The political and religious musings of a Right-leaning, libertarian, formerly Orthodox Jew who emphasizes rationalism, pragmatism, common sense, and free, open-minded thought.
Economist John Maynard Keynes said that in the long-run, we are all dead. He also predicted that his grandchildren and their contemporaries would be working a fifteen-hour workweek. Like so much of his economics and his predictions, he was wrong on this one. An increase in living standards did not diminish the workweek. According to the Federal Reserve Bank of St. Louis, average weekly hours have not decreased in the United States. If anything, they increased in the past decade or so.
Even so, the fight for a shorter workweek is not a hopeless endeavor. Earlier this month, the Spanish government announced that it is going to run a pilot for a four-day workweek (or 32 hours). Although this has been a popular idea among Left-leaning political parties for decades, Henry Ford made the case to lower the workweek from 60 hours to 40 hours. Those who advocate for such a change argue that a shorter workweek would create such benefits as improved productivity, reduced absenteeism, better physical and mental health for workers, and reduced burnout.
The country that has the closest thing to a four-day workweek is France. In 1998, France passed the Aubry laws, which mandated a 35-hour workweek. According to a study from economists at the Massachusetts Institute of Technology, there were two main findings. One is that unemployment remained unaffected. The second is that turnover increased (Estevão and Sá, 2008). At the same time, the 35-hour mark is less of a cap and more of a threshold at which overtime and rest days kick in. If it is true that the French de facto do not particularly adhere to this law (or have found workarounds), then we are not left with any good case studies on a national level. That leaves us with company-level case studies:
The city government of Reykjavik implemented it for its employees. It resulted in greater work satisfaction, fewer sick days, and greater wellbeing.
The Henley Business School at the University of Reading surveyed over 200 businesses in the United Kingdom that implemented the four-day workweek. Aside from two-thirds of the businesses reporting increased productivity, there was also reported savings of £92 billion annually.
Japan has such an overworked society that the Japanese language has a term for "death by overwork" (過劳死). That is why it was nice to Microsoft Japan give it a go. What they found was an increased productivity of 40 percent, as well as saving energy costs.
Online education company Treehouse tried applying the four-day workweek. However, it went back to five days because productivity was an issue.
The nursing home in Svartedalen gained media coverage, but it had mixed results. Much like Treehouse, the nursing home went back to forty hours to cover time and economic productivity lost. At the same time, it created more jobs, had fewer sick days used, and better perceived wellbeing.
A New Zealand trust company, Perpetual Guardian, did an experiment with a four-day workweek. There was better wellbeing, work-life balance, greater job satisfaction, and higher revenue. At the same time, there was more pressure to get work done in a shorter time period. You can review the study here.
It is true that longer work hours make us unhappier (Nakata, 2017) and less productive (Pencavel, 2014). Combine the aforementioned with the fact that there is such a work-life imbalance in the United States makes me more in favor of a four-day workweek. At the same time, we have seen mixed results from various case studies. A shorter workweek is not for every company or every industry. The hospitality industry or other industries that have client-facing are less capable of switching to a four-day workweek.
Whether we are discussing the minimum wage, paid family leave, menstrual leave, or other employment rigidities, implementing such labor market rigidities come with a price. I am interested to see how the Spanish pilot program plays out. However, I would like to conclude by saying that each business make its own decision, and in the meantime, we convince employers of the benefits of the four-day workweek. We did not arrive at the forty-hour workweek through government fiat or by the grace of labor unions. We arrived at a forty-hour workweek through a market-based system in which employers realized that fewer hours and not overworking employees generally lead to greater productivity. I would wager that is how we will arrive to the four-day workweek this century.
Last week, President Biden signed the American Rescue Plan Act, which is the $1.9 trillion plan that purportedly is to provide pandemic-related relief. To be sure, Biden will claim this as a policy victory early in his presidential term. If we scrutinize that claim, we will see that this Act scantly has anything to do with actually providing economic stimulus or COVID-specific relief. The Peter G. Peterson Foundation provides a high-level summary (see below). Let's dig a little further into some of the finer points.
Direct Payments ($411 billion). Included in the Act is a third round of direct payments to individuals making up to $75,000 annually (or couples up to $150,000). I asked in December as to whether we needed another round of economic stimulus payments. My answer is what it was then: "No!" The earlier checks issued in this pandemic had a low rate of return. Additionally, 25.9 percent of the money spent on this recession's checks was used for consumer spending. Direct payments in the Great Recession also proved inadequate in terms of boosting aggregate demand, which is the whole premise of stimulus under Keynesian economic theory. These poorly targeted payments will do very little to "stimulate" the economy.
Aid to State and Local Governments ($362 billion). When I criticized such aid last year, I made two main points. One is that such funds continue to reward fiscal mismanagement. The second is that past bailouts have created greater and more inefficient government spending. Let me throw another one into the mix: these local governments do not need it. The Tax Foundation found that the state and local aid is 116 times the states' revenue loss.
Expansion of Unemployment Benefits ($203 billion). One the hand, it might seem nice to be not-so-dismissive of unemployment insurance (UI) benefits. After all, these benefits are better targeted than direct stimulus checks since the money goes to those in greater need. The UI system is already in place and does not have the same levels of fraud that direct payments do. At the same time, I pointed out an important criticism of UI benefits back in April, a criticism that applies even in these difficult times: the benefits offered are too generous. Relief in an economic context is meant to provide an ease or mitigation of financial suffering. Expanding the federal supplemental unemployment insurance from $300 to $400 per week goes well beyond that. Per a preliminary calculation from the American Action Forum, up to 50 percent of beneficiaries could make more on unemployment than working. As we saw in the Great Recession, lavish unemployment benefits only seek to delay economic recession because they disincentivize people from going back to work. After all, why work if you could make more not to work? With unemployment continuing to decline, the argument for such unemployment benefits diminishes.
Education Emergency Funds ($126 billion). The Act provides emergency funds to school districts to help with reopening. Here's the catch. According to the Congressional Budget Office, $6.5 billion in funds are to be allocated this fiscal year. Another way of putting it is that 95 percent of the funds are not to be allocated before October. This relief is supposedly to help reopen schools. Why isn't that money made immediately available? This lack of immediate spending on this line item is all the more perturbing given the costs of school closures.
Union Pension Bailout ($83 billion). On top of other non-relief measures, the Act includes $83 billion to bail out union pensions unconditionally (CBO). As the Heritage Foundation points out, issues with these multi-employer pension systems predated the pandemic. Aside from being irrelevant to pandemic relief, this bailout also has nothing to do with COVID relief or economic stimulus.
Conclusion: If you want a more thorough analysis on the ridiculousness of this Act, you can read an analysis from the Cato Institute or from the American Action Forum. What I will say is that the Heritage Foundation is right: Any government spending in the name of stimulus or relief should be targeted and temporary. Yet none of the major provisions of the bill truly provide economic stimulus or relief from this pandemic. You know it's bad when Lawrence Summers, who was the Chairman of Obama's National Economic Council, expresses concern that such spending would likely backfire and cost us dearly. If President Biden and the Democratic Congress have succeeded at anything, it is exacerbating the federal debt situation which will only become more unmanageable over time.
Last week, the Dr. Seuss Foundation decided to withdraw six of Dr. Seuss' books from publication: And to Think I Saw It on Mulberry Street, McElligot's Pool, On Beyond Zebra!, If I Ran the Zoo, Scrambled Eggs Super!, and The Cat's Quizzer. The reason? Because these books contain "racist and insensitive imagery" (see more detail on the images here). A culture war debate managed to reverberate throughout the United States as a result. The Left claimed victory for decency, whereas the Right decried cancel culture like we have never seen before. There is so much I would like to cover but will probably not get to, but what I will ask today is the following: Is the Dr. Seuss controversy an example of making a mountain out of a molehill or is this incident indicative of something larger?
Like everyone else, Dr. Seuss was human. As such, he was bound to be imperfect. It is unsurprising that he was a product of his times because we all are. And just because Dr. Seuss was a flawed genius doesn't take away from the fact that he was still a genius when it came to children's literature. Dr. Seuss was a pro-FDR, New Deal Democrat that was all for the Japanese interment camps, so it wouldn't be shocking that anti-Japanese sentiment slipped into his earlier cartoons during World War II. At the same time, his stepdaughter recently said that Dr. Seuss did not have a racist bone in his body. That might be because he decried Jim Crow laws and criticized Nazi Germany. He was all for saving the environment, as is illustrated by The Lorax. The Butter Battle Book was a satirical take on the Cold War with an anti-Reagan subtext. Yertle the Turtle was Dr. Seuss ripping on the rise and fall of Hitler.
Before continuing, I want to acknowledge some valid points that those on the Left have made. For one, these are some of Dr. Seuss' more obscure works, so it's not like we're going after Seuss' more renowned works (or classics from other authors....at least not yet). Also, public libraries in Toronto and Chicago are currently assessing whether the Dr. Seuss books in reference should still be on their shelves. Two, I took a look at the images. Most were not particularly problematic, but I could see how some of them could be offensive, especially the negative depictions of Africans in If I Ran a Zoo. Third, it is not censorship from the government or a violation of the First Amendment. It is a decision by a private company to discontinue publishing its own legal property. At the same time, why is the book de facto being forced out of print? Because its sales figures are terrible? We don't know that since the Foundation refuses to release sales figures. They even refuse to point out which illustrations are problematic and provide a rationale. The most probable explanation is because it offends a small group of people.
Should we cancel something simply because there are parts that are offensive? Merchant of Venice depicts Jews in a negative light. Yet we don't cancel Shakespeare. We laud Shakespeare because he was an excellent writer who had great insight into the human condition. The Adventures of Huckleberry Finn uses the n-word more than 200 times, but we consider it a depiction of race relations in the nineteenth century. Lord of the Flies could be construed as a colonialist narrative negatively depicting indigenous people, yet we read it because of its great use of symbolism and an exploration of the myriad of emotions that exist. To quote writer Janie Cheaney, "whatever an author's faults, classic fiction offers readers a chance to experience lives beyond their own narrow and limited perspective."
There are people out there that are so easily offended or get off on getting offended that they actively look for a reason to be offended. Instead of teaching people to learn from other perspectives and interact with those who are different from you (you know, that thing called "tolerance"), our society is encouraging fragility and intellectual weakness. As Left-leaning comedian John Cleese recently said, the problem with political correctness (more on that momentarily) is that we "have to set the bar according to what we are told by the most touchy, most emotionally unstable and fragile and least stoic people in the country." But I digress....
This all brings up an important cultural question: how much should offensiveness dictate whether something should be a part of culture? Let's forget that life is the exact opposite from being one, big safe space. What offends you might not offend someone else. On the contrary, they might get a kick out of it! While we are not dealing with a constitutional issue, there is a reason why the "right to not be offended" is not in the Constitution or in the Declaration of Independence.
Who determines what is offensive? If we were subject to the whims of an individual's preferences or that of a committee or a small sub-section of society, we could not live our lives freely, especially given the subjective nature of being offended. We could not say what we want, observe whatever religion we want, have sex with whomever we want (provided they are consenting adults), buy what we want, or eat what we want. It's not as if cultural prudes trying to force their views onto the rest of us is anything new. At least in U.S. culture, such a phenomenon dates back to the Puritans. We had the Moral Majority try to force fundamentalist Christian views down Americans' throats in the 1980s. In spite of our love for freedom in this country, there has always been a prudish, morally righteous countercurrent simultaneously existing in society. And guess who the Puritans of the 21st century are? The woke Left.
There are those on the woke Left who would have you believe that the discontinued publishing of these six Dr. Seuss books is an isolated incident or it's a way to bring us closer to polite society. In their minds, they think that political correctness is merely a modern-day application of politeness and decency. "Cultures evolve. Get with the times," goes the argument. There are times where that is the case because there are norms and mores that we outgrow as a society. A good example is tearing down Confederate statues. The South lost the Civil War. Forcing other human beings into slavery wrong, as is the racism that wrongly justified it. At best, these statues should go into museums and act as a reminder as to how morally inept the Confederacy's pro-slavery stance was.
If the forces behind the cultural shifts we are witnessing were more benevolent or less inclined to grasp for power, I would be more sympathetic to their cause. However, I fear that is not the case. As I explained four years ago, political correctness is thought and speech control under the guise of tolerance and brotherhood. There was a time where the Left was all about freedom of speech and freedom of expression. Berkeley gave birth to the Freedom of Speech movement in the 1964-65 academic year. If those liberals were here now, their attitude towards the cancel culture crowd would have been "If you don't like it, don't read it!" How the times have changed!
It has gotten bad to the point where I felt the need to write a piece last July on how the social justice movement greatly parallels that of religious fundamentalism. Being woke comes with so many features of religious fundamentalism, ranging from a doctrinal belief system and wanting to control moral codes to disdain for the non-believer and a holier-than-thou attitude.
The fundamentalism of the social justice crowd unsurprisingly resulted in cancel culture, a phenomenon that I criticized last year. What makes the cancel culture mentality even worse is that it assumes guilt, turns a specific action into a general indictment of character, and then proceeds to escalate the situation in which forgiveness is not the end-goal. It also results in a mob-like, black-and-white mentality in which "if I disagree with you, not only you are wrong, you are a racist, homophobic, bigot." There is no distinction between an anti-Trump libertarian, a moderate, or a hardcore Trump supporter. To paraphrase former President Bush, you are either with the cancel culture mob or against it. It has gotten so bad that Left-leaning comedian Bill Maher acknowledge it: "Cancel culture is real, it's insane, it's growing exponentially, and it's coming to a neighborhood near you." A poll from the Cato Institute from July 2020 shows how bad it is getting. 62 percent of Americans feel like they cannot express themselves. Unsurprisingly, 58 percent of staunch liberals (i.e., the woke Left) feels comfortable expressing themselves.
If you need another example of the black-and-white mentality (pun intended), look at the shift in how we express societal views. There was a time where being non-racist was the ideal, which it should be. Racism is stupid and not conducive for a democratic society. I personally don't associate with racists, anti-Semites, xenophobes, or homophobes. I am one for non-racism, much like in Dr. Seuss' The Sneetches. If you read The Sneetches, you will realize that it a series of allegories pointing out the stupidness of racism, much like Mel Brooks' Blazing Saddles did. It was nice to have the goal of race not mattering. It was Martin Luther King Jr.'s dream! However, we have reached this point where race is a big deal and that The Sneetches is now considered problematic. This trend towards anti-racism is perturbing that it got me wondering how much the obsession of race from the anti-racists was starting to resemble bona fide racists.
Aside from the Dr. Seuss reference, the reason why I bring up the anti-racism trend is that it is another manifestation of how the woke Left would love to do nothing more than control the cultural narrative. It might seem tame in comparison to Mao Zedong's Cultural Revolution or how the Third Reich had a Chamber of Culture to deem what is culturally appropriate. Conversely, as this woke mentality permeates schools, corporations, and other cultural institutions, it will gain more traction. Ultimately, what I want to point out is that power corrupts and absolute power corrupts absolutely. As long as there is a human desire for more power and control over others' lives, freedom will always be on the defensive.
How do we deal with such moral prudishness affecting our freedoms? I sure do not trust the government to be objective in this endeavor. Creating a bureaucracy to deal with this, especially with a Democratic Congress and presidency, will hardly be objective. Such actions would only lead to greater authoritarianism and more cancelling things not considered palatable to the Left. The slippery slope need not be inevitable. We need to do what we have always done in history when "the man" has his boot on our collective throat: defy the establishment. How? Some thoughts. We get more involved in the political process to make sure the government doesn't strip us of our freedoms. We create alternate institutions to counter the wokeness. We call out the B.S. when we see it and we don't cave into the politically correct. We live freely and have our lives be a testament to the importance of freedom. Making sure that we fight against authoritarian trends, whether they come from the Far Left or the Far Right, is how we make sure that American culture is not actually cancelled.
Almost a year into this pandemic, it is safe to say that just about every single person on the planet is sick and tired of the pandemic and the related restrictions. Fortunately, it seems like the end of the tunnel is near....at least here in the United States. Two vaccines (Pfizer and Moderna) have been approved by the Food and Drug Administration (FDA) under emergency use authorization. A third one, Johnson and Johnson, has been recently approved by the FDA, with 20 million doses at the ready. Other countries are also using the Astra-Zeneca vaccine. Vaccines have been produced and approved at a record pace. Operation Warp Speed may very well go down as one of the most private-public partnerships in U.S. history.
Yet there are some people, such as the New York State Bar Association, are clamoring for vaccines to be mandatory. The argument for a mandate essentially comes down to that of a negative externality. We are in the midst of a pandemic, and until we reach herd immunity, there is a major risk to public health. Mandatory vaccinations would help accelerate the process at which we reach herd immunity. If not, they are a threat to others' health, or so goes the argument. I wrote on the topic of mandatory vaccines seven years ago. I went from being for an opt-in system to mildly being supportive of an opt-out system. Even when recognizing the negative externalities related to certain diseases, I was not supportive of a mandatory vaccine system back then. I still do not think that a mandatory vaccine scheme is necessary now.
For one, support for vaccines has been increasing. According to the Kaiser Family Foundation, 51 percent have either taken it or will take it as soon as possible. This is higher than the 34 percent in December 2020. Since December, the number of those who are taking the "wait and see" approach is decreasing, assumedly because more people are waiting and seeing that the vaccines are doing what they are supposed to do. If most that 22 percent of "wait and see" crowd moves from skepticism to being in support of vaccines, it would not be that far off from the 85 percent herd immunity that Dr. Anthony Fauci is calling for.
While vaccination is essential for reaching herd immunity, what we have to keep in mind is that herd immunity is not solely achieved by vaccination. Those who have already been infected with COVID also attribute to herd immunity. This is where I direct you towards an article in the Wall Street Journal written by Dr. Marty Makary.
Dr. Makary is not only a well-renown surgeon and best-selling author, but he is also a public health expert at Johns Hopkins, which is a premier postsecondary institution in the healthcare field. Accounting for those who have had mild to no symptoms, Makary estimated that 55 percent of Americans already have natural immunity. The reason for optimism is because Makary was factoring in something a number of scientists seemed to have forgotten about: antigen-specific T cell immunity. Based on laboratory data, mathematical data, and Makary's conversations with health experts, he predicts we should reach herd immunity by April.
There is also the possibility that a mandate could backfire. As Cato Institute brings up, we live in a polarized society. There was a recent CBS poll showing increased support, but it showed another trend. Out of those who are hesitant to get the vaccine or downright refuse, one in three of those polled said they feel that way because they do not trust the government. It could very well fuel the anti-vaxxer campaigns of misinformation and could ironically delay herd immunity.
There are other arguments I briefly want to touch upon. It is possible that such a mandate is not constitutional for the time being. I could bring up the normative argument thatwe should not be forced to have something injected into our bodies. This is all the more true considering that we cannot guarantee a germ-free or risk-free environment. I could inject some further context and ask whether we need to force vaccinations:
The Spanish Flu, for example, took anywhere from 20 to 50 million lives. This does not factor in the fact that the world population was significantly smaller than it is now. Other infections have been deadlier, including the Bubonic Plague, the Plague of Justinian, the AIDS epidemic. It would not be hard to argue that as bad as COVID is, it is still mild by historic comparisons.
COVID-19 disproportionately affects the elderly and immunocompromised. For the elderly, it is still not exactly a death sentence. For those who are 85 years old, the death rate is 15 percent. For those who are 75 years old, it is 4.6 percent (Owusu-Boaitey and Cochran, 2020).
COVID's overall lethality ranges from 3.7 times to 10 times what the seasonal flu is. For context, there were 28,000 flu deaths out of 38,000,000 flu infections, which is a lethality of 0.07 percent in the 2019-20 flu season (CDC).
Even if we needed to accelerate vaccinations further, there are better ways of going about it than a vaccine mandate. In September, I argued that a $300 billion subsidy to pay people to take the vaccine. This would be a more targeted stimulus, and would be cheaper than the $1.9 trillion boondoggle of a stimulus package that the Democrats are trying to pass, a bill that has very little to do with COVID-related relief, I might add.
Conclusion: To recap, there are multiple reasons to see that a COVID vaccine mandate is unnecessary. For one, we are ramping up vaccine development and distribution. Two, there is increased support for vaccines. More and more people are realizing the importance of vaccines and are seeing that they work. Three, there are a significant number of people with natural immunity contributing to herd immunity. Four, the political climate could attribute to a backfiring of a vaccine mandate. Five, there are constitutional and normative factors to consider, as well. Ultimately, while I think vaccination is vital for the end of this pandemic, I also do not find any reason to have vaccines mandated.
Politicians always take an advantage of a crisis. Some push for more gun control every time there is a school shooting. Others infringe on liberty when there is an attack on one's borders, such as the resulting Patriot Act after the 9-11 terrorist attack. Even natural disasters are not exempt from such politicalization. On February 13, Winter Storm Uri hit the state of Texas, which took out the electricity of millions of Texans. Unsurprisingly, what should have been a time to unite in support of fellow human beings became partisan fodder.
There were those on the Right attacking renewable energy, which was notably done by Texas Governor Greg Abbott. Abbott blamed the statewide blackouts on renewable energy failures, and then proceeded to say that this is why the Green New Deal would be deadly for the country. It is true that wind turbines in Texas froze. However, by and large, renewable energy was not the culprit. Out of the 34 gigawatts of generation capacity forced offline, 27 of those gigawatts came from coal, nuclear power, and natural gas, according to a research director from energy research director Wood Mackenzie.
The short version is that Texas failed to weatherize all of its electricity production, which is something that the Federal Energy Regulatory Commission warned Texas about a decade ago. Some want to use this as an opportunity to blame renewable energy. Coal has already been on its way out the door primarily due to market forces. As important as nuclear power is, this country has not built a new plant in about four decades. Solar power is getting cheap enough where it can start to compete with other energy sources, which mitigates one of the main criticisms of solar power.
Although I have criticized wind power before (particularly for its intermittency), I do think that renewables will account for a greater percentage of energy consumption. I have said that fracking and natural gas are, at best, medium-term solutions. Since fossil fuels won't last forever, we'll need to shift more towards nuclear power and renewables.
That being said, I can see the Left renewing its efforts to fight climate change as a result of this winter storm. Within his first week in office, President Biden signed an executive order to rejoin the Paris Agreement, a move I did not appreciate because of the ineffectiveness of the Agreement. Earlier this week, Biden also took the opportunity to say how the winter storm shows the country's unpreparedness to fight climate change. I would hazard to guess that Biden will use Congress and the Environmental Protection Agency to aggrandize government in its fight against climate change. Without specific policy proposals, I cannot criticize specifics of the Biden administration's approach. What I can say is that if Biden's plan is anything like the Green New Deal that Congresswoman Alexandria Ocasio-Cortez proposed, be prepared for higher energy costs and harming the economy while doing next to nothing to help the environment.
Nobel Prize-winning economist Milton Friedman once said that one of the great mistakes is to judge policies and programs based on intentions and results. When it comes to economic policy, there are way too many on the Left that think that simply by having good intentions makes a prescription of a welfare state or government largesse the correct one. The predominant thinking on the Left is so focused on intent and the process (i.e., government is always the answer) that it makes me facetiously wonder how much the result of actually helping out the poor matters. I have applied this to multiple anti-poverty policies on the Left, but I have found the "intentions matter more than results" argument to especially play out when it comes to minimum wage.
President Joe Biden has not wasted any time since his inauguration. In addition to his flurry of executive orders, Biden has made a federal minimum wage of $15 per hour one of his major goals (Raise the Wage Act). This past weekend, Biden went as far as saying that "it's economics" that the economy booms if you raise the minimum wage to $15 per hour.
What ceases to amaze me is how minimum wage proponents ignore the most basic laws of supply and demand. When you have a price floor above the equilibrium point in a given labor market, you create a surplus of labor (also known as unemployment). This is especially true in low-skill labor markets, in which there exists greater elasticity for demand. As we will see shortly, unemployment is one of the major costs of minimum wage laws. At the same time, it is hardly the only cost. Minimum wage laws prolong recessions, ineffectively targets poverty, make it more difficult for low-skilled laborers find work, and increase consumer prices.
If that is not enough, the Congressional Budget Office [CBO] released its analysis on the proposal of a federal $15 per hour minimum wage yesterday. For those who do not know, the CBO is the gold standard of U.S. legislative research and analysis. This is not the first time the CBO has provided analysis on increasing the minimum wage. You can see my 2019 analysis and 2014 analysis of past CBO reports on the minimum wage. So what did the CBO have to say in its latest report?
Effects on poverty. Since the minimum wage is definitionally increasing wages for workers, it would make sense that there are some workers that are no longer in poverty. The CBO estimates that 0.9 million would be lifted out of poverty (p. 9).
Effects on employment. Higher wages increase the costs for employers. Some of these costs would be passed on in the former of higher prices. This would lead to less consumption, which would affect production. Ultimately, it would mean less money to pay workers their wages. As such, one of the ways that employers compensate for minimum wage costs is to have fewer employers. The CBO estimates that between 2021 and 2025, the federal minimum wage will reduce employment by 1.4 million workers (p. 8). Another way of saying this is "the price of lifting 900,000 Americans out of poverty is to make 1.4 million Americans unemployed." The CBO's finding confirms what much of minimum wage research has to say about its effects on unemployment, especially a recent research paper from the National Bureau of Economic Research (Neumark and Shirley, 2021).
Effects on labor force. If it was not bad enough that minimum wage causes 1.4 million people be without a job, half of those who lose their jobs, or 700,000 people, will leave the labor force (p, 7). This effect has the potential to create a significant amount of potentially permanent unemployment individuals. This is all the more tragic considering that minimum wage earners are the ones who need the experience the most in order to ultimately gain better-paying work.
Effects on consumer prices and cost of labor. Labor is a major cost to employees. According to the CBO, estimated labor costs are to increase by $333 billion (p. 9). Since wages are a cost of doing business, it follows that consumer prices will increase because it is one of the ways that employers pass on the costs of minimum wage. This is even more true for industries using a disproportionate amount of low-wage labor (p. 10).
Effects on the budgetary deficit. On the one hand, spending on food stamps [SNAP] would decrease (p. 4), as would the spending on the earned income tax credit and student loans (p. 5). On the other hand, unemployment compensation would increase because there will be more unemployed persons (p. 4). Spending would also rise for Social Security because the average benefits would increase (ibid.). On net, a federal $15 per hour wage would create a budget deficit of $54.1 billion from 2021 to 2031 (p. 17).
Effects on real output. Raising the minimum wage means a slightly lower GDP. The effects of the unemployment would affect real output since the stock of capital goods would be smaller. Also, investment would be lower, which would lower productivity (p. 10). Any effects increase of consumer demand from lower-income households due to the wage increases would disappear in a few years (p, 10), thereby contributing to lower GDP.
Postscript: In short, it's not "simple economics" that increasing the minimum wage helps the economy, as President Biden asserts. If it were that simple, why not raise the minimum wage even higher? Why do minimum wage laws not work after one increase? Because we live in a world of scarce resources. The laws of supply and demand exist for a reason. The more the minimum wage deviates from the market value of labor (read: equilibrium point), the more negative the effects, especially on the people it was meant to help. I really wish minimum wage proponents could see the price tag of their good intentions.
For more information, read the Cato Institute's analysis on the Raise the Wage Act here.
Last week, I returned from an unforgettable vacation in Ecuador. I truly had a wonderful time. I enjoyed multiple natural sites, including a volcano, a rain forest, and a crater lake. I also got to enjoy the wonders of Quito, which is one of the original UNESCO World Heritage Sites. Aside from learning the differences of the Spanish language across countries, one of the other things I got to learn about was the history of Ecuador's monetary policy.
In 1884, Ecuador took on the currency known as the sucre, a currency that was then linked to the silver standard until 1898 when it switched to the gold standard. To jump forward, the International Monetary Fund established a purchasing power parity in 1946 of 13.5 sucres to the U.S. dollar. Things were relatively stable until 1983. To deal with the devaluation, Ecuador adopted a crawling peg. Things went from bad to worse, from 42 sucres to the U.S. dollar in 1983 to 3,000 sucres in 1995. Ecuador's financial crisis of 1998-99 led to hyperinflation of the sucre, which resulted in a 95 percent devaluation of the sucre. Then-President Jorge Jamil Mahuad Witt to announce in 2000 the adaptation of the U.S. dollar as Ecuador's currency to deal with the rising prices and devaluation. How has the Ecuadorian economy fared since dollarization?
Pros of Ecuador's Dollarization
1. Macroeconomic stabilization. Considering what the Ecuadorian economy was experiencing up to the 1998-99 financial crisis and the path towards hyperinflation that Ecuador was on, this was a major plus. Ecuador has enjoyed price stability that it has not seen at least fifty years prior to dollarization. Since 2005, Ecuador's consumer price index converged to that of the United States, and has not gone beyond 5 percent. Even when Ecuador had fiscal expansion between 2008 and 2014, it was able to do so without inflationary consequences.
2. Improved macroeconomic credibility. Using the United States as a monetary anchor meant a more credible monetary policy. Because of dollarization, Ecuador needed to create a list of priorities within its balance sheet to "limit monetary financing of the central government (ADF)." This credibility also improves long-term investment and trade prospects in comparison to the sucre.
3. Lower risk premia. Because of the improved credibility and stabilization, there is unlikely to be steep currency devaluation. This makes it easier to access international financial markets. It also makes it a lot less likely for capital flight.
4. Elimination of transaction costs. Since Ecuador is dealing in dollars, it becomes easier to business in the international marketplace.
5. Development of financial sector. This is another outcome of the credibility and low risk premia. Since there is greater funding for investment, greater economic growth is an end-result. This economic boost translates into more money for the poor, which means less income inequality.
6. By most metrics, the lives of Ecuadorians improved. Dollarization resulted in higher incomes for Ecuadorians, thereby increasing the GDP per capita (Macrotrends). Unemployment and poverty rates fell. Infant mortality rates did not increase.
Cons of Ecuador's Dollarization
1. Ecuador cannot be a lender of last resort. When Ecuador underwent dollarization, it lost control of monetary policy, which means the Ecuadorian central bank cannot be a lender of last resort. This loss of control was clear during the global financial crisis of 2007-09 when Ecuador's central bank lost its independence. During this time, it had to lend to the government, which dwindled Ecuador's foreign reserve. Although the central bank cannot act as a conventional "lender of last resort," the central bank of Ecuador has used a Deposit Insurance Scheme and a Liquidity Fund that build liquidity buffers.
2. Inability to handle foreign shocks. This is another issue with relinquishing control of monetary policy to the U.S. Federal Reserve. If there is a global recession or a major trading partner has an economic downturn, Ecuador's central bank would have little recourse to deal with it since it cannot use interest rates to maintain the currency. There would need to be a greater reliance on fiscal policy (e.g., higher deficits, higher taxes). Conversely, if a central bank's policy is ineffective or has lost credibility, then this lack of control is negligible.
3. Loss of seigniorage. Seigniorage is profit made by the government making currency, which is the difference between the value of the currency and their production costs. The revenue losses experienced are both in terms of the initial replacement of the currency and the "flow" costs related to future earnings from the flow of new currency.
Conclusion
Dollarization was an extreme policy response to an extreme situation of its financial crisis. Like with so much policy, there are advantages and drawbacks. For one, we need to compare the costs of external monetary shocks to the costs of domestic monetary shocks. More importantly, we cannot compare to what an idealized version of a central bank could look like in comparison to the current dollarization because that would fall under the Nirvana fallacy. Looking at Ecuador's monetary policy from 1983 to 1999 specifically, as well as the history of monetary policy in Latin America more generally, strongly suggests that there was no viable alternative to dollarization in Ecuador. Policy is not about choosing an idealized version, but is choosing the best, or in some cases, the least worst, option. The reason why Ecuador chose the dollar was because there was such institutional weakness in its monetary policy to begin with.
I was in Ecuador watching the presidential primary elections. Given that there were 18 candidates and that there were a lot of populist tropes throughout the campaigning, I wouldn't trust that Ecuador could provide a viable alternative to dollarization at this time. If left to its own devices, it would be more likely that the debt-to-GDP ratio would skyrocket even more than that of the United States currently is. I don't think that dollarization is a silver bullet with the capacity to cure Ecuador's macroeconomic woes, much like it wouldn't be if Argentina were to dollarize (read Mercatus Center analysis here). Aside from the structural issue in which Ecuador's economy is highly dependent on oil exports, it could be argued that dollarization is needed before a country passes more deregulation, freer trade, or balancing the budget. Even if it was not, the aforementioned reforms would be necessary to help complete Ecuador's transition into a developed nation. In short, based on the data available, Ecuador's dollarization was the best option, certainly at the time and still remains their best option.
