Monday, March 23, 2015

Paul Krugman Believes His Own Eyes—UPDATED

Photograph by David Levene/eyevine via Redux.
Tim Worstall’s recent Forbes.com piece, “Paul Krugman’s Amazing About Face On The Minimum Wage”, reminds me very much of the old joke that either came from or found its way into the musical Chicago: The woman who comes home to find her husband in bed with another woman. In the middle of protesting his innocence, the cad asks his angry spouse, “Who you gonna believe, me or your own eyes?”

Worstall’s piece is all about the differences between “good Krugman”, who in September 1998 published an article derisively dismissing minimum-wage arguments (because “the amorality of the market economy is part of its essence, and cannot be legislated away”), and “bad Krugman”, whose March 2 NYT op-ed “Walmart’s Visible Hand” made a devastating concession: “… [E]xtreme inequality and the falling fortunes of America’s workers are a choice, not a destiny imposed by the gods of the market. And we can change that choice if we want to.”

Old Krugman said that Walmart paying higher wages might lead to less turnover, better morale and higher productivity. But only at Walmart because the operative part was “higher wages than other employers”. And that’s the one thing that a general rise in wages, for example a rise in the minimum wage, cannot accomplish.
New Krugman tells us that a rise in the minimum wage will accomplish exactly that thing that Old Krugman tells us is impossible.

What might be the difference between Old Krugman and New Krugman? Seventeen years of observation? The intervention of a recession which exposed underlying fallacies in free-market thinking? Oh, no: according to Worstall, the difference is a paycheck from that “hotbed of liberal ideology,” the New York Times.

And that, my friends, is pretty much the full substance of Worstall’s refutation of Krugman: He writes for “Hell’s Bible”.

The thing is, to get to his off-hand dismissal of Krugman’s op-ed, Worstall has to ignore two key points of the economist’s argument:

What’s the evidence? First, there is what actually happens when minimum wages are increased. Many states set minimum wages above the federal level, and we can look at what happens when a state raises its minimum while neighboring states do not. Does the wage-hiking state lose a large number of jobs? No — the overwhelming conclusion from studying these natural experiments is that moderate increases in the minimum wage have little or no negative effect on employment.
Then there’s history. It turns out that the middle-class society we used to have didn’t evolve as a result of impersonal market forces — it was created by political action, and in a brief period of time. America was still a very unequal society in 1940, but by 1950 it had been transformed by a dramatic reduction in income disparities, which the economists Claudia Goldin and Robert Margo labeled the Great Compression. …
The important thing … is that the Great Compression didn’t go away as soon as the war was over. Instead, full employment and pro-worker politics changed pay norms, and a strong middle class endured for more than a generation. Oh, and the decades after the war were also marked by unprecedented economic growth.

According to Worstall, at NYT liberal ideology is more important than reality; at least, that’s how I interpret his penultimate sentence, which is a syntactical disaster. As much as I’m tempted to agree with that assessment, it fails to tackle Krugman’s first point:

Krugman: “Look, Tim, we have a bunch of states that just raised their minimum wages, and their economies didn’t tank … in fact, they got better. Increasing evidence shows that modest minimum-wage increases don’t hurt like classical economic theory says they do.”
Worstall: “Oh yeah? Well, you get paid by liberals, so it’s not surprising you can’t tell what’s ‘real’ and what’s not!”

Loyola University New Orleans law professor Bill Quigley points out, “[The minimum] wage has been raised 23 times. Every time it was raised it was opposed by some few who said ‘it is going to lose jobs and wreck the economy’ which is factually untrue as study after study has shown.” Why, then, do libertarians and neoconservatives insist on repeating this prediction every time a minimum wage hike is proposed?

As I’ve written elsewhere, the effect labor cost has on labor demand depends very much on how sensitive a particular market is to marginal changes in price, especially once the labor cost increase is broken down per-unit. If a market is relatively price-inelastic, or if the per-unit price increase to the customer is tolerable, any detrimental effect on consumption is practically unnoticeable.

Moreover, the free-market objection depends on a failure to see the connection between employees’ wages and consumers’ wallets. The typical libertarian or neo-conservative economics wonk seemingly never wonders where consumers get the funds to spend on burgers, or what the burger-flippers do with their paychecks. I’ll say it again: you can’t get out of consumers’ pockets what you’re not putting into your employees’ pockets.

The real objection to minimum-wage increases, as I’ve also said before, is that they’re temporary, inflationary patches. They get suggested because the minimum wage is the most minimally invasive manner of redistributing income from the top to the bottom. However, you can’t raise the minimum once for all time. And as nice a thought as it is to try to get the working poor a living wage, it doesn’t stop the evisceration of the middle classes, as their savings and investments are replaced by perpetual debt. Still, it’s better than nothing.

Nevertheless, “good Krugman” got patted on the head by Austrian-school types for regurgitating free-market dogmas, because Austrian-school types don’t deal with the real world except as a special case of theory. In the process, “good Krugman” bloviated patent absurdities such as, “… you can have an economy sustained by the big spending of the few rather than the modest spending of large numbers of people” (that was in the same ritually-impure evil librul New York Times), or asking inane questions like, “… if paying higher wages is such a good idea, why aren’t companies doing it voluntarily?” (Because self-interest distorts our ability to clearly perceive our best interests; or, as we Catholics say, “Sin makes you stoopid.”)

But even Nobel-laureate economists who write for evil librul newspapers can eventually see the light when the facts are shoved in their faces often enough. “New Krugman” is starting to believe his own eyes, rather than the free-market theory for which he gained notoriety.

Even more telling, by calling extreme income inequality a choice, rather than the result of the impersonal working of preter-real “market forces”, “new Krugman” has not only blasphemed against the Austrian-school gods, but also uttered a social-sciences heresy: he has denied the radical determinism which tells us humans can’t behave any other way than the way we do behave. We can choose a destiny other than an ever-widening “wealth gap” and an eviscerated middle class.

I don’t think we can blame this on Krugman being paid by an evil librul newspaper. Progressives are radical determinists too, in their own fashion. But if Krugman is finally beginning to believe in free will, that may just make him a better economist.

UPDATE: Same day, 2:37 p.m. CDT
As I was composing this post Saturday, I nearly included a paragraph or so discussing a recent story in Seattle Magazine, “Why Are So Many Seattle Restaurants Closing Lately?” Now I wish I had.

It turns out that some neo-conservative/libertarian writers, including Tim Worstall, have been writing posts about this story, with various permutations of “See? This is what happens when you raise the minimum wage, just like we always said!” But, as Rick Ungar illustrates in a devastating reply — in Forbes, Tim Worstall’s home base!the impending $15/hour minimum wage played no part in any of the restaurateurs’ decisions! In fact, one of the restaurateurs, Renee Erickson of the Boat Street Cafe, is opening two more restaurants, and is “totally onboard” with the MW increase! 

(Two others, Poncharee Kounpungchart and Wiley Frank of Little Uncle, drily remarked, “We do not know what our colleagues are doing to prepare themselves for the onset of the new law, but pre-emptively closing a restaurant seven years before the full effect of the law takes place seems preposterous to us.” Indeed.)

Simply put, Worstall, the American Enterprise Institute, and Rush Limbaugh lied about the story. Which just goes to show that, whatever else can be said for or against raising the minimum wage, the “job-killer” argument needs to die.