Monday, August 3, 2015

An economists view. Don't worry; we are trained to be wrong.

I have often joked that by getting my degree in economics I was qualified to be a weather man. After all, I would be paid to guess and more often than not be wrong. Okay, the good ones are pretty accurate, but a simple mistake can bring a lifetime of work crashing to the ground.
I'm not here for that. I am here for something else (but keep in mind that my thoughts on this view are related to the first paragraph; incomplete and flawed, and I will have few sources as much of this information is being relayed from memory). I want to talk about two things. First; minimum wage. Second; trickle down economics. The first topic because it has dominated the news quite a bit due to Seattle's decision, and the subsequent decision of places like L.A. to follow suit. The second because of a conversation I had with my rugby club president while on the beach (okay, the bro jokes can now commence). 
Minimum wage is a tricky subject. I call still recall fairly clearly a picture on the front page of the Sheboygan Press from my high school days where an old lady looked sad and frightened. The article it was connected to regarded minimum wage, and how this woman would hardly afford food. She continually purchased a handful of staples to get her through her weeks. Rice and bananas were chief among them. I would love for people to be in a more comfortable financial position. I encourage it. I hope to find feasible and sustainable ways to make that possible.
Here are a few problems, though. In History of Economic Thought, I was tasked with researching minimum wage. The studies I found regarding it discovered that increases in minimum wage were hurtful to the employees gaining higher wages as well as the companies paying more. Increased wages pushed people into higher tax brackets, decreased financial supports in such things as food stamps, and decreased eligibility for other government supports. Higher wages also had a tendency to lead companies to either release people, cut hours, or decrease benefits (retirement matching, health, etc.) in addition to increasing prices for their products. What was found to be the more successful path was providing tax breaks and refunds for people. 
Additionally, with regards to Seattle specifically, things have taken an unexpected turn. The workers themselves have preempted their employers by REQUESTING to "cut down their hours to stay on those subsidies because the $15 per hour minimum wage didn't actually help them get out of poverty." Tipping is being discouraged, and restaurants are increasing prices by 15%, and some stores are selling what they admit to be near superfluous memberships to customers to simply cover costs. By the way, the wage is currently only at $11 per hour. Over the next few years there will be a much larger backlash to the increased wages as prices of food and goods soar. 
I am reminded heavily of Germany post WWI. Most every child had millions of Duetsch Marks to play with. Hear that; millions. As is common knowledge, it was easier to burn the stuff than go buy fuel. Increasing everyone's wage to $15/hr will only shoot inflation through the roof in my mind. As soon as the economy is reset, we will see that $15 is the new $7.50.
Minimum wage is not intended as a living wage. Many of these positions exist to give youth, high school and college aged individuals, chances at working and gaining revenue and experience. The job was not designed to support a family. In that project I did regarding minimum wage, it was the youth, not the adults, who were more likely to keep or get a job once wages increased. I am not intending to be rude or dismissive, by the reason the wage is depressed is because the available pool for workers in that capacity is large. (uh-oh. Here comes the math-ish stuff)
I learned that in high school when my teacher told me a gorilla could do my job as long as he kept his hair trimmed appropriately (I worked at Coldstone Creamery. Gorilla hair would be a bit upsetting in ice cream). These comics and stories people put out regarding "an alternate universe" or comedians spoofing sports shows for school shows are, unfortunately, largely unfounded. The reason that teachers make a low wage relative to sports figures is simple; there are more teachers coming out able to perform the job than there are athletes. In graduation years '03, '08, '12, and '13, just shy of 670,000 people graduated with a degree in education (667400 to be more precise) or an average of 166850 a year. The average class size in the US in 25-26 students per teacher in public schools. With 55 million students slated in Fall 2014, this anticipates about 2.11 million teachers. With 165,000 graduating each year, this means that the entire teaching industry would have to turn over every 12.8 years for there to be no gaps in employment. Strangely, even though each of us knows that one teacher who has been at the same school since Sabre-tooth tigers were the students and not just the mascot, the average career length is a mere 11 years with 25% of teachers leaving within 4 years and a whopping 50% leave an urban school within 5 years, But that still means that around 150,000 people are qualified for a position as an educator coming out each year. How many people are deemed able to play professional football each year? 1273 have been drafted in the last five years. Just under 255 people each year are picked to take the job in the NFL each year (I know there are undrafted free agents) with about 90 players per team at the highest (or 2880 players). Average turnover in the NFL, at least on accounting books, is about 5 years, meaning maybe 600 players each year are able to get the job. There are over 90,000 college football players, meaning 8% of high school players play some level of college ball (oh yeah, there are only 15,170 Div I players). 3%. If 20,000 players leave college football each year, 3% make the NFL. Of the millions that play high school ball, .24%, or about one in every 400, make it to the NFL. The skill set is far higher. The margin for error far greater. The skills you teach at McDonalds and Coldstone and Wal-Mart are relatively easy to match compared to a job as an educator, or a lawyer. The skill required for playing pro sports is rare, and is therefore paid as such. It is because of these (rather long winded) reasons that I am not a fan of increasing minimum wage.
Now let us go to trickle down theory. The argument arose when my club president said "Reagan is a douche." When I asked why (no idea what sparked the statement, by the way), he responded he just was. "I don't care if you are a liberal or a conservative, he was a douche." He ended up eventually bringing up trickle down theory as his argument as to why stating "giving rich people tax breaks so they give money to people doesn't work." He repeated this statement in some form or another multiple times as one of his only supports. He also cited human selfishness and unpredictability as forces for its failure. 
I am somewhat leery of this. I can understand WHY someone would see trickle down theory as a good idea. I don;t have data on it, however. But here is an argument for it.
Back in the 1800's, it would have been near to impossible for John D. Rockefeller or Andrew Carnegie to have run their companies from across oceans. If they were taxed at a huge and high rate, they would have to basically suck it up. Today, if you try and tax someone who doesn't want to be taxed at 90%, they are going to likely leave the country. I cannot recall if it was Rolling Stones or U2 who set up shop in different countries, as have professional tennis players, to escape high taxes. Imagine if Bill Gates were tight-fisted with his money. He would buy his own friggin island and never pay a government entity a dime. Today's technologies allows for business to be run around the world from a laptop tablet phone as you use the toilet in your own home. High ranking officials can now simply jump a border to escape a high tax. This is lost tax revenue on personal income tax. Now let's tax the company a high rate. At this point you may very well see companies uproot and move. Costs from the move are mitigated and more than made up for in higher profits by escaping taxation.
Again, I am not saying cutting taxes for corporations and CEOs is going to solve all the problems, but the theory is there, and it is pretty defensible. By providing financial incentive to remain put, or even start new businesses, self serving individuals will build business and spark the economy on their own in an effort to make their own profits. Theory? Works. Practice? A bit hit and miss.