Calling BS on Sticky Wages

There's a lot going around the economics blogosphere about sticky wages. A great deal has been made of various graphs that show wages are sticky downward (but not upward). Here's one from George Selgin, a researcher whose work I greatly respect: http://www.freebanking.org/wp-content/uploads/2012/07/fredgraph3.png. The graph does, in fact, show that average hourly earnings in the private sector have steadily increased every month from 2005 to now.

Unfortunately, and like most aggregates, that's only part of the story. I looked at the change in average hourly earnings from April 2006 to June 2012 for the following sectors: Construction, Durable Goods, Education and Health, Financial, Good-Producing in general, Information, Leisure & Hospitality, Manufacturing, Mining and Logging, Nondurable Goods, Other Services, Private Services, Professional and Business Services, Retail Trade, Total Private, Transportation and Warehousing, Utilities, and Wholesale Trade. I have graphs for all these, and they generally show upward trades, although slopes differ across the industries.

What's more important for the argument regarding 'downward stickiness' or the reluctance of firms and employees to settle on a decrease in wages is the frequency we observe negative changes (decreases) in the average hourly earnings. You'd think from the 'sticky' arguers that we never see negative changes. This is wrong. In fact, wages do decrease, about 22% of the time (average across all industries). The industry with fewest wage decreases is Private Services (4% of all changes are negative), and the industry with the most is Utilities (40% of all changes are negative). The magnitude of decreases is -0.27% across all industries, while the magnitude of increases is 0.40% across all industries. The industry with lowest decreases is Private Services (-0.06%) and the industry with highest decreases is Mining and Logging (-0.82%).


My point is this: wages do not appear to be sticky. At least, the evidence isn't all in favor of stickiness. Viscous, maybe, but not sticky. Also, here are three graphs drawn from the extremes of my wage change distributions showing the relationship between employment and wages. The first is Private Services, then Mining and Logging, and then Utilities. I see upward trends post-recession of both employment and wages. Riddle me that Batman.

For a strong theoretical point as to why wages are NOT STICKY, see my former Prof and blogger extraordinaire David Andolfatto: http://andolfatto.blogspot.com/2010/07/sticky-price-hypothesis-critique.html

That Other War for Independence

On this particular Independence Day, I want to discuss a different war of independence - the war for Southern Independence. In common parlance, the Civil War. Civil War is a mistaken nomenclature, however. Civil War means to parties fighting for control of the same government. The War for Southern Independence was an invasion of a foreign country, as the states in the South that were attacked by the North had all seceded and were thus no longer part of the United States.

I have to put in a paragraph here that I am not, nor would I ever, defend slavery. It is an unfortunate statement about the quality of education in this country that I have to say this. The War of Southern Independence was not about slavery. (On this see Tom Woods "Politically Incorrect Guide to American History, for example; also see Tom DiLorenzo's work on Lincoln). So when I am talking about the evils of the war, I am not talking about a noble endeavor to free slaves. I am talking about aggression based on economic concerns. Note that if the war was about slavery then the U.S. would have been the only country that had a war to free slaves. Also, four states in the Union allowed slavery after the secession: Missourri, Kentucky, Maryland, and New Jersey. If this war was about slavery, why were these states not warred upon?


The point I am trying to make is that states are the source of federal power, not the other way around, and states have a right to leave the union if they want to (again see Tom Woods on this, and it's important derivative power: nullification). The American war for Independence (the Revolution) was fought to establish the principle of self-government. The independent states, after the war, formed a union and a central government. This was done mostly because of the two-fold need of wanting a central representative to deal with foreign governments and to provide defense services generally. The federal government was not supposed to have more power than the states. The War for Southern Independence and Reconstruction changed that.


The Declaration of Independence states that if a government is destructive to the ends of the people, then the people have the right to dissolve that government and start a new one. That's what the secessionists were after, in the same way the Founding Fathers wanted to remove the British government and establish their own. And didn't the British have forts in the American colonies, just like the Union had Fort Sumter in South Carolina? 


The Union had the option to let, as is proper, states secede from the Union. And President Buchanan did not go to war with the first seven seceding states. But Lincoln, once President of the Union, did. And then the next four seceded because they were forced to choose. Lincoln fought to preserve the Union, not to free the slaves. Lincoln viewed the Union as his empire, and was not about to allow it to shrink.


Had the Union shrunk, the likely outcome would have been catastrophic for the North. Why? Because of trade tariffs. The North was industrialized and the South was agrarian, and the Union had a trade tariff raising the cost of imported goods. This policy obviously favored the North over the South, since cotton and tobacco traded on world markets. Now, if secession had been allowed, the South would have been a free trade zone and foreign powers would have preferred to trade with the South, not the North. So the North saw a huge loss of trade if the South were to successfully secede.


And then, after the war, Reconstruction came. Reconstruction was essentially reparations the Republicans wanted from the South. The most important effect, though, was to install the 14th Amendment. The 14th Amendment essentially puts the federal government above the various state governments as the last word on laws that affect the state. And that was the end of the united States of America, and the beginning of the USA. 

More on Obamacare

After the disastrous and somewhat bizarre Supreme Court ruling today, the president took to the airways to laud the decision and remind us of the law’s great benefits.  He spoke of expanded access to insurance to the currently uninsured, the (now) unlawful practice of charging some customers more in premiums than others (isn’t this fundamental to insurance?), the phasing out of lifetime caps, and other supposed benefits.  And while these may in fact come to pass, surely there are unintended consequences to this 2,000+ page monstrosity known as Obamacare.  This is a classic case of the seen and unseen.  The president was quick to highlight the popular seen benefits, but he failed to even admit that swift and potentially harmful unseen effects will be unleashed by this law.

Here are but a few of the unseen effects, as outlined by the Cato Institute (I think that number 4 is the biggie): 

• While the new law will increase the number of Americans with insurance coverage, it falls significantly short of universal coverage. By 2019, roughly 21 million Americans will still be uninsured.
• The legislation will cost far more than advertised, more than $2.7 trillion over 10 years of full implementation, and will add more than $823 billion to the national debt over the program's first 10 years.
• Most American workers and businesses will see little or no change in their skyrocketing insurance costs, while millions of others, including younger and healthier workers and those who buy insurance on their own through the nongroup market will actually see their premiums go up faster as a result of this legislation.
• The new law will increase taxes by more than $569 billion between now and 2019, and the burdens it places on business will significantly reduce economic growth and employment.
• While the law contains few direct provisions for rationing care, it nonetheless sets the stage for government rationing and interference with how doctors practice medicine.
• Millions of Americans who are happy with their current health insurance will not be able to keep it.

Individual Mandate Constitutional

The Supreme Court decided the individual mandate in Obamacare, that everyone must have medical insurance by 2014, is constitutional. Presumably the constitutional clause that allows this is Section 8 - Powers of Congress, where one sentence is: To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;


So obviously the contentious work is "regulate." It can be taken many ways, and obviously the Supreme Court has decided to take it as "the Federal government can force citizens to purchase products from private corporations." Quite the precedent! I wonder when we'll be forced to purchase cars from GM?

Do you know why the health care issue has become so contentious? Because the government got involved a long time ago and started committing public funds to it. As soon as people are forced into transactions (through taxation, at the very least) you get fierce divisions among the people. Statists' solution to the problems created by the state is more state intervention. Ideologically, statists can't see that going towards less intervention and more freedom will reduce the problems, not exacerbate them.

And don't tell me that Obamacare must be good because healthcare companies favor it. Of course they do! This is guaranteed revenue! Well, don't expect the economy to recover anytime soon.

Where Has All the Inflation Gone?

Price inflation that is. Inspired by Robert Murphy's post here, I decided to discuss why CPI hasn't picked up that much even though money supply is through the roof.

First, how does inflation in consumer prices occur? Well, it is because the purchasing power of money has decreased, which is a result of an increase in the supply of money. So far, this is not controversial. But there is an element missing, and that is the demand for money. Money may not have a unique price but it does have supply and demand functions. The purchasing power of money will not change if the supply and demand for money change in parallel. In other words, if the supply goes up to meet a higher demand to hold money, then we should not observe a change, or much change, in the purchasing power of money.

The problem is that there is no objective measure of the demand for money. It must be estimated. One proxy for demand is excess banking reserves. Normally this wouldn't tell us anything, because it normally is zero. But recently it has gone up quite high (see graph below).

The blue line is Money of Zero Maturity (MZM). The green line is CPI (on the right axis), and the red line is excess reserves. Note the CPI going up every year as money supply increases every year. As excess reserves pick up, CPI drops down and rises more slowly. Excess reserves have increased to nearly $2 trillion since mid-2009, and MZM has increased by roughly $1 trillion. So under these circumstances, I would not expect much price inflation.

Note, however, that these excess reserves are induced money demand, because the Fed is paying 0.75% interest on excess reserves. Normally the interest on excess reserves is zero. So if a loan was going to return 5% interest before, now it has to return 5.75% interest. I don't know how much of the excess reserves is due to only this factor, however. The demand for loans might be low too (meaning demand for money is high).

To highlight another point, I do want to mention that even though CPI is low relative to zero, that doesn't mean it's low relative to what it would be on the free market. Suppose that, without changing money supply, prices would have decreased by 2% (change in CPI = -2%). Then, with an observed CPI of +2%, the actual price inflation is 4% (2% - -2%). But we have no idea what prices would actually do on the free market, except that they have a tendency to decrease (look at computers and televisions, for example).

Finally, an increase in money supply, even to match an increase in money demand, has pernicious effects on the economy that may not show up as price inflation. That is because the new money travels through the economy in a certain way that likely doesn't match the increase in money demand. To increase money supply, the Federal Reserve Bank of NY credits the accounts of its primary Treasury-security dealers with money in exchange for the securities which are sold to FRBNY. Then the money is lent out or traded by the primary dealers (which are primarily investment banks, but also commercial banks) with its trading partners or commercial clients. Then the money slowly moves through the economy as businesses make investments, or more trading occurs, or what have you. It's impossible to know what the reordering will be, and how large it will be. If the increase in money supply is small, the reordering is likely to be negligible. But if it is sustained for a long time, the reordering will be vast. But we may not recognize that the economy is structured counter to the wishes of consumers until the bust actually arrives, and then it's too late. But if you want to read more about that, check out Austrian Business Cycle Theory at Mises.org.

Legal Plunder

Scenario 1.

I walk up to Prof J and demand $20 at gunpoint.  At this, he would have me thrown in jail.  And rightfully so.  I have zero claim on the fruits of his labor.  What’s his is his and not mine.  I would hope that most clear thinking folks would agree with me.  However, let’s change up the scenario just a little.

Scenario 2.

I run for office and pass a law that confiscates some of Prof J’s money.  I take that money and give it government workers, such as TSA agents.  TSA agents, in turn, form a public sector union and require its members to contribute dues.  Part of these dues, which were once Prof J’s money, is used to help elect more folks like me.  I’ve now essentially laundered Prof J’s hard earned money into campaign donations for myself.  This is the workings of a public sector union.

Is this “legal plunder” in scenario 2 substantially different than armed robbery in scenario 1?

More Worthless TSA Security

I’ve traveled to eight states over the past two weeks, and I’ve done most of my traveling by airplane.  And, like most of the flying public, I loathe the TSA.  As if going through their molestation procedures at the checkpoint weren’t enough, they’ve dreamt up new “security” procedures, hassling already-screened-passengers just before boarding the plane.

The past two times I’ve flown (both on Southwest), TSA agents have shown up at the boarding gate, randomly selecting passengers for additional aggravation, er, I mean screening.  As my wife and I were about to enter the tunnel, TSA agents stopped us and asked to peek inside my wife’s purse – as I followed behind her with carry-on luggage.  Only divine intervention kept my mouth closed. 

These “new procedures” masquerading as additional security precautions are nothing more than meaningless tasks designed to provide even more employment opportunities for an agency known as Thousands Standing Around.  It’s time to return airline security to its rightful and inherently interested owner – the airlines themselves.