Thinking About the Economy: Is Raising the Minimum Wage a Good Idea?

I should stop reading the economy-related blogs, people, because they are confusing me. See the following post, for example:

In the midst of the Second Great Depression, Senator Tom Harkin of Iowa has introduced a bill increasing the minimum wage to $9.88 an hour.

“If my proposal went through, a $15,000 a year worker will make $20,000 a year,” he says. “You know $5,000 a year is significant to someone in that category. [It] may not get them out of poverty, but it makes life better.”

OK, we can all agree that $15K per year is abysmally low and nobody can live on that. An income of $20K per year, while still low, sounds much better.

What I don’t get, though, is how the conclusion is being drawn that raising the minimum wage would raise incomes from $15K to $20K. Wouldn’t the employers simply outsource the jobs overseas? And wouldn’t the rest of employers simply stop hiring new workers and, instead, burden the existing workers with even more job responsibilities?

It is probable that I’m not seeing something important here but such suggestions sound like nothing but pretty, self-consoling speechifying. If a politician proposes that the minimum wage be raised, that politician should either find the courage and make it clear that such measure needs to be accompanied by outlawing the outsourcing of jobs and introducing a very stringent regulation of the workplace, or stop blabbering on the subject irresponsibly.

Again, correct me if I’m wrong here, but it seems to me that the economy in this country suffers from being subjected to endless half-measures. It’s like nobody has the courage to select a course of action and follow it without vacillating, going two steps backwards for every step forward, and without actually moving in any direction.

Is it any wonder that we are stuck in a protracted period of economic stagnation at this moment?

Thinking About the Economy: Who’s Stupid Now?

How is one supposed to understand anything about the economy, if most things published on the subject are egregiously unintelligent. See, for instance, this article titled “It’s stupid economists, people.” I don’t know if economists are stupid, but the author of this article definitely is.

The article’s author, who obviously has no understanding of the post-Soviet economies, chooses to pontificate about them:

After the fall of communism, for instance, many economists urged the leaders of the formerly planned economies to switch to market-based economies in one big bang. Since few people knew how to behave in a market economy, it was a disaster.

Within a very short period of time, the post-Soviet people learned, however. Today, just 21 years after the fall of the Soviet Union, there are functioning market economies in the FSU countries. Things are not perfect but the level of economic well-being has soared compared to what was in existence in 1990. Russia, for instance, has weathered the global economic crisis quite well. Ukraine, with its 300+ years of brutal colonial domination, is not doing quite well. Still, I can’t think of a single person I know back home whose economic well-being has not improved dramatically in the past 20 years.

The article suggests that it would have been a better idea to avoid the shock therapy in the FSU countries and, instead, drag out the transition period forever. Yeah, tell that to the people who only have one life to live. Living in a state of transitional uncertainty is very stressful to the majority of people. We went through a couple of bad years when I was in my late teens. But if that period had been extended to a few decades, I can’t see what I would have gained by being 40 instead of 20 when the economy started going back into a working mode.

An attempt to introduce elements of the market economy slowly and make them coexist with Socialist economic mechanisms was made by Gorbachev in the late eighties. This attempt was a resounding failure since the market economy was so much more robust and attractive that it literally exploded the Soviet economic structure from within.

It would be great if the author of the article learned a few things about that before pontificating.

After making these uninformed statements about the post-Soviet countries, the article’s author trots out the old and tired myth about how it is possible to make collective ownership work because, if one looks hard enough, one might find a couple of instances of it possibly working in Nepal and Maine. The journalist seems to recognize that you need to “comb the world” to find something as unnatural and unusual as a successful collective ownership of anything, yet it does not prevent him from cheering on a system of ownership  that, I’m fairly certain, he would not have tolerated for two days in his own life.

Thinking About the Economy: Tax Reform, Anyone?

I’m no economist and I’m struggling right now to improve my knowledge of how the economy works. The following tax reform suggestions, however, are making a lot of sense to me:

Right-of-center, tax reform is inescapable. All households other than the truly poor will be required to pay more in federal taxes. The key issue is that of incentives and excess burdens. A flat tax devoid of all exemptions save for the very poor, is the best solution.  No personal exemptions, no child allowances, no mortgage relief, no charitable donations relief, no tax-subsidies to business enterprise of any kind. Almost every tub would be expected to stand on its own bottom.

The same  flat tax would apply to all dividends and capital gains. Only households would be taxed, at the point of receipt. The corporation tax and the payroll tax would be eliminated (as would the entirely fictitious Social Security Trust Fund).  The flat tax rate would have to be slightly above 20 percent across all income for all non-poor households to reach the tax revenue target. The flat tax ensures that all households – other than the poor – pay exactly the same proportion of their income to the federal government. Of course, the rich pay far more in absolute taxes than do their less rich compatriots.

I especially dig the part that I bold-typed. I don’t really know how the payroll tax works, so I can’t have an opinion about that part of the suggestion, but the rest of it seems eminently reasonable to me. My father, who is a small business owner, has been dreaming of just this kind of a tax system for decades. He says that this would do wonders for his capacity to manage his tiny company. When he comes back from Cuba (he’s on vacation there right now), I’m sure he will be happy to find out that this system is not a figment of his imagination.

Now some questions:

1) What do you, folks, think about this proposal?

2) The quote is from a blog by a Conservative economist who states from the outset that this is a right-of-center tax reform. But the tax reform seems very fair to me. Is this a generally accepted approach to taxes among Conservatives?

3) Can anybody suggest a website or a blog where I can see a Liberal alternative to this tax reform proposal? Or can anybody briefly tell me how it would differ? If I could at least figure out if I’m closer to the Conservative or the Liberal camp on this subject, that would already help me a lot in getting my bearings.

Yes, my questions might sound silly but I have already confessed my lack of knowledge in this area. I’m just trying to understand how things work.

Thinking About the Economy: Is Pessimism Preventing Economic Recovery?

This is an excerpt from a really interesting article on the economy I found in a very unlikely place. Namely, The Washington Post:

Americans see themselves as go-getters and risk-takers. Our optimism will ultimately rescue us. So it’s said. But the folklore increasingly collides with reality. The 2008-09 financial crisis traumatized millions. It swelled the ranks of risk-avoiders, worrywarts and victims. Of course, this was mainly a reaction to overborrowing, inflated home values and lost jobs. But now the fear factor is feeding on itself — and it’s smothering the recovery.

We are prisoners of our rotten mood. Everywhere, the bias is to spend less and wait to see how things turn out. Just as optimism sustained the boom, pessimism prolongs the bust. This is the reverse of “irrational exuberance,” because as long as most people feel this way, the psychology is self-fulfilling. Unfortunately, that’s how they feel.

Admittedly, I am still in the very early stages of figuring out how the economy works in this country. I find it very obvious, however, that the country is going through a doom-and-gloom period where predictions of imminent disasters are more welcome than good news. Grievances and meticulously inventoried while timid suggestions that things might not be all that horrible are greeted with derision.

“Why are you in such a good mood?” people ask incredulously when they meet a content and smiling person. As if happiness needed justification while misery were completely normal and required no analysis.

I’m not qualified to analyze whether there is a link between this culture of misery and doom-saying and the economy. I can say, however, that the fascination with unhappiness does exist and its influence is only growing.

Thinking About the Economy: Why Can’t We Be Like Canada?, Part II

The middle class and the small businesses in Canada carry a really harsh tax burden. There is just no comparison with the kind of tax rates I, as a college professor, pay here in the US and what a person in Quebec with a similar level of income has to shell out. Of course, having access to the really excellent Canadian healthcare system for free is a great benefit that people get in return for their taxes. This is undoubtedly so, and there is nothing to argue here about.

However, if we are talking about young professionals, these are people who don’t really need (for the most part) any ultra-expensive medical services. I’ve had many conversations with younger Canadians defending the healthcare system of Canada from their criticisms. (I’m a huge, huge fan of that system, in case you don’t know).  A young person who pays a humongous sum in taxes finds it difficult to be convinced that it will all make sense once he or she is 60 and in need of an expensive operation. Once again, working more and harder to bring your salary from one level to the next makes no immediate practical sense to people, since the salary increase will immediately push them into an even more highly taxed income bracket.

To give an example, my younger sister pays more in taxes per year than what I make in a year. She sees no return on those taxes because she has a private health insurance and no other welfare benefits are extended to her. She says she’d be much happier paying these taxes if she knew that they went directly to provide some professor’s salary. Sadly, this isn’t how it works.

So here you have a situation where quite a few people are discouraged from working at all. Many more realize that starting a business is too much trouble, and who needs the constant aggravation from the Ministry of Revenue? The Canadian tax people never persecute the large corporations, of course. They just choose some poor schmuck trying to run a small Mom and Pop business and squeeze him until he hands over everything he has and declares bankruptcy. They actually tell that to you face when you beg them to see reason and not fine you for an amount you simply do not possess.

Once again, please don’t dispute this point with me because I just finished talking on the phone with precisely this kind of poor Canadian schmuck who is going through this type of torture right now, and I’m understandably upset.

(To be continued. . .)

Thinking About the Economy: Why Can’t We Be Like Canada?, Part I

In the Liberal circles in the US, the Canadian system of welfare is often an object of envy. “Why can’t we provide the same social safety net that Canadians do?” people keep asking. I can’t tell you whether the welfare system of Canada can be transplanted to the US. However, as a proud citizen of that great country whose family and closest friends live there right now, I have to tell you that the Canadian system, as I see it, is deeply flawed. Over the years, I have come to believe that the Canadian version of “capitalism with a kind face” is a road to nowhere. Now, please don’t start getting angry already and just let me tell you why I think that.

My experience is mostly limited to the provinces of Quebec and Nova Scotia, so if things are dramatically different in other parts of the country, feel free to tell me that.

The system of welfare in Quebec seems to rely on the basic conviction that if a person doesn’t feel like working for whatever reason, then she or he should be allowed to do so and be provided with basic necessities by society. (In Nova Scotia, this idea is less strong but it’s still there, at least do a degree.) If you want to spend your entire life in Canada and not work for a single day, you can absolutely do that. Abusing the system is very easy. I keep seeing people who declare themselves indigent and permanently unemployed (or unemployed most of the year) and who have much more comfortable lifestyles that those poor losers who work day and night, pay ruinous taxes, and can’t scrounge up enough money for a vacation.

“Ha ha ha,” the welfare-recipients sometimes say to the working bees. “You’ve got to be silly or something. You work and work, and what have you got? I, in the meanwhile, am going on a cruise in the Caribbean on my welfare money.”

If somebody is experiencing the need right now to tell me that I’m making this up, don’t. You’ll just make a fool out of yourself. I have played the working bee part in such conversations and have witnessed my family members doing so very very recently. And yes, I’m angry about that.

Of course, as a result, people start getting discouraged from working. My sister has her own job recruitment agency in Montreal. She tells me that often, when she offers entry-level positions to young people, she hears, “Nah, the salary isn’t all that much more than what I’m getting on  the unemployment, so why bother?”

An entire generation of the over-entitled, nah-why-bother people grows up.

(To be continued. . .)

Thinking About the Economy: A Disclaimer

Today, we have started a really productive discussion of the economy here on the blog. The subject seems to be very popular and has generated a great response. Before we continue, though, I want to reiterate that I’m just starting to figure this stuff out. So if anybody arrives at a point where they experience a burning need to tell me that I’m clueless and ignorant of these issues, save your breath. I know I am. I sincerely applaud everybody who was born with a sophisticated knowledge of economics at their fingertips but I’m not one of such people.

All points of view are welcome and appreciated. These are issues that make tempers flare, so let’s try to be kind to each other as much as it’s possible on this topic.

Thinking About the Economy: The Introduction

I’m currently trying to figure out how the American economy works and elaborate my own position on the economic issues. Right now, I don’t have a definitive point of view because I simply don’t possess enough information to arrive at it. In the nearest future, I will be writing a series of posts that will record my attempts to create my personal approach to the issues of economy.  This series will be titled “Thinking About the Economy.”

For the most part, I’m not content with how the Liberal sources I access deal with the economic issues. Back in the Soviet Union, we were all really unhappy with the kind of economy we had. For us, everything that wasn’t similar to the only system we knew and abhorred had to be perfect. The logic behind this was that if the system we are familiar with sucks, then its exact opposite should be great. So we all worshiped capitalism as some kind of a paradise where everybody is rich, has cars, yachts and houses and is happy beyond belief.

In 1991, we were dragged by history through a rapid transition to capitalism. For many people, their first encounter with capitalism was deeply traumatic. We discovered that capitalism brought about very visible income inequalities (they always existed in the USSR, of course, but were often concealed from view), the need to offer yourself on the job market, compete and suffer rejection, the necessity to work really hard with no promise of success, the possibility of indigence that was hard to tolerate when you could see your neighbor getting rich and buying diamonds as a matter of course.

Many of us discovered they couldn’t deal with the new reality. Instead of offering us instant riches, capitalism brought many harsh demands that many people were not equipped to meet. The rewards seemed distant and the need to disinter the skills of entrepreneurship and hard work that had been beaten out of us over the decades of Communism was painful.

The reason why I’m telling you all this is that I see a very similar tendency currently at work in the US. People are only familiar with a single economic system, capitalism. They see its defects and believe that what’s needed is the exact opposite. I find this approach to the economy to be naive. Nothing annoys me more than arm-chair Marxists who believe they are militate on behalf of some vaguely defined proletariat they rarely even see.

When I say that collective ownership of the means of production results in an almost instant impoverishment of the population on a scale that Americans cannot even begin to imagine today, I speak from experience. I know that my experience of a person who grew up in the Soviet Union is not fashionable in the intellectual Liberal circles. Nobody wants to hear anything that contradicts their pipe-dream of Communism and socialism.

In the Soviet Union, whenever we heard that there was racism or poverty in the US, we always concluded that it was all just Cold War propaganda. Liberal Americans still believe that everything negative they heard about the USSR was propaganda that doesn’t contain a grain of truth. They seem to need this belief in order to continue engaging in their sad little Marxist fantasies.

I, however, am not prepared to relinquish my own memories for the sake of spoilt rich American kids of pseudo-Liberal persuasion. I want to look for my own understanding of the economy and I don’t care how offended people are that my search subverts their cherished pieties.