The next Fed nominee

by on June 7, 2011 at 12:51 pm in Games, Political Science | Permalink

1. Should have spent a lot of time talking to Republicans.

2. When meeting with Ron Paul, the following should come to his mind: “I have great respect for the proponents of hard money and I view them as one reason why America became great again, in the 1980s.  I know you think the minimum wage is worse than we at the Fed do, so please let me bring one argument to your attention.  Unemployment is very high now, perhaps in part because the minimum wage has raised forty percent in the midst of a downturn a few years ago.  But those statists in Congress simply will not vote to lower or abolish the minimum wage, damn them.  We can, however, surreptitiously lower the minimum wage in real terms with a bit of loose monetary policy.  I know you are not with us on this monetary issue, but if you find yourself having to strike a compromise of some kind, at least rest assured that a budge from your side would be liberating millions of lower-income Americans from slavery.  It could get us off the Road to Serfdom.”

The Fed governor doesn’t have to believe that, and may not wish to say exactly that, but a speech of that nature should come rather quickly to his or her mind.  If not, he or she is probably not the right nominee in the first place.  The Fed staff can figure out the rest.

Addendum: Matt Yglesias offers relevant comment.  Alternatively, Felix Salmon may be correct that there is no deal to be made with the Republicans.  In that case, a) Diamond would not have mattered anyway, and b) we still should base the choice upon the scenarios where the choice stands a chance of making a difference.  Furthermore, the Republican reps. do not have the same incentives as the Presidential candidate, so a deal may be possible after all.

The Anti-Gnostic June 7, 2011 at 1:08 pm

“We can, however, surreptitiously lower the minimum wage in real terms with a bit of loose monetary policy. I know you are not with us on this monetary issue, but if you find yourself having to strike a compromise of some kind, at least rest assured that a budge from your side would be liberating millions of lower-income Americans from slavery. It could get us off the Road to Serfdom.”

Doesn’t work that way. Workers are way downstream from the new money and are not rendered “cheaper” via inflation. If you want to help lower-income Americans, then get rid of the government’s enormous footprint in the capital markets.

The General June 7, 2011 at 3:21 pm

How does lowering the value of their paycheck not make them cheaper?

Tim June 7, 2011 at 3:41 pm

Why would make them cheaper mean they get hired? Businesses are sitting on piles of cash and not hiring anyone. You think that if Microsoft could pay its workers only $4.50 an hour they’d suddenly start hiring? McDonalds pays better than minimum wage and IS hiring. The minimum wage is a red herring.

We are in a post-”Mythical Man Month” society. Very few good managers throw labor at a problem. As such the minimum wage is really only a detriment for the most poorly run companies. McDonalds pays better than minimum wage which says that the labor you get for minimum wage is not worth paying for, even in the simplest of jobs.

Anon. June 7, 2011 at 6:05 pm

Whether they have enough resources to pay wages is irrelevant. Hiring decisions happen at the margin – is the marginal worker’s production worth more than his cost? If not, he will not be hired, independently of whether a company is sitting on $5 or $5 billion.

The Anti-Gnostic June 7, 2011 at 3:50 pm

The same reason having a million Zimbabwe dollars doesn’t make you rich.

Arbor Landon June 7, 2011 at 5:01 pm

Yes, but the point isn’t wealth creation, but merely undermining the minimum wage.

…Inflation would definitely undermine the minimum wage.

JP White June 7, 2011 at 7:41 pm

Because the inflation doesn’t affect everything evenly. What we have seen over the past several years is increases in commodities and food. So the input costs to a business increase (say hamburger for McD’s), and the the cost of living for someone on minimum wage increases (food that they need to purchase.) This hurts both the employer and employee. Not helpful.

Mark June 7, 2011 at 1:27 pm

“Furthermore, the Republican reps. do not have the same incentives as the Presidential candidate, so a deal may be possible after all.”

When the GOPs incentives are to negatively impact the economy and the Dem incentives are to boost the economy, the deal would be for a candidate that would have no impact. So maybe this explains why the Dems stick with no deal.

What I basically read Part 2 is saying that the candidate should lie and get nominated. Creative advice.

Richard A. June 7, 2011 at 1:36 pm

Christina Romer would make a good choice as the next Fed nominee and should have no problem with the rational right.

Neal June 7, 2011 at 2:02 pm

Does the “rational right” control the right right now?

Bernard Yomtov June 7, 2011 at 4:33 pm

Diamond should have had no problem with the rational right.

Where does this rumored being live?

Tom June 8, 2011 at 12:23 pm

Romer would have been a cinch, if she had stuck to what her research said instead of parroting the administration’s views.

Justin June 7, 2011 at 1:41 pm

Tyler,
Can you think of anyone that you’ve debated with that might be a good candidate?

Brian J June 7, 2011 at 1:43 pm

In other words, the next nominee for the Federal Reserve, despite being completely qualified, has to kiss up to no name Republicans who are concerned only with politics and pretend he or she subscribes to questionable (and that’s being charitable) views of the minimum wage to a crank that will be in a retirement home soon if we are lucky? Why not have this person do a walk of shame as people toss eggs and rotten tomatoes at him or her?

John Thacker June 7, 2011 at 1:57 pm

Brian J,

Because that’s the way it works. Remember that Greg Mankiw had to apologize about outsourcing, despite that being even less controversial (among economists)?

Brian J June 7, 2011 at 2:29 pm

I don’t see how the situation is comparable. Please, tell me how you think it is.

John Thacker June 8, 2011 at 3:51 am

Because Greg Mankiw was forced to “kiss up to no name [Democrats] who were concerned only with politics and pretend[ed] he or she subscribe[d] to questionable (and that’s being charitable) views.” It happens in politics.

Corporate Serf June 8, 2011 at 9:08 am

figures

Brian J June 7, 2011 at 2:46 pm

I don’t see how the situation is comparable. Please, tell me why you think it is.

Matt Waters June 7, 2011 at 5:08 pm

“In other words, the next nominee for the Federal Reserve, despite being completely qualified, has to kiss up to no name Republicans who are concerned only with politics and pretend he or she subscribes to questionable (and that’s being charitable) views of the minimum wage to a crank that will be in a retirement home soon if we are lucky?”

Yes.

I was a “libertarian” big-time Bush supporter up until 2006 or so and I remember being disgusted with the various filibusters and holds to stymie just about any Bush appointment. But the Republicans have really taken it up a notch with their actions against Obama. When a conservative Chief Justice like John Roberts has to basically beg for approval for lower court appointment, you know the Republicans have gone way too far with their obstructionism.

I have quite honestly been disgusted by many Republicans and their war against any sort of rationality or, in the budget debate, correct arithmetic. They win an election through demogouging Medicare just to turn around and try to turn Medicare into Obamacare to prevent raising taxes. Even if Ryan’s voucher plan is a good idea, the blatant hypocrisy is breathtaking.

Brian J June 8, 2011 at 1:39 am

Thank you, thank you, thank you. This isn’t about appointing an extremist and/or an unqualified hack. It’s about screwing with the economy during a time of crisis for political reasons. It’s quite breathtaking that nobody is willing to call Shelby and others out for this crap.

John Thacker June 8, 2011 at 3:46 am

They win an election through demogouging Medicare just to turn around and try to turn Medicare into Obamacare to prevent raising taxes.

If the deficit is really bad, it’s entirely consistent to run on saying that it’s a bad idea to package Medicare cuts with increasing spending on health care, when we need those Medicare cuts to balance the budget. It’s also consistent to complain about the “Obamacare” Medicare cuts but then cut Medicare by less than what “Obamacare” purports to do, which is what the plan does. The reason the deficit declines is because of not spending all the theoretical cuts on other health care spending.

Even if you believe that the recent health care law’s Medicare cuts will stick, the law is much worse than budget neutral, because it uses up (all the) available Medicare cuts only to turn around and spend them immediately.

Mario Rizzo June 7, 2011 at 1:44 pm

Randy Kroszner would do nicely.

Abe June 7, 2011 at 2:04 pm

I agree… he’d be the top name on my list. Not sure he’d go back to Washington though.

Thomas June 7, 2011 at 4:28 pm

We’re not supposed to notice that this was payback and not about policy. If we pretend that it’s about ignorant Republicans versus good-hearted and generous Democrats we’ll all be fine. If we take a look at the broken confirmation process, we may notice that there’s lots of misbehavior on both sides of the aisle.

John Paul Lewicke June 7, 2011 at 1:48 pm

Tyler, what kind of chance would Scott Sumner have at this?

Matt Waters June 7, 2011 at 5:12 pm

Given that Republican rhetoric is picking up about “Bernanke debasing the dollar,” I would be sure Scott would not have a chance in hell with quotes from his blog used against him.

Still, I would very much like his name and his opinions to become much more mainstream. So far, most of the mainstream voices asking for looser monetary policy have been political liberals and it would help if more true conservatives and libertarians also defended looser policy.

Ryan Vann June 7, 2011 at 1:55 pm

Loose monetary policy? As in paying peopel to borrow money? Monetary policy is about a loose as a Reno hooker right now, and it isn’t doing anything on the UE front.

Dean Sayers June 7, 2011 at 2:08 pm

Proponents of hard money were also very damaging during Andrew Jackson’s & Hoover’s administrations. The same argument was used in the 1830s to eliminate the best-competing bank with the strongest currency at the time, and in the 1930s to forgive European debt, contracting the money supply.

I would argue that to incentivize production, the working (consumer) class needs access to more discretionary funds, not less.

Adam June 7, 2011 at 2:12 pm

You don’t think that speech would lead to Paul blasting the nominee as having admitted to being in favor of debasing the currency?

Also, why is he/she meeting with Ron Paul, who doesn’t have a vote on the confirmation?

mulp June 7, 2011 at 4:04 pm

You are right, he needs to meet with Rand Paul, who has also placed secret holds.

Ryan June 7, 2011 at 2:13 pm

Did anyone else catch Yglesias’ contradiction? First, he places “moral blame on Richard Shelby” as to why Diamond withdrew. Then, he goes on to say, “the nominee we really need isn’t a Peter Diamond style solid social democrat. What we need is a monetary economist with right-wing views on economic policy in general, but the right ideas about monetary stimulus.” Seems to me, Shelby and Yglesias agree, at least partially, on the nominee’s requirements.

UserGoogol June 7, 2011 at 3:03 pm

That seems like a weird reading of what Matt said. Matt said “the moral blame for the Fed situation should rest with Shelby and monetary cranks like Ron Paul and Paul Ryan, but the administration has made serious tactical and strategic blunders here.”

Diamond is not the “nominee we really need” because “the current politics of the country” make Republicans make spurious questions of candidates’ qualifications. Matt doesn’t seem to be making Tyler’s argument that a qualified candidate needs to be able to sell sensible monetary policy to cranks, he simply is making the tactical argument that qualified candidates… need to be able to get appointed.

That sort of disqualification is obviously not the sort of thing that justifies Shelby’s actions. For Republicans to filibuster a candidate because he’s unappointable because Republicans are filibustering him is ridiculously circular.

Andrew' June 7, 2011 at 4:47 pm

I find it interesting that the definition of a monetary ‘non-crank’ is one who doesn’t question mass fraud.

You guys are seriously talking about cutting people’s wages via the printing press. That is what you are talking about.

Maybe that’s the…’best’ solution, but I’ll gladly wear my crank badge.

Andrew' June 7, 2011 at 4:51 pm

And not just that. In order to trick people, you are willing to white out over past Fed mistakes by jerking around all prices in the market and dicking with all contracts and are trying to blame the cranks.

I guess being a modern monetarist means never having to say you are sorry.

UserGoogol June 7, 2011 at 5:15 pm

I think that monetary expansion isn’t mass fraud, (don’t really want to have an argument about it since it’s been argued so very passionately elsewhere) but I’ll concede that it was unpolite to use that choice of terms on a website teeming with Austrians, many of them comparatively sane. I wanted a quick shorthand and chose a derogatory one, which was wrong of me.

Ryan June 7, 2011 at 5:41 pm

I fully agree that it is ridiculously circular. Are the Republicans not looking for a candidate with “right-wing views”? Semi-rhetorical. I suppose, in the end, I was working under a naive assumption of honesty. That they’re not filibustering for the sake of filibustering. I see what you’re saying that Tyler is advocating lip service, and well, unless I consistently misread (which very well may be true), Yglesias is suggesting the candidate go one step further and actually believe it.

ben June 7, 2011 at 3:10 pm

Really? The cheaper solution to the unemployment problem caused by minimum wage is to distort prices throughout the economy by the currency’s debasement?

Silas Barta June 7, 2011 at 3:33 pm

This is reminiscent of the traditional debate between two libertarian camps:

1: “Hey, the minimum wage sucks and all, but really, it’s no big deal, because it just gets inflated away.”

2: “But, but … inflation is bad too!”

***
And by the way, Tyler_Cowen is significantly underestimating the impact of the minimum wage: consider its impacts on apprenticeships (or, for the gentry, “internships”).

mulp June 7, 2011 at 4:01 pm

In other words, Tyler’s top requirement for a Fed nominee is a convincing amoral liar.

Should this amoral liar be expected to promote policies that favor a free market dominated by convincing amoral liars?

I suggest the best candidate by Tyler’s criteria would be Bernie Madoff.

Can Obama give Madoff a complete absolute pardon conditioned on winning Senate approval?

Certainly Madoff has the best understanding of the ways bankers lie and deceive others in order to take their money and bring widespread financial ruin.

Maybe Madoff would need to avow to be born again and baptized by Mike Huckabee.

MoneyBoy June 7, 2011 at 4:09 pm

Why would the next Fed nominee meet with Ron Paul? He is not a Senator, and therefore, has no confirmation vote.

Z June 8, 2011 at 2:27 pm

Good point.

mjw149 June 7, 2011 at 4:36 pm

I think you’re badly misreading the Republicans . They are anti-government to the point that they won’t compromise at all. They don’t feel they have any incentive to play the game. A disorganized, ineffective government is their goal, maybe even collapse. Look at them slashing state governments during a recession. They’re showing every sign of playing chicken until the next crash. They honestly don’t want the United States government to succeed. Look at Paul Ryan’s proposed budget. Listen to their budget rhetoric and their crazy followers. They’ve abandoned reason for a good vs. evil narrative, and the United States government is the Great Satan, taking money from hard working millionaires to give to thieving minorities in the inner city. That’s how a Republican health care reform becomes ‘Obamacare’ and why undereducated blowhards would gamble with another global crash.

A. June 7, 2011 at 5:11 pm

No, they want to give out their own version of corporate welfare.

Thomas June 7, 2011 at 10:15 pm

What’s disappointing is how often people repeat this cliched bit, as if it were true or even just novel.

John Thacker June 8, 2011 at 3:50 am

Funny, from the other perspective the Democrats are also playing chicken with the debt ceiling as well. Both parties may be far apart on their positions– the Democrats oppose any long term spending cuts being bundled with the debt ceiling extension, while the Republicans insist on cuts– but it quite obviously takes both players with the same stubborn strategy to have a disaster in a game of chicken.

Tell me, has the Senate even proposed a budget at all, or is the Democratic leadership content to just complain about Republican budgets while sending us towards another budget shutdown?

mjw149 June 8, 2011 at 12:57 pm

As far as I have heard the Democrats are open to cuts, but the GOP won’t raise taxes. And I think the budget compromise is proof. Some of the House GOP don’t want to compromise at all. If you think something has changed since then, I haven’t seen it myself.

We need some cuts, but it’s a bit disingenuous to insist on draconian cuts during a recession when you’re not taxing the rich at a proper rate, i.e. the rate they were taxed 3 decades ago when we were relatively prosperous.

Ryan’s budget wasn’t a serious proposal. It’s just as easy for the Dems to dream up a fantasy budget, but what’s the point? If you were educated, you’d know that deficit spending in times of war and recession is normal, and things will bounce back. If you weren’t educated, you’d spend your time comparing our federal government budget to a household budget.

Bernard Yomtov June 7, 2011 at 4:37 pm

I think Salmon is correct.

Andrew' June 7, 2011 at 5:01 pm

Salmon

Over the past century or so, new regulatory initiatives have inevitably been greeted with predictions of doom from the very businesses they eventually helped. Meatpackers hated the Meat Inspection Act of 1906, but it rescued the industry from the aftereffects of the publication of “The Jungle.”

I’m too tired to count the non-sequiturs. Let’s start with: we don’t care about those being regulated. We know regulators end up helping incumbents. It’s not a feature. The Jungle was negative PR, we shouldn’t rejoice at fallacious positive PR just because it counter-balances fallacious negative PR. We don’t need to rejoice that a government program was used to un-re-trick the public.

Don’t you guys even entertain the idea you might be wrong? John Hussman says you are wrong. Now almost everyone and is brother is coming out saying the alarmists are wrong about the debt ceiling.

Bernard Yomtov June 7, 2011 at 5:55 pm

Now almost everyone and is brother is coming out saying the alarmists are wrong about the debt ceiling.

Really?

Andrew' June 7, 2011 at 7:19 pm

You heard it here first Bernard.

Andrew' June 7, 2011 at 7:20 pm

Bernard,

Your link to Holtz-Eakin is assuming that there would be a lapse in interest payments. I’ve thought this through, and while I may not have thought it through correctly, that assumption doesn’t make sense, and that is what the new thinking seems to be on it.

The Anti-Gnostic June 7, 2011 at 10:25 pm

Regulations scrupulously followed by facilities in Southern Italy, Mexico, South America and East Asia, of course.

A. June 7, 2011 at 5:12 pm

I don’t get the slavery part.

TallDave June 7, 2011 at 5:35 pm

I think Yglesias nailed it: they cannot nominate a solid social democrat right now, qualified or not. “Keynesian stimulus” is a dirty word in the Tea Party circles that drove the GOP tidal wave, and fairly or not the statists are perceived to have not just failed but driven the US into ruinous debt in the process.

But his response was awfully snottu, and I’m not a fan of the “let’s make jobs by chasing aggregate demand with another bubble” school of monetary policy so I’m happy to see Diamond go.

The Anti-Gnostic June 7, 2011 at 10:00 pm

It would probably not be a good idea to nominate a social democrat, given that social democracy is following socialism into history’s trash heap.

The Anti-Gnostic June 7, 2011 at 10:23 pm

Probably not a good idea to nominate a social democrat, given that social democracy is poised to follow socialism to history’s trash heap.

mjw149 June 8, 2011 at 12:59 pm

The socialism that feeds our country? The socialism that provides the most efficient health care in the world … in Europe? That socialism?

TallDave June 8, 2011 at 10:04 pm

Capitalism feeds our country, socialism feeds off capitalism.

European healthcare is “efficient” only because of rationing that Americans (who are significantly wealthier on average) wouldn’t accept, and monopsony pricing that essentially steals U.S. R&D dollars at the price of having to wait about a year longer for new treatments (as detailed in Nature).

And if you think differences in LE or IM across OECD countries is predicted by healthcare efficiency (the usual basis of claims of European HC superiority) then you probably haven’t looked at the confounding factors or the spread in LE across the U.S. or the differences in how IM is reported.

mjw149 June 9, 2011 at 2:23 pm

No really, socialism in the form of price controls and subsidies gives us cheap food which has kept us healthy.

I’m sure rationing looks bad for the rich and a pretty good deal for the hundreds of children dying in the US every year.

It’s easy to cherry-pick statistics and make excuses, but what exactly is the best measure of ‘GENERAL WELFARE’ if not LE and IM?

Come on, admit it, your preferred stat is most expensive procedures for the smallest percent of population. Which we have! USA! USA!

TallDave June 9, 2011 at 3:32 pm

If socialism gave societies cheap food, North Korea wouldn’t have had millions of people starving to death. It’s capitalism that massively increased crop yields and made food cheap.

Poor children already get Medicaid and S-CHIP. If they’re dying it isn’t for lack of medical care.

The best measure of general welfare is GDP per capita.

J Thomas June 10, 2011 at 6:53 pm

If socialism gave societies cheap food, North Korea wouldn’t have had millions of people starving to death.

And if capitalism gave societies cheap food, Ireland wouldn’t have had mass starvation in 1845-1850.

Not that I have anything in favor of North Korean “socialism”, or German “national socialism” for that matter, but your argument is stupid. Somalia is one of the most capitalistic nations in the world, with a national bank that is only recently trying to formulate policy and very little government regulation of any sort. But people don’t hold up Somalia as a model capitalist economy, unless they are rather unusual people.

John Thacker June 7, 2011 at 5:41 pm

I haven’t kept completely up, so did anyone ever offer a rebuttal of the argument that he was ineligible according to the Federal Reserve Act based on geographical considerations? A rebuttal aside from the argument that the Fed is important, and the geographic restriction is stupid? Or the implausible argument that he’s not really from Massachusetts but would represent Chicago, despite being a professor at MIT?

John Thacker June 7, 2011 at 5:44 pm

The geographical restriction may be stupid, but I would argue that in light of the various bailouts there are reasons to avoid having the Fed look like it is nearly entirely composed of people from the East Coast, plus one member from San Francisco.

Gerald June 7, 2011 at 6:25 pm

That sounds an awful lot like code talk for anti-semitism and homophobia, John Thacker!

spencer June 7, 2011 at 6:19 pm

Have you ever looked at the correlation between the real minimum wage and minimum wage employment.

I doubt it. In the US since WW II the relationship between the real minimum wage is almost perfectly opposite of what your theory call for. Your theory says that if the real minimum wage falls that minimum wage employment would rise. But the data shows that the actual history is that when the real minimum wage falls minimum wage employment also falls.Just the opposite of the theory you are proposing we base policy on..

The only time minimum wage employment has risen is after increases in the minimum wage.
.

biooya June 7, 2011 at 8:47 pm

correlation isn’t cause and effect. When min wage is increased, a number of previously above min wage are “captured” by the min wage statistic. During periods of growth, demand for labor increased wile real min wage may decrease. correlation isn’t cause and effect.

Tim June 7, 2011 at 10:07 pm

How ridiculous. Are you honestly saying that you think if my employer paid me more money I would spend more money and creating revenue for other companies allowing other employers to pay their employees better allowing them to spend more money at my company thus allowing my employer to pay me even more?

A sort of “trickle-up” economics? What a preposterous notion.

Matt Waters June 7, 2011 at 10:58 pm

You have a study? My impression was that teenage unemployment was highest in the 1950′s, when the minimum wage was at its highest real level.

One confounding factor for such studies could be if they measure changes in minimum wage vs. changes in employment. You would think that by looking at what happens right after minimum wage changes, you could see the effects of the minimum wage on employment. However, liberal politicians tend to be elected more in economic troughs while conservative politicians tend to be elected more in good economic times. Obama in 2008, Bush in 2000 and Clinton in 1992 are good examples of this. Democrats then tend to do “better” economically just due to the ensuing cyclical economic growth.

Furthermore, the lower wage, the more cyclical their employment becomes. Doctors get laid off far less than homebuilders. So the “minimum wage employment” is also the most cyclical and benefits most (relatively) from cyclical growth in employment. Isolating out such cyclicality is very tough, but common sense says that people become less employable at $7/hour vs. $5/hour and I think interstate studies which actually rely on real data bear out this common sense.

spencer June 8, 2011 at 9:41 am

The data shows that the teen unemployment rate was significantly lower in the 1950s than in later eras. It never went above 15% from 1950 to 1960. but since 1970 it has only barely fallen under 15% at cyclical peaks.

Your impression is 100% wrong.

Matt Waters June 8, 2011 at 7:52 pm

Looking up the Milton Friedman comment I had in mind, I did state it wrong. What actually happened is that teenage unemployment jumped in the 1950′s when the minimum wage was raised substantially and it has remained a good bit above the national unemployment rate.

I would guess since the 70′s, teenagers have also gotten less dependable as employees and they have a higher unemployment rate than before. But that just means the minimum wage laws hurt them even more because their labor is worth less in real terms.

TallDave June 8, 2011 at 12:50 pm

I think looking at the overall unemployment number is probably not as useful as looking at the number of jobs paying wages at or below the new minimum wage before and after the change, then adjusting for the overall employment trend, so as to isolate the effect of the change.

A better explanation for your observation might be that politicians tend to raise the minimum wage when they expect decreasing unemployment. The effect is small relative to the overall economy, so unemployment usually continues to fall.

Your argument seems to assume that employers of minimum-wage labor are price-insensitive. Let’s say that tomorrow, the minimum wage is raised to $20/hr. What effect do you predict this would have on unemployment?

John Thacker June 8, 2011 at 3:58 am

Your theory says that if the real minimum wage falls that minimum wage employment would rise.

No, the theory doesn’t predict that at all. The theory predicts that unemployment rises when the minimum wage rises, but it doesn’t predict that *all* people making the previous minimum wage lose their jobs. Add them to the people that you’re ignoring– the people who already made the new minimum wage, and thus previously were not “minimum wage employment” but now are, and the total number of minimum wage employees can (and does) easily go up even if unemployment increases.

The higher the real minimum wage, the greater the proportion of the working population makes minimum wage. But that’s entirely consistent with increasing it increasing unemployment as well.

spencer June 8, 2011 at 9:53 am

Better make sure that Cowen reads your comment because that was exactly the theory he was stating at the start of his post.

stevelaudig June 7, 2011 at 7:17 pm

Someone explain to me why a “minium wage” is “bad” and allowing for limited liability corporations is “good”. Limited liability stock is a subsidy in the form of insulating individuals from the effects of their conduct. I don’t want to be shouted at I want an explanation of how libertarians are able to support limited liability ownership which caps losses but doesn’t cap gains? It seems inconsistent to me and limited liability is a subsidy. If there is a limit on one’s liability then, in order to not pass losses on there needs to be something like mandatory insurance. I’ll cop to being naive here but I’ve never even heard a non-persuasive argument that limits on liability are not “the government” in the form of the law intruding on the “market”.

biooya June 7, 2011 at 9:53 pm

A share in ownership doesn’t always mean control. Furthermore, losses aren’t capped, nor is it unusual to attempt to “pierce the corporate veil” of liability protection. A corporation can be sued into bankruptcy, and if the controlling owners or managers were grossly negligent they could be sued. In fact, they can be sued by other shareholders if their gross negligence lead to bankruptcy. This is why insurance companies offer “Directors and Officers” insurance coverage.

Matt Waters June 7, 2011 at 11:04 pm

Yeah, for clearly gross negligence, CEO’s and board members cannot hide behind limited liability.

What limited liability does help prevent is capital-providers from suffering more than the capital they paid in. I don’t see it as too much of a “subsidy” that capital providers have their economic losses capped at 100% in most circumstances. What would a world with unlimited personal liability entail exactly? That Enron’s shareholders could lose more than 100% to pay off Enron’s creditors? As much as the investors were guilty in Enron, the shareholders and the bondholders were equally culpable for investing in such a company. For the former, I would say losing 100% of their investment was enough punishment unless they were board members or otherwise actively involved in the fraud.

Bill June 8, 2011 at 7:21 am

Agree with Steve. biooya comments are wrong or disengenuous: losses are capped, piercing the corporate veils is rare and depends on facts (so if you follow the rules, it is not capped); gross negligence for managers is rare and their individual liability is capped by their own, and not the entitites, assets; D&O covers torts, not going out of business or debts.
When corporations commit torts and go belly up, we socialize the losses.

biooya June 8, 2011 at 12:54 pm

@Bill – After 100% loss, there is nothing left. If you consider 100% net assets to a cap, then you’re correct. However, anything after 100% is a moot point. Liability falls on those with control; small shareholders not only have no control of the company but likely have no idea there is any wrong doing. Further, it is not “unusual to attempt to “pierce the corporate veil” of liability protection.” How successful those attempts are depends on the facts and the lawyers, but attempts are common. In fact, its not unusual for creditors and government agencies to require personal guarantees, effectively piercing the corporate veil. ABC laws in many states, for example, require owners or officers to agree to be personally liable for violating ABC regulations. The terms of D&O can be narrow or broad. They many not directly cover the bankruptcy of a corporation, but would protect the directors and officers should they be sued due to poor decisions that resulted in bankruptcy.

http://en.wikipedia.org/wiki/Directors_and_officers_liability_insurance
“In contemporary times (particularly in the U.S.), directors and officers (especially those most sought out by shareholders due to their ability to produce results) are intimately concerned with a company’s directors & officers liability insurance program. Under state law, their personal assets are at risk (not to mention their hard-earned reputation). “

Bill June 8, 2011 at 7:01 pm

Our firm defends these folks, and I can assure you no one gets tagged. In fact, you could argue D&O insurance just transfers the risk to someone else, the shareholders who paid for the policy, and not to the directors.

Stevelaudig was right. It’s just that we tend not to look at these types of subsidies because they are all around us.

Here’s another one to think about: oil companies benefit from the Coast Guard, and, I would argue, even regulations which force them to minimize risk. Exxon does not pay taxes for the Coast Guard or the Dept of Interior, although a beneficiary, because it pays not taxes.

You do.

Matt Waters June 8, 2011 at 8:09 pm

I’m not an expert on tort or bankruptcy law, but I’m having a hard time understanding the points against limited liability.

In Enron’s case, for example, the shareholders lost every dime they put into the company. There may have been torts against the company, along with many other suppliers, back wages, creditors, etc. They were all in line to collect in Chapter 7.

Are you saying the torts should be first in line to get 100 cents on the dollar from the companies assets before anybody else gets paid? Are you saying the shareholders or creditors should have all been exposed to unlimited personal liability and lose (far) more than 100 cents on the dollar of their investments to pay off all the torts? In other words, if Bill Gates owned one share of Enron or Lehman stock, all 50 billion dollars of his assets should be held liable.

It’s important to speak concretely about what you’re proposing. It’s nice to theorize that torts should always get paid in full, no matter what. But if torts could go after investors past their capped losses, it would effectively freeze all stock market investment. In real life, you have to make some tradeoffs. One of those tradeoffs is that shareholders must have their losses capped, so they can be sure that if they are not grossly negligent, they can engage in investment without risk past their investment.

mokpok June 7, 2011 at 9:15 pm

From my understanding limited liability just means that the owners of a corporation are not personally liable for losses of the corporation. It does not “cap” the losses that the corporation itself can make, nor does it limit the liability of the corporation in lawsuits, or the liability of managers in the corporation from lawsuits. Moreover, we could imagine situations where entirely private contracts arose which created limited liability, without the need for a corporate law statute establishing it. Basically, you could write a debt contract where the return on the debt is some contingent function of the corporations profits and holding the debt allows you to vote on certain matters in the running of the corporation. This would effectively be like owning a share in a company with limited liability.

So I don’t neccessarily see how limited liability is a “subsidy”- as it doesn’t change the losses the corporation itself is liable for, in the limit losses are always “capped” by a person or corporations assets, and gains are always uncapped.

As for the minimum wage, that is I think, uncontrevertably a state mandated price floor. Whether such a policy is justified or not is another matter- upon which I offer no opinion.

Tim June 7, 2011 at 10:10 pm

But what does it say if the products with the slimmest profit margins in our country are made by people making more than the minimum wage? The state mandated price floor is below the market value for labor, and thus has no real effect on the market at all.

Matt Waters June 7, 2011 at 11:20 pm

“The state mandated price floor is below the market value for labor, and thus has no real effect on the market at all.”

This just isn’t true. A couple examples:

1. Wal-mart should be the lowest job on the totem pole, but a new Wal-mart in fact receives hundreds of applications for a few dozen positions. It could be possible that all these hundreds of applicants find jobs somewhere else and that the applications just reflect a natural rate of unemployment. More likely, though, a higher starting wage set by the price floor both increases supply and lowers demand. More people fill out the application because it pays $7/hour vs. $5/hour, but Wal-mart provides less jobs through more mechanization, opening less cash registers, stocking shelves less often, etc.

2. One group who does not typically follow labor laws, drug dealers, tend to pay less than minimum wage. They show that one labor market, at least, clears at less than minimum wage. The reason beginning drug dealers happily earn such low wages is for the possible future compensation as a drug kingpin. They show how minimum wage laws hurt beginning employment in legal markets. For example, somebody could work for free as an apprentice in a trade or an internship in banking. The employee benefits through getting experience and the company benefits through taking much less of a risk and using the internship instead of the interview process to find qualified candidates. Minimum wage laws proscribe most such arrangements though, unless they fill out a bunch of paperwork.

stevelaudig June 8, 2011 at 6:48 pm

I appreciate the comments and observations but now return to the question. Any law or series of laws or structure of laws that allows all profits [from an activity] to flow through to owners but doesn’t allow all losses [from the same activity] to flow through to owners is a subsidy/incentive/distortion of the true cost of the activity call it what you will but it moves costs from the actor to the acted upon. Its a “heads I win, tails you lose” arrangement and, it seems to me, that is a market distortion. It isn’t really an answer to say the “corporation” can be liable and the corporation can go bankrupt and the corporation can have all its assets taken because the corporation doesn’t benefit from the profits those are pipelined on to the individual benefitting from the activity who isn’t liable for the activity to the full extent the activity can cause loss. [I think I am getting a bit circular and repetitive here but I am trying to understand it better] Setting aside whether it is “good idea” [like minimum wage or mandatory insurance or any other law] for a society/country/culture/nation to have “limited loss” [a name that more accurately describes the situation] arrangements, it seems clear that until one admits that “yes, as a policy we think that you should be able to make limitless profits from an activity while at the same time not being able to have limitless losses from that same activity” there can’t be an honest conversation as to how to balance that. It is an arrangement that immunizes people from the economic consequences of their actions and distorts the “market” [if you believe in such a thing and, in a sense, is “unnatural” [nature’s only loss limiter is “individual death”. If you give your value to an entity to engage in activity that causes more harm than the amount of your value why shouldn’t you have to compensate those harmed as a result of this “creature, the corporation” which you funded? Under old partnership laws there was no limit on a partners financial responsibility for actions of the partnership creature which meant you paid attention.

Sid F June 7, 2011 at 9:46 pm

A great post, and so much to the point that it hurts to the quick. This Forum here had a similar reaction

http://dismalpoliticaleconomist.blogspot.com/2011/06/senator-shelby-to-block-obamas-2nd-term.html

One hopes it is satire and not a preduction.

John Thacker June 8, 2011 at 3:59 am

I take it that in fact no one actually does have an answer to the geographical restriction argument, so Peter Diamond could not legally have taken a seat.

B.B. June 8, 2011 at 9:48 am

Spiking Diamond’s nomination was payback to Sen. Reid, who would not permit a vote on any Bush nomination to the Fed in 2008 because he was certain a Democrat would be the new president and so would fill up the Fed board. Randall Kroszner was nominated but never got a vote. And so Diamond was nominated and never got a vote.

True, Obama did get some people on the Fed board, but that was when the Democrats had 60 seats in the Senate.

The obvious public choice solution is to permit the Republicans to fill one seat and the Democrats to fill one seat, with the agreement that neither nomination would be to someone with extreme views. Yellen got a confirmation, after all. The Republicans will cooperate with a deal.

Khal Mojo June 8, 2011 at 2:05 pm

The next fed nominee? What’s the point. Obama could resurrect Reagan himself and they’d accuse Reagan of being mind controlled with Obamaesque socialism.

TallDave June 8, 2011 at 10:06 pm

Well, you have to admit, resurrecting Reagan would be a little suspicious.

trotskylives June 8, 2011 at 2:05 pm

A quick glance at odesk.com that is not subject to min wage laws as workers are 1099 contractors show plenty of folks willing to work below min wage. I also imagine folks who work below min wage feel more confident in their jobs and are getting experience they can use to get a better job. They probably also spend more money as they have more confidence in their futures.

It always seemed very strange to me that if 2 people want to exchange legal services for money, the government needs to get involved and says you can’t.

Ray Ban Eyeglasses June 9, 2011 at 5:15 am

This shows which they last very much lengthier and thus saving you income which could otherwise are actually utilized to purchase new ones.

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