

Even If You're All-Powerful, It's Hard To Fix The Economy - eb007
http://www.npr.org/blogs/money/2012/09/14/161153421/even-if-youre-all-powerful-its-hard-to-fix-the-economy

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joshuaheard
Funny, the article didn't mention the minimum wage, which was raised 20% by
Nancy Pelosi in 2007, the start of our unemployment woes.

The law of supply and demand states that if you raise the cost of something,
you will get less of it. Raise the minimum wage 20%, and you will get less
jobs. Elementary.

~~~
bryanlarsen
Things aren't that simple. Raises in minimum wage in a modern economy rarely
have much effect on employment numbers. The vast majority of those at minimum
wage are employed in the service economy, so they compete locally, not
globally. Therefore a minimum wage increase affects a business and its
competitors relatively evenly. The business may be forced to raise its prices,
but since its competitors are forced to do the same no competitive positioning
is lost.

If you're competing against China, it's a different story. But if your company
is that sensitive to the price of labour and competing against China it
probably went offshore years ago. You compete against China with robots and
high-skilled labour, not minimum wage labour.

The nice thing about giving money to people making minimum wage is that they
spend it immediately, putting it back into the economy right away.

~~~
anamax
> The vast majority of those at minimum wage are employed in the service
> economy, so they compete locally, not globally. Therefore a minimum wage
> increase affects a business and its competitors relatively evenly.

Not so fast.

McDonald's isn't competing just with Wendy's. It's also competing with me
making a sandwich.

My cleaning service isn't just competing with other cleaning services. It's
also competing with me saying "hmm, I can live with that", etc.

The local retail store isn't just competing with other retail stores, it's
competing with Amazon....

> The business may be forced to raise its prices, but since its competitors
> are forced to do the same no competitive positioning is lost.

If I spend twice as much at McDonalds, I'm spending less money somewhere else.
Or, I'm not investing it, or I'm not putting it in a bank where it gets loaned
to someone else to invest/spend. (Cue the fractional reserve arguments about
the multiplier on deposits.)

In other words, even if the minimum wage increase "works", it's a transfer
from someone else. A tax, as it were, but an opaque one. (Yes, there are lots
of evils in the world. It's unclear how that justifies creating more.)

> The nice thing about giving money to people making minimum wage is that they
> spend it immediately, putting it back into the economy right away.

If you really believe that the minimum wage has almost no negative effects,
why not raise it to $100. Either they'll spend it right away or they'll save
some and buy houses and cars. The economy will boom.

Either you believe your theory or you don't.

~~~
kkowalczyk
Unless you're extremely poor, spending twice as much at McDonald's won't
affect you (and, consequently economy) in any way but it'll affect people
working at McDonald's.

Even if the total amount of money in the economy is fixed, the distribution of
that money among people matters a great deal to the health of economy which is
something your simplistic argument doesn't address.

In the most extreme example if one uber-rich person has almost all of the
money and the rest of the country has just enough to buy food, it doesn't
matter how much money that uber-rich person has - the economy will be in the
shitters because uber-rich person only needs one house, one car, can eat out
only in one restaurant per night etc. but if no-one else can afford a car, the
cars will not be made (it's too expensive to make just one car).

If there are millions of people that are only one millionth as wealthy as our
uber-rich person but wealthy enough to afford a car, a house, a tv set etc.,
the economy can develop - if there's market for million cars, someone has to
be employed to make those cars, tv sets, serve food to those millions of
people and a virtuous cycle develops where people employed to create things
and services for wealthy people become wealthy themselves.

So the question is: is raising minimum wage creates more over-all wealth (by
transferring more money from rich people who have excess of it) or less over-
all wealth (by making services of poor people too expensive for rich people).

I don't know what the answer is but you certainly haven't proven that 20% rise
of McDonald's prices would cause McDonald's collapse because of massive "I
make my own sandwich" movement. Even if that was purely a matter of price (and
not, say, convenience of getting a hamburger and fries in few minutes in the
middle of San Francisco), McDonald would probably beat you regardless of what
minimum wage is due to massive economies of scale, not to mention that making
your own sandwich is like using Linux: it's only free if your time is worth
nothing.

~~~
anamax
> Unless you're extremely poor, spending twice as much at McDonald's won't
> affect you (and, consequently economy) in any way but it'll affect people
> working at McDonald's.

Not so fast. I can afford to spend much more at McDonalds, but if I do so, I'm
not spending that money somewhere else, regardless of how much money I have.
You have to assume that I get no value from spending that money elsewhere to
conclude that spending it instead at McDonalds doesn't affect me.

However, even with that assumption, it's absurd to claim that my spending more
money at McDonalds and less somewhere else doesn't affect the economy.

You're going to have to argue that the economy benefits from spending money at
McDonalds vs somewhere else. The folks who'd otherwise get that spending will
be very interested to see that argument.

Moreover, you're making incorrect assumptions about McDonalds customers.
They're (typically) not all that well off. More to the point, they're
extremely price sensitive, hence the success of the "dollar menu".

We can test your claim in a situation more favorable to it than the real
world, namely airports. It's inconvenient to "bag it" and the clientele is
reasonably well off. Yet, many folks do, and not just because they don't like
airport food. (The Denver airport, for example, has some decent places.)

You're claiming that airport food places could double their prices without
affecting what people buy. Do you really believe that? (You can't argue "but
airport food is already too expensive" without providing a quantitative
argument showing that McDonalds in South San Jose isn't in pretty much the
same situation.)

If folks are actually price-insensitive, what limits prices at airport places?
(No - competition between restaurants doesn't explain it because the airport
could charge them all more money.)

FWIW, I picked "cleaning service" for a reason. The low-end cleaning services
in San Jose raised their prices 7-10% about a couple of years ago. (I looked
around when mine did.) Mine claimed that she and her competitors lost accounts
when they did so and that some went out of biz. She says that there's less
money being spent on cleaning services even today.

How do you know that she's wrong?

And no, customers' response to a price increase does not depend on why the
price is increasing. (They may be happy with a price increase accomplanied by
some other change, but that's not what you're proposing.)

> I don't know what the answer is

You claim to know enough to know that there's no effect from raising the
minimum wage.

> but you certainly haven't proven that 20% rise of McDonald's prices would
> cause McDonald's collapse

I didn't say that it would cause a collapse. I'm pointing out that the "no
change" claim is almost certainly wrong.

If you think that McDonalds is cheaper than a sandwich that you make yourself
I understand why you want to avoid quantitative arguments.

------
jwatte
Energy is close to free. Peta-Watt-hours per day come into the earth from the
sun.

The problem, in the US, is that the median income in real dollars has actually
declined in the last decade/s. This means the mass market has lower purchasing
power. For a while, debt was masking that effect, but that band-aid was ripped
off. The fix is to increase median real income. This is mechanically simple,
and politically next to impossible.

~~~
richardjordan
Oh that old saw... we get so much energy from the sun it's all hunky dory. The
challenge of converting that energy to a usable form at the kind of scale
needed to power a civilization is not mechanically simple. The supply chain
and energy inputs (including fossil fuels) required for photo-voltaic are non-
trivial. Conc-solar is still not proven at scale and again requires natural
resource and energy inputs to build and maintain the systems. Energy return on
energy investment is the key metric here and one that is not well understood
by many, nor favourable for a lot of the proposed solutions.

~~~
enfilade
This is a critical point. Energy return on energy invested (EROEI) is a
concept everyone should be familiar with.

I suggest beginning with the work of Professor Charles Hall of SUNY-ESF.

<http://www.esf.edu/efb/hall/energy.htm>

------
mbellotti
I'm not sure how much I buy this. With no discussion of the model it's hard to
say what assumptions he did or did not make in terms of how all these factors
respond to each other.

~~~
bitwize
There are four kinds of lies: lies, damned lies, statistics, and computer
models.

~~~
joe_bleau
Exactly. And the model is from someone at Moody's! After the mortgage backed
securities rating fiasco, it's hard for me to give them any credibility.

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The8thDwarf
The only way to fix the economy is to _make_ stuff which people will _buy_. So
lets all just get back to work and do that :)

~~~
Avshalom
well no. that only works if the people can buy.

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dpcx
How does one even begin to model things like this?

~~~
m0th87
If this model were actually accurate, Zandi would be sitting on a throne of
gold.

~~~
dpcx
While true, I'm still interested in how a model with this many variables is
created and run. It seems rather difficult (read: impossible) to model a
global economy in my opinion.

~~~
GFKjunior
<http://en.wikipedia.org/wiki/Econometrics>

Econometrics is the science of modeling the economy. But like you said it's
pretty much impossible to get calculations correct.

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protomyth
"long term plan to deal with the country's debt through a mix of tax increases
and spending cuts"

Skip the tax increases and do the spending cuts.

We do need some serious tax simplification, but Congress is way too fond of
using what should be a simple revenue raiser for social engineering.

~~~
padobson
Tax simplification doesn't win votes. A complicated tax system does win votes.
Is your campaign weak with car wash owners? Add 2k lines to the tax code and
make washing your car at a car wash tax deductible. Can't seem to get over the
hump with the dog walker demographic? Another 1200 lines to the tax code will
ensure their votes when you give them tax deductions on dog doo bags.

~~~
protomyth
Yep, you're right. Doesn't mean I have to like it much. I do think you could
make a campaign out of hating TurboTax though.

------
wazoox
GDP relies on energy. Energy is getting scarcer and more expensive. GDP stalls
and won't recover. This is somewhat oversimplified but resumes what's
happening.

~~~
richardjordan
The right answer. Economic growth maps almost exactly to the expansion of
available energy inputs. As fossil fuel flow rates peak and growth in energy
availability falters, so wil GDP growth. We have an economic system designed
to function in a world of perpetual growth and perpetual growth in energy /
natural resource availability. Our system and its underlying economic theories
are not designed nor tested for environments of perpetual contraction of
either.

~~~
wazoox
Absolutely. For those interested by this, an excellent blog is "Do the math":
<http://physics.ucsd.edu/do-the-math/>

It explains through many articles how the law of physics put terminal limits
on what we can achieve, and kills a lot of misconceptions, like "a service
economy needs less energy", "we could replace nuclear/coal/oil with
wind/solar/hydro", etc.

~~~
richardjordan
Cheers for the link

------
guelo
Baloney, there's tons of work that is in desperate need to get done in this
country. Give me access to the US mint and I'll get unemployment down to 0% in
a few months.

All those college kids without job? Boom! School class sizes across the
country down to 5. Too much crime? Ten times more cops! Potholes in your city?
Gone! Want your city covered in solar panels? Done! Street litter? Gone! Dirty
public facilities and public transportation? Spik and span! Decrepit bridges,
roads, water infrastructure, electrical lines? They're new now!

Keep bringing me people and I'll keep coming up with stuff for them to do.

~~~
mikeryan
Would love to hear how getting access to the US Mint will do that.

~~~
guelo
I'd crank up the presses to pay all my new workers.

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dllthomas
Tax increases and spending cuts didn't pull us out of recession? Huh!

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MaysonL
Why not try something that the economists with the most credibility on
depressed economies recommend: fiscal stimulus? I'd love to see what Zandi's
model would come up with for that.

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josephlord
Steve Keen has some non-traditional economic ideas that seem to make a lot of
sense (although I'm not sure I buy his Jubilee Shares proposal). His economic
model seems much more matched to reality than most I have seen.

<http://www.debtdeflation.com/blogs/manifesto/>

