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https://twitter.com/DavidLeyonhjelm/status/644022781634449408

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How to refute the case for a minimum wage when genuinely calling for a smarter federal minimum wage

What if minimum wage rates could somehow be tied to specific locations as suggested by former White House economist Jared Bernstein puts it in an essay in the New York Times:

When we adjust a national minimum wage of $10.10 for regional differences, these are the amounts you’d need to have the same buying power: $11.94 in Washington, D.C., and $11.40 in California, but only $8.90 in Alabama and $9.08 in Kansas.

And of course, prices vary within states as well. In the New York City area, it would take $12.34 to meet the national buying power of $10.10; upstate around Buffalo, you’d need only $9.47. In the Los Angeles area, it would take $11.94; go up north a bit to Bakersfield, where prices are closer to the national average, and it’s $9.83.

To repeat what George Stigler said on the unsuitability of a nation-wide minimum wage in 1946 when there was monopsony, and therefore a small minimum wage increase is less likely to result in a reduction in employment:

If an employer has a significant degree of control over the wage rate he pays for a given quality of labour, a skilfully-set minimum wage may increase his employment and wage rate and, because the wage is brought closer to the value of the marginal product, at the same time increase aggregate output…

This arithmetic is quite valid but it is not very relevant to the question of a national minimum wage. The minimum wage which achieves these desirable ends has several requisites:

1. It must be chosen correctly… the optimum minimum wage can be set only if the demand and supply schedules are known over a considerable range…

2. The optimum wage varies with occupation (and, within an occupation, with the quality of worker).

3. The optimum wage varies among firms (and plants).

4. The optimum wage varies, often rapidly, through time.

A uniform national minimum wage, infrequently changed, is wholly unsuited to these diversities of conditions

A smarter federal minimum wage is a federal minimum wage of zero. Let each state and city set a minimum wage in accordance with its own economic conditions and the blackboard economics of monopsony and competition in the labour market.

As soon as you concede that there is not one single national labour market, other concessions must be made. This slippery slope includes that the monopsony power of employers might vary from state to state, city to city, and local labour market from local labour market.

Even a state or city minimum wage  regulator  would have to pretend to know an immense amount of information about the labour market with most of this information in a tacit form that cannot be summarised in statistics or other decision aids for regulators. As Hayek reminded in his classic in 1945 on The Use of Knowledge in Society:

the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form.

The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision.

It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot."

The merits of federalism

  • A divided government is a weak government.
  • One great feature of the federal system is that we can try different policies in different states and see what works and what doesn’t.
  • The laws of each state can more closely reflect local public opinion.
  • The will of the people is constantly tested and re-measured in a federal system: elections at one level or another every year contested on local and national issues.
  • People vote more often for different policy packages, rather than occasionally for a few up and down choices.
  • The will of the people is constantly tested and re-measured in a federal system: elections at one level or another every year contested on local and national issues.

After 15 years of Maggie Thatcher, good and hard, British Labor reconsidered devolution because a federal state slows the impassioned majority down.

Who do members of parliament represent?

Delegate - selected for perfect obedience

The theoretical literature on political representation focused on whether representatives should act as delegates or as trustees. James Madison articulated a delegate conception of representation. Representatives who are delegates simply follow the expressed preferences of their constituents.

The classical liberals of the 18th century were highly sceptical about the capability and willingness of politics and politicians to further the interests of the ordinary citizen, and thought the political direction of resource allocation retards rather than facilitates economic progress.

Governments were considered to be institutions to be protected from but made necessary by the elementary fact that all persons are not angels. Constitutions were a means to constrain collective authority. The problem of constitutional design was ensuring that government powers would be effectively limited.

  • Sovereignty was split among several levels of collective authority; federalism was designed to allow for a deconcentration or decentralization of coercive state power.
  • At each level of authority, separate branches of government were deliberately placed in continued tension, one with another.
  • The dominant legislative branch was further restricted by the constitutional establishment of two houses bodies, each of which was elected on a separate principle of representation.

These constitutions were designed and put in place by the classical liberals to check or constrain the power of the state over individuals. The motivating force was never one of making government work better or even of insuring that all interests were more fully represented.

Members of parliament as trustees are representatives who follow their own understanding of the best action to pursue in another view. As Edmund Burke wrote:

Parliament is not a congress of ambassadors from different and hostile interests; which interests each must maintain, as an agent and advocate, against other agents and advocates; but parliament is a deliberative assembly of one nation, with one interest, that of the whole; where, not local purposes, not local prejudices ought to guide, but the general good, resulting from the general reason of the whole.

You choose a member indeed; but when you have chosen him, he is not a member of Bristol, but he is a member of parliament. …

Our representative owes you, not his industry only, but his judgment; and he betrays instead of serving you if he sacrifices it to your opinion.

Burke does not seem to be a fan of federalism and vote trading to protect minorities. Madison liked conflict and tension as a constraint of power and the size of government.

Schumpeter disputed that democracy was a process by which the electorate identified the common good, and that politicians carried this out:

• The people’s ignorance and superficiality meant that they were manipulated by politicians who set the agenda.

• Democracy is the mechanism for competition between leaders.

• Although periodic votes legitimise governments and keep them accountable, the policy program is very much seen as their own and not that of the people, and the participatory role for individuals is usually severely limited.

Modern democracy is government subject to electoral checks. John Stuart Mill had sympathy for this view that parliaments are best suited to be places of public debate on the various opinions held by the population and to act as watchdogs of the professionals who create and administer laws and policy:

Their part is to indicate wants, to be an organ for popular demands, and a place of adverse discussion for all opinions relating to public matters, both great and small; and, along with this, to check by criticism, and eventually by withdrawing their support, those high public officers who really conduct the public business, or who appoint those by whom it is conducted

Representative democracy has the advantage of allowing the community to rely in its decision-making on the contributions of individuals with special qualifications of intelligence or character. Representative democracy makes a more effective use of resources within the citizenry to advance the common good.

Why do we have governments?

Ancient philosophers in general thought that it was to establish virtue or do good. Most modern public choice scholars are more modest in their evaluation of government.

We simply want government to provide those goods and services that people in fact want and that, for a variety of reasons, are hard to provide through the market.

Most people, for example, would like to have the poor taken care of by taxes on those better off. It is true they would have no objection if the poor were taken care of by voluntary contributions, but our experience seems to indicate that voluntary contributions don’t produce adequate funds for this purpose. Hence the use of the government to provide that particular service is generally approved. Of course, that does not prove that in general people are in favour of the exact quantity transferred or the methods used by the government.

There is a large literature on why certain types of things, sometimes called public goods, are provided by the market in a very inefficient way and will be provided in a better (although far from optimal) way by the government.

…We will just accept as a fact that there are a number of things which are better dealt with by the government. We will also accept as a fact that there are other things which are better dealt with by the market.

…In general, we want the government to give the citizens what they themselves want. That, indeed, is the point of democracy.

The smaller the government, the smaller the number of its voters. The smaller the number of voters, the more power each individual voter has. That’s one side of the argument.

On the other side, we have the fact that many government services are hard or impossible for small governmental units to provide.

These two arguments have to be set off against each other and since different government activities will turn out to have a different balance, having different governmental sizes is sensible.

… The existence of many small government units dealing with certain special problems has another advantage. Not only are these small governments more under the control of their voters in the sense that each individual voter’s preferences count for more than in the large government, their existence means that citizens may move from one to the other if they are dissatisfied.

Gordon Tullock

The New Federalist (1995)

New Zealand is not a federal state. I like federalism because a divided government is a weak government.

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