Sunday, March 16, 2014

A Challenge to Minimum Wage Advocates

The only positive thing about minimum wage logic is that it is easily defeated. Common sense economics rejects it, but non-economic arguments cause it problems, too.

Here is a non-economic challenge to minimum wage proponents I have yet to hear convincingly answered (perhaps a commenter or my counterpart Tim can provide an explanation): If someone—say, John—wants to work for six dollars an hour at Company X, and Company X wants to hire John for that wage, why should that be illegal?

Thursday, March 13, 2014

Don't Cry for Me, Argentina

In an op-ed column titled “Cry for Me, Argentina” New York Times columnist Roger Cohen argues that “Argentina is the child among nations that never grew up. Responsibility was not its thing. Why should it be? There was so much to be plundered, such riches in grain and livestock, that solid institutions and the rule of law seemed a waste of time.”

This is about par for the course for the news media over the last decade or so—long diatribes about how Argentina must be doing horribly because their leaders say populist things, have nationalized a number of industries, and about a decade ago defaulted on its debt. You see, these are all things that only irresponsible countries do. Things must be awful in Argentina. 

So how’s it going south of the equator?

Wednesday, March 5, 2014

For the Last Time: Why David is Wrong About Fiscal Stimulus (Dense)

I’ve written twice now on David’s misguided attempts to explain away fiscal stimulus. But David’s latest post just repeats the same fallacy over and over again as if it were some fundamental truth in economics: “all money in an economy is applied toward economic activity.”

To be fair, there is indeed an economic identity that says that all income is applied toward economic activity—that is, all income is spent. The problem is, there is no economic identity that says that all money is applied toward economic activity because banks convert savings into economic investment by making loans. So here's a somewhat denser version of why David is wrong.

Monday, March 3, 2014

Why the Stimulus Failed, Part Two

I recently explained why government stimulus spending must fail. Tim contested my argument, but I will show why it stands.

The basic flaw with stimulus spending is that, in order to spend a dollar into the economy, government must remove a dollar from the economy, which renders spending a zero-sum transfer of resources.

Tim challenged these basics by asserting that not all money is contributing to economic activity, so utilizing “idle” dollars for government expenditure would avoid the zero-sum critique and raise national income. There are three reasons this is wrong.

Sunday, March 2, 2014

Striking Out on Stimulus

Yesterday, David wrote a post attempting to explain why the government’s $800 billion stimulus “failed.” The point of David’s piece was to prove that not only was stimulus an empirical failure, but also a theoretical one. Reasonable people can disagree on whether the stimulus was an empirical success. But what should be clear is that economic theory does, in fact, suggest that it can work.

Yet David argues that “The only way government can spend a dollar into the economy is by removing a dollar from the economy, meaning spending is a zero-sum transfer of resources.”

I pre-empted this argument, and many of David’s other points, already in the blog post “Why Government Spending Stimulates.” That piece showed how David was incorrectly equating the concepts of money and income by assuming that because there is a zero-sum transfer of money when the government deficit spends, there must also be a zero-sum transfer of economic resources. But David remains unconvinced, so let me try this again.

Saturday, March 1, 2014

Why the Stimulus Failed

The five year anniversary of the so-called “stimulus” marks an opportune time to reconsider why it failed to grow the economy.

Let us recall that in 2009 government spent monumental quantities—some $800 billion—in an effort to rejuvenate economic growth. Obama administration economists Jared Bernstein and Christina Romer reported that, with the stimulus spending, unemployment would not rise above 8 percent. Absent the spending, however, they alleged unemployment would reach upwards of 9 percent.

Despite these assurances, the herculean spending effort left the economy unmoved. Unemployment peaked well above 10 percent, and growth has remained vanishingly weak, particularly compared to historical post-recession standards. Yet the lack of real world success was as predictable as the theory is wanting.