Even If You're All-Powerful, It's Hard To Fix The Economy

http://www.npr.org/blogs/money/2012/09/14/161153421/even-if-youre-all-powerful-its-hard-to-fix-the-economy

by eb007 • 14 years ago

26 55 14 years ago

mbellotti• 14 years ago

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• 14 years ago

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

joe_bleau• 14 years ago

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.

dllthomas• 14 years ago

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

joshuaheard• 14 years ago

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.

Permit• 14 years ago

This is a vast, vast oversimplification.

By your logic, Canada should be seeing massive unemployment as our minimum wage is 20%-30% higher in most provinces than most states.

The reality is that Canada's unemployment rate sits at about 7.3% in August compared to the 8.1% rate in the United States.

bhughes• 14 years ago

Not necessarily. It's possible that with a lower minimum wage, Canada's unemployment rate might be even lower. The best you can hypothesize is that all things being equal minimum wage does/does not negatively affect unemployment numbers. Obviously the economies of Canada and the US are vastly different.

gojomo• 14 years ago

The ACA/Obamacare also added new expected costs to hiring... further aggravated by uncertainties over how completely it will be implemented in the face of political opposition.

Every new bit of cost/uncertainty around hiring makes it relatively more attractive for those who could be hiring to instead (1) automate or otherwise replace workers with capital investments; (2) outsource or offshore; (3) take the afternoon off instead of struggling with hiring-led growth.

bryanlarsen• 14 years ago

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.

anamax5• 14 years ago

> 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.

sampsonjs• 14 years ago

Perhaps they didn't mention it because a lot of jobs lost in the great crash paid more than the paltry minimum wage, making that old commie's attempts to raise it a moot point.

calibraxis• 14 years ago

This common argument is a good illustration that econ is a soft social science with low standards. For one thing, it ignores that people aren't just producers but also consumers. And those with lower salaries unfortunately need to spend a larger percent of their incomes on necessities.

I'm reminded of this political cartoon... (http://www.dollarsandsense.org/archives/2008/0508toon.html)

It all depends. For instance, corporations may be able to punish populaces who successfully campaign for a better minimum wage, with attacks like capital flight. If successful, the unemployment rate may indeed increase. In other situations, it may decrease.

scarmig• 14 years ago

Sometimes people take half of Econ 101 and really run wild with it.

Labor markets are notoriously not ones that can be explained by simple application of the "law" of supply and demand. There are massive uncertainties in knowledge on both sides, power dynamics, high transaction costs, and substantial difficulties in knowing how much and of what type of value the employee will offer to the organization and the organization to the employee.

And even theoretically there are plenty of models where you're totally out there. Google monopsony and labor markets for just one situation where raising a minimum wage should increase employment.

Empirically, "it depends" seems to be the right answer, but even the most negative studies on minimum wages don't claim that minimum wages are in effect within an order of magnitude or two of what the financial crisis did to employment rates.

ktizo4• 14 years ago

The law of supply and demand states that if you raise the cost of something, you will get less of it.

Say you can produce a certain amount of widgets out of a given resource, but with research you can produce more widgets, and that you can reduce the time needed to do that research by hiring more people and equipment. Now you are in a situation where raising the cost to your customers can result in a larger availability of widgets.

And that's just with widgets. If you look at wages, raising the minimum wage has lots of possible effects, many of which can actually serve to reduce the unemployment rate over time. One of them is that if the minimum wage is a reasonable margin above subsistence, then people in employment find it easier to start small businesses, leaving a job vacant when they venture out on their own and then even employ people themselves.

Damning people who are willing to work, to subsistence level incomes, is not how you grow an economy.

And when you get past elementary, let us know.

mikeryan2• 14 years ago

Oh please Nancy Pelosi didn't raise the minimum wage. It was the Fair Mimimum Wage act and passed with Bi-Partisan (80 Republican's in the house voted in its favor) support and include a tax break for small businesses in order to offset the costs.

http://en.wikipedia.org/wiki/Fair_Minimum_Wage_Act_of_2007

The8thDwarf• 14 years ago

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• 14 years ago

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

dpcx2• 14 years ago

How does one even begin to model things like this?

m0th872• 14 years ago

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

dpcx2• 14 years ago

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.

wamatt• 14 years ago

I really have no clue how the economy works, but right now there is only one guy I trust,

Ray Dalio

Self made macro hedge fund manager with a rags to riches story. He's pretty strange and employs an army of financial engineers in some forest in Connecticut to model this stuff (and make billions of dollars in the process).

Oh, and forgot to mention, it's now the largest hedgefund in the world.

MaysonL2• 14 years ago

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.

protomyth4• 14 years ago

"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• 14 years ago

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.

protomyth4• 14 years ago

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.

jberryman• 14 years ago

Many tax code simplifications amount to tax increases, and some of the best of those are hard to sell to the middle class, e.g. eliminating home mortgage deduction. And taxes on capital gains should be higher.

protomyth4• 14 years ago

Depends on what you set as the deduction for a flat-rate tax. I don't think the voter has had any effect on tax law in a long time. It is all special interest groups and people trying to influence behavior through taxes.

I would love them to eliminate the home mortgage deduction, because it is another factor encouraging people to buy homes when they shouldn't. I would also say taxes on capital gains should be zero. Too many normal Americans don't have traditional pensions and will need the tax break in later years.

MaysonL2• 14 years ago

Doesn't work: see Britain's current recession. Cutting government spending when the economy is depressed will cause the economy to become more depressed, at which point tax revenues will go down, causing you to wish for more spending cuts... economic death spiral (think runaway inflation in reverse).

protomyth4• 14 years ago

I'm a little confused, all the graphs I see of UK spending are upwards. They have not cut overall spending. The best I can say is the rate of growth of spending declined.

wazoox2• 14 years ago

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.

richardjordan3• 14 years ago

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.

wazoox2• 14 years ago

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.

jwatte• 14 years ago

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.

waterlesscloud• 14 years ago

What's the mechanically simple answer?

graeme• 14 years ago

Peta-watt hours of energy came in from the sun for all of human history. Most of it is used by the ecosystem.

In any case we didn't use it then. We aren't going to magically use it now.

The fact that we're drilling for fossil energy in increasingly hard to reach places is strong evidence that using more solar energy is non-trivial. You can't just hand wave away the energy issue.

lprubin• 14 years ago

I think that the drilling in hard to reach places proves how lucrative the oligopoly on oil really is to a few powerful, politically connected corporations.

richardjordan3• 14 years ago

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• 14 years ago

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

mistercow• 14 years ago

>Peta-Watt-hours per day

Also known as 41.66 terawatts.

josephlord• 14 years ago

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/

guelo2• 14 years ago

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.

mikeryan2• 14 years ago

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

guelo2• 14 years ago

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

Even If You're All-Powerful, It's Hard To Fix The Economy

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