Baum on Money: Minimum Wage, Maximum Nonsense
Good morning, and welcome to the Tuesday edition of what I'm reading on issues affecting the U.S. economy:
Democrats have good luck, not skill
Students of economic and market trends already know that the U.S. has performed better under a Democratic president (average real GDP growth of 4.35 percent) than a Republican (2.54 percent) in the post-World War II era. While the Democrats might prefer to think good policy is the reason, a new paper supports the idea that Lady Luck is responsible. It turns out that Democratic presidents have been more fortunate when it comes to oil price shocks, productivity shocks and consumer confidence, according to Princeton economists Alan Blinder and Mark Watson. Control of Congress? Divided versus unified government? Not a factor, they say.
Why is the minimum wage different from other prices?
Café Hayek's Don Boudreaux has a few questions -- a thought experiment, actually -- for all the proponents of a minimum wage increase. What other good or service besides unskilled labor challenges the established relationship between price and quantity demanded? When you figure it out, let me know. And tell Paul Krugman, who assured us yesterday that raising the price of labor has little or no adverse effect on employment.
Inflation doesn't travel well from the Ivory Tower back home
The New York Times' Binyamin Appelbaum explains why economists are different from you and me: They worry less about inflation. This we know, because several highly respected practitioners have been advocating a higher inflation target, and higher inflation, as a cure for our economic malaise. What makes sense in theory or in an econometric model doesn't fly with consumers, who see higher inflation eroding their standard of living as wages fail to keep up with rising prices. Good for them. And shame on those who think the Fed has the precision of a Navy Seal when it comes to hitting a target.
Yes, banks are still profit-maximizing institutions
Who is lending in the fed funds market, the New York Fed's Liberty Street blog asks. Not the banks, which are earning an interest rate of 0.25 on the deposits they hold at the central bank. Compare that to an average effective fed funds rate of 0.11 percent over the past year, and you'll understand why. Yes, we're talking pennies here. But they add up. It turns out Federal Home Loan Banks, which aren't eligible to earn interest on excess reserves, account for 75 percent of the volume in the funds market nowadays. Total volume is less than a third of what it was pre-crisis. Is this a surprise to anyone?
The Seinfeld budget deadline
Budget guru Stan Collender says a failure of the House-Senate budget conference committee to reach an agreement to fund the government by the Dec. 13 deadline will have no immediate or practical impact on anything. That's one week from Friday, which happens to be Friday the 13th (as if these folks needed more omens hanging over them). Yes, there will be headlines and even a new low -- if such a thing is possible -- in Congress' approval ratings. But "like Seinfeld, which was a TV show about nothing, December 13 is the budget deadline that's about nothing," Collender says. The real deadlines are Jan. 15, when the current funding for the government runs out, and Jan. 18, when the next round of automatic spending cuts go into effect.
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