January 2007 – artdiamondblog.com

Increase in Minimum Wage Hurts Poor

The strong bipartisan support for increasing the federal minimum wage to $7.25 an hour from the current $5.15 — a 40% increase — is a sad example of how interest-group politics and the public’s ignorance of economics can combine to give us laws that manage to be both inefficient and inegalitarian.

An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor. Producers adjust both by substituting capital inputs and/or high-skilled labor for minimum-wage workers and, because the substitutes are more costly (otherwise the substitutions would have been made already), by raising prices. The higher prices reduce the producers’ output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivated not by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor. That increase has the same misallocative effect as monopoly pricing.

Although some workers benefit — those who were paid the old minimum wage but are worth the new, higher one to the employers — others are pushed into unemployment, the underground economy or crime. The losers are therefore likely to lose more than the gainers gain; they are also likely to be poorer people. And poor families are disproportionately hurt by the rise in the price of fast foods and other goods produced with low-skilled labor because these families spend a relatively large fraction of their incomes on such goods. And many, maybe most, of the gainers from a higher minimum wage are not poor. Most minimum-wage workers are part time, and for the majority their minimum-wage income supplements an income derived from other sources. Examples are retirees living on Social Security or private pensions who want to get out of the house part of the day and earn pin money, stay-at-home spouses who want to supplement their spouse’s earnings, and teenagers working after school. An increase in the minimum wage will thus provide a windfall to many workers who are not poor.

Some economists deny that a minimum wage reduces employment, though most disagree. And because most increases in the minimum wage have been slight, their effects are difficult to disentangle from other factors that affect employment. But a 40% increase would be too large to have no employment effect; about a tenth of the work force makes less than $7.25 an hour. Even defenders of minimum-wage laws must believe that beyond some point a higher minimum would cause unemployment. Otherwise why don’t they propose $10, or $15, or an even higher figure?

A number of countries, including France, have conducted such experiments; the ratio of the minimum wage to the average wage is much higher in these countries than in the U.S. Economists Guy Laroque and Bernard Salanie find that the high minimum wage in France explains a significant part of the low employment rate of married women. Mr. Salanie has argued that the minimum wage also contributes to the dismal employment prospects of young persons in France, including Muslim youths, an estimated 40% of whom are unemployed.

For the full commentary, see:

GARY S. BECKER and RICHARD A. POSNER. "How to Make the Poor Poorer." The Wall Street Journal (Fri., January 26, 2007): A11.

Schumpeterian Alan Greenspan Receives Second Richest Book Advance Ever Paid

Why is this man smiling? (Alan Greenspan has reason to grin.) Source of photo: online version of the NYT article cited below.

I believe that the market for economists is imperfectly competitive, since the supply and demand for academics is highly regulated by governmental and quasi-governmental institutions. But it is interesting that the second highest book advance ever paid is going to Alan Greenspan. Greenspan is a practical, eclectic, economist who believes that Schumpeter’s process of creative destruction is important for understanding the workings of a capitalist economy.

(p. C1) Alan Greenspan, the former chairman of the Federal Reserve, has agreed to sell his memoir for an advance of more than $8.5 million, according to people involved in the negotiations, making a deal that appears to give him the second-largest advance ever paid for a nonfiction book.

. . .

(p. C8) Mr. Greenspan’s advance ranks second only to the more than $10 million paid to former President Bill Clinton for his memoir, "My Life," which was published in June 2004. Pope John Paul II received an advance of $8.5 million in 1994 for his book, "Crossing the Threshold of Hope," and Senator Hillary Rodham Clinton received an $8 million advance for her memoir, "Living History," published in 2003.

For the full story, see:

EDWARD WYATT. "Greenspan’s Book Deal Is Said to Be Among the Richest." The New York Times (Weds., March 8, 2006): C1 & C8.

Empirical Science at Its Best

Source of book image: http://images.barnesandnoble.com/images/11460000/11468284.jpg

I have not yet read The Ghost Map, but from the review excerpted below, it sounds like a wonderful book. One lesson from the book appears to be that much good can come from a careful collection of evidence, and that much harm can come from sticking to a theory in spite of the evidence. It is also interesting that in this tale, the villain turns out to be the advocate of public works, whose good intentions resulted in much death and suffering.

(p. P8) The sociology of error is a wonderful subject. Some university ought to endow a chair in it — and then make Steven Johnson the first professor. Mr. Johnson last provoked the public with his counterintuitive polemic "Everything Bad Is Good For You," in which he argued that TV and videogames actually improve our cognitive skills. In "The Ghost Map" he tells the story of how for 30 years and more the medical establishment in Victorian London refused to accept what was staring them in the face, namely that cholera was a waterborne disease.

Thousands of Londoners died while doctors and public-health officials stubbornly clung to the view that the plague was an airborne miasma that hung in the foul atmosphere of the slums and was inhaled by the wretched creatures who lived there. Every kind of cure was proposed: opium, linseed oil and hot compresses, smoke, castor oil, brandy — everything but the simple, obvious remedy of rehydration, which reduces the otherwise fatal disease to a bad case of diarrhea.

The fact that the cholera toxin tricks the cells in the lining of the colon into expelling water at a terrifying rate (victims have been known to lose 30% of their body weight in a matter of hours) should surely have alerted someone to the possibility that putting this Niagara back into the body might be worth trying. Only one doctor, Thomas Latta, hit upon the answer, in 1832, just a few months after the first outbreak ever in Britain. His mistake was not to inject enough salty water, and his lone initiative was soon overwhelmed by the brainless babble of the quacks.

Chief among the villains of Mr. Johnson’s unputdownable tale was the man whom we were brought up to revere as the father of public sanitation, Edwin Chadwick. This dour, tactless, unpopular reformer laid the foundations for all the government interventions in public health that we now take for granted. Yet in this story he labored under not one but two illusions that proved catastrophic.

. . .

With the austere teetotaller and vegetarian Dr. Snow and his devoted helper in the Soho slums, the Rev. Henry Whitehead, "The Ghost Map" gains not one but two heroes. Patiently they mapped the patterns of victims and survivors and narrowed down the most likely source of the cholera plague to the Broad Street pump. But even after the pump handle was removed so that Londoners could no longer fill their buckets there and the illness subsided, the miasmatists were not convinced. Snow then tramped the streets of Battersea and Vauxhall to demonstrate that those who had their water from higher up the Thames, above the reach of the tide, remained unharmed, while those who took it from the foul tidewater perished in the hundreds. This was no easy task, since the pattern of water pipes under London’s houses was as tangled as the pattern of Internet service providers are today.

Why did it take so long? Because mapping epidemics was only in its infancy, though Snow’s famous map was not quite the first. Because the questions that Chadwick’s public-health board researched were self-fulfilling, all having to do with the smells and personal habits of the poor and not with the water they drank. The researchers mistook correlation for causation: Nobody died on the high ground of Hampstead, where the air was purer, therefore higher was safer — or so it seemed until a Mrs. Eley, who had retired thither, arranged to receive a jugful of water from her beloved Broad Street pump and got cholera.

But above all Chadwick and his crew were certain of themselves because the stench of the slums was so utterly disgusting and because smell acts so powerfully on our imaginations. Only the most careful and dispassionate investigators were free of the obsession with stench. Henry Mayhew, for example, noted in his "London Labour and the London Poor" (1851) that sewer-hunters, who scavenged deep underground knee-deep in muck, lived to a ripe old age. The Great Stink of 1858, which finally persuaded the government to commission Sir Joseph Bazalgette to lay down the magnificent network of sewers that have lasted to this day, did not kill a single Londoner — yet still Chadwick did not believe.

For the full review, see:

FERDINAND MOUNT. "BOOKS; Lost in a Time of Cholera; How a doctor’s search solved the mystery of an epidemic in Victorian London." The Wall Street Journal (Sat., October 21, 2006): P8.

(Note: ellipsis added.)

The reference to the book is:

Johnson, Steven. The Ghost Map: The Story of London’s Most Terrifying Epidemic – and How It Changed Science, Cities, and the Modern World. New York: Riverhead Books, 2006. 299 pages, $26.95

Dr. John Snow. Source of photo: online version of the WSJ article cited above.

Edwin Chadwick. Source of photo: online version of the WSJ article cited above.

Health Care Spending Increases Faster than Inflation, But Slower than Previous Year

Source of graph: online version of NYT article cited below.

WASHINGTON, Jan. 8 — Spending on health care in the United States increased in 2005 at the slowest pace in six years, mostly because of much slower growth in spending on prescription drugs, the government reported Monday.

It was the third consecutive year of slower growth in the nation’s medical bills. Total health spending reached nearly $2 trillion in 2005, growing only a bit faster than the economy as a whole, officials said.

But with new medical technology becoming available every month and with a generation of baby boomers approaching old age, federal officials made no bold claims about having tamed health costs.

“It is unclear whether this phenomenon is temporary or indicative of a longer-term trend,” said Aaron C. Catlin, the principal author of the government’s annual report on health spending, published in the journal Health Affairs.

For the full story, see:

ROBERT PEAR. "In ’05, Medical Bills Grew At Slowest Pace in 6 Years." The New York Times (Tues., January 9, 2007): A13.

Level 3 Hangs On

The fiber optic network of Level 3, originally founded in Omaha, Nebraska. Source of map: online version of the WSJ article cited below.

Ex ante, Level 3 seemed to have a plausible business model. When they laid fiber optics, they left room to install more, when demand, or a change in technology, made that profitable. But demand did not rise as expected; and technologists elsewhere found clever ways to cram more bandwidth into existing fiber optics. So, alas for many in Omaha, ex post, the results are in the graph below.

Fiber-optic network operator Level 3 Communications Inc., a high-flyer during the telecommunications bubble, almost went bankrupt after the sector burst in 2000.

Now, it is back, with a stock price that has almost doubled in the past year and bond prices that have risen about 20%.

Behind the gains: Explosive growth in video viewing over the Internet, which requires high-speed networks of the sort Level 3 offers. At the same time, a hearty appetite by investors for risky debt has enabled the company to put itself on firmer footing by refinancing its debt at lower rates. There also are good reasons to believe that Level 3 might be an acquisition candidate, though many feel such speculation is overblown.

But there are reasons to be wary: The company remains saddled with debt, it is in a business that still has excess capacity, and it has reported a quarterly profit just once in its more than 20-year history. With the stock and bonds at lofty levels, it could be that any future possible good news already is priced in.

For the full story, see:

LI YUAN and GREGORY ZUCKERMAN. "HEARD ON THE STREET; Level 3 Regains Luster Amid Web-Video Boom." The Wall Street Journal (Thurs., December 21, 2006): C1 & C4.

(Note: the above version is the online version, and differs some from the print version, though not in substance, as far as I noticed.)

Level 3 stock prices. Source of graphic: online version of the WSJ article cited below.

Poor Mexicans Hurt by Higher Corn Prices Caused by Ethanol Production

In Mexico City, protesters complain about the high price of tortillas and other corn-based food staples. Source of photo: online version of the NYT article cited below.

Support for the free market is very fragile in places like Mexico. Calderón won a close election, and is, by all accounts, an advocate for the free market. So it is sad that United States government subsides for ethanol result in pain in Mexico that makes it harder for Calderon to effectively move Mexico toward the free market, and a better life for the Mexican people.

So do we blame Bush for coming out for ethanol in his State of the Union address on Tuesday (1/23/07)? Well maybe Bush can only afford to fight the political trends on one or two issues. And he has seen the war against terrorism as the big issue of our time. On that he is right.

So while we can see why political survival may force Bush into support of ethanol, and Calderón into support for price controls on tortillas, we still need to identify policies that are inefficient and wrong.

Subsidies on ethanol, and price controls on corn, are inefficient. And inefficiency means that the economy produces less, and grows more slowly, and lives are lived less well.

MEXICO CITY, Jan. 18 — Facing public outrage over the soaring price of tortillas, President Felipe Calderón abandoned his free-trade principles on Thursday and forced producers to sign an agreement fixing prices for corn products.

Skyrocketing prices for corn on the world market have pushed up the price of the humble tortilla, the mainstay of the Mexican diet, by nearly a third in the past three weeks, to 35 cents a pound in Mexico City and even higher in other parts of the country.

Half of the country’s 107 million people live on $4 a day or less, and many of them survive largely on tortillas and beans. The price increases have riled the public to such an extent that it has created a political storm that threatens to swamp Mr. Calderón’s fresh presidency.

This month, the president, who took office in December, was booed and heckled at events around the country over food prices. Mexican lawmakers called on him to impose price controls, while leftist opposition leaders suggested that he was protecting giant corn companies.

. . .

There is a continuing debate here about what caused the price of tortillas to shoot up so quickly. Some economists blame the increased demand for corn from ethanol plants in the United States, and it is true corn prices in the States last week reached their highest point in a decade, the United States Agriculture Department said. At the same time, the cost of white corn has risen about 13 percent here over the past year, Mexican government figures show.

. . .

The spike in corn prices has hurt small storefront tortilla makers, a hallmark of the Mexican street. José Solano, a 27-year-old tortilla maker in Mexico City, said he had lost about 40 percent of his business since early January, when he was forced to start raising his prices.

“People are still buying tortillas, but many of them buy less,” he said. “Look, we can’t give our product away because we need a profit, and if they raise the cost of corn, there’s no other way.”

The crisis has hit hardest for the poorest Mexicans, who may spend more than a quarter of their daily salaries on tortillas.

“This really affects my budget, the expenses of my family, because I cannot tell my kids to eat less,” said Ruth Soria, a 37-year-old housewife, who was buying four pounds of tortillas for her six children on Thursday. “This is something that they must control well. The tortilla is something basic for us. What the government did today is the least they could do.”

JAMES C. McKINLEY, Jr. "Cost of Corn Soars, Forcing Mexico to Set Price Limits." The New York Times (Fri., January 19, 2007): A11.

Calderón on right shakes the hand (and picks the pocket?) of Roberto González, who is the head of Gruma, one of Mexico’s large tortilla and corn flour distributors. Source of photo: online version of the NYT article cited below.

The Poignant Nobility of Katalimata

Source of book image: the web site cited below.

Years ago I saw a program on the History Channel that has stuck in my mind. (But, alas, I do not remember the title.) Near the end, I think, they discussed an ancient horde of invaders that created a dark age in the Mediterranean region. An on-sight scholar discussed a tiny cliff-side settlement that a family of natives had retreated to, to defend what little they had.

Attacking the tiny enclave would have been difficult. It was a long way up a treacherous and visible trail. But for the same reasons, living there would have been difficult too.

How human these unknown ancients were who defended their family and property; how poignantly noble.

When I watched the program, I jotted down a single word, the name of the site: Katalimata.

In doing a web search, I encountered the book (a monograph in the Aegean series), whose image appears above. I’m guessing that the book discusses the site I saw in the program, since the book description says that its author participated in digs at Katalimata.

The reference to the book is:

Nowicki, Krzysztof. "Defensible Sites in Crete C.1200 – 800 B.C." Aegaeum Vol. 21, 2000.

For more information on the book, see:

http://www.ulg.ac.be/archgrec/aegaeum21.html

The Case for Clutter

Cartoon clutter by Edward Koren. Source of cartoon: online version of the NYT article cited below.

(p. D1) But contrarian voices can be heard in the wilderness. An anti-anticlutter movement is afoot, one that says yes to mess and urges you to embrace your disorder. Studies are piling up that show that messy desks are the vivid signatures of people with creative, limber minds (who reap higher salaries than those with neat ”office landscapes”) and that messy closet owners are probably better parents and nicer and cooler than their tidier counterparts. It’s a movement that confirms what you have known, deep down, all along: really neat people are not avatars of the good life; they are humorless and inflexible prigs, and have way too much time on their hands.

. . .

(p. D6) Mr. Freedman is co-author, with Eric Abrahamson, of ”A Perfect Mess: The Hidden Benefits of Disorder,” out in two weeks from Little, Brown & Company. The book is a meandering, engaging tour of beneficial mess and the systems and individuals reaping those benefits, . . .

For the full story, see:

PENELOPE GREEN. "Saying Yes to Mess." The New York Times (Thurs., December 21, 2006): D1 & D6.

(Note: the ellipses are added.)

The reference to the new book:

Abrahamson, Eric, and David H. Freedman. A Perfect Mess: The Hidden Benefits of Disorder–How Crammed Closets, Cluttered Offices, and on-the-Fly Planning Make the World a Better Place. New York: Little, Brown & Company, 2007.

Don Springer won his company’s contest for having the worst clutter. Source of photo: online version of the NYT article cited above.

Warm Winter Benefits Poor

THE recent warm weather in the Northeast might not have been great for makers of winter coats, but the economy and markets could be poised for a small fillip.

. . .

Putting agriculture aside, there are other potentially important macroeconomic effects, said Michael Greenstone, a professor of environmental economics at the Massachusetts Institute of Technology. “The basic idea is that extremes of temperatures, really hot and really cold, are dangerous for human health,” he said. “To the extent that the recent warm weather on the East Coast moved us from cold days to more moderate days, that’s likely to reduce mortality rates. Having more people around is obviously good for consumption and economic activity.”

. . .

The temporary warm weather does have very real benefits for poor families.

A warm winter can relax their financial constraints by requiring less spending on heating, said Steven J. Haider, an associate professor of economics at Michigan State University.

“They often are making very tough decisions, whether those decisions are paying bills, child care, clothes or food during a particular month,” he said. “If there is a cold-weather shock, and their heating bill goes up in a particular month, there are poor people who struggle.”

Professor Haider and three colleagues researched the effect of weather on poor families’ budgets and found that there were substantial effects from extreme temperatures.

“For the short-run effects that we’re seeing this year, the answer is, yes, the poor families are feeling a little less constrained,” he said. “I’m sure the families have other important uses for that money.”

Indeed, lower demand for heating oil in the United States, along with rising inventories for other refined petroleum products, has helped to push crude oil prices down— a boon for the rest of the world, too.

For the full commentary, see:

DANIEL ALTMAN. "ECONOMIC VIEW; A Tepid Winter Warms Some Wallets." The New York Times, Section 3 (Sun., January 14, 2007): 4.

(Note: ellipses added.)

International Trade Helps Poor African Cotton Farmer

Left photo shows Dennis Okelo in the grocery store that he opened with savings from growing cotton, and selling it to Dunavant. Right photo shows a Dunavant cotton gin in Zambia. Source of photos: online version of the NYT article cited below.

(p. 1) WHERE is he?” the old woman asks. “Where is he?”

Finding Dennis Okelo used to be easy. The old woman — and most other people in a village outside of Lira, the provincial capital of northern Uganda — went directly to Mr. Okelo’s fields. He was always in one of his “gardens,” with his slacks rolled up above his calves and a short hoe close by. Or he was seated outside of his mud-brick house under a banana tree.

Then cotton growing revived in Uganda, and Dunavant Enterprises came to town about five years ago, paying cash on delivery. After three seasons of growing cotton for Dunavant, the world’s largest privately owned cotton broker and one of the biggest family-owned agribusinesses in the United States, Mr. Okelo, who owns less than three acres and has two wives and a passel of children, had saved $300, about double his annual earnings before Dunavant started buying his cotton.

Last summer, Mr. Okelo opened a grocery store, which is where the old woman finally found him: smiling, standing behind the wooden plank that serves as his service counter in a shop the size of a utility shed. The grocery, one of two in the village, carries dried foods, cooking oil, matches, cosmetics, batteries and candy.

“Before Dunavant, no one came to help us,” says Mr. Okelo, 40, who has farmed a variety of crops in these parts for about 20 years.

. . .

(p. 7) IN his small shop, Mr. Okelo knows nothing of global developments in the cotton trade even though he is a direct beneficiary of them. He started farming during the lean years in Uganda, after the ouster of the country’s notorious dictator, Idi Amin, when the cultivation of cotton lagged so badly that production nearly ceased and farmers treated the crop like a weed.

A few years ago, as Uganda’s production began to revive, Dunavant’s trainers taught Mr. Okelo to grow cotton in straight rows and to use a string to measure precisely the distance between rows, to maximize plantings. Mr. Okelo’s new methods are basic, but in a part of Africa where farmers work the land chiefly with a hoe — and tractors, fertilizer and pesticides are rarities — even basic improvements can lead to large gains in production.

“Cotton is the crop that gives farmers the best money,” Mr. Okelo said. “I want Dunavant to be even closer to me.”

For the full story, see:

G. PASCAL ZACHARY. Out of Africa: Cotton and Cash." The New York Times, Section 3 (Sun., January 14, 2007): 1 & 7.

(Note: ellipses added.)

William B. Dunavant, Jr. Source of photo: online version of the NYT article cited above.