Somebody Needs To Stand Up For Wall Street

Bashing Wall Street is a perennial pastime of the progressive politician.  Certainly, it's Bernie Sanders' favorite occupation.  His speeches are filled with accusations that it was "greedy bankers" that "drove the economy to its knees," and with calls to break up the big banks and to make "Wall Street billionaires" pay their "fair share" in taxes.  But he's far from alone.  Massachusetts Senator Elizabeth Warren has risen to the status of left-wing icon through endless bashing of "Wall Street."  Hillary Clinton, while perhaps stopping short of the rhetorical extremes of Sanders and Warren, has joined enthusiastically in calls for more and yet more regulation of the financial sector.  (Wasn't the 2000+ page 2010 Dodd-Frank law supposed to include every possible idea for financial regulation that any progressive politician could even think of?)  

And actually, it gets even worse.  Here in New York, the financial business is our main home-town industry, the activity that far more than anything else makes us one of the richest cities in the world, if not the richest.  And yet somehow bashing Wall Street is an even surer route to political success here than elsewhere in the country.  Eliot Spitzer, when he was New York's AG, showed how a prosecutor could easily shake down any financial institution of his choosing for a few hundred mil, and quickly rode that horse to the governorship.  His current successor as AG, Schneiderman, continues in Spitzer's ignoble footsteps.  Same for the politician-wannabe U.S. Attorney (Bharara), who also follows the Spitzer playbook except that he has upped the customary hit of protection money per settlement by an order of magnitude, from a few hundred mil to a few bil.  Bashing Wall Street is also a sine qua non of most every successful campaign for the City Council.  Even in my own precinct of Greenwich Village -- home to loads of people in the financial business and where all local businesses, from real estate to retail to restaurants to theater to museums, depend on the success of the financial business for their livelihoods -- you are hard-pressed to find anyone with a good word to say about Wall Street.  They know that their own company consists of hard-working and ethical people, but somehow at the same time they buy into the narrative that everyone else in the financial sector is some kind of a crook.

Well, somebody needs to stand up for Wall Street.  And what's the point of being the Contrarian if you're not willing to do it?

First of all, what is "Wall Street"?  It once referred to a neighborhood near the Southern tip of Manhattan where the financial business was heavily concentrated.  The stock exchanges actually used to have a rule requiring stock brokers to keep their offices in the neighborhood in order to facilitate the physical transfer of share certificates from one firm to another when stocks were bought and sold.  Obviously, that rule became obsolete with the disappearance of paper share certificates.  Today I have my office in the Financial District area, a couple of blocks from Wall Street itself, and I can say from observation that the financial business is a much reduced presence in this area.  In the time since I previously worked around here in the 70s, close to half the buildings have been converted to residential.  In the 70s the residential population of the Financial District area was only a few hundred hardy souls; today estimates put the population around 50,000.  The biggest remaining office space users seem to be City and State government agencies.  Big new private office space users include the likes of Revlon, A.C. Nielsen, Conde Nast and Time, Inc.  Of the big banks, Citi and Chase have some operations here, but their headquarters and main operations are elsewhere; only Goldman Sachs maintains a headquarters in this area.  There are many small to mid-size stockbrokers and investment firms, but far and away most of that business is in midtown, if not Westchester or Greenwich, Connecticut (or Florida).

So "Wall Street" today is much more an abstraction than a place.  Indeed, Wall Street is an abstraction about the business of dealing in abstractions.  People rarely give a definition of what they are talking about when they use the term "Wall Street," but a good working definition is that part of the economy that deals in buying and selling abstractions.  In the traditional economy, you bought and sold physical things that could be touched and seen.  Even the other big wealth-generating sector of today's new economy, tech, has output that can mostly be touched, or at least seen.  Think computers, smart phones, or, in the case of programming, the output that you can see on your screen.  But what does the financial services sector produce and sell?  Things like rights to future repayment with interest, or rights to pieces of the future revenue stream of a business, or rights to future payment depending on the fluctuation of prices of something like gold or pork bellies or interest rates.  

It all seems so ephemeral.  Why should people get rich dealing in things you can't even touch?  Which is what gives the opening to the likes of a Sanders to say that Wall Street "produces nothing."  Well, that's because he's not smart enough or observant enough to perceive the benefits that buying and selling abstractions can bring to human existence.  Here are just a few examples:

  • Availability of credit to the masses.  When I was a kid, credit cards were a new thing, and the large majority of people did not have them.  Most purchases required you to earn the cash first.
  • Venture capital.  It's not just Microsoft and Apple and Google and Facebook.  Hundreds of companies in new and untried fields have gotten started in the U.S. through speculative venture capital investments, and a few of them have become the backbone of the economy in a remarkably short period of time.  Other countries don't have those companies because they don't have our venture capital investors.  Yes, some of the venture capitalists have become billionaires.
  • Private equity.  Closely related to venture capital, but private equity often deals with existing businesses that could benefit from a good shake-up, or new businesses in more traditional fields.  In the old days to execute your business idea you needed wealthy friends or family to back you.  Today, there are Wall Street players who specialize in separating the promising ideas from the lemons.  If they actually have a good eye for the ideas that will work, they will make a lot of money.  And the economy will have many new and successful businesses to provide jobs and income to the masses. 
  • Liquidity of investments.  Today you can buy or sell thousands of different stocks or bonds or funds in seconds, with minimal losses to commissions and bid/ask spreads (which today are a fraction of what they were when I was younger).  Much of the added liquidity comes from the increased presence of speculators in the markets, one species of which, the "high speed trader," is a favorite villain of Wall Street bashers.
  • Risk shifting.  Before derivatives markets, farmers got wiped out when the value of their crop dropped between planting and harvest.  Miners got wiped out when the value of the output dropped while the mine was being developed.  Companies selling internationally got wiped out when currency prices fluctuated.  Today farmers and miners and international traders lock in their prices before they produce the output.  Who takes the risk?  Speculators.
  • Efficiency of business.  Back in the 70s and 80s, a constant lament of business writers was that American business had gone soft, with entrenched management leading the easy life without accountability.  That meant less innovation and higher priced products for the consumer.  Today another aspect of "Wall Street" consists of activist investors and a market for whole companies ("corporate takeovers"), with aggressive investors constantly on the lookout for lazy management to challenge or oust.  Lazy entrenched management has been largely eliminated, except for that handful of companies with two-tiered stock structures that allow a family or other inside group to keep control (New York Times, anyone?).
  • Someplace to earn at least something on your retirement savings even as the government runs a decade-and-counting-long war against savers and retirees by keeping interest rates at or near zero. 

And really, I'm just getting started.  To say that "Wall Street" produces nothing of value is to show that you do not know what you are talking about.  

As is obvious from the above list, despite the rhetoric of Sanders, Warren, Clinton, et al., the so-called "big banks" are only a small part of the businesses referred to as "Wall Street."  The biggest banks (the likes of Chase, Citi, BofA, Wells Fargo and Goldman Sachs) may have big shares of certain aspects of "Wall Street," like bank "assets," bank accounts, credit cards, and home mortgages; but they are far from dominant in the overall financial services sector of the economy.  Wikipedia here, citing a Citibank source, puts Citi's share of the overall financial services market at about 3%.  That would put the market share of the five biggest banks in the range of 10 - 15%, which seems about right to me.  And you won't find many of the "Wall Street billionaires" working for the big banks.  Outside of their investment banking operations, the big banks employ thousands of people who administer things like bank accounts and home mortgages, and do not make outsize salaries.  Some investment bankers do make outsize salaries, but they also have about the highest pressure jobs in the world, often concluding enormously complex transactions on breathtakingly short time schedules.  Meanwhile, the large majority of the "Wall Street billionaires" will be found not in the big banks, but rather in the venture capital funds, the private equity funds and the so-called hedge funds. 

And finally, what exactly is wrong with buying and selling abstractions?  With all the upsides identified above (and plenty more that I have not had space to mention), what is the downside?  Sanders says that Wall Street "brought the economy to its knees."  How?  Sure, every market fluctuates, and prices of anything can (and, from time to time, will) crash.  Is that a reason to prohibit the existence of the market?  It's just complete ignorance, but with literally nobody pushing back.       

















Unifying Themes Behind Pseudoscience

Most of the coverage of pseudoscience at this site has been of two things, the climate scare and the high-fat diet hoax.  But in a column in yesterday's Times of London, Matt Ridley reminds us that there are plenty of more examples of big-time pseudoscience out there.  His column covers two more that are also the subject of recent news:  (1) glyphosate ("Roundup") weed killer, and (2) DDT.  That makes four.  Do all of them seem to have some unifying themes?

Why is glyphosate in the news?  If you are in the U.S. you may not have seen much news about it lately.  But Ridley notes that just last week the European Parliament voted to ban it for "non-professionals" -- that is, gardeners -- while also "allowing" its use for another counting-down seven years for farmers while the matter is "studied."  So what's the problem with glyphosate?  It certainly has some big positives.  Besides having a large role in increasing crop yields and reducing famine around the world, it is much less toxic than prior-generation weed killers:

Dose for dose, glyphosate is half as toxic as vinegar, and one tenth as carcinogenic as caffeine. Not that coffee’s dangerous — but the chemicals in it, like those in virtually any vegetable, are dangerous in lab tests at absurdly high concentrations. . . .  Roundup is probably the safest herbicide ever, with no persistence in the environment.   

But Ridley gives several reasons why glyphosate has come to be hated by what he calls the Green Blob:

[T]he Green Blob hates it for three reasons. It’s off-patent and therefore cheap. It was invented by Monsanto, a company that had the temerity to make a contribution to reducing famine and lowering food prices through innovation in agriculture. And some genetically modified crops have been made resistant to it, so that they can be weeded after planting by spraying, rather than tilling the ground: this no-till farming is demonstrably better for the environment, by the way.   

But what's the state of the science?  Is glyphosate dangerous?  On that subject we have the U.S. Agricultural Health Study, which has been tracking 89,000 farmers and their spouses for 23 years.  The results:

The study found “no association between glyphosate exposure and all cancer incidence or most of the specific cancer subtypes we evaluated, including NHL [non-Hodgkins lymphoma]. . .”   

Numerous other studies reach the same results.  So why isn't that the end of the matter?  Because something called the International Agency for Research on Cancer, part of the UN's WHO, hired an EDF activist and long-time anti-glyphosate campaigner named Christopher Portier to advise on glyphosate.  Portier proceeded last year to put together a big dossier on glyphosate for IARC, claiming to find that glyphosate is "probably carcinogenic"; and he's been going around from government to government pushing for a ban ever since.  And thus the European Parliament's vote last week.  Ridley characterizes the Portier dossier as "surely pseudoscience" and based "on a tiny number of cherry-picked studies."

For more on the IARC anti-glyphosate campaign, see this from blogger David Zaruk: "IARCgate For Dummies:  Three Reasons This WHO Agency's Glyphosate Campaign Is A Scandal."  

So what themes do we find here?  Activist campaigners claiming to be advocating for environmental or health issues (often for both) seek to exploit minor potential risks of concern to wealthy constituencies to gain vast additional amounts of additional control over people's lives.  Oh, and in the process throwing under the bus poor and third-world constituencies.  In the case of glyphosate, it's the poor who would benefit greatly from increased crop yields and decreased famines.

Do you notice any similarities to the situation with DDT?  People forget that malaria was very much a major health problem in the United States until as late as World War II.  Although progress had been made against it through laborious efforts with larvicides and draining of stagnant water, it was the widespread use of DDT after the war that literally wiped malaria out in the U.S.  Then came Silent Spring. DDT got banned, and today millions annually continue to die in Africa.

What I don't understand is how people can convince themselves that they are on the moral high ground when they would ban glyphosate for the poor while they themselves eat like kings; ban DDT for the poor while they themselves live where malaria has been wiped out by DDT; ban fossil fuels for the poor while they themselves jet around the world; and on and on.     


How Not To Measure Whether Obamacare Is Succeeding

After some months of little news on the Obamacare front, it's suddenly back in the headlines in the past week or so.  Major health insurers have announced withdrawals from the "exchanges"; others have announced big losses; and some are predicting a combination of further withdrawals and/or big premium increases when the next round of annual renewals comes up.  Is the whole thing starting to unravel?

Obviously, the New York Times needs to weigh in.  They did so with a big front page article on Monday titled "One Year Later, Many Are Finding Relief in Health Care Law."  (Online the title is "Immigrants, the Poor and Minorities Gain Sharply Under Affordable Care Act."  )  Is Obamacare succeeding?  Of course it is!  At least, Obamacare is succeeding if you use the criteria of success that the New York Times uses.  The problem is that they use criteria of success that seem to make sense to the progressive mind, but don't make any sense to me.

Now, if you asked me to assess whether Obamacare is succeeding, the criteria I would come up with would have to do with whether it is accomplishing important goals in a cost-effective manner.  In other words: (1) Have health outcomes improved for some categories of the supposed beneficiaries of the law? and (2) At what cost?  You won't be surprised to learn that this very long New York Times article does not devote one word either to the question of whether anyone's health outcomes have improved, nor to the question of cost. 

Well, of course they don't devote a word to the question of whether health outcomes for anyone have improved.  That's because by now everybody (or at least everybody who follows the literature) knows that expanding the number of people covered by health insurance does not measurably improve health outcomes.  (You mean you don't know that?  You've been reading the New York Times!)  Megan McArdle here in a 2013 article summarizes the results of the major studies on whether increased "coverage" by health insurance improves health outcomes:

  • There was the big Oregon randomized study that ran for two years from 2008-10.  Oregon got some money to expand Medicaid, but only for about half the number of people they wanted; so they held a lottery to determine who got in.  And then they ran a randomized study on 6400 people who got in and 5800 who did not.  Results:  Not only was there no detectable difference in mortality, but "the study failed to find statistically significant improvement on the three targets associated with the most common chronic diseases.  This, mind you, is the stuff that we're very good at treating, and which we're pretty sure has a direct and beneficial effect on health." 
  • Then there was the big observational study, conducted by Richard Kronick of UC San Diego, based on data from 672,000 insured and uninsured people as reported on the National Health Interview Survey from 1986 to 2000.  Results: "no mortality benefit from insurance."  
  • Or, going back a ways, there was the big Rand randomized study of close to 8000 people, divided into five groups ranging from very to much less comprehensive health insurance, that ran from 1971 to 1982.  Results:  "[T]hey looked to see what differences emerged in health outcomes.  Shocker: none did."

OK, so the Times won't talk about any improvement in health outcomes.  What then are they referring to when they say that immigrants, the poor and minorities have "gained sharply" under the law?  Answer:  they've gained "coverage"!

[T]he Times’s analysis shows that by the end of that first full year, 2014, so many low-income people gained coverage that it halted the decades-long expansion of the gap between the haves and the have-nots in the American health insurance system, a striking change at a time when disparities between rich and poor are growing in many areas.  

Yes, it's "coverage," the holy grail of progressive healthcare policy.  But can somebody please explain to me why "coverage" is of any value to a poor person?  Remember that "coverage" will not improve your health outcomes.  Also remember that in this country, if you are sick or injured and show up at a healthcare facility such as a hospital, they have to treat you.  You might run up a big bill.  But it is a given that if you are poor and without assets, they won't be able to collect the bill.  That's why low income people with few assets who think about the subject for a few moments realize that their sensible strategy is to go without health insurance.  If you had few assets and an income around, say, $30,000 per year, and suddenly you had available another $10,000 or so per year in cash, is there really any chance that you would think your highest priority would be to spend all of that money on health insurance?  How about food for the kids, or a new TV?

Let's give the Times a chance to try to explain why "coverage" is valuable to poor people.

“From the vantage point of the poor and working poor, Obamacare has been profound,” said Jim Mangia, president of the St. John’s Well Child and Family Center, a federally funded health clinic in South Los Angeles that has enrolled 18,000 new patients under the law, nearly all of them Hispanic or black and the vast majority in Medicaid.

But what exactly is the "profound" effect of Obamacare for poor people if you can't demonstrate any change in health outcomes?  There is, of course, the fact that Jim now gets paid a lot more, since he gives away much less uncompensated care.  Good job, Jim, trying to spin that as a benefit to the poor.

Or try this one:

One new patient, Angela Cruz, 60, is a typical example of a winner under the law. A legal immigrant who is not a citizen, she came to this country from El Salvador in 1990. She had never had health insurance in her 25 years of working in the United States, most recently as a nanny. . . .  Then she got coverage under the health law’s expansion of Medicaid in California.  Now, she said, “I don’t have the stress of wondering — can I pay this — when sometimes I didn’t have anything to pay it with.”   

So what exactly did this big Obamacare "winner" win?  No demonstrably improved health outcomes, but she doesn't have the "stress" she used to have!

I say, give Angela the real test:  offer her the cost of her Obamacare "coverage" in cash and see whether she takes the cash or the "coverage."  Of course, she'll take the cash.  And so would nearly everyone else who the Times says is "gaining sharply" from Obamacare.  That's because, as I wrote in this post back in 2013, health insurance is about asset protection, not health.  If you don't have assets to protect, health insurance is of next to no value to you.  It won't improve your health.  OK, it may relieve some "stress."  If you had no meaningful assets and pretty good health, would you pay the cost of Obamacare "coverage" versus taking the cash?

Oh, and dare we address that other subject that is taboo over at the Times -- cost?  The CBO here puts the net cost of Obamacare subsidies for 2016 at $660 billion.  (And that's before you even get to the effect of Obamacare in driving up everyone's premiums.)  But don't worry, the resources of the federal government are infinite.  We'll never miss the money.

Careening Down The Road To Stupid

It's been a long time since a New York voter got to have some real say in a presidential election, so I suppose that I should celebrate that somebody may actually notice that I voted this morning.  Still, all the polls seem to be indicating that on the Republican side Donald Trump is way ahead in New York, and indeed may for the first time in any primary receive more than 50% of the Republican vote.  Meanwhile, on the Democrat side, although Hillary seems to have a reasonably comfortable lead in statewide polls, believe me, in our neighborhood you would barely know she is running.  All the energy is on the Sanders side.  Our local newspaper (The Villager) has endorsed Sanders.  If you went to a fancy college and got a fancy job in New York and moved into fancy and expensive Greenwich Village, it is now just a given that you believe that the government is an infinite source of free money that can and should be passed around by those in power to solve every human problem and create perfect fairness and justice.  Hey, we all know it!  Feel the Bern!  

Back to the Republican side.  Readers here will not be surprised to learn that I don't think much of Trump.  Yes, I don't naturally take well to people who are obnoxious and insulting to everyone else; but I could learn to live with that if I agreed with the person on major issues.  In Trump's case he's just completely at sea on the issues.  It's not so much that I disagree with him as that when he's not contradicting himself I often can't even figure out what he's talking about.  In this post last month I commented on Trump's endlessly-repeated line that running a trade deficit with another country means that we are "losing" some kind of trade war with that country, and that the situation can be fixed by having some really good negotiator as President to negotiate better government-to-government "trade deals."  Then we'll be "winning."  It just doesn't make any sense, and shows complete ignorance of the subject matter.  I could even live with ignorance on a complex subject like this, if the person was willing to be humble and show a willingness to learn.  Obviously, that's not Trump, who has made the subject of his greatest ignorance into his signature issue.

And then there I was last night watching a video clip of Trump at a campaign rally in Buffalo.  In the particular clip that somebody had chosen, Trump was saying that "nobody here can vote for Ted Cruz."  And the reason?  Because Ted Cruz had dissed New York by voting against the Hurricane Sandy relief bill at the end of 2012.

Now, as anyone who can do basic arithmetic will immediately recognize, the Hurricane Sandy relief bill was a terrible thing for New York.  Not for the then governor and mayor, who got big wads of free money to pad their budgets for a couple of years; but for the people of New York it was a terrible thing.  The Hurricane Sandy relief law passed out a wildly-inflated $60 billion, mostly to New York and New Jersey, to pay for everything that anybody could think of to put on a wish list at an emotional moment, without the slightest consideration of whether particular expenditures made sense or were justified.  This was a terrible thing because it established the precedent that the federal government after a natural disaster will pay whatever it takes to restore everything to perfection in any amount, reasonable or unreasonable, that anyone can think to claim.  This precedent was terrible for New York because, Hurricane Sandy notwithstanding, New York is not very subject to natural disasters.  Therefore, under a regime where the federal government provides complete no-limits relief and recovery aid for every natural disaster, over time New York will pay out in disaster relief to other parts of the country a large multiple of anything that it ever receives, likely ten or twenty or more times as much.  

New York rarely gets a serious tornado or earthquake.  And while it does get a hurricane occasionally, it gets far, far fewer of them than the South Atlantic states and the Gulf coast.  Just look at a map, and you will realize how difficult it is for a hurricane coming up the East coast to score a bulls-eye on New York.  For this post written at the time of the Hurricane Sandy relief bill, I did some research and discovered that in the 50-year period from 1961 to 2010, some 27 "major" hurricanes (categories 3, 4 and 5) made landfall in the United States.  Of those, 23 hit the Gulf coast or Florida, 3 hit the Carolinas, and just one (Gloria in 1985) hit the mid-Atlantic.  By demanding and taking the Hurricane Sandy money, we have put ourselves securely on the hook for the cost of recovery from the twenty or thirty or more serious hurricanes that are sure to strike the South for every one that we get over the coming decades.  Take a look some time at the dozens of miles of multi-million-dollar mansions and condos lining the oceanfront north and south of Miami in Florida.  A good cat-3+ hurricane strike in the middle of them would cause losses a multiple of those from Sandy.  The oceanfront mansions and condos wouldn't even be there except that the Floridians are secure in the knowledge that New York and the rest of the country are going to replace everything when the big hurricane comes through.

And then give some thought to tornadoes in Kansas, earthquakes in California, and floods along the Mississippi.

I don't know about you, but for me, the first thing I would expect from a negotiator negotiating on my behalf would be that he/she can do the basic arithmetic to figure out which position in the negotiation benefits me and which position costs me.  If you lack that basic skill, you will promptly get taken to the cleaners by your negotiating counterparties.  From the evidence I can see, Trump seems to lack that skill.  And supposedly, negotiating skill is his big selling point.  Lord help us.  

Cruz?  Whatever else you may think of him, he definitely had this one figured out.

Well, I take heart from realizing that as bad as Trump's basic arithmetic skills seem to be, he's not in the league of Bernie and Hillary and their supporters.  Disaster relief is a question of some tens or maybe hundreds of billions of dollars every now and then.  Not being able to figure out that Social Security and Medicare and Obamacare (and single payer healthcare for all, and free college, etc., etc.) are ponzi schemes is more like a $100 trillion issue.  I guess Bernie and Hillary have the excuse that they are old enough that they can dupe the suckers for now and they're likely to have died as heroes by the time everything comes apart.

UPDATE, April 20:  Who says that my Congressional District (NY-10) is good for nothing?  Our district covers the West Side of Manhattan and some pieces of Brooklyn, and is known for loopy left-wing thinking, Columbia and New York Universities, Greenwich Village, and the highest income inequality of any district in the country.  According to election results here, we gave enough votes to John Kasich yesterday to take a delegate away from Donald Trump.  But we were bested by our cross-town rivals NY-12, where Kasich actually took a plurality of the votes and 2 of the 3 available delegates.  Outside Manhattan, Trump swept all but a couple of delegates.  If you are looking for an explanation, I don't have it.     

What To Expect When The Minimum Wage Goes To $15

Late last week a reader named Bert wrote to ask a series of questions about what is likely to happen in places that raise the minimum wage to $15.  The questions are found in Bert's comment at this post.  Since Bert is interested in my thoughts, I thought others might be as well.

To summarize, Bert's questions are:

  1. Won't raising the minimum wage also raise the wages of others up the pay scale, as employers seek to preserve the differentials between lowest paid workers and those next up the ladder?
  2. Isn't raising the minimum wage a "cynical tax grab" by government, because the higher wages, both at the bottom and up the ladder, will generate more taxes?
  3. Is there a "moral" issue involved in government preventing a voluntary economic transaction, even if that transaction involves paying for human labor at a wage so low that we find it distasteful?

To address these questions, I have to start with some basic economics; and by "basic economics," I mean what you learn in the first couple of weeks of an intro economics course.  Now unfortunately, you can't trust much of what you learn in an economics course, and the more "advanced" it gets, the more likely it is to be a total fallacy -- see, for example, the Keynesian "stimulus" fallacy endlessly promoted by the likes of Krugman and Blanchard.  But the stuff you learn in the first couple of weeks of the intro course has stood the test of time, particularly in its depiction of what to expect from price controls.  

So here's the basic summary:  A market is what we call a place where people come together to buy and sell stuff.  A market not subject to government price controls (sometimes called a "free market") will "clear," meaning that everybody who wants to buy can buy and everybody who wants to sell can sell; and, to reach the point of "clearing," the market will come to a "market-clearing price," that is, the price at which everybody who wants to buy can buy at that price, and everybody who wants to sell can sell at that price.  "Free" markets not subject to government price intervention rarely have shortages or surpluses.  A good example of such a market is the stock market, which determines prices that "clear" the market for each stock on a moment-by-moment basis.  If you want to buy or sell 100 shares of Microsoft, you can always do it in a matter of seconds.

Then there are markets where the government intervenes and tries to control the price.  Sometimes the government tries to control the price at a level lower than the market-clearing price (examples: rent control in New York; consumer goods in present-day Venezuela).  Other times the government tries to control the price at a level higher than the market-clearing price (examples: many agricultural commodities; the minimum wage).  When the government tries to control a price low, the result, always and everywhere, is a shortage -- the good or service becomes unavailable to many willing buyers.  Witness the empty store shelves and long lines in today's Venezuela.  When the government tries to control a price high, the result, always and everywhere, is a surplus -- there are people who would like to sell but cannot find buyers at the controlled price.  Witness the surplus corn and wheat and butter endlessly produced as a result of U.S and European agricultural price controls.  In the case of the minimum wage, the surplus manifests as unemployment or involuntary idleness for some segment of the population otherwise willing to work.

So do minimum wage laws actually lead to job losses and increased unemployment?  It's hard to believe that they wouldn't, and here are the results of a survey by the American Economics Association of labor economists showing that the large majority of that group believe that that would be the result.  But the effect may be hard to parse out of the very crude government statistics when the minimum wage is low as a percentage of the median income and few people are actually paid at the legal minimum (and therefore the effect of the minimum wage on the labor market is small).  That's been the case in the U.S. for some time, where the current $7.25 federal minimum is around 30% of the median wage nationally, and less than 4% of workers are actually paid at or below the $7.25 level.  

But, if you look closely at the data, you will find, even at the current $7.25 minimum, strikingly high levels of idleness among the very-least-skilled potential workers, particularly among young black males.  This idleness does not necessarily manifest in the government's numbers for "unemployment," because to be counted as unemployed you must say that you are looking for work.  Thus, many eminently employable people may be without employment, but not counted as "unemployed."  As an example, the demonstrations in Baltimore following the death of Freddie Gray about a year ago revealed to the audience large numbers of young black males with lots of time on their hands; and, as I reported in this post last April, even though Baltimore's official "unemployment" rate was only a couple of points above the national average, its employment-to-population ratio was a full 5 points below the national norm -- meaning that tens of thousands of people who would be employed elsewhere are without employment in heavily-minority Baltimore.  Others who have recently looked at the condition of young black males in major American cities have also found strikingly high rates of non-employment, not reflected in the official government numbers for "unemployment."  For example, a New York Times editorial on February 20 titled "The Crisis of Minority Unemployment," cited to a report from something called the Great Cities Institute for the proposition that about 30% of young black males (ages 20-24) in New York and Los Angeles neither work nor attend school; and in Chicago the comparable figure was said to be close to half.  (Being ever the skeptic, I would point out that the Great Cities Institute is an advocacy group and its numbers may well be exaggerated; but even if the correct figures are only half of what they claim, these would still be very striking numbers.)  

Now, how much of this idleness can be attributed to the current minimum wage?  Obviously, there could be other factors at work.  On the other hand, markets not subject to government price controls literally always "clear."  That means that, to attribute the idleness to something other than the minimum wage, you must believe that these young black men are somehow completely unemployable, or would refuse to work at any price.  Those things don't seem too likely to me.  I think that the minimum wage is substantially responsible, although I admit that it's a judgment call and others could differ.  

But there are other places where we can look for more data.  What happens when the minimum wage becomes much higher as a percent of the median income?  As it happens, we have an example of that in the United States, which is Puerto Rico.  And it's not pretty.  Puerto Rico is subject to the federal $7.25 minimum wage, but its median income is only about 40% of that in the 50 states, so that a full-time minimum wage job comes in at about 70% of median income, versus 30% in the rest of the country.  And here are some of the things we find in Puerto Rico:  its official "unemployment" rate is 11.8%, almost 7 full points above the national average; even more dramatically, its "labor force participation rate" (ratio of jobs plus unemployed to population 16 and over) is only 42% -- more than 20 full points below the national norm.  That 20 point differential represents something like 400,000 people who would be working if Puerto Rico met national norms for labor force participation.  And two more things about Puerto Rico:  (1) it is losing population hand over fist (down about 10% since 2000) as people leave for the mainland to find employment; and (2) 25% or more of its economy is said to be "underground" and not reported to the government.  Again, there could be other factors at work than just the minimum wage.  But it is very hard to assign principal responsibility for these things to anything other than the minimum wage.

So what will be the effect of a $15 minimum wage?  Here in chic Manhattan, probably not much at all.  The effective market-set minimum is around $15 right now.  The same may well be true in San Francisco and the wealthy parts of Silicon Valley.  But how about Syracuse, Utica, Fresno and Stockton?  I'm sorry, but I think you are in for the fate of Puerto Rico.  Maybe not quite so bad, but only because the $15 minimum is more like 50-60% of your median income versus the 70% that Puerto Rico experiences.  The people most harmed will be those at the very bottom of the labor skills scale.  They will be put completely out of business, and rendered idle.  Oh, there's always the underground economy.  Drug dealing, anyone?  

With all that background, I now turn to Bert's questions.

  1. Yes, there could be some pay increases for people in the next tiers up the pay ladder from the very bottom rung, as the bottom rung moves up.  But remember, a business cannot pay out in wages more than its revenues and expect to survive for long.  Some raises can come out of former profits, but the marginal businesses that pay minimum wages don't have a lot of profits to play with.  It is hard to believe that the aggregate of raises will exceed the aggregate of lost wages to the lowest income workers from firings, downsizings, and company closures.
  2. It is possible that politicians with zero mathematics skills (e.g., Sanders, Clinton) may actually think that a higher minimum wage will create vast new wealth out of thin air that can then be taken by taxes.  The reality of course is Puerto Rico, where a tenth of the population leaves the jurisdiction entirely and quarter or more of the remaining economy goes underground and stops paying taxes altogether, and the tax system goes into a death spiral.
  3. Yes, there is a huge "moral" question in the minimum wage that somehow goes undiscussed in trendy progressive circles.  The correct way of looking at the minimum wage is that it is a device used by entrenched workers, often white and unionized, who have achieved above-market wages through cartelization, to protect themselves against price competition from minorities.  Should the young black kid be able to win a job against a competing white worker by underbidding on price?  After all, underbidding on price is how the Waltons became billionaires.  I personally find it morally repugnant that the government shuts young minorities out of the ability to get a first toe-hold in the labor market by competing on price, and renders them idle and often dependent on government hand-outs.  Why Hillary, Bernie, and all the other trendy progressives don't find this morally repugnant, is beyond me.