Archive for the Category Misc.


Letter to the NYT, etc.

My posting will be relatively infrequent for the next couple of weeks. I just returned from DC, where I finally got a chance to meet John Cochrane.  He’s taken a position at the Hoover Institute.  Although we disagree on sticky wages, we have uncannily similar views on a wide range of other issues, such as immigration, health care reform and financial system reform.  I also got a chance to meet quite a few of the Mercatus scholars, and came away very impressed with the organization.

[BTW, the acronym for the new monetary program is POMP (Program on Monetary Policy.)  My enemies are thinking, “I always knew Sumner was a pompous ass.”  Or perhaps “pomp” indicates that it will eventually be regarded as the queen of the monetary policy programs.]

Over at Econlog I have a post on Krugman’s recent minimum wage column. Caroline Baum (you’ve probably seen her columns at Bloomberg, and elsewhere) responded to the column with a letter to the NYT.  They didn’t print it, so I thought it would be a good idea to post it here.  The rest of the column is her letter.  I request that commenters be more polite than usual.  I don’t mind obnoxious comments, but let’s please treat her as a guest—if you disagree, do so respectfully:

To the Editor:

In his July 15 op-ed, “Liberals and Wages,” Paul Krugman states definitively: “There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.” In support of his no-evidence conclusion, he cites a widely discredited 1994 study by economists David Card and Alan B. Krueger.

So flawed was the study – it relied on telephone surveys of fast food restaurants in neighboring counties in New Jersey and Pennsylvania after New Jersey raised its minimum wage – that Card and Krueger were forced to redo it. Using official employment data the second time around instead of a telephone survey, they re-published their findings in 2000, claiming similar results to the first study.

Economists who have reviewed the body of literature on the effect of an increase in the minimum wage have criticized both the methodology and the results of the second Card/Krueger study. David Neumark and William Wascher, both widely respected for their work in the field, cite the vastly different patterns of teenage employment in the two states that pre-dated the study, disqualifying Pennsylvania as a good “control” group. They also find that the depressing effect of a minimum wage hike on employment occurs with a lag, not within Card/Krueger’s short-term time frame. (Neumark and Wascher’s study can be found here:

What’s more, unlike a randomized controlled trial for a new drug, Card and Krueger have no way of measuring what would have happened to fast-food employment in New Jersey absent a minimum wage increase.

It is disingenuous for Mr. Krugman to ignore the wide body of evidence demonstrating that an increase in the minimum wage deprives entry-level workers of an opportunity to enter the workforce. Instead he relies on the findings of an outlier study that contradicts basic economic theory. An increase in the price of any good or service, including labor, results in a decrease in demand for it.

No one will argue with Mr. Krugman’s point that paying workers a higher wage and providing good benefits increases employee loyalty. Businesses choose to do it all the time. Henry Ford didn’t double his workers wages to $5 a day in 1914 because he wanted them to buy Model T’s. He paid his workers more because he wanted to reduce turnover on the assembly line, which proved to be a hard, unappealing line of work.

When the government mandates a floor on wages, many low-margin businesses can’t absorb the higher costs and raise their prices. Even high-margin businesses pass the cost along to their customers.

The New York Times does a disservice to its readers when it allows a Nobel prize winning economist to dissemble to make a political point. Progressive economists may argue in favor of a minimum wage on compassionate grounds, but they all understand the economics of supply and demand. The non-partisan Congressional Budget Office reported last year that raising the federal minimum wage to $10.10 an hour from the current $7.25 would eliminate 500,000 jobs nationwide. (Currently 29 states have minimum wages higher than $7.25.)

And yes, a higher minimum wage is great for those who keep their jobs. But it’s an impediment to those starting out in the workforce.

Mr. Krugman is entitled to his own opinion; after all he writes opinion pieces. But he is not entitled to his own facts. As an opinion writer myself for three decades, my work is always fact-checked for accuracy. Perhaps the Times should make accuracy in support of opinions a priority.

Caroline Baum

West Tisbury, Mass.

Three cheers for the NBA draft

I know that this blog is supposed to be about economics, so let me start off by pretending to discuss economics, before getting to the interesting stuff, tonight’s NBA draft.

No, the draft is not unfair.  No, it doesn’t violate antitrust rules.  Although NBA teams compete in an athetic sense, they don’t compete in an economic sense—they cooperate.  The economic competitors to the Chicago Bulls are not the San Antonio Spurs, the competitors are the Chicago Blackhawks, Chicago area movie theaters and nightclubs, and Chicago area TV programming.  It helps to think of the NBA as a single firm, with lots of franchises, which collaborate to produce the most entertaining product possible–in a vastly larger entertainment “industry”.  I’ve never heard anyone complain that Cirque du Soleil is violating antitrust laws if they assign acrobats to one of their 19 stylish circuses.

For NBA fans, the draft is very interesting precisely because a single player can make a much bigger difference in basketball than in the other major team sports.  No quarterback or pitcher, no matter how good, could take a bunch of misfits to the championship series the way Lebron did this year.  And now that the best players come out early, there’s a lot of uncertainty as to how good they’ll end up being once they get to the NBA.

Today I’d like to point to a possible inefficiency or bias in the drafting process.  Teams picking at the top (say the first or second pick) seem to overrate the importance of big men.  Non-basketball fans might be wondering what I mean, aren’t all basketball players “big men?”  It’s relative, I’m talking mostly about centers, or very big power forwards.  I looked back over the drafts since 1965, and didn’t find a single example where a team picked a small guy at one or two over a big guy, and strongly regretted it.  In contrast, there are 9 cases of where a team picked a big guy over a small guy, and clearly regretted it.  (And there probably would have been 10 if Len Bias hadn’t died.)  I looked at picks one and two over picks two or three—obviously if you look at the entire draft you can find hidden gems, I’m looking at a choice between the top few prospects.

Even worse, the NBA is rapidly evolving in the direction of centers being unimportant.  In the recent playoffs, teams would often go without any center at the end of games, when it mattered most.  The team that won the championship was able to do this for long periods, without the big men on the other team being able to take advantage.  So this is an even stronger argument to draft small.  And yet once again, the top pick and probably the top two picks are expected to be big men.

Here are some botched draft picks, big over small:

1966:  Bill Buntin (2) over Gail Goodrich (3)

1984:  Sam Bowie (2) over Jordan (3)

1990:  Derrick Coleman (1) over Gary Payton (2)

1998:  Michael Olowokandi (1) over Mike Bibby (2)

2001:  Kwame Brown  (1) over anybody

2003:  Darko Milicic (2) over Carmelo (3) Bosh (4) and Wade (5)

2005:  Andrew Bogut (1) over Deron Williams (3) and Chris Paul (4)

2007:  Greg Oden (1) over Kevin Durant (2)

2009:   Hasheem Thabeet (2) over James Harden (3)

If you define “bigs” more generously, you have one possible error in 2011, when Evan Turner (2) went ahead of Derrick Favors (3).  Favors has finally emerged as arguably the better player.  But then what about 2013, where the semi-big Anthony Bennett (1) went ahead of Oladipo (2)?

If the Lakers take Russell over Okafor and it doesn’t pan out, it would be the first time in at least 50 years that this happened.

BTW, I vote for OKC having the best string of drafts ever, getting Durant (2) Westbrook (4) and Harden (3) in three consecutive drafts, arguably three of the top 6 players in the league right now.  (The others are obviously Lebron, Curry and AD.) Too bad OKC traded Harden.

Because I’m a Wisconsin fan you might be wondering what I think of our two prospects.  The most notable aspect of Kaminsky is how bad he was in his first couple years, and how rapidly he improved in his final two.  He started out as a guard in high school, and can do a lot of things pretty well.  Fits well in the new NBA, which emphasizes the 3 over traditional centers.  Dekker has a higher ceiling than Kaminsky but a lower floor.  It all depends whether he can consistently hit the three.  Don’t pay attention to lazy pundits who always compare people to other players of the same race; Dekker’s closest comp may be Richard Jefferson.  He’s surprisingly effective in the open floor, especially when driving to the basket.

PS.  Think drafting is easy?  Take a look at picks 11 through 16 in 2008, and then picks 21 through 26 from the same draft:

11-16:  Jerryd Bayless, Jason Thompson, Brandon Rush, Anthony Randolph, Robin Lopez, Marreese Speights

21-26:  Ryan Anderson, Courtney Lee, Kosta Koufos, Serge Ibaka, Nicolas Batum, George Hill

Which 6 would you rather have?

PPS.  I’m opposed to the current draft lottery for obvious tanking reasons.  I favor all of the non-playoff teams having an equal chance for any of the first 14 slots.  Philadelphia is a disgrace to professional sports.

PPPS.  I don’t like the 3 point shot—makes games too one dimensional.  Reminds me of the way tennis was ruined when changes in technology made it impossible to employ the wide variety of shots that McEnroe used to use.

Are the Democrats increasingly becoming just a bunch of socialists?

I don’t believe so, although the term ‘socialism’ (like capitalism) is so vague that I find it almost meaningless.

But public opinion polls suggest that Democrats are becoming more socialist.

And, by the way, Sanders’s self-identification as a “socialist” no longer marks him as extreme, at least to Democrats. Forty-three percent of Democrats say they approve of socialism, the same percentage who like capitalism. The public, to say the least, does not agree: By a margin of two to one, they preferred capitalism to socialism in a May YouGov poll.

So why don’t I think the Dems are becoming a bunch of socialists?  Because I don’t believe public opinion polls measure public opinion.  Indeed I don’t think public opinion exists in the sense that most people think it exists.  I doubt that as much as 43% of the American public even knows what terms like “socialism”, “inflation”, “NGDP growth”, “unemployment”, “quantitative easing”, and “the Fed” mean.  If the GOP insists that Obamacare is socialism, is it any surprise that Dems increasingly call themselves socialist?

Now of course many people disagree with me.  But here’s something for progressives to think about.  Suppose you hear Rush Limbaugh complaining that the Democrats are increasingly dominated by socialists.  Your first reaction might be to accuse him of McCarthyism, or red-baiting.  But would that be fair, at least is it fair if you actually believe in public opinion polls?  Would it be fair to argue that Limbaugh is a red-baiter and at the same time argue that, “polls show the public supports a higher minimum wage.”  I guarantee I could design a poll question that shows the public prefers a higher EITC to a higher minimum wage rate.  It’s all in the framing effects.

You need to take the sweet with the sour.  Either polls are believable or they aren’t. If you insist on giving credence to polls of public opinion, then you need to start calling the Dems a bunch of socialists.

PS.  Just to be clear, I believe polls on voting intentions are much more accurate, as the question of which way you will vote in an election is relatively well defined.

Hovers and Hoovers

I thought the following observation was sort of related to my recent posts on CommodityAmerica and InfoAmerica. (This from the FT):

In the past, Chicago acted as the locomotive of its hinterlands — in Mr Longworth’s words — buying the Midwest’s farm produce and other raw commodities and then converting them into products. The city was linked umbilically to its surrounding geography and vice versa. Today, it mostly hovers above its hinterlands. But in some ways it is also parasitic on them. Much like the giant sucking sound of London hoovering up the UK’s talent, Chicago takes the best and the brightest from the small towns of America and plugs them into the global economy. Chicago’s success is no longer symbiotic with its rural neighbours. In some ways it comes at their expense.

Hovers and hoovers.  I’m seeing a sci-fi movie with vast circular cities that float 1000 feet up in the air, populated by the elite and with long tubes sucking the resources from below, produced by the lower classes.  Or did H.G. Wells already write that story?

Off topic:  I’m looking for links to Fed officials saying that they were easing policy in late 2012 because of worries about the fiscal cliff.  I recall reading that sort of thing, but can’t find a link.

Digital deflation? Not an attractive idea

Commenter Morgan Warstler keeps insisting that I’m dense because I don’t see the glorious digital revolution, which is transforming our lives and dramatically raising living standards.  If only I could see that the actual price level is falling, if we took account of all the free goodies provided by the internet.  Here’s me and then Morgan’s response:

“Morgan, OK, tell me how fast real consumption is rising, to within 3 decimal points. Show your work.”


The invisible real consumption measure is this:

How much less money will you live with today to not have to live yesterday without access to today’s things?

Whatever you attribute to “money illusion” there is a greater gravity pulling the another way.

I don’t deny Money Illusion has a short term weighted value. But I don’t need 10 years to show digital deflation.

Since 2008, measuring real consumption, the quality of American (not easy to benefit 3rd worlders) life has increased at a pace faster than ANY 7 years period pre-Internet in American history.

So here’s my work:

1. Scott Sumner finds the best 7 years in real consumption in American history pre-1994.

2. 2008-today is rising faster than that.

And that’s when he’s being relatively sober, other times he seems like a cross between Gollum and a dominatrix:

“Morgan, There’s is nothing to win because it doesn’t matter what the numbers are; these are just statistics pulled out of thin air. Only NGDP is real. And NGDP growth is slowing.”


Your precious is a little b*tch compared to mine.

REAL CONSUMPTION measures in Digital > Atomic is the highest moral metric.

YOUR JOB is to argue that your precious at X% best services my precious.

So why am I wasting your time with this?  Because even Martin Feldstein, the most unMorgan-like creature in the entire universe, seems to feel the same way.  This is John Cochrane responding to Feldstein:

Martin Feldstein has an interesting Op-Ed in the Wall Street Journal, “Why the U.S. Underestimates Growth.”

The basic idea is that inflation may be overstated, because it doesn’t do a good job of handling new products. As a result, real output growth may be a bit stronger than measured.  Marty runs through a lot of sensible conclusions.

He doesn’t talk about monetary policy, but that’s interesting too. So what if inflation really is (say) 3% lower than we think it is, and therefore real output growth is 3% larger than it really is?

That would mean we are a lot closer to “normal” of course.

So why am I still skeptical?

1.  From 1995 to 2004, productivity and real GDP rose at an unusually rapid rate.  The IT cheerleaders told us that this fast productivity growth was the long delayed fruits of the IT revolution.  Now we have very slow growth, and the digiterati tell us it’s also caused by the IT revolution, which is generating lots of stuff that doesn’t get picked up in the output data, because it’s free.  While I’m impressed by an explanation that’s as flexible as a circus contortionist, I’d prefer something that isn’t consistent with any possible state of the universe.  I’m no Popperian, but I like my theories to be at least a little bit falsifiable.

2.  Much of this discussion proceeds as if economists have some sort of clear concept in mind when they talk about the price level.  We are led to believe that if only we had God-like powers to know everything, we could determine the “true” rate of inflation.  Not so, economists have never even figured out what inflation is supposed to measure, in a world where product quality is constantly changing.  Is it supposed to be the extra income you’d need today to be just as happy as the average person was in 1950?  That’s one definition, but that’s not what we are doing.  And if you look at what we are actually doing, it has no theoretical justification anywhere in economic theory.

3.  Yes, I agree, fuzzy concepts can be useful.  I have no problem with someone saying Britain’s inflation was about 20% in 1980, and 1% today.  That’s a fuzzy statement, but it is sort of useful.  But for debates about digital deflation to be useful, we need a far better idea of what inflation is supposed to measure.  Do most people really feel that a constant nominal salary now means a rising standard of living?  If so, I’d expect to see a groundswell of support for cutting the minimum wage, to below $7.25 an hour.  After all, a lower nominal income would provide just as good a standard of living, since the poor can now see lots of beautiful pictures of food on the internet.  And now they can travel using Uber!  Seriously, I think the average person would find the idea of digital deflation to be absurd.  On the other hand I’ve never been stopped from believing something just because the average person finds the idea absurd.

4.  With the atomic world, there was a sort of logic connecting more stuff with higher living standards.  More food, a washing machine, a TV and telephone.  But with the digital world “more” begins to seem rather monotonous.  I used to really enjoy reading magazines.  I recall occasionally leaving a barbershop or doctor’s office and secretly wanting to finish a National Geographic article I had started on while waiting.  I only held back because I didn’t want to look “weird” to the receptionist.  Information was really enjoyable because it was so scarce.  Now there’s a sort of infinite magazine at my fingertips.  And it’s all a bit too much.  Travelling used to be about discovery, strange new worlds you’d never seen.  Now it’s  “Yup, Costa Rica looks just like it did on the internet while I was planning the trip.”  And what about the negatives, the constant annoyance of your computer freezing up, or losing a long email that you had almost finished typing, and hadn’t saved.

5.  Revealed preference?  OK, I like that argument as much as the next guy.  But who’s to say it’s not like being a heroin addict.  Just got to check one more site before I go to bed, the 10 best places to retire, and then suddenly it’s 1 am.

Again, the price level and RGDP don’t matter, only NGDP matters.  I suppose it’s interesting to ask whether our living standards are improving, if we had any sort of semi-objective way of doing so.  But as far as I can tell we don’t have one, and most economists are oblivious to the fact that we don’t have one.  That makes debates over the “true” rate of inflation quite tedious, like people who debate how good a basketball player Bill Russell would be today, without actually having even a clue as to how one would come up with a meaningful answer.

PS.  In previous posts I’ve argued that living standards are clearly much higher than in 1973, so I also don’t agree with the opposite extreme, who say real wages aren’t rising at all.

PPS.  I’ve never bought a cell phone, but instead have been using old discarded ones.  November 29 I get a free iPhone 6 plus.  I’ll let you know if it brings me great happiness.  I know Morgan will be pleased.