A More Powerful Fed?

So, is the Obama administration’s idea of making the Federal Reserve a super-regulator of our financial system a good idea or not?

The July 10 New York Times ran an important story (“Two Authorities on Fed Advise Congress Against Expanding Its Power”) focused on two critics of the proposal. The entire piece warrants reading. But three points are worth highlighting here:

• The Obama administration is proposing to make the Fed responsible for identifying and reining in “systemic risks,” like the explosion of reckless mortgages that nearly destroyed the financial system and started a recession that has yet to hit bottom. The Fed would also be in charge of regulating giant financial institutions that are considered too big to fail, perhaps by imposing higher capital requirements on them.

• “I do not know of any single clear example in which the Federal Reserve acted in advance to head off a crisis or a series of banking or financial failures,” said Allan H. Meltzer, professor of political economy at Carnegie Mellon University and the author of a history of the Fed.

• A broader warning came from John B. Taylor, a top Treasury official under President George W. Bush who was considered a potential candidate to succeed Alan Greenspan as Fed chairman. Mr. Taylor said that expanding the Fed’s power would dilute its main mission of steering the economy, create conflicts of interest, reduce its credibility and jeopardize its independence. “The administration proposal would grant to the Fed significant new powers, more powers than it has ever had before,” he told lawmakers. “My experience in government and elsewhere is that institutions work best when they focus on a limited set of understandable goals.”

Taylor is a wise economist.

Again, read the full article.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Government Worker Pay Cut?

Did you ever notice that no matter how bad the economy gets, government workers remain relatively unscathed?

Small business owners struggle for survival, along with their employees. Big firms shed jobs. And private sector workers in general face fewer job opportunities, lost income, and/or unemployment.

But government workers? They still seem to continue to get pay raises, with lavish compensation packages marching on. And to make matters even worse, private individuals and businesses wind up paying higher taxes to continue with these luxurious pay packages for government’s often wasteful and unnecessary ventures.

That’s why a story about California state government from the July 9 Sacramento Bee caught my attention. It said:

The governor's latest budget proposal assumes almost 20 percent in employee wage cuts: 15 percent from the three-day furloughs that started this month, plus another 5 percent across-the-board whack.

"Three days (furlough) plus the 5 percent," said H.D. Palmer, Department of Finance spokesman when asked Wednesday to clarify the governor's budget proposal.

The Legislature won't go for the pay cut, but the governor can then add a furlough day …

Last May the governor proposed a 5 percent cut on top of what were then twice-monthly furloughs. The proposal was dead from the start; everyone knew the Democratic-controlled Legislature would never go for it. "State workers," as one Capitol Republican staffer told me, "are their constituents."

Sure enough, the Legislature defeated the plan in June. Schwarzenegger followed the "defeat" with a new executive order to add a third furlough day, getting the 5 percent cut in state worker wages that he wanted.

He could do that because a Sacramento Superior Court judge ruled in February that Schwarzenegger's emergency powers let him treat the government's fiscal meltdown like a Southern California wildfire by claiming broad emergency authority – including the power to furlough state workers.

The legal hurdle to exercising that power is proving there's a crisis. The Legislature's bickering while the state's budget ruptures helps. Its rejection of a pay cut is even better.

Of course, no one likes the hardships that come with the current deep and long recession. But if we really want to get the economy moving again, then it’s time for government to start seriously tightening its belt. Apparently, though, things have to get as bad as they’ve been in California in order to get any action on the government worker front.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

About That Minimum Wage Hike

The federal minimum wage is scheduled to increase from $6.55 per hour to $7.25 on July 24. This follows an increase from $5.15 to $5.85 in July 2007, and then to $6.55 in July of last year.

The minimum wage is one of the few areas where most economists are in agreement. Both economic theory and countless studies show that a higher minimum wage reduces employment opportunities for low-skilled, inexperienced, young workers. It’s pretty simple: when government artificially raises the price of low-skilled, inexperienced labor, then businesses will reduce jobs for those workers. For businesses that have no choice but to hire such workers, those firms have to find other ways to make up for lost resources.

In the July 6 Wall Street Journal, “The Outlook” column on page two by Kris Maher focused on the impact of raising the minimum wage in the current bad economy. But there were some odd declarations in the piece.

For example, Maher wrote: “In the past, minimum-wage increases have done little to dent job creation. And pouring more money into people's pockets -- especially low-wage workers who are likely to spend the increase to meet living costs -- would normally boost the economy.”

Really? That might be Maher’s opinion, but it is not rooted in economic reality. After all, do the resources that go for a higher minimum wage just drop from the sky?

And a bit later, Maher asserts:

Still, many economists also see long-term positive effects for the economy from boosting the income of those at the bottom of the economic ladder. They note that many small businesses may benefit through higher productivity in the form of improved worker retention and less churn.

Again, really? Just who are these “many economists?” Maher continues:

The Economic Policy Institute estimates that the minimum-wage increase will add $5.5 billion to the economy, and that this money is likely to be readily spent by low-wage workers, giving a boost to local economies. Heidi Shierholz, an economist at the liberal think tank in Washington, argues that ‘it is actually a good time’ for an increase in the minimum wage.

Ah, now I understand. Maher turned to the labor-union-backed Economic Policy Institute to find economists willing to say rather silly things about the minimum wage. Indeed, only a handful of liberal, labor-union-biased economists would ever make such mistaken statements regarding the effects of the minimum wage.

The true economics are not in dispute. A government-mandated wage increase means increased labor costs – at the minimum wage level and often higher, as workers with more experience and skills look for a commensurate wage hike. Those costs are either born by workers who will have fewer job opportunities, or by employers, or both. Maher offered the following example:

Ryan Arfmann, who owns a Jamba Juice franchise in Idaho Falls, Idaho, is a case in point. He said he will have to boost pay to all of his 18 workers. The ones making less than $7.25 an hour will be raised to the new rate. But he said he will have to give raises to those currently earning more than $7.25 an hour because they have more experience. As a result, he plans to cut hours for his part-time workers. "I'll definitely have to run a tighter shift each day and watch numbers like never before," said Mr. Arfmann, who estimates his business is down between 3% and 4% this year.

That’s the reality of a government-mandated wage increase.

In the private sector, increased pay is earned due to such factors as increased productivity, enhanced skills, greater responsibilities, a shift in labor market demand and/or supply, business growth, and so on. A government-mandated wage hike has nothing to do with such factors. It’s simply political pandering overruling economics, with workers and business owners paying the price. That bad no matter what the current state of the economy, but it’s especially bad in a down economy, as is the case now.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Antitrust and Telecom

Apparently, consumers have little or no choice when it comes to telecommunications services and devices.

What’s that you ask? Am I crazy?

Not me. According to the July 7 Wall Street Journal, this is about the Justice Department's antitrust chief, Christine Varney. As the Journal reported:

The Department of Justice has begun looking into whether large U.S. telecommunications companies such as AT&T Inc. and Verizon Communications Inc. are abusing the market power they have amassed in recent years, according to people familiar with the matter…

The telecom review isn't a formal investigation of any specific company, and it isn't clear it will ever become one. The review is expected to cover all areas from landline voice and broadband service to wireless.

Anyone even casually familiar with the industry would seem to understand that this is an odd – to say the least – inquiry. After all, there is more competition now in telecommunications than ever before in the history of the industry, including battles, for example, between cable and phone companies when it comes to broadband land lines, and a wealth of choices when it comes to wireless services.

So, what then is this about? To a significant degree, it is another example of an administration that believes the political process can do a better job allocating resources and can manage the economy, as opposed to leaving such matters to the private market, which, of course, is guided by competition and, ultimately, consumer decision-making.

In a May 21 Long Island Business News/Dolan Media Company column, I wrote:

Antitrust enforcement just got a big jolt of life. On May 11, President Barack Obama’s antitrust chief, Christine Varney, essentially dissed the Bush administration for being too lax on antitrust enforcement. She promised to get tough.

Is this a good idea for business and the economy? Quite simply: No. It means that politicians and their appointees overrule the decisions made by consumers in the market.

In that earlier column, I concluded:

The notion that a true monopoly, able to raise prices without fear from current or future competitors, can emerge from the competitive marketplace is more economic fiction than fact. That’s especially the case in today’s dynamic, high-tech, global economy. Antitrust activism by Obama appointees, along with their European buddies, will only serve to overrule consumers, and hurt U.S. competitiveness.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Immigration and Employers

On July 2, The Wall Street Journal noted a shift in immigration enforcement under the Obama administration. Specifically, the Obama White House has targeted “hundreds of companies suspected of employing illegal immigrants, signaling a shift in strategy: going after employers instead of workers.”

Given the Obama White House’s view toward business thus far, this is not surprising. Unfortunately, though, this periodically has been the take on immigration enforcement served up by the federal government for more than twenty years now.

The Journal noted that this latest shift does not help the workers involved: “While the new enforcement approach isn't set up to trigger immediate deportations, it is still likely to unsettle immigrant communities. ‘The net effect for workers is nearly the same: They lose their economic lifeline. They may not be deported but they may have to relocate,’ said Craig J. Regelbrugge, the co-chair of Agriculture Coalition for Immigration Reform, an association of agricultural producers.”

One of the targets is a California-based company:

American Apparel -- founded and run by a Canadian emigrant to the U.S., Dov Charney -- has been one of the most outspoken proponents of changing U.S. immigration laws. Many of its stores post signs and sell T-shirts that read "Legalize L.A.," a reference to the city's many undocumented workers. Mr. Charney said in a statement Wednesday that the company hoped the employees "are able to confirm their work authorization so that they may continue to work at American Apparel."

Near the end of the article, it was noted: “It remains to be seen how much pressure the new policy could put on employers.”

Charney is right to, in effect, emphasize that it should not be the responsibility of business owners to verify the legal status of workers. It is the federal government’s job to guard the borders and regulate entrance into the nation. Just because the laws are misguided and the government has failed to do its job are not reasons to hoist additional costs onto the backs of America’s small businesses.

Comprehensive immigration reform is needed. But that certainly does not mean ramping up the demands on America’s entrepreneurs as immigration police. Instead, it’s time to remove the duties of policing immigration from the business community, and give it back to the federal government.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council