ECONOMIC THEORY: SCIENCE OR SCAM?

[n2doc]

By Nick Hanauer

Noah Smith, a smart financial writer with a very good blog, wrote an article on the $15 minimum wage at Bloomberg earlier this week. The piece celebrated the fact that, finally, we’ll have some data on how the $15 minimum wage would affect jobs. Smith said he considered it a test because in theory “a higher minimum wage should cause increased unemployment.”

The more I thought about it, the less sense this premise made. Noah’s article underscored two big things for me: first, the degree to which people see the evidence they want to see, and also how silly the idea of “economic theory” can be. Smith claims that we don’t know what the result of a $15 minimum wage will be. Will it kill jobs or not? But the truth is, there’s abundant and overwhelming evidence that this theory is wrong, and that higher minimum wages don’t hurt employment. The evidence is there; you just have to choose to see it.

Let’s just look in my own back yard for an example of that evidence. Washington State has had the highest minimum wage in the nation for several years—at $9.47, it’s a full 30 percent more than the federal minimum of $7.25. Washington’s unemployment rate of 5.5 percent isn’t the best in the country, but it’s not the worst, either. In fact, it perfectly matches the national rate. But Seattle was until recently the fastest growing big city in the country. And speaking of evidence, the first part of the $15 minimum wage rollout was successfully implemented in April, and unemployment in our county promptly plummeted to 3.3 percent.

An even more dramatic example of the goofiness of this so-called “economic theory” is the impact of the wages of tipped workers on the restaurant industry. In Washington, these workers earn at least $9.47 plus tips, a whopping 440 percent more than the federal tipped minimum of $2.13 plus tips. Despite the predictions of “economic theory,” and despite the warnings from the National Restaurant Association that eliminating the tip credit would cause food armageddon, Seattle has one of the most robust restaurant scenes in the USA. Why? Because when restaurants pay restaurant workers enough so that even they can afford to eat in restaurants, it’s really good for the restaurant business. If economic “theory” were correct, if paying workers more resulted in higher unemployment, we would have no restaurants in Seattle.

more
http://civicskunkworks.com/economic-theory-science-or-scam/

[unblock]

1. as with most theories, you have to know how to apply it.

economic theory is more complex than politicians or political economists like to think it is. there's a lot more to it than just higher prices means fewer sales, or higher wages means more unemployment.

you have to look at the whole picture, you have to consider if the market is functional and at equilibrium to begin with, you have to look at multiplier or downstream effects, etc.

economic theory works well but only if you pay attention to the details and the assumptions and all the data.

it's the oversimplification of it that's the scam.

[Gregorian]

2. You might like The Naked Short Club on resonancefm

It's a London based radio hour with very bright guests that go over their observations and predictions of the world markets.

Wow, I found a link to an archived show (where can one hear Hendrix and econ in one show?):

https://www.mixcloud.com/Resonance/the-naked-short-club-30th-march-2015/

[unblock]

3. cool, thanks!

[Igel]

4. It's been fun at times to listen to economists debate the "minimum wage v unemployment" problem.

Both start by citing studies to support their position. This, of course, is very much a humanities and social-science methodology.

Ultimately both force the other to admit that ultimately, you pick your assumptions and get your answers. That's almost getting them pushed into a science frame of reference. But, not to worry: Each, like a hermit crab, quickly retreats to the comfort of his/her own theoretical shell.

In other words, you choose which set of evidence to see, because the two sets are both each wildly incomplete and often at odds.

To wit: "first, the degree to which people see the evidence they want to see," meaning that wisdom and insight is about to break forth. Soon, though: "The truth is, there’s abundant and overwhelming evidence that this theory is wrong, and that higher minimum wages don’t hurt employment. The evidence is there; you just have to choose to see it."

And there's the safety of that nice shell; blinders carefully affixed--and only admitted when it was a useful tool to point out that "we all have blinders, but I only really care about yours."