has more effectively. That means reforming education, including higher education, and not just shoveling more money at the problem. America already spends more per student than most of its peer nations do, it just doesn’t get as much bang for the buck because its schools and colleges don’t teach independent thinking as well as they could. For details, see my Fubarnomics or my Higher Education and the Common Weal: Protecting Economic Growth and Political Stability with Professional Partnerships, which was so radical that it was only published in India.

In conclusion, Robert Reich is right when he says that income inequality is increasing. He is also right that inequality is problematic but due to its negative effect on incentives to work hard and smart not due to kooky Keynesian concepts. Reich’s analysis of causes and hence his policy suggestions are way off base. If we fix corporate governance, healthcare, higher education, and the social safety net, inequality as measured by the Gini coefficient will decrease to the mid-30s of its own accord. If resorting economic freedom doesn’t work, then, and only then, we can think about increasing tax rates, keeping in mind, however, the inconvenient truth that with the free flow of capital globally actually collecting anything over 50 percent is highly unlikely, which is why the marginal rates were reduced in the first place. Thank you and God bless.

Viral Video on the History of the Federal Reserve

Word on the web is that a documentary on the Federal Reserve that I am interviewed in has gone viral, in the good sense of course. That is the one that Augie covered several days ago here. The documentary, put together by economist Murray Sabrin at Ramapo College in "Joisey," is embedded below. Enjoy!

America: Time to Learn From So. Dak.

I published the first two grafs below on the FacultyRow site several days ago but ran out of words. Here they are again, along with my closing thoughts.

America’s huge economy is finally showing signs of renewed vigor but it still faces significant headwinds in both the long and short terms. Inflationary pressure has been building for some years due to the rapid and sustained increase in the Fed’s balance sheet following the Panic of 2008. The monetary pressure may become insurmountable if the economy continues to heat up and the federal government continues to run large deficits. Longer term, the U.S. economy may face several crises related to the effects of changing demographics and runaway healthcare and higher education costs at a time when confidence in the federal government’s ability to do anything right, much less to implement substantial reforms, is at a very low ebb. 

Most troubling of all is the decline in Americans’ “economic freedom” as measured by the Heritage Foundation. The United States now ranks tenth in the world and its absolute score has declined for five consecutive years. Numerous studies have shown that economic freedom is highly correlated with sustained economic growth and many scholars believe, after removing the statistical noise created by the business cycle and one-off shocks like wars, that economic freedom is the root cause of growth. Bigger, more intrusive government, especially one that is no longer trusted by many citizens for a variety of reasons, is not conducive to entrepreneurship, especially of the more growth-inducing innovative and inventive varieties. Crony capitalism, one of the “bad” forms of capitalism identified by Will Baumol et al, appears ascendant.

Policymakers, pundits, and concerned citizens looking for a way out of this morass will find much to learn from South Dakota, America's freest state (and just a smidge less free than Alberta, the freest place on the continent). Although solidly Republican, the state is highly democratic; its people demand efficient government and usually get it, at least relative to many other places globally and even nationally. Congress has finally passed a budget, but one that doesn't solve any fundamental problems. Washington should not waste this reprieve but instead use it to really analyze government services and cut what is not needed, privatize that which can be privatized without endangering national security or the economy, and streamline the rest. If it makes those decisions based on independent studies and not partisan politics it will win back some respect and can then start to work on cronyism.

Jon Stewart: Gutless, (Economically) Brainless, but so Funny!

Jon Stewart has been making me laugh for over a decade now ... I started to tune in to The Daily Show just before the invasion of Iraq. He has often made the right calls politically and diplomatically over the years but almost every time he tackles economic or financial subjects, he sounds like an uncastrated male bovine with diarrhea. (That means a bunch of bullshit in case you missed the joke.) Last night was no exception as he berated somebody for asking if a $15 minimum wage is good for the economy, why isn't a $100,000 minimum wage? Of course nobody means that as a serious question. What she was really asking was how do central planners (like Stewart and others advocating for a higher minimum wage) know that $10 or $12 or $15 is the "right" figure economically. (As opposed to the one that is high enough to meet their policy objectives, which apparently is to garner votes for Democrats, who are hurting after the Obamacare website fiasco, but not so high as to cause inflation, immediate derision, etc.) Once you seriously begin to consider what the minimum wage "should" be economically, it soon becomes a silly exercise because the cost of living varies over place (and time) and the ability of businesses to pay it varies over industry, location, season, and so forth. A central planner who was really interested in the commonweal, i.e. in the most economically efficient outcome, would soon begin to pine for some sort of mechanism for balancing the number of workers with the need for workers in each industry ... and oh geesh there it is, supply and demand. If S&D lead to an equilibrium that is not socially efficient, direct subsidies are much more efficient than distorting the labor market with a wage floor.

I call Jon Stewart "gutless" because he won't have me on his show. He knows I will show him up and generally kick his knee jerk liberal, uneconomic brain all over his own stage and do it in a funny way too. I have sent him books before, with handwritten notes, etc., and never so much as a query has come from his office. He has another opportunity now, with the launch of my Corporation Nation from the University of Pennsylvania Press on Monday, December 9, 2013. The book should appeal to him at some level because it shows that corporate governance has broken down, giving execs too much power over their own compensation, by exploring in detail for the first time early U.S. corporate governance rules, which contained numerous checks and balances against arbitrary power that began to seriously erode after the Civil War and today are almost completely gone. I'll be on the East Coast a few times over the next few months to make it even easier for him to finally have on his show an intellectual who is not part of the NE academic elite. But he won't because he is afraid of what scholars in the Midwest might think or say, setting back his apparent attempt to brainwash his viewers with liberal economics of dubious (to say the least!) merit.

Slavery Today

Substance of a Talk Given in Madsen Center 201, Augustana College So. Dak. at 3:30 pm, 3 December 2013:

I got interested in modern slavery soon after coming to Augustana College because I was disappointed with a student in my U.S. history survey course who kept whining about how she couldn’t believe that quote unquote WE stole the land of Native Americans and that SHE would have stopped the exploitation of Indians. When I pointed out that she was doing nothing to help Native Americans today and that they were still very much exploited, she shifted to abolitionism and complaining about what quote unquote WE did to Africans. Two minutes on Google allowed me to bash her over the head, metaphorically speaking of course, on that one too. 

Only later did I realize that I should have thanked that student for awakening me to the notion that the study of history can do more than make us feel good or bad about the past, it can help us to change the future. Now I am the Academic Director of Historians Against Slavery and editor of “Slavery Since Emancipation,” a new book series being published by Cambridge University Press that publishes books that show that knowing something about the history of slavery and abolition can help activists today to reduce slavery worldwide.

The idea that slavery still exists in the world today may sound preposterous at first, but that initial incredulity evaporates when we reflect on North Korea or other totalitarian states that clearly condone political or Lockean slavery, i.e., the subjugation of people to the arbitrary will of some leader or his agents.

          The notion that economic slavery persists to this day might seem strange at first, too, until one becomes aware of labor conditions in many Less Developed Countries, the politically correct term for what we used to call undeveloped or Third World nations. 

Please note that I refer here not to sweatshops, which may or may not be staffed by persons working against their will, but to conditions like those depicted in the 2006 film Blood Diamond starring Leo DiCaprio, where workers are essentially abducted and forced to labor for others. That is very different from someone choosing to work in a factory for a pittance over selling fruit for half a pittance or not working at all. 

What separates the slave from the non-slave is personal agency, or the ability, in other words, to choose a course for oneself, even if the alternatives do not appear very savory to the individual worker much less to rich world observers. To be a non-slave is not to have the God-like power to arrange the universe to one’s liking but to take the world as it comes and change between existing paths as one sees fit, not as directed by another. For example, I do not count myself a slave because I was too fat, slow, and weak-armed to play Major League Baseball. I am a non-slave because when confronted with the reality of my inability to consistently hit 90 mile per hour sliders I chose where to go next with my life. Some might even call that freedom but it certainly is not slavery.

That economic slavery exists in the United States, and even right here in Sioux Falls, surely must be false, right? How could anyone be forced to labor for another in the U.S. today? There are no cotton plantations in So. Dak., no slave coffles are observed on Louise Avenue, or even Minnesota Avenue, and no runaway slave notices appear in the Argus Leader. That is all true because chattel slavery was abolished throughout the United States, and indeed the entire world, by the end of the second half of the nineteenth century.

But as anyone who has ever scored some alcohol before age 21, or a little weed outside of certain states, or maybe smoked some crack with Toronto mayor Rob Ford knows, making something illegal does not eliminate it but merely forces it into new forms. Slavery never went away but transformed into debt peonage, convict labor, and sex trafficking. It is not as important economically as it once was but that does not make it right or reduce our moral obligation to free those currently ensnared. 

Today, slavers keep their slaves hidden from open public view through a variety of techniques ranging from actual physical restraints to threats against family members to subtle psychological manipulation. Even in antebellum American slavery, most of the barriers to slave freedom were invisible, psychological rather than physical. Most slaves did not slay their masters or run for the North because slavers taught them that they were inferior and worked hard to deny them access to information that would aid rebellion or escape. Slavers do the same today.

Right here in Sioux Falls, in June of this very year, 37-year-old Carl Campbell of Sioux Falls received three life sentences plus 40 years after being convicted of luring minors and young adults into his power and forcing them to engage in commercial sex acts in the Sioux Falls area and elsewhere. That was one of three local cases cracked this year alone. How many are as yet undetected? Certainly more than zero because South Dakota’s sex trafficking laws have been ranked as the weakest in the nation and not all criminals are morons and hence will gravitate to where the likelihood and costs of getting caught are lowest.

Many of the prostitutes that service the Sturgis Motorcycle Rally and some pheasant hunting lodges are trafficked. In other words, they are tricked, cajoled, bullied, and intimidated into selling sex and are not doing it of their own accord. Some are shipped in from other states or countries for those and other events while others are Native, with a capital N. For more details, see Be Free 58’s website, befree58 dot org.

Modern slavery entails more than sex trafficking.  Slavers force people to do other sorts of work as well, usually low-skilled work. In 2007, for example, Robert and Angelita Farrell were convicted of forcing Filipinos to labor at their Comfort Inn and Suites hotel in Oacoma, which is just across the Big Mo from Chamberlain in case I pronounced it wrong. The enslaved Filipinos said that the Farrells controlled every aspect of their lives, including what they ate and where they lived as well as their working hours and tasks. The Farrells issued paychecks but then forced their slaves, under threat of turning them into federal immigration authorities, to endorse them back to the Farrells.

It doesn’t bother me when people work long, hard hours for what seems to be little pay so long as compensation is set fairly, which is to say by the market forces of supply and demand. But when employers steal from their workers by forcing them to accept below market wages they need to be stopped, fined, and imprisoned. And the victims, the enslaved individuals, need to be helped. That is where students like you can help the most, by providing resources to NGOs that interdict slavers and help victims to recover from their ordeals and to reduce their vulnerability to re-enslavement. Forming an Augie chapter of The Free Project, which is now part of Historians Against Slavery, is one way to do so. It is easy to do and the chapter itself gets to direct where every dollar it raises goes. Check it out at thefreeproject, all one word, dot org.

Thanks! I can take a few questions.

Don’t Be an Armsby

Move over Kunta Kinte, Solomon Northup is back! Actually, there is no objective basis for ranking Roots and 12 Years a Slave as they served two very different Americas. The former, which first aired in 1977, struck viewers still healing from the Civil Rights Movement of the 1950s and the urban uprisings of the 1960s and still coping with the overt bigotry of All in the Family’s Archie Bunker and his ilk. The latter is hitting theaters with the nation’s first African American president in his second term and with racism, though still a potent force, lurking deep in institutional crevices and exposed to public scrutiny only occasionally, by series like HBO’s The Wire.

As a period piece, 12 Years a Slave is extremely well executed. It is so good, in fact, that I hope that some well-heeled individual or well-endowed foundation will buy the rights and make it available to the world for free. Yes, people can read the book for free on Google and elsewhere online but the big screen version supersedes the text in some respects. The savagery of the whipping scenes, followed by tenderness of the post-whipping care that slaves provided each other, belie the slavers’ claims that it was the enslaved who were the savages. The hanging scenes expose how powerless the enslaved ultimately were: Northup watches helplessly as two slaves are strung up while later slaves go about their daily activities as Northup himself tiptoes in the mud with a noose about his neck for hours on end. Similarly, the wailing of a mother separated from her children by sale will not be soon forgotten by most viewers.

Director Steve McQueen has gotten the details right too. The overseers and slave traders are suitably grimy and ignorant. The economic activities depicted, shopping in stores, picking cotton, cutting cane, milling, and so forth, are accurately portrayed. Masters lust after their chattel, as we know many did, and their wives respond in authentic ways. And Paul Giamatti plays a scumbag slave trader oh so well. In short, professors can show this film in class confident that students will come away with an accurate glimpse into antebellum American chattel slavery.

There is a deeper layer here as well, one that I hope professors will explore in their classrooms. In short, we’re all Solomon Northup now. We may get a glimpse of slavery, as Northup did in a flashback scene to his pre-abduction life in Saratoga Springs, New York, but we do nothing about it, confident that slavery is something that happens to somebody else, somebody far removed from us in time or space. We cannot believe that our loved ones could ever end up in bondage but the simple fact is that it could happen, that it already has happened to millions of people worldwide, including untold numbers of Americans both at home and overseas. (Exact figures are disputed but not the point here.) Our abduction and sale are unlikely, but so was it for Northup. His trusting nature and high market value ($1,000 at the time, or approximately a quarter million dollars today) put him at risk and bad luck sealed his fate. Today, females and children are most at risk, both to be prostituted and put to forced labor, but in some areas adult men are still prized as agricultural field hands, fishers, or industrial workers. The remote possibility of abduction must be weighed against the high cost of losing a cherished one to slavers, even if you are one of the lucky few to possess Liam Neeson’s “very particular set of skills.”

We simply do not know what percentage of the enslaved are ever emancipated from modern bondage. Surely some perish and others never recover their former identities (including possibly Northup himself, who disappeared with nary a trace in 1857). Although modern forms of slavery take place all around us, the enslaved are trapped by invisible chains similar to those that prevented Northup from trying to escape, the fear of corporal punishment and even death. While Northup, a Dickensian surname to be sure, had to contend with the great physical distance from the Louisiana plantations where he was forced to whip his fellow slaves to freedom in the North, he did not have to worry about slavers killing his family like many slaves today must.

Spreading the word about modern slavery can help people to avoid abduction in the first place but just as importantly it can help to turn everyone into Brad Pitt, or rather Bass, the Canadian laborer who Pitt plays in 12 Years. Bass was antislavery but he not an abolitionist hero. He was just a handsome working stiff who saw injustice and risked his own neck and livelihood to save a fellow human being in trouble. He probably did not know that free blacks were abducted and enslaved by the hundreds (possibly thousands) but he was intelligent enough to see that Northup’s story was plausible. Had white wage laborer Armsby (played by Garret Dillahunt) been more intelligent, or at least more informed, he might have chosen to help Northup instead of taking Northup’s money and ratting him out to the master.

Maybe by next fall term, professors can show 12 Years a Slave to their students legally and at no cost. It is good enough to be used as a straight up period piece to supplement lectures or readings on antebellum American chattel slavery but the connections to modern slavery should be explored in classrooms as well. Like Northup, most of us know a little about modern slavery but rest content in our comfortable middle class lives barely cognizant that we, too, could fall victim to slavers. More likely, we could be cast to play a potential savior and will have to choose between Armsby and Bass. Let’s help our students to pick the latter every time.

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.

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 MeasuringWorth.com, $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.

 

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.