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    Wages and Floors

    Jul 22 • Businesses, Demand, Supply, and Markets, Economic Debates, Labor, Regulation • 338 Views

    A writer for The Baltimore Sun recently said that, “A ‘new living wage’ will make Baltimore City no more livable than stilettos will make Sen. Barbara Mikulski a forward for the WNBA.” Meanwhile, in New York City, Mayor Bloomberg was said to have “scoffed” at a similar idea. These opponents of “living wage” legislation believe businesses will flee and unemployment will climb because of a mandated higher wage.  

    On the other side, proponents say that workers deserve a fair wage. Laborers should be able to afford to live in the city in which they work. In New York, supporters of a $10.00 living wage say that the current $7.25 state minimum is inadequate.

    The “living wage” is a municipally mandated minimum for all subsidized jobs. For example, any business receiving a tax break, which could include most retailers, would have to observe the pay minimum. Living wage mandates tend to cluster between $10 and $11 an hour. Close to 140 municipalities, including Los Angeles, CA and Santa Fe, NM have living wage laws. Each time one is proposed, the same dilemmas resurface. The graph described below conveys the basic dilemma.

    The Economic Lesson

    Please imagine for a moment a supply and demand graph. Price is the y-axis and quantity is the x-axis.

    Thinking of wages, the supply curve represents labor and the demand curve is the business side of the market. The point at which demand and supply meet, called equilibrium, is the wage (the price of labor) determined by the market.

    Government, however, can say that it believes the market determined wage is too low. It then mandates a higher wage that can be depicted as a horizontal line placed above equilibrium. Economists call this horizontal line a “floor” because it stops wages from moving lower to their natural market price. 

    And therein lies the dilemma. A higher wage or more jobs? Floors create surpluses. At the new, higher wage, the number of jobs laborers want is more than the number of jobs businesses are willing and able to offer. So, we have a higher wage but fewer jobs.

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    China’s Wages

    Jul 21 • Developing Economies, Economic Debates, International Trade and Finance, Labor • 377 Views

    Because I am still reading Peter Hessler’s Country Driving A Journey Through China, I related a recent NY Times article to his wonderful descriptions of an expanding transportation infrastructure, villagers migrating to cities, and more affluence. Saying that textile jobs were shifting to Bangladesh, Vietnam, and Cambodia, the NY Times article focussed on higher Chinese wages for unskilled labor. Then, combining all of this with other articles on striking workers at auto plants, I assumed that Chinese wages were rising. 

    But it is never that easy.

    I checked further and discovered that not everyone agrees on the status of Chinese wages. In a rather interesting debate at The Economist, several experts present different perspectives. One Peking University professor said that although wages have been rising, demographic data indicate that the era of “cheap” unskilled labour has not ended. Similarly, Morgan Stanley’s Stephen Roach says that “Chinese wage convergence” has a long way to go. A third commentator looks at a shift that has begun and economist Tyler Cowen says that instead, we can focus on Chinese productivity.

    The Economic Lesson

    I guess all of this returns me to, “It’s complicated.” Involving a huge work force, many businesses, and a powerful government, a changing Chinese economy requires a closer look when someone states a clear and logical conclusion.

    Also I will let you know more when I finish the “factory half” of the Hessler book. I am looking forward to it. 

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    China’s Drivers

    Jul 20 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 347 Views

    Peter Hessler’s Country Driving A Journey Through China From Farm To Factory takes the reader to China’s roads, villages, and factories. Having just completed the first half of the book, I wanted to share random fascinating facts that relate to their transportation infrastructure. 

    1. Many provincial roads in China do not have a name. When Hessler asked how you know where you are, he was told that sometimes there are signs naming a nearby town. Otherwise, you just ask.
    2. “Chaff crops” such as millet, wheat, and sorghum are placed in the middle of roads for drivers to “thresh” them. He called it a “drive-through harvest”.
    3. With considerable road building and a growing number of drivers, national law mandates every Chinese driver to takes 58 hours of driving practice through a state approved course.
    4. Until 1945 when they switched (because of a US Army suggestion) the Chinese drove on the left side of the road.
    5. Although the legal driving age is 18, most people do not drive until their 30s because they cannot afford it.
    6. Price controls keep gas cheap. In 2002, across China, the price was the equivalent of $1.20 a gallon.
    7. “Gas station girls,” in their teens, who left small villages, were the attendants who pumped gas in western China.
    8. In Beijing, people can sell their cars in huge lots where they paid 25 cents an hour in exchange for being able to solicit buyers. A typical sign might have read “2003 model, one owner. All registration legal.” One women was observed saying, “December, 1998″ when asked about her car’s age.
    9. Xiali is a popular Chinese carmaker.

    The Economic Lesson

    Within China and between China and its neighbors, China’s transportation infrastructure is expanding geometrically. Comparable in some ways to the U.S. during the 19th century, China’s new roads will facilitate specialization, urbanization, and efficiency.

    Margaret Thatcher once said, “You and I travel by rail and road. Economists travel by infrastructure.



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    Economic Growth

    Jul 19 • Economic Debates, Economic Thinkers, Government, Macroeconomic Measurement • 443 Views

    Did someone once say, where you look determines what you see? For evaluating the impact of federal spending, perhaps that is the problem.

    Some economists emphasize the connection between federal spending and the change in GDP (national production). Mathematically, they say, “Look, we spend one dollar and then national production increases by $2. The reason is the new spending that was created.” Government could build a road, then workers are paid, they buy computers and cars, still more workers receive additional wages, which they spend, and so on. The result would be the multiplied impact of the first dollar spent by government–the goal of the 2009 stimulus package. One economist, during Senate testimony, said that the type of spending or tax cut determines the change in GDP. Citing his “Bang For the Buck Chart,” he said that the ripple of spending during one year is especially magnified when government extends unemployment benefits.

    A trio of Harvard researchers looked at spending through a totally different lens. They focused on the connection between congressional spending and business investment. Looking at congressional districts to which powerful members of congress directed federal dollars, they found that businesses responded by doing less. Why? They hypothesized that government took over what business would have done, government created uncertainty, and government attracted employees.

    As you might have predicted, the first economist recommended more government spending while the second group had the opposite conclusion.

    The Economic Lesson

    Explained by economist John Maynard Keynes during the 1930s, the government spending multiplier is a controversial concept. Believed by some and condemned by others, it contends that government spending can “prime the pump” and stimulate the private sector when a nation is experiencing an economic contraction.

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    Figuring Out Financial Regulation

    Jul 18 • Businesses, Economic Debates, Economic History, Financial Markets, Regulation • 321 Views

    Words cannot describe the 2300 pages of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In a way, because it says so much, it tells us very little. Still though, after looking at the bill and several news summaries, I wanted to share some main ideas.

    At first, “risk” and “protection” were the two words that came to mind. Risk: Lawmakers want to manage the impact of the risks taken by financial institutions. Protection: Lawmakers hope to protect consumers from making unwise financial decisions.  

    Then, I discovered a second approach that made sense to me at WSJ.com where they described the basics of the bill through four categories: 

    1) Government: Its powers will grow in order to preserve financial stability. Starting with the Federal Reserve, countless government regulatory agencies will be transformed.

    2) Banks: Financial firms will experience new restrictions on trading different types of complex securities.

    3) Consumers: A new bureau to protect consumers will be established. Its responsibilities will impact a plethora of financial activities. 

    4) Investors: Different investing groups such as hedge funds, people who give investment advice, insurance companies, and those who create securities packages will have new constraints.

    Essentially then we have four groups responding to a Congress that hopes to control financial risk and expand financial protection. With 2300 pages of text, mathematically, the ways in which the four groups can respond and then interact create countless permutations. 

    The Economic Lesson

    Passed in 1932 and 1933, the Glass-Steagall Act separated investment and commercial banking, changed the structure of the Federal Reserve, and created the FDIC. Although it was formally repealed in 1999, regulators permitted financial institutions to violate its spirit beforehand. When I read the act, I was surprised to see language that was as tough to follow as the current financial reform bill. However, as 34 pages of legislation, it had fewer variables and appeared to cover many of the necessary regulatory details.  


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