Classical Liberalism, Cosmopolitanism and Nationalism

In another thought-provoking post on Facebook (does the guy ever write mediocre stuff, I wonder?) Barry raised the question of the relation between classical liberalism, nationalism and cosmopolitanism. He wrote the following:

“On the capture of classical liberal/libertarianism by anti-cosmopolitans. This is very influential at the heart of the ‘leave’ ‘elite’ in the UK, and can only be destructive of classical liberalism/libertarianism. The immediate political consequence of Leave is the elevation of Theresa May to Tory leadership/Prime Minister’s office on a much more ‘Red Tory’, communitarian, corporatist foundation than existed under Cameron. ’To the extent to which the current wave of populism maps into a conflict over national versus transnational identity (Dan Drezner is unconvinced), the problem is not an excess of cosmopolitanism but rather its absence, especially on the conservative, free-market right.”

He seems to take a positive relation between classical liberalism and cosmopolitanism as the default position. Of course Barry did not provide definitions in a FB post, but here I take cosmopolitanism to mean “the idea that all human beings, regardless of their political affiliations, belong to a common moral community. Cosmopolitans often believe that all individuals have the same basic moral status, and tend to downplay the importance or desirability of national political institutions. [They are] opposed to nationalism” (source: Matt Zwolinski (editor), Arguing About Political Philosophy, Routledge, 2009).

I argue that Barry overlooks that classical liberalism combines a cosmopolitan side, with a strong defense of national political institutions (e.g. the state). The cosmopolitan side is perhaps easiest to see, if one takes the idea of free trade as the guiding principle. Free trade is by nature morally neutral for the individuals involved, and has numerous positive economic effects; it fosters cultural exchange as well as innovation and knowledge sharing. In that sense classical liberalism is indeed related to cosmopolitanism.

Yet this stops where the national state comes into play. Classical liberals never predicted any positive political effects of trade (see my earlier notes on this topic) and, just as importantly, they actually favor a strong state, with a limited number of tasks. At the same time, from Hume and Smith onwards to Mises and Hayek, they strongly dislike the idea of transnational political institutions, because these lack any substantial emotional basis which nations do posses. Also, these large political institutions easily become a threat to individual liberty, even more so than national states with too many tasks. So, there is no really no relations between political cosmopolitanism and classical liberalism at all.

There is also no relation between nationalism and classical liberalism. A preference for the national state does not lead to nationalism, which is the vicious and poisonous belief in the superiority of one’s country, often accompanied with a dislike of allegedly inferior neighboring countries or peoples or groups. This is collectivism turned even worse, which is a double ‘no’ from a classical liberal perspective. This said, if patriotism is defined as national pride, then classical liberalism and patriotism can and will go together. There is a fine line between the two sometimes, but patriotism is not violent and dividing, but a binding force between individuals sharing a national state.

The last point is on the European Union. Hayek and Mises have been on record with strong support for a European Federation, primarily as a remedy to war-torn and nationalism-infected Europe. In these circumstances the default position of an international order as a society of states no longer functioned, so there was a need to seek an alternative. Needless to say their federation had little resemblance with the current super state we know as the European Union, which has become a classical liberal nightmare in terms of liberty and property rights violations it commits on a daily basis.

The current EU has some classical liberal traits (the imperfect common market is the single most important one), which is of tremendous use to all European individuals. It is, however, way too cosmopolitan in the bad political way. A likely consequence of Brexit is that this will become even worse, now that the French and their allies will get more room for their collectivist fallacies.

A note on the police or – “Why I don’t trust the police.”

Police brutality is back in the news cycle following the Dallas shootings, Philando Castile shooting, and [insert your regional news cycle shooting here] in early July. I expect the topic to be removed from the news cycle as the Olympics draw closer so I am writing this note now explaining why I don’t trust the police and why I hope other classical liberals have similar reservations.

Two quick asides:

  1. I am at heart at pacifist and I don’t encourage the use of violence against anyone.
  2. The current literature shows that police activity reduces crime rates; here is an ungated article for those interested in reading part of that literature.

I come from a poor migrant family and was raised in Los Angeles’ Koreatown back in the 90s. The area has become more middle classed in recent years due to new development, but at the time it was a working class neighborhood populated largely by recent migrants and other minority groups. Unsurprisingly there was plenty of crime and the sound of police sirens and helicopters was common for me growing up.

Despite this I don’t think I ever held police in a high prestige. It is true that I often saw the police round up criminals, but I also saw them round up several innocents or perpetrators of ‘victimless’ crimes, mostly unlicensed merchants.

Many of the migrants in my neighborhood, including my family, were illegal and therefore unable to acquire employment in the formal sector. To survive they instead turned to work in the informal sector. I had a neighbor who ran a bakery from her kitchen and sold her goods on the street. Another neighbor sold various electronics and clothing apparel; during the weekend they would go around buying things from garage sales in bulk and re-sell them during the week. My father ran a taco stand. Often times the police would harass these informal vendors by confiscating their goods and/or destroying their makeshift stands. I vividly remember my father’s taco stand being thrown to the street when he didn’t have the proper documents for passing police.

In my mind the police were worse than the criminals they put away. To be sure criminals are undesirable, but most of the ones I encountered in my youth only wanted to steal what cash you had and they would leave you alone otherwise. On the other hand whenever my father’s taco stand was raided by the police his cash would be confiscated and he’d be put back several hundred dollars in fines and having to rebuild his stand. Not only was a robbery cheaper, but criminals never pretended to have the moral high ground.

Note that in my story there was no mention of police corruption. The police who harassed my family and neighbors might have been acting out of genuine belief that they were serving the public good. Their good intentions still had negative consequences for the neighborhood though. Those who were harassed were the immediate losers, but so were their consumers. There were plenty of people who would have wanted to purchase from the informal vendors, but were denied the freedom to do so.

-And for what reason? It was not like vendors in the informal market have any incentive to cheat their consumers. The neighborhood baker might not have been licensed, but she could hardly afford to give food poisoning to anyone.  The apparel salesperson relied on repeat business and would quickly be out of business if they didn’t sell clothing others wanted. My father certainly wasn’t adding horse meat to the tacos or anything like that – migrants are picky about how their tacos are made!

The police may be filled with good intentions, but they ultimately are enforcers of illiberal laws. If well intentioned can so easily cause harm one needn’t much imagination to see how corrupt police can do much worse. It is difficult for me to understand those who defend the police or even honor them. It may be the case that they are a necessary evil to discourage other criminals, but they are still an evil themselves. Police ought to be tolerated at best, but never glorified.

BC’s weekend reads

  1. Dr Khawaja is back in Palestine for the summer
  2. The nation-state is making a global comeback
  3. Nationalism isn’t replacing globalism
  4. Can Multiculturalism Be Exported? Dilemmas of Diversity on Nigeria’s “Sesame Square” (pdf)
  5. The West’s biggest statue: a tall tale

Why a Nexit would be good for the Netherlands

Past Friday, 51.9% of the British have voted to leave the European Union against 48.1% of those who have voted to remain. The details of the EU referendum can be found on BBC’s EU referendum page. Although it is still unclear what shape the relationship between Britain and the EU will take, I expect that the Brexit will offer good economic opportunities for Britain provided that they can reach free trade agreements with all nations within the EU and provided that they will continue to open up their markets for free trade with other countries outside of the EU.

An Exit of the Netherlands, or a Nexit, will have more consequences than a Brexit as the Netherlands are also participants in the European Monetary Union. A Nexit could therefore lead to an end of the Euro. An analysis of the EU is a political analysis and as politics is always complemented by power, this analysis should hence incorporate insights on power struggles and competing visions. Each country has its own interests within the EU, just like any politician within the EU has his own special interests that he is serving. Participation in the EU is often represented as an exercise of solidarity and political appeasement, however it is still politics with politicians’ usual desire for self-enrichment.

There have always been two competing visions of the EU. The first one is a classical liberal vision, led by German speaking Christian democrats Schuman (France), Adenauer (Germany) and Alcide de Gasperi (Italy) with the Treaty of Rome (1957) as the greatest achievement of this classical liberal vision for Europe. The Treaty sought to deliver the following four freedoms: free movement of goods, freedom of movement for workers, the right of establishment and freedom to provide services, and free movement of capital. The other vision was a socialist vision led by mainly French politicians, such as Jacques Delors and François Mitterrand whose goal was to create a supranational state.

Treaty of Rome signed
Treaty of Rome.

Classical liberal vision
The first vision promotes political competition between the EU’s member states by opening up borders. When a person is discontent with the excessive taxes in his country, he could leave his country for another. Competition between member states would lead to smaller governments, lower taxes, and political respect for people who would want to pursue their individual freedoms in another member state. It would represent a return to the political model that was prevalent in Europe from the Middle Ages to the 19th century when different political systems coexisted independently. There were independent cities or city states in Flanders, Germany and Northern Italy. There was the kingdom of Bavaria, the republic of Venice, and small city states like Ghent and Bruges embraced their autonomy. The German writer and poet Johann Wolfgang von Goethe (1749-1832) had expressed the beauty of such a political system as follows when he discussed a Germany that was still splintered in 39 independent states:

“I do not fear that Germany will not be united; … she is united, because the German Taler and Groschen have the same value throughout the entire Empire, and because my suitcase can pass through all thirty-six states without being opened. … Germany is united in the areas of weights and measures, trade and migration, and a hundred similar things. … One is mistaken, however, if one thinks that Germany’s unity should be expressed in the form of one large capital city, and that this great city might benefit the masses in the same way that it might benefit the development of a few outstanding individuals. … What makes Germany great is her admirable popular culture, which has penetrated all parts of the Empire evenly. And is it not the many different princely residences from whence this culture springs and which are its bearers and curators? … Germany has twenty universities strewn out across the entire Empire, more than one hundred public libraries, and a similar number of art collections and natural museums; for every prince wanted to attract such beauty and good. Gymnasia, and technical and industrial schools exist in abundance; indeed, there is hardly a German village without its own school. … Furthermore, look at the number of German theaters, which exceeds seventy. … The appreciation of music and song and their performance is nowhere as prevalent as in Germany, … Then think about cities such as Dresden, Munich, Stuttgart, Kassel, Braunschweig, Hannover, and similar ones; think about the energy that these cities represent; think about the effects they have on neighboring provinces, and ask yourself, if all of this would exist, if such cities had not been the residences of princes for a long time. … Frankfurt, Bremen, Hamburg, Lübeck are large and brilliant, and their impact on the prosperity of Germany is incalculable. Yet, would they remain what they are if they were to lose their independence and be incorporated as provincial cities into one great German Empire? I have reason to doubt this.”[1]

In addition to the advancement of political competition, the vision also promotes economic competition. A German employee would not be obstructed from working in France anymore, a Dutchman would not be taxed by the government if he transfers money from a Dutch to a Spanish bank or when he decides to buy stocks on the Italian equity market. Nobody would withhold a Belgian brewery from selling beer in other countries within the European free trade area.

Socialist vision
The second vision promotes a European central state that holds the power to enact more regulations, redistribution of wealth, and harmonization of legal systems within the whole Union. A strong central political body is to coordinate such efforts. The consequence is that its member states would increasingly have to give up their sovereignty. This is clearly visible from the political events in Greece and Ireland during the financial crisis of 2008 when Brussels demanded from Greece and Ireland how they should deal with their deficits and what austerity measures they should take. The socialist vision of Europe is an ideal for the political class, bureaucrats, interest groups and the subsidized sectors that want a powerful central state for their self-enrichment. Political competition among its member states, something that the classical liberals supported, should be eliminated. Doing so, Europe becomes less democratic and political power is increasingly shifted into the hands of bureaucrats and technocrats in Brussels. Historically, such plans for concentrated political power had been realized by such figures as Charlemagne, Napoleon and Hitler. The difference with our times is that the creation of a modern European superstate does not directly require military means. The introduction of new institutes like the European Central Bank, a common currency like the Euro, and extended power of the European Commission would suffice. Similar socialist intentions were already visible from the start of the European integration in the European vision of Jean Monnet, the intellectual father of the European community. Fearing an independent and emerging Germany after the second World War, an integration of Germany into Europe was considered to be a good thing. Next to that, the French wanted to have control over the Rühr area and they wanted to keep other vital German resources out of solely German hands. After losing her colonial powers in Indochina and Africa, the French ruling elite were also looking for new influence and pride which they eventually found in the European community.[2] The French premier in 1950 had for example proposed a plan to install a European army under the leadership of the French.

Why it is good for the Netherlands to leave the European Union
I believe that the EU should never have had more ambitions than the free trade zone that requires no supranational institutes, except for a European Court of Justice that is restricted to supervising conflicts between the member states and guaranteeing the four freedoms. The EU has become so far removed from the classical liberal vision of political and economic competition that it is not worthwhile anymore for the Netherlands to participate. It has declined into a malignant cartel of states that can tell its members with whom and how they should conduct their trade. A good example were the quotas and import levies on Chinese solar panels in 2013 under the disguise of ‘anti-dumping’ measures. Several countries like the Netherlands and Germany had first opposed to these measures as they would like to maintain good relationships with China. Nonetheless, the European Committee, apparently under influence of solar panel lobbyists like those of the German producer Solarworld AG, introduced ‘anti-dumping’ measures. The eventual winners of such measures are European solar panel producers and its victims are the European people that simply want to buy cheap solar panels. Another example are the sanctions that the EU had imposed on Russia since the Ukrainian conflict – a conflict that was provoked by American imperialists and NATO.[3] The deteriorating trade relationships between the EU and Russia is also detrimental to the wealth of ordinary European citizens. Another recent example is the prohibition of high-powered vacuum cleaners and possible future bans on other energy appliances such as kettles and hairdryers in order to reach environmental targets.[4] Those who profit from such measures are mainly large legacy organizations such as Bosch and Siemens that have enough capital to meet the strict EU regulations.

Another reason why a Nexit would be good for the Netherlands is that it offers an opportunity to extricate oneself from the Euro and the implicitly pledged financial aid when a future financial crisis will tear through Europe.

The tragedy of the Euro
The introduction of the Euro has proven to be a huge mistake, because it has enabled fiscally irresponsible governments of such countries like Portugal, Italy, Greece, Spain etc. to conduct unsustainable economic policies. In the past, when these states had their own currency, their governments had to finance their budget deficits through the sales of government bonds which resulted in higher government debts. The higher government debts manifested itself in higher interest rates on their government bonds, and a greater money supply would lead to devaluations of their currencies.

To illustrate how the process of government bonds financing works in the European Monetary Union, we could look at the development of 10-year government bonds. The graph below shows the interest rates that governments have to pay to the financiers of their 10-year government bonds from 1995 to 2011:

Development in Interest Rates on 10-year Government Bonds
Interest rates on 10-year government bonds from 1995-2011.

The y-axis represents the rates of interest that an investor receives from 10-year government bonds. Countries that are economically stronger and fiscally more conservative are rewarded with lower interest rates due to the smaller risk that these governments will not pay back their loans. In the case of Germany, a country with traditionally a stronger economy, a more conservative Bundesbank, and a fiscally more responsible government than many other European nations, investors received 7.5% interest on their 10-year government bonds in 1995. Greek government bonds had a yield of 18% in 1995. 1995 was the year in which the European Committee had announced that the Euro would arrive in 2002. Interest rates on government bonds consequently converged in the following years. At the end of 1997 all rates of interest on Portuguese, Irish, Spanish, Italian, French and German 10-year government bonds were more or less equal despite the fact that many of the governments of these countries still spent more than they received in tax incomes. The consequence of sharing a common currency with fiscally more responsible countries like Germany and the Netherlands is that fewer price signals in the form of higher interest rates on government bonds of fiscally irresponsible governments emerge. Irresponsible governments can issue government bonds to the banking sector that transfer these bonds as collateral to the ECB in return for loans. The interest rate that banks pay for the loans of the ECB are issued as profits to their governments. This is in short how ‘seigniorage’, the profits derived from money creation when the costs of money production and the distribution of money are lower than the value of money itself, is created.

Sovereign debt financing in EMU
Sovereign debt financing in the European Monetary Union.

This process leads to inflation, but the costs of inflation in the EMU are not solely borne by the respective country that issues the government bonds, but by all countries that participate in the EMU. A country like Spain can for example issue government bonds that traditionally would correspond with 10% inflation. However, when other countries like the Netherlands and Germany issue an amount of bonds that corresponds with 5% inflation, Spain benefits from seigniorage as the inflation created by Spain is higher and borne partly by the Netherlands and Germany. A Euro in this regard is beneficial for fiscally irresponsible governments. It is actually a “Tragedy of the commons”. Abusing the Euro in this way is exactly what countries like Portugal, Italy, Ireland, Greece, Spain and France have done. This works until a financial crisis shows how insolvent the governments of these countries actually are. That has happened in 2008, the moment when interest rates on European government bonds started diverging. The ECB had even decided to buy up Greek government debts in May 2010 in order to lower the interest rates on Greek government bonds. In June 2010, a temporary European Financial Stability Facility (EFSF) was founded with guarantees of up to €440 billion to combat the European sovereign debt crisis. It has provided financial assistance to Ireland, Portugal and Greece. The EFSF was later replaced by the European Stability Mechanism (ESM) in October 2012 with a total described capital of around €700 billion of which the Netherlands has pledged €40 billion in capital participation. The Dutch prime minister, Mark Rutte, had promised the Dutch in 2011 that the Netherlands would receive back the money it has loaned out to Greece in May 2010.[5] The total sum that was loaned to Greece by the Dutch was €3.2 billion. However, in 2012 when the Netherlands loaned out €14.5 billion of the second financial aid package of €130 billion that was pledged by Europe and the IMF to Greece, the Dutch minister of Finance, Jeroen Dijsselbloem, admitted that the Netherlands were losing money. Rutte also admitted that he could not guarantee that the Dutch loans to the Greeks would not be forgiven.[6] Three years later, on July 13 2015, the Netherlands loaned out another €22.6 billion to Greece.[7] It has become clear that such financial pledges of the Netherlands to fiscally irresponsible governments like that of Greece are not beneficial for the Dutch. Even in the long run it is not beneficial for the EU as it supports and prolongs a socialist European system that is deeply rotten to its core and destined to fail. What the EU needs is a radical return to decentralization and political competition.

The EU has become a sinking ship. It appears to me that the Netherlands should leave the Union as soon as possible. I do not see how Europe can maneuver itself safely through the next financial crisis that is at the point of breaking out as more banks are on the brink of collapse.[8] I also expect greater centralization of political power within the EU and a greater loss of individual member countries’ sovereignty. On June 27, 2016, the Polish media had reported that France and Germany were taking matters into their own hands and are using the Brexit to unveil their plan to morph the continent’s countries into one giant superstate. Under their radical proposals,

“EU countries will lose the right to have their own army, criminal law, taxation system or central bank, with all those powers being transferred to Brussels.”[9]

Conclusion
A sensible Netherlands would leave the European Union and the European Monetary Union in order to preserve political and economic sovereignty. They would have free trade agreements with all countries within and outside of the EU. EenVandaag, a popular Dutch TV programme, had published the results of their 27,000 large online poll on Sunday June 26, 2016 in which 54% of the Dutch would like to hold a referendum about the Netherlands’ participation in the EU. 48% of the poll wanted the Netherlands to leave the EU against 45% who would like to remain in the EU.[10] In the meantime, the Remain camp will continue their nauseating snobbery accusing the Leave camp of being racist, nationalistic, isolationist or simply ignorant.

References
Bagus, P. (2010). The Tragedy of the Euro.

BBC. (2016). EU referendum: The result in maps and charts.

China Courant. (2014). Mogelijk nieuwe straffen voor producenten Chinese zonnepanelen.

Dijkstra, M. (2015). Griekse crisis: wat heeft het allemaal gekost?

DutchNews.nl. (2016). Dutch PM rejects referendum calls: not in the Netherlands’ interest.

Fullfact.org. (2016). First they came for the vacuum cleaners: will it be kettles next?

Gutteridge, N. (2016). European SUPERSTATE to be unveiled: EU nations ‘to be morphed into one’ post-Brexit.

Hoppe, H.H. (2001). Democracy the god that failed.

Judt, T. (2006). Postwar: A History of Europe Since 1945.

McMurtry, J. (2016). Ukraine, America’s “Lebensraum”. Is Washington prepared to wage war on Russia?

NOS. (2011). Rutte verwacht Grieks geld terug.

NU.nl. (2012). Rutte geeft verbreken verkiezingsbelofte toe.

Zerohedge.com. (2016). Deutsche Bank tumbles near record lows as yield curve crashes.

Footnotes
[1] From Johann Peter Eckermann’s Conversations with Goethe (1836-1848).

[2] Tony Judt writes in Postwar: A History of Europe Since 1945 (2006) that “[U]nhappy and frustrated at being reduced to the least of the great powers, France had embarked upon a novel vocation as the initiator of a new Europe” (p. 153). He also writes that “[F]or Charles de Gaulle, the lesson of the twentieth century was that France could only hope to recover its lost glories by investing in the European project and shaping it into the service of French goals (p. 292).”

[3] See for example Prof. John McMurtry’s “Ukraine, America’s ‘Lebensraum’. Is Washington prepared to wage war on Russia?” for an analysis how Washington had provoked the Ukrainian conflict with Russia.

[4] See “First they came for the vacuum cleaners: will it be kettles next?”

[5] See “Rutte verwacht Grieks geld terug” (2011). http://nos.nl/artikel/275035-rutte-verwacht-grieks-geld-terug.html

[6] See “Rutte geeft verbreken verkiezingsbelofte toe” (2012). http://www.nu.nl/algemeen/2968363/rutte-geeft-verbreken-verkiezingsbelofte-toe.html

[7] See “Griekse crisis: wat heeft het ons allemaal gekost?” http://www.elsevier.nl/economie/article/2015/07/griekse-crisis-wat-heeft-het-ons-allemaal-gekost-2657386W/

[8] See for example “Deutsche Bank tumbles near record lows as yield curve crashes.” http://www.zerohedge.com/news/2016-06-13/deutsche-bank-tumbles-near-record-lows-yield-curve-crashes

[9] See “European SUPERSTAT to be unveiled: EU nations ‘to be morphed into one’ post-Brexit.” http://www.express.co.uk/news/politics/683739/EU-referendum-German-French-European-superstate-Brexit

[10] See “Dutch PM rejects referendum calls: not in the Netherlands’ interest.” http://www.dutchnews.nl/news/archives/2016/06/92520-2/

The minimum wage still bites

Politicians, pundits and activists jumped on a new literature that asserts that there no negative effects of substantial increases of the minimum wage on employment. Constantly, they cite this new literature as evidence that the “traditional” viewpoint is wrong. This is because they misunderstand (or misrepresent) the new literature.

What the new literature finds is that there could be no significant negative effects on employment. This is not the same as saying there are no negative effects overall. In fact, it is more proper to consider how businesses adjust to different-sized changes by using various means. Once, the minimum wage is seen in this more nuanced light, the conclusion is that it still bites pretty hard.

The New Minimum Wage Literature

Broadly speaking, the new literature states that there are minimal employment losses following increases in the minimum wage. It was initiated twenty years ago by the works of Alan Krueger and David Card who found that, in Pennsylvania and New Jersey, a change in the minimum wage had not led to losses in employment. This caused an important surprise in the academic community and numerous papers have found roughly similar conclusions.

These studies imply that the demand for labor was quite inelastic – inelastic enough to avoid large losses in employment. This is a contested conclusion. David Neumark and William Wascher are critical of the methods underlying these conclusions. Using different estimation methods, they found larger elasticities in line with the traditional viewpoint. They also pointed out Card and Krueger’s initial study had several design flaws. With arguably better data, they reversed the initial Card and Krueger conclusion.

These critics notwithstanding, let us assume that the new minimum wage literature is broadly correct. Does that mean that the minimum wage is void of adverse consequences? The answer is a resounding no.

This is because of an important nuance that has been lost on many in the broader public. In a meta-analysis of 200 scholarly articles realized by Belman and Wolfson, there are no statistically discernable effects of “moderate increases” on employment. The keyword here is “moderate” because the effects of increases in the minimum wage on employment may be non-linear. This means that while a 10% increase in the minimum wage would reduce teen employment by 1%, a 40% increase will reduce teen employment by more than 4%. A recent study by Jeremy Jackson and Aspen Gorry suggests as much: the larger the increase of the minimum wage, the larger the effects on employment.

If labor costs increase moderately, the strategy to reduce employment may be relatively inefficient. The increase of labor costs needs to reach a certain threshold before employers choose to fire workers. Below such a threshold, employers may use a wide array of mechanisms to adjust.

Adjustment channels

Employers on their respective markets face different constraints. This diversity of constraints means that there is no “unique” solution to greater labor costs. For example, if the demand for one’s products is quite inelastic, labor costs can be passed on to consumers through an increase in prices. While this may not necessarily hurt workers at the minimum wage, it impoverishes other workers who have fewer dollars left to spend elsewhere. This is still a negative outcome of the minimum wage – its just not a negative outcome on the variable of employment.

In other cases, employers might reduce employment indirectly by reducing hours of work. This is an easy solution to use for employers who cannot, for a small increase in labor costs, afford to fire a worker. Even Belman and Wolfson – who are sympathetic to the idea of increasing the minimum wage – concede that increases in the minimum wage do lead to moderate decreases in labor hours. More skeptical researcher, like Neumark and Wascher, find that the effects on hours worked is much larger. Again, the variable affected is not employment measured as the number of people holding a job. However, a reduction in the number of hours worked is a clearly a perverse outcome.

Another effect is that employers might reduce expenses associated with their workers. Even Card and Krueger, in their book on the minimum wage, recognize that employers may opt to cut on things like discounted uniforms and free meals. An employer facing a 5% increase in the minimum wage will see his labor costs increase, but firing an employee means less production and lower revenues. Thus, firing may not be an option for such a small increase. However, cutting on the expenses associated with that worker is an easy option to use. This means fewer marginal benefits and on-job training. Employers adjust by altering the method of compensation.  For example, economist Mindy Marks estimated that a 1$ increase of the minimum reduced by 6.2% the probability that a worker would be offered health insurance.  Again, employers adjust and the effects are not seen on employment. Nonetheless, these are undisputedly negative effects.

The effect may also be observed on the type of employment. Employers may decide to substitute some workers by other types of workers. Economist David Neumark pointed that, subsumed in the statistical aggregate of “labor force” is a shift in its shift. In his article, written for the Employment Policies Institute, he stated that “less skilled teens are displaced from the job market, while more highly skilled teens are lured in by higher wages (even at the expense of cutbacks in their educational attainment)”. Another example could be that a higher minimum wage induces retired workers to return to the labor force. Employers, at the sight of a greater supply of experienced workers, prefer to hire these individuals and fire less-skilled workers. In such case, “total employment” does not change, but the composition of employment is heavily changed. The negative effects are clear though: less-skilled workers are not allowed to acquire new skills through experience.

Conclusion

None of these adjustment mechanisms in response to “moderate increases in the minimum wage” are desirable. Yet, all of these channels would allow us to conclude that there are no effects on employment. To misconstrue the ability of employers to select multiple channels of adjustments other than reducing employment as the proof that the minimum wage has no negative effects is perverse in the utmost. The statement that “moderate increases in the minimum wage has no statistically significant effects on employment” is merely a positive scientific statement with no normative implications whatsoever. If anything, the multiple adjustment mechanisms suggest that the minimum wage still hurts and that is both a positive and normative statement.

From the Comments: Pushback in favor of Brexit

Dr Stocker‘s recent post arguing against Brexit elicited the following response from Chhay Lin in the ‘comments’ threads, and I think it’s worth highlighting in a post of its own:

Very well explained, Barry Stocker. Although it can be good for Britain to leave the EU, it entirely depends on how they go on from there. I am worried that Britain will move unto the path of less free trade which would be an erosion of the 4 freedoms – free movement of goods, capital, services, and people. On the other hand, it seems to me that the EU was steadily moving toward greater centralization and harmonization of regulations that would decrease the competition between its member states and thereby becoming quite harmful. I think that the EU should have never had greater ambitions than the 4 freedoms with a European Court of Justice that would protect these freedoms. Now they can impose EU-wide tariffs and quotas against products from countries outside of the EU or they can impose EU-wide sanctions. Some harmful examples of the EU: the quotas on cheap Chinese solar panels and EU-wide sanctions against Russia. A wise independent Britain would have free trade agreements with countries within and outside the EU, but I’m afraid that too large a portion of the Leave supporters are hostile to immigration and open markets.

Chhay Lin has written more about Brexit, in Dutch, on his homepage and I do recommend you check it out.

Brexit, free trade, and the EU

I posted this on Facebook twenty hours before the results were known:

The United Kingdom will not leave the EU. If it does, there will be concrete talks of a trade agreement between the UK and the Union within a week. Free trade is the best part of the EU anyway. It may be the only worthwhile part. At least, it undeniably works. The EU has a free trade agreement with Norway and with Switzerland already. I don’t see it denying the UK, not even out of collective pique.

My guess (guess) is that the UK will have done the EU a favor by pointing out that much of the European Union’s bureaucratic, abstract, nebulous project is simply overambitious. The UK taught the world democracy and soccer (football). It can teach its European neighbors pragmatism.

Obviously, I called the referendum wrong. The mistake I made was to guess that people who were going to vote for staying were more likely to lie to pollsters than partisans of Leave. That would have given an underestimate for the “stays.” I should not have called it. I am not inside British culture enough to make this kind of guess. I shouldn’t have. I won’t again.

I am perplexed by some of the comments I heard all day in the US media. Perhaps as a result of a bit of psychological projection, American commentators state that anti-immigration sentiment played the main part in the victory of the “leave.” This may be the case; I don’t know enough to pronounce but I need to make a technical point that the pundits don’t seem to be completely aware of. Leaving the European Union can only lessen the flow of European immigrants into the UK: Polish (plumbers), Romanian carpenters, and tens of thousands of French citizens, at least. Since about one million Brits leave abroad and almost all in the EU, I see an exchange agreement in the making. Don’t you?

Leaving the EU will do nothing or nearly nothing to reduce the intake of immigrants of color and of Muslims. Those landed in the UK and continue to land there as a consequence of past colonial relationships. I say this because I suspect (I suspect; I don’t know) that Brits are more exercised about large numbers of dark-skinned Muslims than they are about fewer dishwater-white Catholic Poles. Call me a cynic!

Second technical point. Many of the American commentators I heard today, including those predicting Armageddon as a result of the British referendum, seem to have vague ideas about what the European Union actually is. It’s actually fairly complicated but I don’t excuse them. If they want to comment, they should do their homework. Anyway, the EU is first and foremost a free trade area and and free investment area. In this capacity, it works very well. I mean by this that any step backward would impoverish all Europeans to some extent.

I don’t see how British industry and British commerce can really face the possibility of meeting with tariff walls and other discriminatory treatments in a market of 27 countries until now wide open to them.

The Brits have two years to finalize their exit. I think (but I have been wrong before; see above) that they will say to the EU: We are leaving except that… we want to be included in your free trade and free investment area, like Iceland and like Norway. As I mentioned above, I also think they will want some mutual arrangement about citizens of the EU living in the UK and citizens of the UK living in the EU. I think there are going to be many rounds of negotiations around the theme: “We are leaving but…” It’s also possible that the most fervent Leave-ers will ultimately be satisfied with having made a rude gesture toward Brussels, the capital of the European Union. I am repeating (in fear this time) my prediction that the British referendum will cause the EU to reform itself. In fact, think it already has.

See also “Protectionism; Free Trade….” It was written for the intelligent uninformed.