Baum on Money: Looking for Storms, Not Raindrops

Good morning. If you're still focused on economic matters as the year winds down, please take a look at what I'm reading to start the week.

Good morning. If you're still focused on economic matters as the year winds down, please take a look at what I'm reading to start the week.

This just in: regulators yearn for simplicity

Rarely have I read more intelligent words on the subject of financial regulation than those of Andrew Haldane, the Bank of England's director for financial stability, in the Wall Street Journal's weekend interview. He says that somewhere along the line, "the goal of financial regulation became to capture every raindrop rather than to look out for thunderstorms." Well put. The 1988 Basel Accord was 30 pages long. Basel III, in 2010, was 616 pages and the Volcker Rule is 71 --with nearly 900 pages of interpretation and supplementary information. The good news is that Haldane sees signs of the Basel Committee and G-20 starting to move in the other direction, studying "how to make global financial standards cleaner and more transparent." Let's hope they come to a conclusion in less time than it took to write the Volcker Rule.

Beware strangers bearing free lunches

The New York Times' Annie Lowrey forgets that if something sounds too good to be true, it probably is. "Unlike any other form of wealth redistribution, raising the minimum wage is basically cost-free to Washington," she writes. What to say about such a misguided statement? Lowrey cites a 20-year-old study of abutting states that found no effect from raising the minimum wage (one state did, the other didn't). The study "completely upended prevailing economic thought on the issue of the minimum wage." Not on my planet. Raise the price of something, and the quantity demanded falls. The Manhattan Institute's Diana Furchtgott-Roth offers a counter to Lowrey. Only 3 percent of Americans earn the minimum wage or less, so raising it by a small amount may not have much of a noticeable effect on unemployment. It does, however, discourage employers from hiring the marginal workers that the minimum wage is designed to help.

Old folks aren't driving the decline in labor-force participation

Many analysts have satisfied themselves that the decline in the labor-force participation rate (LFPR) was a reflection of the increased number of Americans aged 55 and older who are choosing to take early retirement. Researchers at the Atlanta Fed, however, noticed a change starting in 2012: Now prime-age workers (ages 25-54) are responsible for more than half of the decline in the LFPR. While recent numbers on job growth have been encouraging, it's hard to get excited about the 63 percent LFPR, which is close to a 35-year low. The pattern of the unemployment rate declining for the wrong reason remains, the researchers find.

Why do they call it a FOREcast?

The IMF's managing director, Christine Lagarde, told "Meet the Press" that the Fund is raising its forecast for U.S. economic growth in 2014, based on improved economic data. On Friday, we learned that real GDP rose by an annualized 4.1 percent in the third quarter. The IMF is looking back to project forward, which should be called hind-casting, not forecasting. Yes, Lagarde said congressional action to relax the automatic spending cuts were a factor, as was "increased certainty." Uh-huh. I wonder how the economy managed to grow 4.1 percent last quarter given all the uncertainty about things that are now so certain.

Happy birthday: The Fed turns 100

The Washington Post's Robert Samuelson offers a brief review of the Fed's first 100 years. The central bank's record is mixed: many successful decades "marred by three huge blunders." Those would be the 1930s, when the Fed did too little; the late 1960s and 1970s, when the Fed did too much; and the 2008-2009 financial crisis, when the Fed was slow to realize the systemic effects. Samuelson's conclusion is spot on. "There's a disheartening consistency to the Fed's cycles of success and failure," Samuelson writes. "The beliefs and policies of one era aren't suitable to the conditions and challenges of the next, but the Fed adapts only slowly under the press of events."

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