Student Paper About Safe Roads Amendment

Transportation Amendment-Yes or No

I had planned a trip to Chicago with my family last month.  My son was so excited; my husband not so much.  We were going north on I-55, and my husband was already agitated with all the construction and orange barrels everywhere.  That is when we hit the mother of all pot holes.  This thing was as deep as it was round.  I could instantly see the panic in my husband's eyes, then I heard the sound of a cannon going off.  It was our tire, there was no saving it.

Anywhere you go in Illinois; this is how our roads are.  Why is that? Where is Transportation revenue going?

On November 8, voters will have the chance to add an amendment to the Illinois Constitution.  The proposed amendment is called the Safe Roads Amendment or Transportation Lockbox by supporters. This amendment prohibits the General Assembly or any local government from using, diverting, or transferring money raised from transportation revenue sources for non transportation purposes.  Transportation revenue includes gas taxes, fees, license taxes, and registration and title fees.  Over the past decade, the state of Illinois has diverted more than $6.8 billion away from transportation projects that should have been spent on them.  The result of these diversions is crumbling roads and unsafe bridges across the state.  This will affect pretty much everybody in Illinois; we all drive or use the roads one way or another.  The following is a quote from a flyer that is being distributed to homes across Illinois in support of the Safe Roads Amendment.

PRO: from a flyer being distributed by Citizens to Protect Transportation Funding: "Half of Illinois’ roads and 4,200 of our bridges are in poor condition. … Our state of disrepair isn’t because we lack money. It’s because the politicians have used the Road Fund as a slush fund. Over the last decade, $6.8 billion has been swept out of the Road Fund.  

The next quote is from House of Representative members against the Amendment, this is what they says:  CON: From a letter written by State Reps Barbara Flynn Currie, Laura Fine, Elaine Nekritz and Pamela Reaves Harris:"This amendment would severely curtail the ability of the state to react to these types of events. … Other states that have passed transportation funding lockboxes, have release valves for emergencies. …The proposed Illinois amendment is missing a safety valve."

Illinois is not the first state to put a "lockbox" on their road funds.  Wisconsin and Missouri have passed similar amendments.  The problem with Illinois compared to Wisconsin and Missouri is we do not have a balanced budget and they do.  

Polling in Illinois shows that 85% of voters support the idea of a transportation lockbox. All the amendment needs is a 60% majority vote to pass.  Most of the general assembly that was polled, was in favor of the Safe Roads Amendment; and those that were not in favor was because the amendment needed a safety net, in case of emergencies.  This new amendment will not cost the state of Illinois any more money because the money is there.  It just needs to be spent on what it is allocated for.  Some sources do say that if this amendment is passed, Illinois will have another reason to raise taxes.  

This paper does not make the case that this is relevant to social welfare policy, so I will try to make that argument.  Safe roads and infrastructure are a way to encourage economic development and increase incomes throughout the state.  If we neglect transportation infrastructure, it is possible that this will drive away businesses, or create dangerous situations for motorists such the disaster your family encountered on the 55. Neglecting transportation infrastructure can cause deaths, as for example in the I-35W Mississippi River bridge collapse on August 1, 2007 or notorious Point Pleasant Silver Bridge Collapse on December 15, 1967.  Also, spending on transportation infrastructure will stimulate the economy, so it is a way for the government to provide a public good while at the same time pumping tax dollars back into local economies.

One does need to ask what the money diverted away from transportation was used to purchase.  I do not know the specifics, but I do know in general where state money goes.  The state of Illinois spends most of its money on Health & Social Services (41.8%) and Education (24.7%).  The state spends 5.5% on transportation, but I notice that only 2% of state revenue comes from motor fuel taxes. (All this information comes from the FY 2015 report from the Illinois Comptroller).   So, it is quite possible the money was taken from the transportation fund to spend on education or health and social services. Education, even more than transportation infrastructure, is a sort of investment in the public good that ought to bring economic returns to the whole state.  Spending on health and social welfare is more often pure consumption (although some of it is investment that can save money, like in prevention programs).

Here is an update on the final result of the voting for the amendment: it passed with about 80% voting in favor.  I voted against it. The amendment was supported by trade unions and large businesses that all profit from infrastructure spending.  I am not always a knee-jerk opponent to what large trade unions or large businesses desire (I am often quite sympathetic to whatever unionized labor is trying to get), but in this case, I was not convinced that this amendment would really improve the state, and I am not sure that transportation infrastructure spending is so much more important than, for example, education spending.  Should we have an amendment that forces the State of Illinois to pay a certain amount per student for every student in public K-12 education, or for each student in public Illinois universities?  Perhaps we should, but the education lobby is not as strong as the lobby that backed this particular amendment.  I doubt there will be any terrible consequences of this amendment, or at least it will cause no harm to compare with the horrifying disaster the state is experiencing because of the inability of political leadership to make a series of tax increases and spending cuts the state needs. Time will tell.    

Benjamin Powell's Presentation on the Virtue of Sweatshops.

Here is a reaction to a lecture you may view at the UIS on demand video website.  The lecture was given by Benjamin Powell, and the topic was sweatshops.

• Out of Poverty: Sweatshops in the Global Economy by Benjamin Powell – February 23, 2016

Points to consider in the sweatshops presentation by Benjamin Powell:

Much of the appeal of the lecture comes from the point Dr. Powell makes when he asks about how much you can pay a worker for a day’s work when that day’s work adds $2 to the value of your product. The correct answer is you cannot pay the worker more than $2. Dr. Powell claims that in some places the efficiency of workers (as determined by local infrastructure, not by the skills of the workers) are much lower than in America, and therefore labor is less expensive in those places, and therefore manufacturers will prefer to have labor-intensive operations moved to those low-labor-cost places.

Dr. Powell is obscuring the issue. The efficiency of the worker (how much value the worker adds to the product through processing) isn’t so much the deciding factor; the real issue is how much lower than their efficiency the worker can be paid. There will always be a ratio of labor cost to labor efficiency. If a worker is paid $1 per hour and adds $2 of value to the products that worker is processing each hour, the worker is essentially doubling the capitalist investor’s money. If a much more efficient American worker can add $20 of value to the products that worker is processing each hour (ten times more productive than the third world worker), but must be paid $16 per hour for the labor, the capitalist investor is only getting 120% ($1.20 for every $1.00 spent on labor). Capitalist decisions to invest in overseas production is based not on lower labor costs, but on the lower ratio of labor cost to labor efficiency or value. If workers in a poor country must be paid greater than $1.60 per hour when their productive enhancement of the products they handle only increases value $2.00 per hour, it will be more profitable to hire American workers at $16 per hour who add $20 of value.
On average, employers everywhere pay their workers less than the value those workers add to the products the workers are producing. Partly this is because money must be extracted from the workers’ pay to cover the costs of operating a factory (managers, administrators, custodians, physical plant maintenance, insurance, paperwork related to conforming to safety and anti-pollution regulations, and so forth). Partly this is also because capitalists must have a reasonable expectation that the return on their investment will exceed what they could get elsewhere… that is, if you could earn 10% interest in some safe investment with government-backed securities, you would have no reason to invest money in a more risky proposition (owning a factory) where your return on investment would give you 5% interest. (By the way, employers do not always under-pay their workers to cover other costs related to business operations and the expectations of profit; it is quite possible that some workers are over-paid for their contributions to the firm, often because of cultural expectations or business customs, and it’s only on average when we sum up all the wages of all the workers and compare this to the overall gains of the entire enterprise that we must, in the long-term, always find labor costs below the gains in value).

A key moral and economic argument against sweatshops isn’t that the wages are low. The argument is that there is a “fair level of exploitation” related to the quality of the job and the efficiency of the worker. It is not the case that workers are paid $1 per hour for producing $2 of value to their employers… that is actually a fairly normal ratio, and is, for example, better than the ratio of compensation to value received by professors at UIS. The problem is that in the same countries where wages are low, local elites and capitalists and the government work together to ensure that the ratios between labor costs and value added are much lower. A worker may add $3.30 per hour in value to the product and receive 33¢ per hour in compensation, a ratio of labor-to-value that gives investors about $10 of value for every $1 in labor costs. An argument on fairness and social justice would claim that their ought to be a ceiling to this ratio, perhaps with different ceilings in each society based upon its level of development, but in no society should the ceiling to this ratio exceed some number. Perhaps in a poor country the fair ceiling is $4 of value to $1 paid to the worker, while in a medium-income country the ceiling ought to be $3 of value to $1 paid to the worker, while in a wealthy country the ceiling ought to be $2.50 of value to $1 paid to the worker. But, everywhere, there ought to be some sort of natural limit to how much exploration is still acceptable, and the argument by anti-sweat-shop activists should be that a number that allows reasonable profits without obscene exploitation ought to exist, that “good factories” in poor countries will be able to pay it and still make profits, and “sweatshops” will pay less than it.

For example, let’s say a factory in Sri Lanka or Burma is producing jackets, and a typical team of ten workers can sew 50 jackets per hour, and the pre-sewn parts of the jacket are worth $50 ($1 of materials for each jacket) and after being sewn, if sold to the domestic market from the factory door, each jacket could be sold for $3. This means that those 10 workers took in $50 of jacket materials and produced $150 of jackets by sewing during that hour. That means that the workers added $100 of value in that one hour. As there are ten workers in this team, that means the workers each added $10 in value per hour to those jackets. The argument against sweatshops is that there ought to be a minimum standard of how much those Sri Lankan or Burmese tailors are paid, and if the ratio is $1 paid in labor to $10 given in value, the wage ought to be about $1. In America, with better equipment and more machine tools, it might be possible to run a factory that assembles and sews jackets with 10 workers taking $500 of jacket materials and producing 90 jackets per hour that could be sold for $9 per jacket (materials worth ten times the value of the materials used in Sri Lanka or Burma to produce 90% more jackets that could be sold for three times the price). That would a case of workers turning $500 of materials into $810 of jackets, for a value gain of $310 per hour, or $31 per worker. In America, those skilled workers, working in a highly mechanized plant, might be paid $15.50 per hour. The company could be quite profitable with this arrangement, but the investors would only be earning $2 for every $1 invested in labor, and they would also have higher costs for conforming to regulations or purchasing and maintaining the equipment that allowed their worker to make 9 higher-quality jackets per hour per worker while workers in Sri Lanka or Burma could only produce 5 lower-quality jackets per hour per worker. The investors could make far, far higher profits by investing in jacket production in Sri Lanka or Burma where $1 invested in labor gave $10 in value. It’s not the $1 per hour wage in Sri Lanka or Burma that attracts investors compared to the $15.50 per hour wage in the USA; it’s the ratio of $10 value gained to $1 invested in the labor costs that makes Sri Lanka or Burma attractive.

Now, Dr. Powell is saying something very non-controversial when he says that investment in poorer countries where wages are lower can give higher profits to investors, and therefore it happens. He is also correct that historical evidence confirms that as investors compete to attract low-wage workers in poor countries, wages in the poor countries will rise and working conditions will improve. If labor costs are lower and productivity is similar, or if productivity is lower but wages are much, much lower, we have a situation in labor called “competitive advantage” or “comparative advantage” and investment will flow into labor-intensive production in places with a comparative advantage in low-cost labor. Some places where wages are low relative to productivity of workers are naturally going to attract foreign investment in labor-intensive production. In the example I gave, American workers were able to produce nearly twice as many products per hour than their competitors in poorer countries, and their products were of higher quality so that the lowest prices that would be paid for those products were also three times higher, and in raw terms, the factory owners in America were getting $15.50 more in value than they were paying in labor compared to the $8 in higher value compared to wages in Sri Lanka or Burma. Yet, the ratio of cost to value was what made Sri Lanka or Burma a more attractive place to invest in the jacket factory ($9 for $1 is much better than $31 for $15.50, which is $2 for $1). 

With some products, the technology is such that the maximum productivity is approximately the same in the poor countries as it is in the wealthy countries. Let’s imagine a product where, with the best factory using the most up-to-date technology a worker in Sri Lanka can produce 10 per hour and a worker in the USA can also produce 10 per hour… there are almost no efficiency gains at all in the USA. In such an industry it is natural that production will move to poorer countries. If the cost-of-living in India or Sri Lanka or Burma or Kenya is such that we can pay workers $0.65 per hour in the local currency and they can produce approximately the same quantity of goods at approximately the same quality level as what we could get from American workers paid $15.50 per hour, then of course India and Sri Lanka and Burma and Kenya will get the factories. The moral argument against sweatshops is this: if the efficiencies of the workers are about the same, and the quality of the goods is about the same, then there ought to be a society-imposed constraint on the level of extraction of profit from the workers. If the American workers paid $15.50 per hour are generating $31 in value per hour, and the workers in poor countries are also generating something close to $31 in value per hour (let’s assume it’s about $25 in value per hour), then the ratio of wage to value can be somewhat better for the capitalist in the poor country, but not obscenely so. If the workers generate $25 of value per hour, a wage at American levels of profitability ($2.5 to $2 value per $1 of labor) might be somewhere between $10 and $13, and for a medium-income country like Mexico or Turkey or Romania ($3.5 to $3 value per $1 of labor) the wage might be somewhere between $7.50 and $9, and for a low income country ($4.5 to $4 value per $1 of labor) the lowest wage might be between $5.50 and $6.25.
The argument against sweatshops is not that wages are lower. The argument is that while wages ought to be lower, they are too low. In the example above where tailors working in a factory in a low-income country were generating $10 of value per hour making jackets, perhaps the fair wage is $2.00 or $2.50 per hour, and in fact they are only paid $0.50 or $1 per hour. In the example above where the value given was $25 per hour we suggested with a 4-to-1 ratio ceiling the wages ought to be around $5.50 to $6.25 per hour, but perhaps the workers are only paid $2 or $3 per hour.

Dr. Powell’s whole argument is based on the idea that the “market” will make employers bid for good workers and raise wages up to levels that support adequate profits while simultaneously raising wages locally. The counter-argument he never addresses is that the “market” is distorted by artificial constraints on worker’s ability to sell their labor to higher bidders and constraints on factories and investors preventing them from raising wages. That is, in these poorer countries non-democratic tyrannies enforce low prevailing wages and prevent workers from asking for more, and also prevent investors from paying more. Wages do increase, and conditions do improve, but that process is artificially slowed or temporary halted by unfair practices in which elites, capitalists, and investors work together to use intimidation, murder, wage-price fixing (at artificially low levels) and so forth to keep ratios of wages to value of labor in a realm where profits are obscene.

If there were international standards of acceptable limits to the ratio of wages to labor value, the poorer countries could compete against the wealthier countries, jobs would continue to flow to the poorer countries, and investors would continue to make more profits from labor in the poorer countries, but wages would be relatively higher (low skilled worker might make $2 per hour rather than 50¢ per hour in the poorest countries, and more highly skilled workers in more modern factories in poor countries might make $5 per hour rather than $2 per hour). All Dr. Powell’s arguments in favor of low-wage work in poor countries would still hold true, but workers would enjoy immediate dramatic improvements their quality of living, paid for by reductions in capitalists’ profits from super high levels to merely high levels.

One of his counter-arguments is that exploitive wages (say, paying 50¢ rather than $1 or paying $2 rather than $5 per hour) is a better situation for workers in poor countries than no foreign investment at all. There are two problems with this argument. First, he has created a false dichotomy. The correct anti-sweatshop argument isn’t that there should be no low-wage factories in low-wage countries taking advantage of the comparative advantage in labor costs. The correct anti-sweatshop argument he should be addressing is that low-wage factories ought to be forced to adhere to international standards of how much labor can be exploited, and those standards ought to be instituted to counteract tendencies of local business owners in the third world from extracting too much profit from their workers. If low income countries are permitted a $4 value to $1 labor cost ratio as a minimum standard, they will still have an advantage over nations where the prevailing ratio is $3 value to $1 labor cost. And, even if the ratio of value to labor is held the same everywhere (at, say, $3 to $1), the factories in poor countries will still have a comparative advantage in production where labor efficiency is about the same in their country as it is in high-wage countries.

The second problem with this argument that sweatshops are better than nothing is the lack of any valid moral argument behind it. The argument that there ought to be limits to exploitation, and that free societies ought to only trade with societies where these limits to exploitation are set and enforced, is a moral argument about defending workers from excessive profit-taking by capitalists. The argument that investment and competition ought to be allowed anywhere because it raises the standard of living in the poorest places is amoral, and would lead to competition between free workers and oppressed workers so that societies that allowed the oppression of workers would have trade advantages.

For example, if America still had slave labor in the south, profits would be higher in the south, and poverty would be higher there as well, because free labor would experience depressed wages due to competition with slave labor, and slave labor would be poorly compensated). In such a situation, Dr. Powell’s argument would be that we ought to encourage investment in the slave-holding south because the increased investment there would create competition among slave-holding capitalist factory-owners to improve the productivity of their workers, which in turn would create a demand for improved conditions for their workers (better food and medical care, and perhaps shorter hours if it turned out that workers produced more in 50 hours of labor per week than they did in 70 hours of work per week). Dr. Powell’s amoral “moral” argument for investment in the south would also claim that greater wealth from the increased production in the south would generally improve the standard of living throughout the south for both free labor and slaves. Without the investment, Dr. Powell would claim, the slave-holders could just continue with their traditional styles of production and the south would remain in poverty and the slaves would remain miserable in a stagnant economy. Or, take his pro-sweatshop argument to Nazi work camps. He might argue that buying the products of Nazi work camps kept up a demand for the products of those camps, and gave the Nazis incentives to not exterminate the workers. If we hadn’t purchased the products of the labor camps, the workers would have been liquidated by the Nazis, and so there was be a moral imperative for us to purchase the products of those camps. By creating a false dichotomy between the bad situation of supporting hyper-exploitation of workers and investing nothing in job opportunities (even in slavery, even in Nazi work camps, because we will ignore the conditions of the workers in the camps as compared to any absolute moral standard and only compare it to the relative standard of having no investment for new work opportunities for those workers), Dr. Powell gives us an amoral situation that allows us to ignore a range of moral considerations about the means of production because we are narrowly focusing on only the moral argument that something is relatively better than nothing.

The alternative to Dr. Powell’s amoral argument is to make a moral argument that we ought have free trade with free societies that enforce labor and environmental standards with which we agree. High tariffs or outright bans on trading with unfree societies where ratios of value to labor gave obscene profits to local capitalists would direct foreign investment into societies where liberty prevailed and ratios of value to labor compensation did not exceed standards of human decency. This would allow the benefits of free trade to raise standards of living in the poorest free societies, and would prevent the growth of wealth and power among the elites and capitalist classes in the unfree poor societies. Such a situation would create an incentive for elites and capitalists in the unfree societies to adopt universal labor standards and liberate their people so that they could participate in trade and gain the benefits from free trade.

Dr Powell described Hong Kong as one of the societies enjoying the greatest freedom. He claimed that this freedom allowed economic expansion and great wealth in Hong Kong. This is a half-truth. It is true that in 1997 when Hong Kong was taken by the dictatorship in Beijing, the per-capita GDP of Hong Kong was higher than the GDP of the colonizing country, the United Kingdom. It is also true that there is tremendous wealth in Hong Kong. However if we look at standards of living using medians rather than averages, we find that Hong Kong people have had worse conditions than the British. Poverty, and the living conditions for those who are in poverty or near it, are very bad in Hong Kong, and have always been so. Much of the wealth in Hong Kong is not generated in Hong Kong through it’s “free economy.” Instead, money flows out of the dictatorship ruled by Beijing, where great fortunes are amassed but private property is not secure, and this money ends up in Hong Kong, raising prices and inflating the incomes of the professional classes and investors and all those in the upper end of income and wealth distribution. So, Hong Kong has become a safe haven for China’s wealth. Hong Kong is also a tourist destination for Chinese and others in Asia. So, the concentration of wealth brought by visitors and outside investors creates a very high per capita GDP and average personal income and wealth in Hong Kong, but among the lowest half of the population, life is not very good at all. And, Dr. Powell’s suggestion that the cost of living in Hong Kong is not very high seems ridiculous. Hong Kong is ranked by Mercer’s as the second most expensive city in the world for cost-of-living. The most expensive city in the USA is New York City, which ranks 16th in the world. Hong Kong is more expensive in terms of cost-of-living than even Zurich or Geneva. The “freedom” in Hong Kong is not very good. If the institutions were democratic, the working classes would have greater power in the legislature, and minimum wages would increase and the welfare system to protect the poor and working classes would expand. However, Hong Kong is not free, and it does not have free elections to select the majority of its legislative body or its top administrator. The executive leadership in Hong Kong is appointed by a dictatorship installed by a military take-over of China and perpetuated by a police-state based in Beijing that imprisons, tortures, and kills opposition. Lately, journalists in Hong Kong who criticize the regime in Beijing have been kidnapped and removed from Hong Kong to face an unpleasant fate in China.

Dr. Powell showed a comparison of wages in the sweatshops to the prevailing wages in the surrounding economy. Some of the wages in so-called “sweatshops” were much higher than prevailing wages in the local economy. I think Dr. Powell is probably correct that these are unlikely to be real sweatshops. They could be. Perhaps the prevailing wages in that area give investors $10 value to $1 labor cost and the better wages in the so-called “sweatshops” are merely $5 value to $1 labor cost, still excessively exploitive, but not as bad as the prevailing practices. A problem here that Dr. Powell correctly addresses is that too many Americans, ignorant of economics, condemn all low-wage factories in low-wage countries as sweatshops. However, when Dr. Powell shows his graph, there are some places (in Thailand and South Africa, for example) where wages in the sweatshops are far below local prevailing wages. In those cases, he explains, he found that the sweatshops were exploiting refugee or immigrant labor (e.g., South African factories might hire economic refugees from Zimbabwe, and Thailand’s factories might hire refugees from Burma). In these cases, the factories could presumably make decent profits paying the prevailing wages, but pay much less than the local prevailing wages because they have a special power over their refugee immigrant labor force. This is sweatshop work at its worst, because the wages are excessively exploitive. The free market is not working here, because the employers are using a special workforce they can exploit and control.
Dr. Powell’s point is that the refugee workers are relatively happy, as they would rather work for their capitalist employers in South Africa or Thailand compared to the working situation they would face back home in Zimbabwe or Burma, or on the farm. He has again made the same logical error of a false dichotomy. The choice should not be for these workers to either work back home for 35¢ an hour or work in South Africa or Thailand for 75¢ per hour when prevailing wages in South Africa and Thailand are $2.50 per hour. No, the choice should be between working for 35¢ back home or working for $2.50 per hour in South Africa or Thailand just like all the other workers in their community. The problem isn’t the one Dr. Powell pretends it is, that anti-sweatshop activists complain that factories pay 75¢ when they should be paying American wages of $12 per hour. No, not at all. The problem is that the factories pay 75¢ per hour when wages in that area are supposed to be $2.50 per hour. And, a further problem might be that wages in South Africa and Thailand at $2.50 ought to really be about $3.00 or $3.50 per hour, given fair ratios of work value to labor compensation.

Dr. Powell keeps misstating his arguments by arguing the point that wages that are far below western standards are okay. That is already something every serious economist agrees with. Dr. Powell assumes that wages and conditions in the lowest wage factories are set by competition in the capitalist marketplace, but his own data disprove this. If factories can pay much less than the prevailing wage by exploiting refugees, then clearly something other than pure supply and demand are at work. If the market was working as Powell asks us to imagine it does, wages should be fairly similar, and there shouldn’t be cases of some workers being paid one-third the prevailing wages. In the case of the sweatshops where pay is much lower than local prevailing wages and the workers are refugees, it’s clear that capitalist are collecting “rents” (unearned windfalls) by exploiting their workforce’s precarious legal or social situation. A similar situation happens more widely in unfree poor countries where local capitalists and elites collude with foreign investors and use the local police or criminal gangs to intimidate workers and keep wages low.

Dr. Powell’s argument that labor unions do not raise wages is false. He uses historical data to show that wages did not increase suddenly when unionization was made legal. This is not be the correct way to examine the effect of unionization. The correct way to measure the influence of unionization is to examine the wages of unionized and non-unionized labor in similar labor pools within the same economy over the same historical period. For example, today in America, workers in comparative occupations with comparable skill levels make significantly more if they are unionized and engage in collective bargaining than if they are not unionized. And, there are spillover effects, where average wages in highly unionized job sectors are higher, even for non-unionized workers in those fields. Examining total wages in the whole economy when unionization becomes legal would make sense if as soon as unions were made legal almost all workers joined unions and started collective bargaining. In fact, when unions were legalized, it still took decades for union membership to grow. It is a fact that strong USA wage growth between the 1940s and 1970s was associated with a higher rate of unionization than has been present in the past few decades when wages have been (after adjusting for inflation) stagnant while unionization has declined.

Dr. Powell mischaracterizes the argument against child labor, by presenting a false dichotomy between children being allowed to work in sweatshops (or contributing to household income by helping with take-home work brought home by parents who work in sweatshops) versus the alternative of children working in agriculture or traditional non-sweatshop occupations (perhaps goat herding, food preparation, child care). The argument against child labor is that every government on earth rules a society with enough wealth to provide universal education for children from age six or seven up through age 15 or 16, and therefore children ought to devote time to education rather than labor, and the jobs where children aged 6-15 are working out to be taken by adults. Unless there is only frictional unemployment of 3%, any job taken by a child could have been taken by an adult. Non-market forces allow employers to exploit children more thoroughly than they may exploit adults, and protection against child labor is a necessary antidote to the ability of employers to wield these pressures on a vulnerable workforce, and an important protection for adult workers so they need not compete against children for jobs. 

 It may be true that many children are kept out of school to work on the farm or in family enterprises, but this is a separate problem, involving the state’s ability to both ensure a minimum level of food and housing security and simultaneously enforce compulsory universal education. Dr. Powell’s solution is to say that in the poorest societies, where people are food insecure, child labor helps ensure enough income to prevent malnutrition, and therefore ought to be permissible. This is only true if we start with an assumption that the state could not possibly secure a distribution of enough food to guarantee minimum standards of nutrition and housing to the entire population while also providing education for all children in some age range going up to the level where employment seems legitimate (perhaps at age 15 or 16). If state could collect and redistribute resources to provide universal compulsory education and a minimum standard of food security, then the “problem” ought to be defined as the state’s failure to do this, and promoting child labor as a “solution” to the existing conditions is an argument that takes the premise that the state cannot achieve universal food security and elementary education as a given. I contend that in every country on this earth there are sufficient resources to provide universal food security and elementary education, and child labor is therefore unnecessary. Thus, Dr. Powell is wrong to suggest child labor is a solution while ignoring the problems of governments failing to provide minimal standards of universal access to food and education. He would probably counter that allowing child labor is feasible and pragmatic, whereas forcing governments to effectively distribute resources to achieve universal food security and education is only feasible in theory, and realities on the ground would prevent this from happening, so it is more moral to look for a plausible solution (child labor) than to work toward a goal (universal food security and elementary education) that cannot be achieved without decades of slow improvement in government administration and local practices. I reject such arguments because I reject the moral relativism implied within it. Human rights, such as the right not to be malnourished or starve, and the right to education, belong to all people, even people living in countries with corrupt and inefficient governments.

Dr. Powell never considers the example of Cambodia when it was ruled by the United Nations. While under United Nation administration at the conclusion of a civil war, the nation of Cambodia had western labor standards fairly well enforced, and therefore had high wages and good working conditions, compared to its competitors in Laos, Vietnam, Philippines, and Southern China. Because Cambodia was at the time under United Nations administration, the European Union and other western countries gave it favorable trading status with very low tariffs. Wages were low compared to European and developed economy standards, but there weren’t many sweatshops, working conditions were relatively good, and wages were higher than the sweatshop infested economics of the dictatorships in Vietnam, Laos, and China (and better than in the oligarchic capitalist feudalism of the Philippines). This experience with Cambodia suggests that a similar situation could be created, where poor countries could prosper without sweatshops (but with many low-wage factories). What is required is a political willingness in the West to give favorable trading status to low-income countries that have good labor standards and laws prohibiting sweatshops and the worst exploitation. One reason this doesn’t happen is that capitalist elites, who tend to have more power everywhere, even in Western democracies, prefer to have free trade with societies where the ratio of their investment dollars to worker productivity and value is more suitable for high profit-taking. Since dictatorships constrain the ability of workers to agitate through political processes (minimum wage and pro-unionization laws) or strikes, it is dictatorships where the ratio of labor value to pay is much higher and profits are correspondingly higher. Free trade with China and Vietnam and Mexico, where labor is relatively powerless, tends to be very popular with elites who can make investments in production in such societies. Favorable trade agreements tend to be decided partly by the profitability of trade with the treaty partner, rather than the civil rights and human rights and environmental policies of the treaty partner.

Dr. Powell also tends to believe that capitalism and efficiency maximizing is the ultimate end. However, in a democracy, the majority of the people might decide to have some other ultimate end toward which they assign higher value than economic efficiency or profitability. If the majority of the electorate are wage-earners, and they prefer to elect politicians who will institute trade policies that prevent direct competition between free American workers and the workers who are subjected to dictatorships that prevent their collective bargaining for higher wages and better working conditions, then that is the better policy, because better policies are the policies that reflect the will of the citizens. If Dr. Powell succeeds in convincing a majority of the electorate that they will enjoy a better society and a fairer world if trade barriers are lowed and American workers enter direct competition with low-paid workers in societies that prevent the democratic pressure for wage standards and working standards and environmental standards, then we can have the sort of free trade world he prefers. But, I think it highly unlikely that most Americans will want that. Such a world would drive down wages in wealthy societies. Wages in low-income countries would remain lower than would happen if free trade was restricted to only societies where workers had democratic rights to demand welfare systems and wage standards and pro-union legislation through democratic political processes. In other words, free trade with dictatorships and undemocratic societies would generally slow the spread of human rights and civil rights as profitability of worker exploitation in less democratic societies helped prop up the local anti-worker anti-democratic elites.

 The “free market” is not a thing we find in nature. It only exists to the extent that the public sector, the government, creates conditions that allow something that approximates the theoretical free market. In actual fact, the free market is always distorted. In societies without freedom, the market is distorted more powerfully by elites and dictators and their henchmen in the police forces or criminal gangs. In societies with freedom the market may be distorted by workers who elect politicians who create welfare security and social insurance and wage standards and laws promoting unionization and workplace safety and pollution control.

Dr. Powell supports his arguments with surveys of workers in sweatshops, where various improvements in working condition are offered and workers are allowed to say how much lower they would allow their wages to be in order to enjoy those benefits. Again, Dr. Powell is starting from a premise that the free market has already created a situation where sweatshop employers are making profits so low from their workers that any improvement in working conditions would necessarily require a reduction in wages. That is how the case is presented to the workers to demonstrate that the workers value wages above workplace conditions and benefits.  

The actual situation is that employers in sweatshop conditions could substantially raise wages and improve working conditions and still continue to make profits with higher returns to investment than they would expect in high-wage economies. Sweatshop owners have such an advantage over their workers in negotiating wages that they can set wages at levels so low that workers would face malnutrition or homelessness if they received any reduction in wages, and therefore, they are unwilling to trade off any reduction in wages (increased chances of malnutrition or homelessness) for any workplace improvements or benefits. However, if workers were given choices where they were aware of the profits made by their employers, saw the alternative investment opportunities available to their employers (where they would shift their investments if wages became too high), and were asked what mix of wage increases and improvements in working conditions they would like and what corresponding reductions in profitability to their employers they would take to get those improvements in wages and working conditions, the workers might have a very different answer to Dr. Powell’s surveys. They would probably squeeze out every bit of extra profit their employers were making, to a point where the investors were still making profits in excess of what they could earn in alternative investments, but the excess was reduced to almost nothing, and the “extra excess” of profit-taking was distributed to the workers as wages and improved working conditions, rather than remaining in the concentration of profits extracted by local sweatshop owners and their foreign investors. Dr. Powell makes the false assumption that almost nothing substantially additional can be taken from the owners, and builds this premise into the questions he asks the workers.

The critical mistake Dr. Powell and conservatives or libertarians like him make is that they assume as a premise that the free market works and investor profits are so low that they cannot afford to improve the conditions or pay for their sweatshop workforce. The correct anti-sweatshop argument is that this is not the case. Rather, sweatshop owners perpetuate political and economic situations where the “free market” is distorted so that they can accumulate extremely high profits, and they do this partly by creating political realities in which workers are not free to create institutions that would protect them from excessive exploitation by sweatshop owners. For example, sweatshop owners, foreign investors, and local elites might all cooperate to consolidate land ownership and remove substance farmers from land where their small cash crop and subsistence crop farms had given them a relatively good life and freedom. The many small holders would be replaced by large plantations that are more efficient, but formerly independent small land-holders would now become landless workers dependent upon selling their labor to earn their livelihoods. Sudden land consolidation and buy-outs of small farmers would create a sudden surge in the unemployed workforce, raising the supply of labor relative to the demand for labor, and lowering wages. In this situation, foreign investment and local investment should create new factories to take advantage of the labor force, and wages should rise. In fact, wages do tend to rise in this case. But, whereas in a free market factories would boom and wages would boom, in actual practice, the government, local elites, and foreign investors can create new factories and hold down wages by fixing labor prices artificially low. Factories boom and average incomes boom, but almost all the income goes the factory owners and investors, and median wage growth for workers is very slow.  The owners can do this by paying traditional (very low) wages and pressuring other employers to join them in giving only minimal wage increases. Governments might attract foreign investors with assurances that wages are at a certain low level and will not rise suddenly. Local contractors with sweatshop factories might all agree to pay certain wages and not substantially raise wages. The government might work with local factory owners to intimidate or murder workers who lead attempts to organize and demand higher wages. Dr. Powell pretends this doesn’t happen. In fact, it does happen. It has happened over and over again ever since the days of guilds and feudalistic labor laws, and if Dr. Powell had any familiarity with labor history he would know many examples of how wages were artificially depressed by collusion among elites and factory owners.

Dr. Powell and other libertarians and conservatives who love free markets and capitalism are correct that free markets tend to have many beneficial effects. Clearly, capitalism and free markets will tend to create helpful economic growth, which can directly reduce poverty, or can be redistributed to reduce poverty. So, everyone should have some respect for the uses of free markets and capitalism. But, free markets and capitalism are human institutions, and there will always be human interest groups who seek to use law and physical coercion to shape the human institutions of the marketplace. Geographic variations in the cost of living, prevailing wages, and even perhaps the acceptable moral standards of what can be tolerated in the ratio of labor value to wages paid, will create situations where some labor-intensive production probably ought to move to lower-wage locations. Jobs where the ratios of compensation to value-of-labor are extremely advantageous to workers and less advantageous to investors will tend to migrate to places where those ratios are more favorable to investors and less favorable to workers. But, the distortions of the market that allow local elites and foreign investors to establish production with egregious ratios of profit to labor value are distortions that we ought to oppose. Sweatshops are examples of this sort of unfair distortion of the labor market. Fair distortions of the labor market in which democracy allows workers to elect representatives to the government who will set limits to exploitation and create alternatives (they may be low-wage labor alternatives) to sweatshops, are the sort of market distortions we ought to encourage.

FY 2011 Budget Proposed by White House

The White House has proposed a budget for FY-2011, with projections out for several years into the future. There are huge cuts in the federal budget planned for FY-2012, including a $45 billion cut in defense spending (why not a $90 billion cut, I wonder?). There are optimistic forecasts of savings from health care reform ($7 billion in FY 2011 and $17 billion in FY 2012, with a $23 billion drop in Medicaid spending from $297 billion to $274 billion) between 2011 and 2012.

The budget deficit we're building up now to take care of the economy will mean that our payments on the national debt go up from $251 billion in FY 2011 to $343 billion in FY 2012. Still, our servicing of the national debt is only about 6.5% of the total federal budget. That's not too bad just yet, but when we are out of the recession and unemployment drops below 7% we need to balance the federal budget so we can reduce the national debt and use a smaller portion of federal spending on debt servicing. The proposed budgets with the long-term forecast don't show us ever balancing the federal budget.

I noticed that only 0.3% of the federal outlays go to international aid (USAID, Peace Corps, Development Banks, and so forth—the only unlabeled sliver of the pie chart above). It seems to me we ought to be spending about 1% on foreign aid. The National Institutes of Health and the Centers for Disease Control and Prevention combined get about 1.0% of the federal budget. These are some of a very few areas where big cuts aren't planned. Still, it seems to me unwise to devote 13.5% of the budget to defense and security from violent threats from abroad and only spend 1% on diseases and health threats at home. Why not spend 3% of the federal budget on health research and prevention of disease and injury and then cut defense spending to 6% or 7% instead of 13.5%?

Anyway, I recommend people check out the proposed budget on their own.

Student believes global warming is a hoax.

This is an example of a lengthy opinion article written by a student.  It has something to do with social welfare policies if you read through toward the end. I commented in purple font in some places. 

    Global warming is a theory - not fact.  It is not even well-substantiated when you consider the research errors that form the weak foundation of this theory that warming of the earth is caused by man. The charts showing the history of climates have been proven false by scientists.  A few key points were omitted such as a thousand years ago the warming period followed by the small ice age.  Another misinformation is that the warmest year on the planet was 1998.  While that sounds ominous, the truth is that the warmest year in history was 1934.    Doesn't sound so scary now, does it?  If the warmest year was 1934 then the planet is not heating up - in fact, it has cooled.  

These are some important claims to make if you are arguing against global warming, but it would be helpful to offer citations or references to support the claims. Also, there is a logical flaw in the claim that if the hottest year on record was 1934 there is not presently a warming trend.  A “trend” would depend upon on more than a single year’s temperature. So the 1998 or 1934 dates aren’t convincing unless they are shown to be part of a trend involving multiple years.  There is also a logical flaw with the proposition that since in the past there have been warming periods followed by rapid cooling, the current warming trend is not in fact a warming trend.  The two facts aren’t really connected. Warming and cooling trends are part of the planet’s climate history. Warming and cooling trends always follow each other, or else our planet would keep warming or cooling until it became a Venus-like furnace or a frigid ice ball.

     So how can scientists be so wrong?  Global warming is a controversial topic.  Billions of dollars and political agenda hang in the balance if this is not true.  Let's rephrase that - now we are looking at trillions of dollars with "green" everything from cars to soap.  Scientists on both sides of the issue weigh in.  For every article written by a scientist propagating the theory of global warming, there is an article by a scientist with facts disproving it.  In the 1970s scientists said that we were headed for an ice age. If you take 

the time to research it, the information is easily accessed on the internet.  The scare was that falling temperatures could lead to another ice age and that snow would advance all the way to the equator.  That obviously didn't happen either.  Scientists need to receive grants for research.  So now if the grant for millions of dollars is to promote global warming then that is the push. The fact is that the earth has heating and cooling trends.  The hype and hysteria that the planet is going to burn up because of global warming is to push policies through more quickly.       

It is not factually accurate to say that for every article published to provide evidence supporting a claim that we are now in a period of global warming there is an article with counter-evidence against that claim. Counts of published articles show that there is no quantitative approximation. You have made another factual error (mischaracterization) when you write that in the 1970s scientists claimed that we were in a cooling trend headed toward an ice age (although given the historical oscillation between thaws and ice ages, it is probably correct that we always assumed, and still assume, that an ice age will reoccur someday in the future.) In fact, researchers have gone back over articles published in the 1960s and 1970s and found no significant trend in articles claiming trends toward cooling among scientific articles.  Please see http://climateprogress.org/2008/11/10/killing-the-myth-of-the-1970s-global-cooling-scientific-consensus/ 

You also claim that climate science is driven by an economic agenda of selling policies and products that will reduce the human contribution to increasing concentrations of greenhouse gasses. Could you support this claim with any evidence?  As a scientist involved in the community of peer-reviewed scientific publishing and grant proposal writing I find a plausible half-truth in your claim. Yes, if referees and grant proposal reviewers  are convinced of global warming, they will be biased against research that counters that consensus. But scientists who do climate research are not typically motivated by hope of making financial gains in the shift to an economy that produces fewer greenhouse gas emissions. 

     In a recent poll by Habitat Heroes, "one out of three children aged 6 to 11 fears that the earth will not exist when they grow up.  More than half - 56 percent - worry that the planet will be a blasted heath, or at least a very unpleasant place to live.  On this survey of 500 American preteens - 250 males and 250 females - minority kids have it worst; 75 percent of black children and 65 percent of Hispanic children believe that the planet will be irrevocably damaged by the time they reach adulthood."  What are we doing to our children?  They are vexing over the state of the planet, obsessing over recycling and conserving water and electricity.  They fear that animals such as polar bears and penguins will become extinct.  The poll states that girls worry more than boys.  Children as young as 6 to 8 years old worry that the earth will not be a good place to live when they are adults.  Is that giving our children hope?  Children don't come from the womb worried about the planet.  They are taught this erroneous theory in their schools, and their parents are bombarded with the propaganda on television news and programs, newspapers and magazines.  

Sometimes it is important to face facts and deal with truth so that problems can be solved.  Positive illusions and unrealistic hope can be toxic if they make a society ignore real problems that loom in the future. 

     The Scientific Committee on Antarctic Research published a report on April 18, 2009 in Sydney, Australia.  The report noted that the South Pole had shown significant cooling in recent decades.  Dr. Allison, a scientist quoted in the report, states that "ice is actually expanding in a large portion of the continent.  Ice core drilling by the Antarctic Climate and Ecosystems Co-Operative Research Centre shows that last year, the ice had a maximum thickness of 1.89m, its densest in 10 years. The average thickness of the ice 

since the 1950s is 1.67m. A paper is soon to be published by the British Antarctic Survey in the journal Geophysical Research Letters that is expected to confirm that over the past 30 years, the area of sea ice around the continent has expanded."  So what about these photo ops of polar bears floating on melting icebergs?  Once again, it is political.  If the polar bear can be listed as an endangered species we cannot drill for oil. 

As to the cooling trends, please examine the graphics of the data for yourself.  They are available at http://data.giss.nasa.gov/gistemp/. It is not political.  The scientists who study polar bears are motivated by the scientific quest for accurate information. My sister (a biologist) works with some of these scientists  at the Wildlife Conservation Society in New York, and I can assure you that she and her colleagues are not motivated in their scientific work by political desires to achieve some sort of alternative energy regime or political success for particular ideologies.  At academic and research conferences she attends the scientists are presenting peer-reviewed studies showing significant threats to polar bear populations.  There is a real possibility that polar bears face an imminent population crash as sea ice melts earlier or forms further from land. 

     Dr. Steven Hayward, a scientist with Pacific Research Institute, states in his documentary that the earth is warming, but his explanation exposes the fallacy of the global warming theory, and there will be no catastrophe.  The computer tables are only estimated calculations, not scientific.  This is a new phenomenon to be researched and to declare global warming as fact and "Case closed" is premature.  Did your daddy ever tell you about hastily buying a car without checking under the hood?  We know what we think of a salesman who says, "I looked under the hood for you.  It's all good.  Trust me.  Hurry, just sign here."  The theory of global warming is being shoved at us riddled with gaps and I'm not buying it.

     Let's look logically at the perpetrator of global warming - Al Gore - and we will see many inconsistencies between his theory and how he lives his life.  Jetting around the world pushing his theory of global warming so he has a legacy, he had to cancel several speeches because of the weather - not that it was too hot and everyone would be burning up as he spoke about global warming - no, he had to cancel because of record-breaking freezing temperatures. How do you give a speech on global warming when the city is having close to the coldest weather in history?  This happened in Boston on October 22, 2008.  The temperature in the Boston area was a low of 31 degrees.  The record low 

temperature in 1883 was 28 degrees - almost 125-year record-breaking low temperatures.  And it's happening all over the world.  Gore spoke in Italy during "rare" cold and snow.  In November 2006, Gore flew to Australia. Cold and snow came with him, despite that the country was nearing its summer months. The British House of Commons held a marathon debate on global warming during London's first October snowfall since 1922.  Bicyclists raising awareness of global warming had to bike through ice and snow in New York October 22, 2008. And the list goes on of global warming rallies in the snow.    

     We will see the language change from global warming to climate changes.  As more data is substantiated, global warming is being revealed as the hoax it is.  But who can deny that the theory has been lucrative for Al Gore?  He's made millions off his movie An Inconvenient Truth, his lectures, his books, and his self-propagated legacy.  

     The politicians have their motives for pushing global warming.  We will see more and more American factories closing and unemployment rise because this administration has a political agenda.  During his campaign Barack Obama said we are 5% of the world's population and consume 25% of the world's energy, and he is going to do something about it.  Well, he is.

     Al Gore and Barack Obama have double standards.  We the peons are to recycle, ride our bikes, turn our thermostats down in winter and up in summer.  We are to conserve fuel. It's obvious they don't believe in the theory of global warming any more than I do.  If they believed it their lifestyles would change.  The Tennessee Center for Policy Research on June 17, 2008 revealed that "In the past year, Gore’s home burned through 213,210 kilowatt-hours (kWh) of electricity, enough to power 232 average American households for a month." After his extreme energy misuse was made public, he began renovations to go "green" with solar panels, geothermal installation, more efficient light bulbs, and he now consumes 10% more energy than before the renovations, according to public records at the Nashville Electric Service.

 

     During a campaign event in Oregon in May, Barack Obama said we have to "lead by example." He said, "We can't drive our SUVs and eat as much as we want and keep our homes on 72 degrees at all time." During the extremely cold winter of 2008-2009 where ice storms cut power to millions in the country, Obama's Oval Office thermostat was set so high his own Chief of Staff, David Axelrod, told the New York Times, "You could grow orchids in there."  But I guess it doesn't matter to him since the American taxpayers pay his heating bill.

     Business that could more easily be done at the White House he is jetting all over the country and the world, still campaigning.  He flew to the White House a pizza maker from St. Louis he had met on the campaign trail to make pizza for 140 during the Somali pirate hostage incident.  That's round trip, 860 miles each way.  Mark Knoller, a CBS White House correspondent, reported that on Earth Day Barack Obama flew to and from Iowa using 9600 gallons of fuel, two flights on Air Force One and four on Marine One, not counting the presidential vehicles that drove him - all this to make a speech in front of a wind turbine calling for a “new era of energy exploration in America.” (AP, April 22, 2009). His carbon footprint is all over the globe.  Instead of getting our own oil we are subservient to Saudi Arabia and Venezuela.  Scaring everyone with the global warming theory, environmentalists have blocked us from drilling for our own oil.  Nancy Pelosi and others who have invested financially in T. Boone Pickens' wind farms have an interest in seeing prices of oil go up so that Americans will be more open to other sources of energy - like wind.  Thus the jetting of Barack Obama for a photo op in front of a wind turbine on Earth Day. 

     I am pragmatic and want to know the truth. We need to take care of the planet, but the truth is this planet was here long before any of us and will be here long after we are gone.  One-third of American children are afraid the earth will not be here when they grow up, so in their naivete they will do whatever they are told to do to preserve the earth.  Scaring children into thinking there is not a bright future for the sake of promoting a political agenda is unconscionable.

A student's reaction to aspects of the bail out.

Here is a student's reaction to certain aspects of the financial bail-out. We had discussed in class how government spending is used to maintain employment and economic growth, since employment and growth will raise wealth and decrease poverty. Since the nation is going through an economic recession, we've been looking at some of the things a government can do to avoid recessions or let them pass quickly or mildly.

I am writing to say a few words on all the bonuses the large corporations’ executives are still receiving. While I do agree that we as a nation had to pull together and do some creative bailouts for save this country I do not understand why we did not put tight restriction and limits on how much and who should get the money. We are spending so much money bailing out Wall Street, yet we have forgotten Detroit. We now are talking about allowing these large companies to go bankrupt and yet we are allowing very little restrictions on our Wall Street beneficiaries. The large car makers of our county generate a large amount of revenue here, and they actually produce useful things, made up of parts and serviced by others in our country. I am afraid of the consequences if these companies are allowed to go into bankruptcy. We are not only talking about current employees but all the retirees who will be harmed. If they lose their benefits and health care these folks will be looking to the already strained Medicare system to help more. The Wall Street financial companies, in contrast, didn’t produce anything worthwhile, and they didn’t give us any good services. They just speculated and gambled and shuffled papers around and made deals that didn’t improve the world or create lasting benefit in our economy or society.

While I do not profess to know the answer to this situation I do know that we (and by “we” I mean the economists and the great minds employed by our nation to look at the entire picture) must study the deeper problems carefully, and not to jump at the first easy solution. We all know that the easiest is not always the best in the long run. If it seems easy to fix Wall Street and keep our banking system running, maybe there is a more difficult solution that would let the financial sector entirely fail as it has existed, and we could replace it with something entirely new and better, and devote more of our public dollars to saving industries and sectors of the economy that actually produce worthwhile goods and services.

The old saying is that the easiest path is not always the shortest. Sometimes we must take the long way for the best results.

Bail out policy proposal

Policy Proposal submitted by a student.

Our government has spent money bailing out banks and other big industries. We have done this to save our economy. Our economy is still shaking, and many more companies are asking for bailouts. My suggestion is that instead of bailing out big industries we should bail out the taxpayers. People are losing their jobs. They do not have enough money to make ends meet. Therefore they are cutting back on their expenditures. If the government would take the amount of money they would spend on a bailout and distribute it evenly to all taxpayers, then that would boost the economy and the companies would no longer need bailouts. This is something that has never been done on a large scale before in this country. Our leaders have always depended on the trickle-down effect before. Obviously this is not working. If the American consumer had a large sum of money then they would have the means to buy cars, to put in savings accounts, to pay their bills, or to even buy a house. This increase in revenue would create a demand, which would give people their jobs back. It is time for the government to give back to the constituents that voted for them.

Student's analysis of their proposal.

I chose to write the above proposal because it is one of the federal-level policies that I care about. Right now the economy is very vulnerable. I realize that the government will never bailout the Average Joe. They say that financial independence is the responsibility of every individual. Then they go and reward bad behavior. They give money to the people that are some of the reason why our economy is in shambles, and they leave them in charge with few stipulations.

I actually got this idea from an email I received around the first bailout. A guy had actually figured out how much each U.S. tax payer would receive if the government would give us the bailout instead. I cannot remember the amount, but I do remember thinking that with that amount of money I could pay off my house, buy a new house, and buy a different vehicle and still have some left over. The email was just a joke, but it makes sense. The economy is not going to get better until the middle and working classes have money to buy products. Until they do people will continue to lose their jobs because there is no demand for the products they are producing.

My response to my student:

There is something to this. The government can “invest” $700 billion in the banking and financial sector, and expect to lose perhaps half of that investment in the long-run, but in the mean time the banking system will be propped up so that it doesn't collapse. Or, that same money could be used for something else. For example, the United States could establish a public bank that would give refinancing to everyone who owed money on a property, with 50-year 3% mortgages. All the commercial banks would get rid of their “legacy assets” as everyone refinanced using this public bank. This would in essence be “giving” money to Americans (people who are paying 5% or 7% interest would be paying half as much in interest, and keeping the rest for themselves). It might drive some banks out of business, but other banks that are bring driven toward bankruptcy because so many of their loans have gone bad will be saved as the people who are defaulting will transfer their debt to this national public bank.

If you divide $700 billion by 305 million (approximately the population of American citizens) you get a figure of $2,395 per each American. That is unlikely to be enough to help very many Americans buy new cars or houses. If you use a figure of $1.1 Trillion you still only yield $3,600 per American.

The $1.1 trillion is going to the following things, according to ProPublica:
$247 billion for banks.
$100 billion for purchase of bad loans (“toxic assets” or “legacy assets”).
$70 billion to prevent AIG from going bankrupt.
$60 billion to keep Fannie and Freddie Mac running.
$50 billion to help prevent foreclosures.
$25 billion to help auto companies avoid (or prepare for) bankruptcy.
$79 billion for other things.
$470 billion ready for whatever.
And by the way, there is a $500 billion line of credit for the FDIC, which may draw upon that to take over some of the largest banks that may be going insolvent.

Now, I wonder what would happen if the government gave nothing to keep up the banks, did nothing to buy toxic assets, let AIG go bankrupt, let Fannie and Freddie Mac cease operations, let the auto companies go through bankruptcy, and passed on the cost savings from all that to taxpayers. That would give each of us $2,000, and families with four persons would have $8,000. On the other hand, such a policy would mean that probably AIG, Bank of America, Citigroup, J.P. Morgan Chase, Wells Fargo, General Motors, Goldman Sachs, Morgan Stanley, U.S. Bancorp, Chrysler, Capital One Financial Corp, and American Express would all go bankrupt, along with about 100 other banks and financial companies and industrial companies. That would be okay if there were some big and healthy banks or private equity funds somewhere on the planet who could buy them up when they went bankrupt. However, the banks in other parts of the world are also in very poor financial condition. With so many of the most important banks going out of business, many companies would have to pay on the credit default swaps (billions of dollars promised as insurance that the big firms wouldn't collapse, so that entities owed money by the big firms would cover their losses if those big firms went bankrupt). This would create a domino effect that would cause the failure of almost all the large banks on the planet. Every major equities market on the planet would crash. It's entirely plausible that the only large financial institutions left standing would be ones that had been taken over by governments and central bankers.

Since almost all large companies depend on these banks to provide short-term credit to help make payroll and so forth, there would be very serious problems at most major companies outside of the financial sector. Layoffs and bankruptcies would multiply. The unemployment rate could go from 8.5% to 28.5% in a few months, and the stock market and equity markets all across the globe would drop by 80% or more. Consumer demand would drop like a meteor crashing through the atmosphere.

Tax revenues would drop and state governments would need to cut spending by 30% or more, but because there would be such high unemployment, the demand for government services (especially unemployment relief) would be very high indeed.

But, at least every American would have $2,000 or $3,000.

I agree with you that it is aggravating to see our money to go pay off the problems of the financial sector. I’d like to see the government take over all the big companies and fire all the managers and administrators, and replace the speculative financial sector with some sort of super-powerful national public bank. But then, I like the idea of planned economies and public control of key sectors in the economy (in economics I like some aspects of socialism), so for me this would be quite acceptable. But, practically, it’s not going to happen. The bailout is the policy we’ll get. And we've got to push for the best bailout we can get. One that will save world capitalism without throwing the world into an economic free fall that would make the 1930s look prosperous. One where American taxpayers aren't entirely ruined. One where the financial sector is tamed and the people who run that sector are knocked down to a humble size.

Minimum Wage Policy

This suggestion at the change.gov website inspired a student reaction:

Raise the Minimum Wage to $9.50 an Hour by 2011:
Barack Obama and Joe Biden believe that people who work full-time should not live in poverty. Even though the minimum wage will rise to $7.25 an hour by 2009, the minimum wage's real purchasing power will still be below what it was in 1968. As president, Obama will further raise the minimum wage to $9.50 an hour by 2011, index it to inflation and increase the Earned Income Tax Credit to make sure that full-time workers can earn a living wage that allows them to raise their families and pay for basic needs such as food, transportation, and housing -- things so many people take for granted.

Here is the student's reaction:

I believe that raising the minimum wage is an excellent idea and way overdue. I agree that people working full-time should not have to live in poverty. The current minimum wage is way below the poverty line. In an article in (wps.ablongman.com) the poverty line for a family of four in 2001 was $18,267 a year. Which is $8.75 an hour if working full time? I believe that people want more than just enough to get by on. The American Dream is more than “just enough.” If an individual works in a full time position and still can not afford their basic needs, it leads to hopelessness. In my opinion, individuals who feel hopeless are more likely to give up, live off of the in-kind benefits, resort to illegal activities, or give in to the escape of alcohol and drugs, all of which contribute to poverty.

I hope that the minimum wage will indeed be indexed to inflation, and not just be raised to the $9.50 an hour amount and then forgotten for several years or shelved by the next administration.

This reminds me of a couple passages from "The Wealth of Nations" by Adam Smith (1776). I'll quote them here. First, this:

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks, which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him, but the necessity is not so immediate.

We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labor above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbors and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things, which nobody ever hears of...

And secondly, and most significantly, there was this:

A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation. Mr. Cantillon seems, upon this account, to suppose that the lowest species of common laborers must every where earn at least double their own maintenance, in order that one with another they may be enabled to bring up two children; the labor of the wife, on account of her necessary attendance on the children, being supposed no more than sufficient to provide for herself. But one-half the children born, it is computed, die before the age of manhood. The poorest laborers, therefore, according to this account, must, one with another, attempt to rear at least four children, in order that two may have an equal chance of living to that age. But the necessary maintenance of four children, it is supposed, may be nearly equal to that of one man. The labor of an able-bodied slave, the same author adds, is computed to be worth double his maintenance; and that of the meanest laborer, he thinks, cannot be worth less than that of an able-bodied slave. Thus far at least seems certain, that, in order to bring up a family, the labor of the husband and wife together must, even in the lowest species of common labor, be able to earn something more than what is precisely necessary for their own maintenance; but in what proportion, whether in that above mentioned, or in any other, I shall not take upon me to determine.

So, what does it cost to maintain oneself and also bring up a child? In our city in 2009 you would need at least $500 per month for the smallest apartment with utilities. I believe an adult and child could eat well enough on a budget of $200 per month. If we're merely talking about survival, food and shelter are all they would need, but I suppose a bike, enough money for some bus passes and an occasional taxi ride, some money for clothing, and that sort of thing would perhaps create a need for another $200 or so. So, something just under $1,000 per month would be enough for survival. In a typical month a person might work 160 hours. To earn $1,000 per month working full time, they would need to be earning $6.25. In fact, the federal minimum wage is $6.55, but will go up to $7.25 in July. Here in Illinois the state minimum wage went up to $7.75 in July of 2008, and it will go up to $8.00 in July of 2009.

So, it looks to me as if we have minimum wages that are at the level that Cantillon and Smith thought were "natural" and "necessary" for workers.

If you think we ought to be more generous, and mandate a minimum wage that allows a single income-earner to raise a household with one adult and three children out of poverty, then you must consider the 2009 poverty threshold for a family of three (which is $18,310), and divide by a reasonable number of hours to expect a person to work in a year of full-time labor (a reasonable 1,850 hours would require a minimum wage of $9.90, and a more toil-and-work-diligently American full-time standard of 2,000 hours per year would require a wage of $9.16).

Are there any studies that indicate that people lose jobs when we set a minimum wage? That is a standard argument against minimum wages. Well, there are some studies that show the opposite influences (raising minimum wages increases employment). Here is a list of ten articles that, judging by the abstracts and other information I could gather, seem to have evidence about minimum wages:

The Effect of Minimum Wage on Youth Employment and Unemployment in Taiwan
Author: Chuang, Yih-chyi
Source: Hitotsubashi Journal of Economics v47, n2 (December 2006): 155-67

Minimum Wages and Poverty with Income-Sharing
Author: Fields, Gary S.; Kanbur, Ravi
Source: Journal of Economic Inequality v5, n2 (August 2007): 135-47

On the Empirics of Minimum Wages and Employment: Evidence for the Austrian Industry
Author: Ragacs, Christian
Source: Applied Economics Letters v15, n1-3 (January-February 2008): 61-64

Do Minimum Wages Have a Negative Impact on Employment in the United States?
Author: Bazen, Stephen
Source: Economie Publique n17 (2005): 41-58

Minimum Wages and Employment
Author: Neumark, David; Wascher, William L.
Source: Foundations and Trends in Microeconomics v3, n1-2 (2007): 1-186

Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates
Author: Flinn, Christopher J.
Source: Econometrica v74, n4 (July 2006): 1013-62

Minimum Wages, Inequality and Unemployment
Author: Adam, Antonis; Moutos, Thomas
Source: Economics Letters v92, n2 (August 2006): 170-76

The Minimum Wage Can Harm Workers by Reducing Unemployment
Author: Lee, Dwight R.
Source: Journal of Labor Research v25, n4 (Fall 2004): 657-66

Minimum Wage Policy and Employment Effects: Evidence from Brazil
Author: Lemos, Sara
Source: Economia: Journal of the Latin American and Caribbean Economic Association v5, n1 (Fall 2004): 219-52

Minimum Wage Impacts on Youth Employment Transitions, 1993-1999
Author: Campolieti, Michele; Fang, Tony; Gunderson, Morley
Source: Canadian Journal of Economics v38, n1 (February 2005): 81-104

Where to find good information

When you try to find information about the economy or policy and you search on the Internet you'll need to be cautious about your sources.

Interest groups keep a strong presence on the internet. Interest groups usually have a strong bias, and they are good sources for one side of an argument or one particular view of an issue. One way to demonstrate the degree of bias in interest groups is to look at how candidates are rated by them on particular issues. In class this week we looked up Illinois Senator Dick Durbin in the non-partisan Project Vote Smart web page, and when we examined the interest group ratings we found that on some issues all the interest groups either give Durbin a 100% or a 0% rating. In family and children issues, for example, the Children's Defense Fund and the American Family Voices interest group recently gave him 100% ratings while the Family Research Council and the American Family Association gave him 0% ratings. Both sets of interest groups claim to be interested in children and families, but they have different ideologies, and this influences how they rate Durbin.

When it comes to "think-tanks" and scholarly institutes the bias isn't always so obvious as it can be with interest groups. In the 1980s and 1990s some wealthy conservatives decided they would support the creation of several think-tanks and scholarly institutes to give intellectual validity to various positions favored by the donors (e.g., that government should be small, taxes low, military spending with lucrative contracts for private industry should be high, Evangelical Christian understandings of the Bible should inform government policy, etc.) There are also think-tanks that have an openly liberal bias (favoring regulation of the economy, programs to transfer wealth from the wealthiest to the poorest, and so forth). Then there are think-tanks that try to be fairly neutral, and hire scholars of all ideological positions. It so happens that among scholars and technocrats there may be more of a tendency toward so-called "liberal" thinking (liberals may think this is because rational people who are well-informed and intelligent will converge with similar opinions that happen to be moderate-to-liberal), and so conservatives and conservative intellectuals point out liberal biase in the "neutral" think tanks. Radical intellectuals also attack the neutral think-tanks. So, even the think-tanks and scholarly institutes that try to reduce bias and provide information that is simply technically accurate still trigger dissatisfaction and complaint.

Here are some of the liberal think-tanks and interest groups:
The Economic Policy Institute.
The Center on Budget and Policy Priorities.
The Center for Law and Social Policy.
The Century Foundation.
The Open Society Institute.

Here are some of the moderate or neutral think tanks and interest groups:
The Annie E. Casey Foundation.
The Rand Corporation.
The Brookings Institution.
The Pew Charitable Trusts ("the power of knowledge to solve today's most challening problems").
The Woodrow Wilson Center and its program and project publications.
The Center for International Policy.
The Council on Foreign Relations.
The World Policy Institute.

Here are some of the conservative and libertarian think tanks and interest groups:
The Hoover Institution (this could also be considered non-partisan)
The American Enterprise Institute for Public Policy Research (more moderate)
The Cato Institute.
The Heritage Foundation.
Atlas Economic Research Foundation.
The Concerned Women for America's Beverly LaHaye Institute.
The New Coalition for Economic and Social Change.