Monday, August 15, 2011

Ron Paul Blackout in Full-Swing

Recent polling has Ron Paul well ahead of Michelle Bachmann and clearly in third place (without Rudy and Palin running) - yet he is not mentioned at all in the polls. Makes you want to believe in Conspiracy theories.

Wednesday, July 27, 2011

Debt-Ceiling Question

If the US Government sees its credit rating deteriorate, won't that make other investment options look more attractive?

Tuesday, July 19, 2011

Can Romney be Beat?

Probably not, and here are my thoughts on the 2012 GOP nomination at this point. 

I don’t think Ron Paul has a chance at winning, but I will be backing him until the end. My hope is that he garners enough support during the process that he can *get his son on the ticket as VP*. That would be huge. Until about two weeks ago I thought Bachmann would be on the ticket – but I expect Rubio at this point: if Republicans truly believe they can win, Rubio HAS to be on the ticket because he is being fast-tracked up to leadership…if he’s not the nominee, he’ll be locked out for quite a while.

Furthermore, I expect the Democratic Party to throw everything they’ve got at him in 2016 – Rubio is the key to the GOP fulfilling their long-term plan to bring Hispanics into the party, so it may be prudent to protect him in the White House. Rubio swears he will not be the VP candidate in ’12, so Paul Ryan would be a strong possibility as well if he’s being honest. I have strong disagreements with Rubio on Foreign Policy, but otherwise he’s good.

I kind of wrote Romney off because of RomneyCare before, but not so much anymore. A while back, Ann Coulter (not like she matters) said that she would vote for Charlie Sheen over Barack Obama, and if that is any gauge of the GOP base's willingness to hold their nose and pull the lever for a moderate, it's nothing but good news for Romney. I think Romney's explanation for RomneyCare will satisfy most primary voters. Here's my summary of his explanation:

- Just like states have the right to mandate auto insurance coverage and the federal government doesn't, MassCare was the federalist approach to a mandate

 - Mass had a significant free rider problem at hospitals and emergency rooms, and MassCare was able to redirect federal funds towards a better purpose. *This* is in line with the GOP platform position calling for MediCaid block grants, which Romney also advocates.

- The GOP used to advocate for a mandate. Conservative think tanks still call for a move to the Swiss Health Care Model, probably the most right-wing in the world: everybody is required to purchase insurance -- and everybody gets subsidies to purchase insurance...all insurance providers are private, as are providers.

 - Any federalist would agree that each state should decide for themselves what policies they want. And since Mass is a very blue state, they got what they wanted -- and Romney injected some conservative principles into the bill.

- MassCare is incredibly, I mean INCREDIBLY, popular -- over 80% approval.

- Many of MassCare's budget problems are due to changes Deval Patrick implemented.

Let's be clear here: the "Movement" people in the GOP see Paul Ryan, Rand Paul, and Marco Rubio as the future of the conservative movement. Paul Ryan is seen as *the* next Reagan by many, and I saw at least two candidates in the last debate give deference to him...deference to a 40-year old policy wonk from I like Paul Ryan -- he has a decent grounding in Austrian Business Cycle Theory (ABCT), which is important...if you understand the boom-bust cycle, every other decision flows naturally. I think the best way-ahead for Ron Paul and his supporters is to garner a sizable chunk of the vote and agitate for Rand on the ticket: spread rumors that the Tea Party will walk out of the convention if the right person isn't on the VP slot.

More on Paul Ryan -- thinking this through strategically, Paul Ryan may be the VP no matter what if Rubio is a no-go -- they want to get their golden boy in the spotlight. Paul Ryan is *locked out* of any promotions in the House so he needs to be the VP -- WI has a GOP Gov., (1) GOP Senator, and the other senator is a retiring democrat and Ryan won't run (it's a set-aside for Mark Neumann, but Tommy Thompson has thrown his hat in).

Earlier I thought Pawlenty was the establishment’s answer to the base’s distaste for Romney. I’m not quite ready to write him off yet, but he has proven to be of weak character and is clearly not an “alpha male” – I think he’s even scared to look Romney in the eye. A poor showing in the straw poll could force him to hang it up.

Here’s how I see the race shaping up if Perry enters as expected. Personally, I think it could ironically help out Mitt Romney...for the same reason John McCain won the primary --

1. Perry will draw more votes away from Bachmann than from Romney, possibly giving Romney Iowa. Romney voters that would go to Perry would presumably be conservatives who support Romney for electability reasons.
2. A win in Iowa makes Romney UNBEATABLE in New Hampshire
3. Romney is already a lock in Nevada
4. Romney is leading by 10% according to today's South Carolina poll. Pencil him in for a win.
5. Romney is up 10% in Florida right now -- with the momentum from previous wins, he should win there and lock up the nomination. Cali is a lock after that.

Rubio will probably be Romney's running mate, and the ticket will beat Obama-Biden handily. The Bush family strongly backed Romney in 2008, so if I were a conspiracy theorist I would have to say that Perry is a plant to further splinter tea party support...but I won't go that far. Only way I see Perry catching on is if the Bachmann campaign totally implodes and the Tea Party rallies behind a single candidate -- I don't see that as will remain splintered, with anti-Muslim crazies backing Cain to the end, evangelicals splintered between Bachmann, Pawlenty, and (maybe) Perry. Libertarians will back Paul and Bachmann somewhat. Divide and conquer I guess...

Friday, February 04, 2011

The Chart that Says it All...

The chart above from BLS, posted at Economix, shows the number of months it took for employment to recover after a recession. I've seen this chart a 100 times, and it never ceases to amaze me.

Our response to this recession has been more interventionist than any since World War II, and we have the slowest recovery. If you overlayed the recovery from the Great Depression, I imagine it would look like today. The malinvestment from the prior bubble has yet to be completely liquidated due to government intervention, and millions of workers are on the sidelines as a result. Oh, they'll eventually get back to work, but we're looking at 100 months (2016) before that happens.

Medicare Vouchers

Economix has a review of the Medicare voucher plan put forth by Rep. Paul Ryan (R-WI) and Alice Rivlin of the Brookings Institute:

Under the defined-benefit plan, the government promised to procure specified medical goods and services for Medicare beneficiaries, as medical necessities assessed by the beneficiary’s physician. That puts the risk of escalating costs for that health care mainly onto the shoulders of taxpayers, although Medicare beneficiaries share in these costs through premiums for Part B of Medicare (chiefly physician services) and co-payments at the time of service.

However, Professor Reinhardt, who penned the review, doesn't like the plan because it pegs growth in the voucher at GDP Growth + 1%, while recent growth in Medicare costs has been GDP Growth + 2%. What Professor Reinhardt fails to understand is that the growth in medical costs over the past 40 years is due to a total lack of price controls -- massive overconsumption of medical care by those receiving insurance from the government and (to a slightly lesser extent) by corporations. If more people actually pay for their own medical services, there will be cost controls on medical care put in place by the market.

Essentially, what the Ryan plan does is reduce growth in federal health-care spending by about 1.2% annualized from the CBO baseline over 30 years from 2020 - 2050. That reduces medicare spending in 2050 by about 30%. If you locked in Medicare spending at GDP growth, you would cut it in half.

While I think the Ryan voucher plan is a good idea, I would prefer block grants for Medicare to states. Just as the Ryan plan would determine the voucher amount by the amount of medicare spending per enrolled member, each state would get a check equal to that amount for its members. Let's look at Florida as an example.

With 3.4 million seniors right now, and an $11,000 per enrolled member, Florida would receive a check for $37.5 billion for FY11 to cover the medical costs of their seniors. The state of Florida could distribute this money any way they see fit -- they could give everyone a voucher, provide medical care for all seniors, provide free medical for the poor and give everyone else a reduced voucher, etc. The point is that this system would allow each state to design the system that's optimal for their residents. If individual states wanted to augment the voucher with additional funding, they would be free to do so.

I could envision a system where voucher payments are progressively indexed based on the net worth of the recipient -- so seniors with a million dollars of net worth would receive less in a voucher payment than the senior with a hundred thousand in net worth. In order to smooth this process out, the Federal government could make 401(k) withdrawals to pay for medical care tax-deductible. Seniors are the wealthiest segment of the US population, and it amazes me that they are treated as if they are the poorest -- why should low-income twenty-somethings pay for the medical care of a 65 year old millionaire?

But what's important is that a state or local run system would (1) be decentralized and (2) costs would be controlled at the federal level. States that dished out too large of medicare vouchers would see their workforce disappear -- states that dished out too small of medicare vouchers would see their seniors -- and their sizable nest eggs -- disappear.

Thursday, February 03, 2011

A Carbon Tax?

Robert Murphy has a nice review of Alan Blinder’s call for a carbon tax in the WSJ. Murphy did not mention the possible attractiveness of a carbon tax over other taxes, as Holtz-Eakin did.

To begin, let’s start with the attractiveness of such a tax swap. With 6 billion tons of CO2 emitted in the US every year, a $100/ton tax would generate $600 billion dollars a year and allow us to eliminate (1) the corporate income tax and (2) eliminate the employee’s share of the payroll tax. Hundreds of billions in inefficiencies would be removed with the end of the corporate income tax, and labor productivity would increase drastically with the elimination of most payroll taxes. Additionally, this would give a huge relative advantage to renewable vis-a-vis hydrocarbons -- such an advantage that all of the subsidies and tax credits currently in place could be eliminated. This would, in my opinion, spur innovation in "green" R&D and allow more homeowners to go "off the grid". Finally, introducing a carbon tax swap would bring certainty into the future price of compliance with carbon regulations, eliminate all the mileage standards on cars, and "get the greens off our backs".

On the negative side, there would be a misallocation of resources from other sectors of the economy into the green economy. I don’t know if the cost of this misallocation exceeds the savings from the corporate income tax and payroll taxes – I don’t think it would. Furthermore, a $100/ton tax, which is the same amount Sweden taxes CO2, would discourage CO2 emissions so the price would have to go up over time.

Bottom Line: a carbon tax swap is a great idea, as long as its gradually implemented – perhaps a 1-year payroll and corporate income tax holiday before carbon taxes start getting implemented. Additionally, getting a carbon tax swap may be a much better deal for market-oriented Americans than what the Left would implement if they had their way.

Wednesday, February 02, 2011

Bittman's 'Food Manifesto'

Mark Bittman has posted a "Food Manifesto" at the NYT blog, calling for a few changes to make food "healthier, saner, more productive, less damaging and more enduring". Here are his points, with my comments in Italics:

  1. End government subsidies to processed food. No problem with me -- artificially-cheap corn-based products lead to less healthy food.
  2. Begin subsidies to those who produce and sell actual food for direct consumption. Bad Idea -- this wouldn't do anything other than increase the cost of food.
  3. Break up the U.S. Department of Agriculture and empower the Food and Drug Administration. I'm mixed on this one -- I'm all for getting rid of the USDA, but I'm afraid getting rid of the USDA would empower the FDA to regulate types of food (e.g. salt) as "harmful". A better idea is to just get rid of the USDA and (if you insist) move the inspection and education functions under the FDA. Ideally, I'd like to see the food-producing industry become fully liable for the safety of their products -- that would encourage them to set up their own quality inspection boards.
  4. Outlaw concentrated animal feeding operations and encourage the development of sustainable animal husbandry. I like the goal, but is it really necessary to outlaw? If you get rid of the corn subsidies, you'd have more grass-fed, free-range beef, and if producers are liable for the safety of their products, they will maintain cleaner facilities.
  5. Encourage and subsidize home cooking. Why??? Isn't this a personal economic decision?
  6. Tax the marketing and sale of unhealthful foods. Another bad idea. This would just reduce the amount of information available on food products. And who's to say what's "unhealthy"?
  7. Reduce waste and encourage recycling. Amen - but how? Perhaps we can get rid of the incentives that contribute to corporate agribusiness, like the estate tax and corn subsidies...that would go a long way.
  8. Mandate truth in labeling. So would a government-ran "truth" commission determined what meets he "truthiness standard" -- another bad idea.
  9. Reinvest in research geared toward leading a global movement in sustainable agriculture. The free market and NGOs are already doing this. With currently-high food prices due to QE2, I wouldn't be surprised if there's a misallocation of resources towards increasing production in agriculture. In accordance with ABCT, these R&D efforts will fold once commodity prices come back down to reflect true consumer demand.

re: The Corporate Income Tax

Everybody knows that the corporate income tax is a horrible system that probably costs more in economic inefficiencies than it takes it, and even liberals want to reform it. But I still don't understand why we have to have a corporate income tax at all...the optimal rate is 0%. no individual can use profits from a firm without having to pay a tax on it, either on dividends, capital gains, or wages/bonuses. So if you simply put the rate at 0%, you would have the following benefits:

- market efficiency gains
- a reduction in overhead costs from the removal of tax lawyers/planners
- a sizable reduction in lobbyists
- revenue-neutrality

The only reason I can think of to explain why governments keep corporate taxes around is in order to keep a little bit of control over them...if they don't play ball, tax breaks can be taken away.

Constitutionality of ObamaCare

I don't really understand the argument Reagan's Solicitor General is trying to make here, but if the government can force you to buy health insurance, they surely can force you to buy any other product they want.

After considering the implications of that new grant of power to the Federal Government, I think SCOTUS goes 5-4 and shoots down Obamacare.

If they uphold it, it removes any remaining notion of limited government. I also think SCOTUS could cite US v. Lopez (1995) as precedent in ruling that the commerce clause does not cover non-economic activity.

My First 2012 Post

This got been thinking: Which freshman senator-as-VP-candidate is more likely to ensure the Tea Party shows up to vote for Tim Pawlenty in 2012 -- Rand Paul or Marco Rubio? I say Tim Pawlenty as the nominee because I think he's the front-runner in my mind -- front-runner because he's Mitt Romney without Romney's huge negatives (RomneyCare, elitist arrogance).

The answer to the above question will come down to who the true Tea Party is: a group of people truly worried about the US fiscal situation (Paul) or those who have cultural objections to the current direction and are worried that reckless spending will (eventually) curtail defense spending (Rubio).

I am a bit on the fence on this issue, because while Ron Paul is the politician who best represents my views, Rand might be a little too anti-immigration for me -- but he does support a guest-worker program. Rubio would push the GOP share of the Latino vote back up to the impressive 44% (or higher) that GWB captured in 2004...virtually guaranteeing GOP victory

I think Palin is done -- and I hope she is (perhaps Obama's only chance to get re-elected).

I Hope China Continues to Screw its Middle Class

China's neo-mercantilist policies make America richer, impoverishes middle-class Chinese citizens, and keeps Chinese workers in the factory toiling away instead of in the streets demanding an end to CCP rule. I think everyone but Paul Krugman understands that Chinese currency manipulations are America's gravy-train: wonderful foreign products in exchange for little green depreciating pieces of paper that they then loan back to us at 3%. From Yglesias:

...China’s exchange rate policy is a huge ripoff for the bulk of the Chinese population. At market exchange rates, China’s per capita GDP is under $5,000 per head. Disbursing that horde of dollar-denominated financial assets to the population so that people could obtain additional foreign-made goods would be a boon to Chinese people’s welfare. But it would be bad for the owners of politically influential export factories, so it doesn’t happen.

Make-Work Bias

Yglesias points out the make-work bias in the new oil and natural gas industry ads that point out how many jobs they support:

The Trouble With “Jobs”: But as an argument on the merits, it’s a huge fallacy. Suppose someone invented a Magical Energy Device tomorrow, a cube that costs about $1,000 to build and provides enough energy to power a city the size of Philadelphia. Even better, the cube has no operating expenses and causes no pollution. What should we do? Well, obviously, we should start building MEDs! A lot of them. We’d need somewhere between 300-400 of them to power the whole country, and we’d want more than that since with this new source of basically free, zero-pollution electricity we’d want to pursue electrification of our automobile fleet very aggressively. This technological breakthrough would be an enormous step forward for mankind. And not because of the jobs that would be created in the MED-manufacturing sector. Even if all the MEDs were built in China, America would benefit, and even if all the MEDs were made in the USA the benefits would be modest since the total size of the global market for MEDs would be pretty modest in dollar terms.

But Yglesias fails to mention that the green sector, and their "Green Jobs" push is far, far worse at falling for the make-work bias than the hydrocarbon industry.

Social Security May Not Be Going ‘Broke’, But It’s Still a Raw Deal

Over at Angry Bear, the authors make the argument that Social Security is not going broke – the general fund is. And they are right – if Social Security were a private pension, it would be “fully-funded” through 2037. However, that is assuming their investments – Treasury securities – are still viable until then. If the Social Security Trust Fund cannot cash in their investments at face value, then it will be depleted much sooner; that is no different than a pension fund who made poor investments. Once the trust fund runs out, Social Security can only pay out what it takes in – I do not believe that the federal government is obligated to fund social security deficits. Benefit formulas will need to be re-written at that time.

While Social Security is not going to go ‘broke’, it is still a net economic bad – especially for those above the poverty line. To begin, for 70 years the Social Security Trust Fund has been a source of demand for US Treasury Securities: due to creative accounting, this has always made the deficit look smaller than it actually was. A great example was in the late 1990s, when President Clinton took credit for budget surpluses, even though they weren’t really surpluses. So instead of investing in the private sector and sparking economic growth, which other pension and retirement programs do, Social Security invested in government programs!

In addition to being bad for the economy, Social Security is a bad investment for the individual, regardless of their risk tolerance; the risk/reward debate is the result of excellent framing by the Left. Let’s first look at what Social Security is: an annuity. In general, annuities are a bad investment for most people – just Google “annuities” and “bad investment”; a social security annuity is even worse, because at least with private annuities you can get a provision where you will at least get your principle back.

Social Security is even worse for those earning above the median income, based on the Social Security Administration’s current bend points. The SSA has a progressive benefits formula, where workers earn a lower return on additional contributions. Here are the current bend points:

- 90 percent of the first $749 of his/her average indexed monthly earnings

- 32 percent of his/her average indexed monthly earnings between $749 and $4,517

- 15 percent of his/her average indexed monthly earnings over $4,517

These average monthly earnings are an average of a worker’s highest monthly earnings over their best 35 years of earnings (min. 40 quarters to qualify) – it’s called an AIME. As you can see by the highly progressive formula above, Social Security quickly becomes a losing proposition once you get out of poverty:

- A person with an AIME of $1498/month – twice the base level, only gets 35% more benefit…even though they’ve paid in twice as much

- A person earning six times the base level only gets 2.75 times the benefit

- A person earning maximum benefits -- $106,000 per year in income – pays 11.75 times as much in FICA and gets 3.75 times as much benefit

Keep in mind that these are also best-case scenarios. A person with 160 quarters of eligibility could pay as much as 50 times more in FICA with only 3.75 times as much benefit.

Based on these returns, please consider the break-even times. For the minimum-eligible person, break-even is one year, with a 100% annual ROI every year after that. For the maximum contributor who paid in for 40 years, we’re looking at over 20 years to break even, with an annual ROI of 5% after that. Even for the person making the median personal income, $32k a year and contributed for a full career (40 years), that’s a break-even period of 10 years and an ROI after that of 10%; with the average life expectancy for a US man at 75 years, he can expect to break even before he dies.

So, to summarize, Social Security is not going broke, but it is still a terrible program and a raw deal for most Americans. For every American who owns a home (at current interest rates), eliminating FICA and social security would allow them to convert their 30-year mortgage into a 10 or 15 year mortgage with no out-of-pocket difference…perhaps an even shorter term. With an extra couple of decades to save that mortgage payment, savings and retirement income would dwarf what they earned under social security. The 75% of American workers who make more than $15,000 a year are subsidizing those who have failed in life – those who cannot even hold on to a minimum wage job full-time. But hey, at least it’s not as bad as Medicare, which is nothing short of a fiscal train wreck (even the Left understands that).

Update: Some of these commenters at Angry Bear ignore reality. They think they can frame the SS debate in their favor if they simply say that SS is "insurance", not an investment. Well if we concede that point, there are still tons of insurance products that provide the same hedge against risk that SS does without any of the downside. Have they ever heard of private disability and life insurance? They must have, that's what exposes SS for what it really is -- a program to keep the most destitute amongst us as reliable Democratic voters.

Tuesday, February 01, 2011

How Much Immigration?

Dave Henderson, on his blog, speculated that if the United States shifted to an open immigration position, upwards of 300 million people would move here over a matter of a couple of years. I think that number is far too high to be achievable. The US economy cannot absorb that many immigrants at any one time. While immigrants certainly grow the economy, there wouldn’t be enough opportunities at any single point in time.

If you spread it out over 10 – 20 years, a doubling of the US population through immigration is definitely achievable. Latin America, Southeast Asia, and Africa add about 50 million residents every year. We could probably absorb about half of that number every year without significant shocks.

So, just how large would the US population be? In order to have a population of 1 billion Americans by 2025, the United States, the United States would have to take in an additional 8% of its population every year – or about 25 million starting in 2011 and 75 million additional residents in 2025. A 1 billion person America in 2030 would have respective numbers of 18.5 million in 2011 and 50 million in 2030. For a very modest goal of 1 billion in 2050, we’re looking at 7.5 million in 2011 and 23 million in 2050.

The economic growth we would experience would be spectacular. Economic growth would be spectacular, as mentioned. Immigration has no negative effect on natives (perhaps even slightly positive), and if we assume the 1.8% in real per capita GDP growth we’ve had for the past 40 years – that’s the US growth rate since America entered “decline” from the Golden post WW-II era – we’re looking at a $90 trillion dollar economy (2010 dollars) in 2050.

I would suspect that most of these immigrants would move to regions of the United States where the cost of living is low, limited red tape to start a business is low, and there are right-to-work laws. Looking at America’s Mega-Regions in 2050, I would expect most population growth to occur in the Sun Belt and the right-to-work states – the Great Plains and the Mountain West (in addition to the Sun Belt). I expect the following regions to grow the most in the next 40 years, but these regions would experience even more growth with immigration:

  • - The 700 Mile Birmingham-Atlanta-Charlotte-Raleigh-Cape Fear corridor. Warm weather, low taxes, limited building restrictions, right-to-work laws, low regulation, good infrastructure
  • - The Texas Triangle (Dallas-Houston-San Antonio). Same reasons as above – it is also welcoming to Hispanic immigrants.
  • - Arizona Sun Corridor, stretching from Flagstaff through Phoenix and Tucson and down to Sierra Vista. Dirt-cheap cost of living expenses and (again) very welcoming to immigrants from Latin America.
  • - Gulf Coast. With the exception of the city of New Orleans, the entire region is pro-growth, pro-business, has good infrastructure, and a pretty good support network for Southeast Asian Immigrants.
  • - Florida. Same as above.
  • - The “Corn Triangle”. I named that one – Omaha/Lincoln-Des Moines-Kansas City. 3.5 million people – pro-growth, no red tape whatsoever, plenty of agrijobs, excellent infrastructure. I don’t know why this isn’t its own mega-region.

America is a huge country that can absorb a lot more people than it currently has – most of our mid-tier cities are pro-business and primed for explosive growth, but I don’t think it could absorb the shock of a few hundred million coming in over only a couple of years.

My Definition of Sticky Wages

A commenter asked for me to define 'sticky wages'. My definition of sticky wages is as follows:

In an efficient market, there shouldn't be any real unemployment above the natural rate; if there is a recession (correction), workers would adjust their wages downward and full employment would be maintained. However, if wages are sticky, workers don't adjust their wages downward very quickly (or at all), and we get unemployment as a result.

That's my definition of sticky wages.

Monday, January 31, 2011

Why Are Wages ‘Sticky’?

Bob Murphy had another great article at today entitled “Are ‘Sticky Wages’ a Market Failure?”:

Finally, we should note that "sticky wages" are not a market failure at all, but a quite appropriate response to the worker and employer's desire for predictability. In other words, it is not some arbitrary fluke that allows copper and gold prices to adjust by the second, while labor contracts tend to be for periods of a year or more.

Suppose things were the opposite, and that worker' wage rates could adjust every minute according to supply and demand. Someone making $20 per hour today might make only $8 per hour tomorrow. In such an environment, workers would build up an enormous cushion of savings, because they would have to draw down their liquid assets to get them through periods of below-average wages. Very few workers would buy houses, but would instead rent apartments, ideally on month-to-month terms.

While sticky wages are no doubt a real phenomenon, there are multiple causes, both inside and outside the market. To begin outside the market, government-imposed regulations on labor – such as union laws -- cause wages to be stickier than they otherwise would be.

Within the market, there are also factors that cause wages to be sticky. Immature markets tend to be stickier than mature markets – look at the capital market: 30 years ago capital was fairly immobile, even when you discount the capital controls in place at the time. But as the sharing of market information advanced, capital became more mobile and less sticky. With labor, we have also seen advancements. 75 years ago, wages were much stickier:

- It was much more difficult to know what others were being paid in your profession, little alone in other geographic areas or in different professions.

- Labor mobility and the ability to relocate for work was harder

- There was a less-dynamic economy, so there were fewer options outside of your own profession if there was a secular downturn

As we move forward, I expect less-sticky labor markets – unless the government intervenes. There are, however, a few ways that we can “un-stick” wages and allow them to adjust a little more smoothly during corrections:

- De-Unionize; union labor contracts are very sticky and there is often an agency dilemma when dealing with union leadership. Union leadership will often fight a pay-cut and deal with higher unemployment, even if a pay-cut is in the best interests of its members. Individual, non-unionized workers are more likely to adjust their wage to reflect current market conditions than union leadership – no agency dilemma.

- Increase Immigration; As pointed out previously, an increase in migration can serve to satisfy the mismatch between consumer preferences and the structure of productive forces that occurs in an Austrian Business Cycle correction. Free labor migration – optimally in the form of guest workers – would be able to meet new preferences very quickly and lower overall prices in the economy. Previously-existing labor contracts would be more viable with a higher level of economic output. Additionally, higher levels of labor migration would increase specialization within the economy and make it more dynamic – opening up more opportunities for native workers.

- End Unemployment Insurance (UI); With current unemployment insurance stretching for longer than 100 weeks, the reservation wage is unusually high. While the average unemployment rate in the US is set at about minimum wage ($290/week), many states are far above that – Massachusetts’ benefit ranges between $16 and $24 an hour – over 2 – 3 x the minimum wage. Why would anyone take less than that when they can make more doing nothing? Personal reservation wages are even higher than the UI rate; we can’t know for sure personal preferences, but I would suspect many people would prefer to get paid $16 an hour to do nothing than get paid $20 an hour to be a construction laborer (digging ditches, etc) – that person’s reservation would be incredibly sticky.

- Increase Information-Sharing; as brilliantly pointed out long ago by Hayek, the sharing of prices and other market information is the key to an efficient market. This can be done in the labor market by reducing job-lock: if employees work for a larger variety of firms, they are going to have more knowledge of what different wages are…and would be more willing to take a pay-cut if they had a better picture of market conditions. Job-lock can be reduced by reforming our broken system of tying health and pension benefits to the individual; this could be easily done by shifting the quarter-trillion dollar health insurance tax credit to individuals – government will provide a tax credit equal to 1/3rd of the premium…up to a standard premium amount. Additionally, the mountain of data the Bureau of Labor Statistics collects could be easier to sift through: If I’m a roofer in Portland, I should be able to know where wages are high and unemployment is low for roofers.