Britain’s Labour Party leader Ed Miliband says that a Labour government would boost the national minimum wage to £8 an hour, an increase of about £60 per week, by 2020. He says the UK economy is booming, and the low-paid should get a bigger share of it.
Actually, at present rates of growth, the minimum wage will be close to £8 in 2020 anyway, so this is a one of those political sensations that doesn’t amount to much. Even so, it is foolhardy now to commit UK businesses to pay any specific figure in 2020, since anything could happen in the meantime.
The minimum wage gets unthinking politicians (and not just Labour leaders) dewy-eyed. ‘We can’t have people being paid a wage that isn’t enough to live on.’ ‘Businesses should pay their workers more, and take less profit.’ ‘The minimum wage hasn’t killed jobs as the doomsayers say.’ You know the story.
In fact, high minimum wages do destroy jobs. in particular, they destroy those starter jobs, the low-paid, temporary jobs that once gave young people their first step on the jobs ladder – pumping petrol (as I did), stacking bags in supermarkets, ushering people to their seats at the flicks. Now those jobs don’t exist, because they are not worth the minimum wage (plus all the National Insurance and the burden of workplace regulation that goes with them – a particular burden on small firms). So we have a million young people out of work.
As for profit, try using that argument on anyone running a small business, already weighed down by taxes, rates, and regulation. Often they are getting less than their lowest-paid employees, and working longer hours for it Higher minimum wages mean they can afford to employ fewer people, or provide less generous perks and conditions.
I don’t want to live in a country where people can’t afford to live on what they take home either. That is why we have a welfare system, to top up the earnings of the lowest paid. We need a negative income tax – above the line, you pay tax, below the line, you get cash benefits – structured so that you are always better off in work than out of it. A paying job, even a low-paid job, is the best welfare system the human mind can devise.
And we must take low-paid people out of tax and national insurance entirely. Then more small firms could afford to take on more low-skilled workers and give them that first step on the jobs ladder.
If we could simply vote ourselves higher pay, why stop at £8? Why not fix the minimum wage at £800 an hour. The answer is obvious. The only people who would be worth that amount to anyone would be a few Premier League footballers, rock stars, investment bankers and high-class hookers. The rest of us would be out of a job.
The minimum wage does no harm to people who are already earning it, though it does them no good either. But it does positive harm to those earning less, or those who cannot get a job at all. The former will be let go, or will have to endure worse conditions; the latter will find it very much harder to get a job. And all that, of course, has already happened.
We’ve yet another attempt from Nicholas Stern to persuade us all that beating climate change would actually be good for the economy. Fortunately we’ve also got Richard Tol around to tell us what’s really going on here:
The original Stern Review argued that it would cost about 1% of global GDP to stabilise the atmospheric concentrations of greenhouse gases around 525ppm CO2e. In its report last year the Intergovernmental Panel on Climate Change (IPCC) put the costs twice as high. The latest Stern report advocates a more stringent target of 450 ppm and finds that achieving this target would accelerate economic growth.
This is implausible. Renewable energy is more expensive than fossil fuels, and their rapid expansion is because they are heavily subsidised rather than because they are commercially attractive. The renewables industry collapsed in countries where subsidies were withdrawn, as in Spain and Portugal. Raising the price of energy does not make people better off and higher taxes, to pay for subsidies, are a drag on the economy.
Just not impressed there is he?
There are some eminently sensible things that could be done, things that would have the effect of reducing climate change into the future. Poor and oil producing nations throw $600 billion a year in subsidies at fossil fuel use for example. Stopping that would be a sensible thing to do: but it would be a sensible thing to do simply because it’s a sensible thing to do. The effect on climate change is just an added benefit.
But the most important part of this latest report is this:
“Well-designed policies … can make growth and climate objectives mutually reinforcing,” the report claims.
Yes, that’s entirely true. But as Tol also points out:
But low-cost climate policy is far from guaranteed – it can also be very, very expensive. Europe has adopted a jumble of regulations that pose real costs for companies and households without doing much to reduce emissions. What is the point of the UK carbon price floor, for instance? Emissions are not affected because they are capped by the EU Emissions Trading Systems, but the price of electricity has gone up.
There’s an awful lot of weight resting on that “well-designed” there. In fact, absolutely every report, yea every single one, that has concluded that we’d be better off trying to avert climate change than to go through it has been running the numbers on the politicians using sensible methods of aversion rather than not sensible ones. And yet when we see what those same politicians actually enact on that evidence base they’re not sensible policies. Thus the justification they’re relying upon doesn’t in fact exist.
Over at The Economist some musing on whether there really is a poverty trap that developing economies can get stuck in. and the answer is yes, of course there is: but also that it’s potentially possible to escape such traps.
DO POVERTY traps exist? Academics seem to think so. According to Google Scholar, so far this year academics have used the phrase “poverty trap” 1,210 times. (Paul Samuelson, possibly the greatest economist of the 20th century, was mentioned a mere 766 times). Some of the most innovative work in development economics focuses on how individuals’ lowly economic position may be perpetuated (geographical and psychological factors may be important).
But, says a new paper by two World Bank economists, the idea of poverty traps may be overblown. They focus on national economies and present some striking statistics. In the graph below, a country that manages to get to the left side of the line has seen real per-capita income improvement from 1960 to 2010.
So that’s the empirical evidence. But there’s also a basic logical point that we can make.
Three hundred years ago all countries were poor. Now some countries are not poor and some countries still are. It’s thus logically certain that it is possible to escape whatever poverty traps there are. For some places have done it. It’s also equally true that there must be things that prevent that economic growth from happening for some places haven’t had that economic growth. Thus we can assert, without possibility of contradiction, that sure, there are poverty traps but there’s nothing inevitable about them at all. It is possible to escape for some have done so.
The Bank of England slashed its discount rate (‘Bank Rate’) to 0.5% in its 5th March 2009 meeting in response to the growing recession, hoping to stimulate demand. Its discount rate is the rate it lends out to commercial banks—if they can borrow cheaper they are likely to lend more. It has left it there ever since, and indeed, because of the ‘Zero Lower Bound’ on interest rates it has turned to other tools to try and bring about an economic recovery—a recovery which is only just setting in properly.
When the Bank moves its key policy rate, commentators talk about it hiking or cutting interest rates; on top of this, we’ve seen extremely low effective interest rates in the marketplace; together this makes it reasonable to believe that the central bank is the cause of these low effective rates.
There are lots of reasons to doubt this claim. In a previous post I pointed out that the spreads between Bank Rate and market rates seem to be narrow and fairly consistent—until they’re not. I made the case that markets set rates in an open economy. And I argued that lowering Bank Rate or buying up assets with quantitative easing (QE) may well boost market rates because they raise the expected path of demand, the expected amount of profit opportunities in the future, and thus investment.
Since then I came across an elegant and compelling explanation of exactly why this is. In a 1998 paper, Tore Ellingsen and Ulf Söderström show that this is because some monetary policy changes are purely expected and ‘endogenous’ responses to economic events, whereas some monetary policy changes are unexpected ‘exogenous’ changes to the central bank’s overall policy framework (like raising or lowering the inflation rate that markets believe they really want).
When changes are expected, market rates keep a tight spread around policy rates; when changes are a surprise, cutting Bank Rate actually results in higher interest rates in the marketplace.
To identify which changes were exogenous (surprises) and which changes were endogenous (expected) Ellingsen and Söderström looked at market commentaries in the Wall Street Journal the day after policy events—where the Fed decided whether to change or maintain its current policy rate. When traders they interviewed were surprised or disappointed by the move (or lack of move), they judged it exogenous—when traders explained the Fed’s move in terms of changes in economic data they judged it endogenous.
This neatly explains why raising Bank Rate would not shut off bubbles (as an aside: a recently-published paper finds that tight, not easy money, is more closely associated with bubbles) and house price booms and so on. Cutting Bank Rate would raise market rates if it changed markets’ perceptions of what target the Bank of England is working towards (i.e. made them think it wanted higher inflation). Conversely, if the Bank had decided not to look through high supply-driven inflation, and thus surprised markets by running tighter than expected policy, this would have been likely to push rates even lower.
The best way to get rates back to normal territory, thus incentivising firms to economise on investment projects and put cash into only the very best, is to make sure the economy doesn’t suffer the effects of what Hayek called a ‘secondary depression’. And the best way to ensure that is to implement something we might call a ‘Hayek Rule’ after the monetary policy he proposed—stabilising MV (the money supply x velocity, equal to aggregate nominal income). Recent work has shown that we get less creative destruction and capital reallocation in slumps as opposed to healthy growth periods.
Firm expectations now mean that setting this at zero, as he proposed, would have a very costly intermediate period while firms reset their plans—setting it at the rate consistent with 2% inflation (roughly 5%) would be more appropriate. Perhaps in the long run it could come down. But without a stable macroeconomic environment, capitalism cannot create the wealth that makes it so widely and dynamically successful.