Rock Stars Respond to Incentives Like the Rest of Us

ABBA, looking fabulous

The Guardian reports that Abba’s wild outfits were influenced by Swedish tax laws:

According to Abba: The Official Photo Book, published to mark 40 years since they won Eurovision with Waterloo, the band’s style was influenced in part by laws that allowed the cost of outfits to be deducted against tax – so long as the costumes were so outrageous they could not possibly be worn on the street.

I think this qualifies as a Pigovian tax.

Would Mises have Supported Fiscal Stimulus?

Ludwig von Mises
Ludwig von Mises (1881-1973)

I am currently reading Human Action for the first time, so I will pose a question here for anyone more familiar with Mises’ theory of the trade cycle than I am: Would Mises view the US government’s deficit spending as mitigating the harmful effects of quantitative easing?

Mises repeatedly emphasizes that his theory describes the sequence of events that follow from an injection of money (in the broader sense) into the economy through the loan market. If this new money enters the market in such a way as to affect commodity prices and wage rates before entering the loan market then, according to Mises, it would not generate a boom and subsequent bust. I will quote him at length (pp. 568 of the Scholar’s Edition, available here):

The Difference Between Credit Expansion and Simple Inflation

In dealing with the consequences of credit expansion we assumed that the total amount of additional fiduciary media enters the market system via the loan market as advances to business. All that has been predicated with regard to the effects of credit expansion refers to this condition.

There are, however, instances in which the legal and technical methods of credit expansion are used for a procedure catallactically utterly different from genuine credit expansion. Political and institutional convenience sometimes makes it expedient for a government to take advantage of the facilities of banking as a substitute for issuing government fiat money. The treasury borrows from the bank, and the bank provides the funds needed by issuing additional banknotes or crediting the government on a deposit account. Legally the bank becomes the treasury’s creditor. In fact the whole transaction amounts to fiat money inflation. The additional fiduciary media enter the market by way of the treasury as payment for various items of government expenditure. It is this additional government demand that incites business to expand its activities. The issuance of these newly created fiat money sums does not directly interfere with the gross market rate of interest, whatever the rate of interest may be which the government pays to the bank. They affect the loan market and the gross market rate of interest, apart from the emergence of a positive price premium, only if a part of them reaches the loan market at a time at which their effects upon commodity prices and wage rates have not yet been consummated…

It is important to pay heed to these facts in order not to confuse the consequences of credit expansion proper and those of government-made fiat money inflation. [emphasis added]

Continue reading Would Mises have Supported Fiscal Stimulus?

Assigning the Burden of Proof

Have you ever experienced learning a new word and then hearing it everywhere in the days after you learn it? I’ve had a similar experience since making my argument that the burden of proof that the minimum wage is beneficial falls on the law’s supporters. Now I’m seeing people making burden-of-proof arguments everywhere. Bryan Caplan, in a post on EconLog, quotes Mike Huemer making the argument explicitly:

[T]here is a kind of moral presumption against coercive interventions. Laws are commands backed up by threats of coercive imposition of harm on those who disobey them. Harmful coercion against an individual generally requires some clear justification. One is not justified in coercively harming a person on the grounds that the person has violated a command that one merely guesses has some social benefit. If it is not reasonably clear that the expected benefits of a policy significantly outweigh the expected costs, then one cannot justly use force to impose that policy on the rest of society.

Ryan P. Long, over at Open Borders: The Case, makes what is essentially a burden-of-proof argument for open borders:

[W]hile it’s easy to merely allege that “the immigrants” caused crime to increase in your neighborhood or property values to decrease, it is substantially more difficult to prove it. I leave the burden of proof for [the idea that the differences between people really do translate into a reduced quality of life] on immigration’s critics.

Migrants from poor countries often see a 20-fold increase in their earnings just by setting foot in a wealthy country, so you had better have a good reason for barring them from doing so. The people at Open Borders: The Case do a great job arguing for the positive benefits of increased migration, but if we assigned the burden of proof correctly, it would be open borders’ opponents who would have to do the hard arguing. Continue reading Assigning the Burden of Proof

Benefits Vs. Capital

Spencer writes the following in the comments to my post about monopsony and the minimum wage:

“If wages increase, the employer would want to increase workers productivity normally that would entail improved working conditions.

But you are claiming that employers react to higher wages by implementing policies that reduce productivity — that does not make any sense and is contrary to economic theory.”

I want to make a clear distinction between benefits and capital. Benefits are things that the employer provides that make workers happier to work for that employer, ceteris paribus. Capital is what the employer provides to make each worker more productive.

The reason employers provide benefits (above those legally mandated) is because their employees implicitly pay for them by taking a pay cut. People must be paid more to do more unpleasant work, and less to do less unpleasant work, so investments employers make to make working for them less unpleasant are implicitly paid for through lower wages. Continue reading Benefits Vs. Capital

Erdmann, Empiricism, and the Minimum Wage

Erdmann's MW and teen unemployment graph
Pre-trend lines are for period from 27 to 3 months before MW hike. MW Trend lines are for period from 3 month before to 27 months after initial MW hike. [Y axis = Teen Employment To Population Ratio]
Kevin Erdmann, over at Idiosyncratic Whisk, posted a graph similar to the one shown above,* demonstrating that the trend in the US teen employment rate after a minimum wage hike was lower in all but one case than the trend before the hike.

There have been many responses, but I would like to focus on one over at Angry Bear that captures the worst of the criticism.** The writer goes way over the top in criticizing Erdmann, saying that people who oppose the minimum wage “apparently believe that the business cycle never impacts teen employment or unemployment.” To read this article, you’d think think that the only opposition to the minimum wage came in blog-post form. Frankly, no empirical analysis coming from a blog (including Angry Bear) can offer anything but a prima facie case for or against some proposition. I don’t read Erdmann as claiming that his little graph is the final word on the minimum wage.

The Angry Bear post goes on to use some very questionable econometrics to show that the minimum wage doesn’t have a big impact on teen unemployment. The author doesn’t use the inflation-adjusted minimum wage in his graphs (and presumably in his regression) for reasons unknown, making them pretty irrelevant. He then naively regresses the teen unemployment rate against adult unemployment, a recession dummy, the teen population, and the minimum wage to find that (surprise!) the minimum wage doesn’t have a big effect on teen unemployment. For someone who criticizes others about omitted variables, this regression should be pretty embarrassing. That’s time-series data! You don’t just apply OLS regression to time-series data. OLS regression assumes uncorrelated error terms, and the fact that adult (and teen) unemployment last month is highly correlated with adult (and teen) unemployment this month destroys that assumption. Continue reading Erdmann, Empiricism, and the Minimum Wage

Opaque Facts

Welcome to Night Vale

“Some mysteries aren’t questions to be answered, but just a kind of opaque fact—a thing which exists to be not known.” – Welcome to Night Vale: A Story About You

The above quote was in an episode of the excellent podcast Welcome to Night Vale. I love the term “opaque fact,” and it strikes me that economics is full of opaque facts, and that our distinctions between opaque facts and mysteries largely determine our views of markets.

People’s preferences are opaque facts. We can’t know other people’s preferences; the best we can do is observe their past actions to infer something about their past preferences. Continue reading Opaque Facts

Monopsony and the Minimum Wage

Suppose it is entirely true that the employers of low-skilled workers have monopsony power over those workers. Maybe low-skilled workers aren’t informed about their other options.

Standard economic analysis would indicate that under such conditions, the minimum wage could increase employment. However, this standard analysis simplifies the labour contract down to two elements: price and quantity. In a more realistic setting, where labour contracts involve more than just the exchange of some quantity of homogeneous labour for some quantity of money, we would expect other elements of the contract to be adjusted in response to a binding minimum wage.

So what does this mean? Well, without the minimum wage, the employer would compensate his workers so as to minimize his costs for any given level of compensation. He would offer a total compensation package such that the marginal cost of adjusting any element of the package would be equal to the marginal benefit to the employee of adjusting that element of the package. This would minimize the employer’s costs. With a binding minimum wage, the employer is obligated to offer a greater proportion of compensation in cash, so the marginal value of adjusting some other elements of the total compensation package must be higher than the marginal cost of doing so (e.g. the employee would forego $1.50 for $1.00 of additional on-the-job training from his employer). Thus it is more costly to offer any given amount of compensation to employees under a binding minimum wage, and even a monopsonist would reduce his employment of low-skilled labourers! Continue reading Monopsony and the Minimum Wage

Abstaining From Alcohol has Ambiguous Effect on Life Expectancy: Study

Alcohol! I only drink to make YOU more interesting!Can you imagine a news article with that title? Certainly not. How about  this one: Abstaining from alcohol significantly shortens life. There, that’s more sensational, isn’t it? (To be fair, that’s the title on the page, not the title of the article. I’m not sure why they aren’t the same.)

I’ve seen news articles circulating about a recent study from the University of Texas at Austin that followed 1,824 adults between the ages of 55 and 65, and compared how likely they were to die over a 20-year period depending on whether they abstained from drinking alcohol, drank moderately, or drank heavily. The results indicated that moderate drinkers had the  greatest longevity, followed by heavy drinkers, with abstainers being the most likely to die.

This is where the science reporters stopped paying attention, and started writing sensationalist “alcohol is good for you!” news articles.

I’m skeptical of this interpretation. The technique being used by the researchers is one that is very common in health and social science studies, whereby the researcher measures many real-world variables, and uses linear regression to tease out the effects of each variable on the variable under study. Continue reading Abstaining From Alcohol has Ambiguous Effect on Life Expectancy: Study

Introducing the Economics Detective

This blog is about economics. Economics is about people. People are about six feet tall.

What is economics? It’s the science of human action. People have goals, and they employ means to achieve those goals according to their beliefs.  They act.

I will use this blog to explore economics, to discuss current and historical events relevant to economics, and to converse with you, the public, so we can all learn.

Garrett M. Petersen's blog about markets, institutions, and ideas.