Wednesday, May 26, 2021

Minimum Wage Economics and Fallacies: Marginal Revenue Product (Part 2 of 2)

Click here to read the original Cautious Optimism Facebook post with comments

8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues with minimum wage as the low-skilled worker’s hurdle—not ladder—to a career.

As we discussed in Part 1, the concept of Marginal Revenue Product (MRP) is a useful tool for analyzing the potential impact of raising wage floors such as proposals for a national $15-per-hour minimum wage.

Marginal Revenue Product, or MRP, is the additional (marginal) revenue a firm can secure with the labor of one more hired or retained (ie. “marginal” or “the last”) employee. 

To go back and read MRP basics visit:


The Economics Correspondent credits Loyola University Economics Professor Walter Block for the ladder-hurdle illustration.

Progressives who laud a higher minimum wage depict it as a “ladder” that helps employees climb up to a better lifestyle.

But Professor Block argues that since low-skilled employees first have to produce the additional MRP required to exceed the higher minimum wage, it actually serves as a taller hurdle they must first jump over to get a job.

If a young worker with no skills can only produce $10 in MRP, he will probably be hired at $7.25 per hour. And once employed inexperienced workers doing low-skilled labor, even in fast food or basic office work, do learn valuable job skills.

For example, just having to deal with angry customers teaches novice workers a lot about the importance of serving others in the marketplace or standing in the shoes of the consumer. They may not realize the importance of showing up to work on time—until they’re late and get an earful from the boss. And they have to sharpen their communication and listening skills even when doing something as simple as taking orders.

Young, unskilled workers learn none of this while sitting idle at home playing video games every day for years, or loitering on streetcorners waiting to get in trouble with the law.

And over time inexperienced workers' MRP can rise above $10 as they gain experience and pick up more skills, allowing them to find work elsewhere for higher pay. Hence the real first rung of the “ladder” is a job that can teach young workers skills that better position them for advancement to better jobs.

However if the minimum wage is forced up to $15, now the proverbial hurdle they must jump over is raised. 

Still producing an MRP of $10 per hour, they don’t get the starting job to begin with.

Far from giving them the “ladder” to climb to better opportunities, the higher wage floor has robbed them of a starting job and instead presented a higher “hurdle” they must scale to get that critical start in the workplace.

The Economics Correspondent himself started with a very low-paying job ($5.77 per hour, barely over the minimum wage at the time) answering phones at a major airline’s newly built reservations office. Over time he picked up skills that led him into operations, then transferred to other companies in financial services and corporate travel as an analyst learning new telephone systems and operational skills. Eventually the Correspondent's MRP rose enough to qualify for a six-figure professional services career in telecom consulting which financed a comfortable retirement nest egg. 

His MRP rose as he gained more skills in multiple jobs over the years.

And it all started with no marketable skills and $5.77 an hour.

But if at the beginning the local government had forced a “living wage” on the airline and demanded $10 an hour for all new hires—which would have increased the office’s operating budget by at least $18 million a year—the facility would have been built in another city or state, or the added $18 million in annual cost would have been diverted to expensive automated telephone systems to replace new hires. 

Under a mandated “living wage,” the Correspondent’s career ladder would have turned out very differently or perhaps not at all.


When confronted with MRP, a common retort from Fight for $15 advocates is:

“Just raise prices which in turn will raise the worker’s MRP.”

After all, MRP is expressed in dollar terms so just demand more dollars. With more dollars coming in, the new minimum wage is now lower than the new MRP. How could that not work, right?

Most opponents of higher wage floors instinctively see the problem with this solution right away—rooted in the Law of Demand.

All things being equal, the higher the price of a product the lower the quantity demanded.

So if Subway arbitrarily raises its sandwich prices by two or three dollars, the Law of Demand states customers will make fewer purchases, a phenomenon that’s been proven out by four thousand years of historical evidence.

Even if consumers’ attitudes are magically unfazed by the increase (and 99% of consumers are not, they notice) higher prices alone will simply eat away that much more of their discretionary income and limit their purchases as a matter of simple arithmetic.

Which leads us to another critical concept that applies worker MRP:

The decision to hire or retain a worker after a minimum wage increase and price hikes is made less by the employer than by the consumer. After all, the “revenue” in Marginal Revenue Product comes from consumers, not from bosses.

Fight for $15 proponents like to think it’s easy for firms to give legions of low-skilled workers big pay raises and the only problem is that bosses are just too stingy. 

But in reality it’s the consumer’s stinginess that plays the larger role in prohibiting higher pay, not the employer’s.

Not only that, but it’s neither the employee, the employer, nor the progressive activist who determines the worker’s subjective marketplace “worth.” Ultimately the final arbiter of worth is the consumer by decision to pay or abstain from paying.

Simply declaring “I want MRP for a new sandwich artist to be $100 per hour” and raising the price of a sandwich by $25 in order to generate that MRP will quickly be canceled out by reality when consumers balk and stop buying. Thus the sandwich artist’s MRP will fall far, far short of the $100 per hour dream no matter how badly minimum wage proponents want to believe it won’t.

Of course the employer is the easier political target to bash since he/she can be portrayed as the greedy fat cat holding large bags of money with dollar signs. But in a market economy the employee’s—even the employer’s—whims and wishes are subject to the consumer’s final veto power.


The Fight for $15 proponent then often says “Well we’re not talking about $100 an hour. We want a modest increase which won’t generate the negative consequences in your extreme example.”

There is a real kernel of truth in this. There can be nuanced “room to wiggle” with modest wage and price increases, so long as one accepts there is virtually always a negative cost to some worker somewhere.

Fight for $15 proponents might say “Just raise the minimum wage to $15 and you only have to raise the price of sandwiches by $4, not $25.” 

That’s probably true. A $4 price increase will also cause demand to decline, but more modestly. So if a typical Subway store employs a dozen people, perhaps only two or three might watch their wage fall to zero (ie. lose their jobs) along with reduced store hours. And perhaps one full-time employee will be reduced to part-time.

The part-time worker’s total take home pay might be reduced (depending on how many hours are cut and the size of the raise) although he can get a second part-time job to make up the difference. But low-skilled jobs are going to be harder to find when hours are being reduced everywhere with even many fulltime workers being let go, including two or three of his former colleagues who are now job market competitors.

And even if he’s lucky enough to find another job, he then becomes the poster boy for politicians like AOC who lament “more people than ever have to work two jobs to make ends meet,” and go on to demand an even higher minimum wage creating another round of layoffs and reduced hours.

And the job losses won’t stop there. 

The Congressional Budget Office has estimated (conservatively) that a net 1.5 million U.S. workers would immediately lose their jobs due to a nationwide $15/hour minimum wage. But what doesn’t make CBO headlines is that additional jobs will be lost over ensuing years as companies replace labor with automation/capital, a process that takes time and will eliminate more jobs long after the initial headlines have faded.


More heartening to "living-wage" proponents is this: Some firms might reduce staff to a level where the remaining staff’s MRP actually does rise from $10 to $15 an hour, and the pay raise really is justified.

Setting aside that other workers still got a pay cut to zero, how can the surviving low-skilled worker’s MRP magically rise from $10 to $15 per hour?

By reducing staff to the point that constant customer queues (bad for the consumer) fully occupy workers who never get a chance to catch their breath. Even with low skills, if their on-the-job occupancy is raised from 65% to 95% they technically can raise their MRP. Both their productivity in terms of units produced per labor-hour and revenue per unit rise, and some employees might even prefer this tradeoff: earning more but working nonstop.

But many will also “burn out,” and politicians will again blame capitalism for “imposing slavery-like workloads on employees.” Never mind it wasn’t capitalism at all but rather politicians forcing mandates on employers that reduced the worker’s options to two: work like a dog or be fired.

So it becomes a value judgment: Is it worth laying off some employees so the surviving ones can be overworked to generate higher MRP, but imposing an unsustainable workload on them to do it?


Incidentally the Correspondent witnessed this exact “Subway phenomenon” after San Francisco raised its minimum wage to $15 per hour in 2018. Prices at local Subways rose considerably, many employees were fired, several stores reduced business hours or closed.

And even the diminished number of customers found themselves waiting in longer lines (much longer, until the pandemic) as there was only one employee behind the counter working frantically while looking miserable and burned out. 

Yes indeed, the surviving worker’s higher MRP now justified a $15 per hour wage—the only way he was going to keep his job anyway—but at the cost of another employee’s job, higher prices, lower consumer demand, reduced customer service/well-being, and his own mental health.

The Correspondent has also seen customers walk in, survey the queue, then turn around and walk out, another form of reduced demand and negative consumer well-being since the consumer chooses to abandon an exchange he was previously willing to enter into, even at the higher price.

And most ironically the Correspondent has heard plenty of grumbling by angry customers waiting in those lines. In San Francisco you can bet most of them voted to raise the minimum wage to begin with and now have no clue that they are being inconvenienced/frustrated by the consequences of their own political decisions. But instead they blame “greed” and “free market capitalism” while opining that “if only the government regulated these companies more.”

We’ll discuss the concept of Marginal Factor Cost (MFC) in the next column.

Sunday, May 23, 2021

Minimum Wage Economics and Fallacies: Marginal Revenue Product (Part 1 of 2)

Click here to read the original Cautious Optimism Facebook post with comments

7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff, having concluded the first half of his series on free vs regulated banking in Great Britain, will give readers a “break” from banking history with something a little more current events: a new series on the economics and fallacies of minimum wage with a focus on “Fight for $15” proposals.

The Economics Correspondent is fairly active reading CO’s posts and comments and in his estimation most CO Rockers generally “get” the problems and negative consequences created by governments imposing wage floors above market equilibrium wages for low-skilled labor. But he thought that some econ nerds of the CO world might unite finding more detailed economic theories, history, empirical evidence, and even a few anecdotes interesting reading.

In the next two columns we’ll focus primarily on “Marginal Revenue Product,” a concept that, once established, provides a great deal of insight into consequences and fallacies of minimum wage.

Aside from the obvious law of demand—which states the higher the price of a good or service the lower the quantity purchased—economists frequently employ the concept of Marginal Revenue Product to analyze the effects of minimum wage.

Marginal Revenue Product, sometimes referred to as Marginal Revenue Productivity, refers to the additional revenue a firm can secure from one additional employee’s labor. It’s also the amount of additional revenue the last hired or least productive employee’s labor can secure for the firm.

Marginal Revenue Product is a mouthful, so going forward we’ll refer to it by its customary abbreviation of MRP.


It’s probably self-evident that workers with few to no marketable skills have low MRP while those with high skills have higher MRP.

In more complex real world scenarios MRP may apply to a small group of new hires since it takes more than one employee to secure any marginal revenue at all. For example, a new international long-haul airline route won’t bring in a dollar of additional revenue with the hiring of a single marginal flight attendant. It requires several of them, two cockpit crew members, and marginal additions to ground personnel, gate agents, etc… before the marketable product—an additional flight—can be offered to the public and begin attracting even a single new dollar of sales.

But for illustrative purposes we’ll keep it simple and discuss examples involving single new hires.

So let's take an extra sandwich artist at Subway, given the sporadic frequency of customer orders and arrivals throughout the day, who might only produce $10 per hour in MRP. Meanwhile a skilled doctor seeing several patients a day may be able to produce $150 per hour in MRP. 

At the extreme NFL quarterback Tom Brady, given the number of ticket holders and viewers he can attract by doing his job, may be able to produce $10,000 per hour in MRP. 

It all has to do with how much money the extra worker’s skills and labor can entice customers to hand over to the company.

So moving to the obvious next analytical step, if the least-skilled sandwich artist at Subway has an MRP of $10 per hour, odds are good that he will be hired or remain employed in a state with a minimum wage of $7.25 per hour. But if the state raises the minimum wage to $15 per hour and the employee’s MRP doesn’t rise accordingly, hiring or retaining him becomes an instant moneyloser—at least $5 per hour in losses.

And no matter what Fight for $15 activists might say, no business is going to consistently hire or retain the marginal (ie. next or last) employee at a loss. Or as economist Gary Wolfram says "The government can force an employer to pay a worker $15 an hour, but it can't force an employer to hire or retain that worker."

Important side note: Some readers may say “Hey, $15 an hour in revenue at Subway isn’t that difficult to secure. Just serve two customers, each of whom pays $7.50, and the employee’s MRP is $15 per hour. Problem solved.” 

But remember that MRP refers to marginal revenue that the worker’s *labor* produces, not the revenue the entire enterprise produces.

A clerk at Walmart’s TV department can sell three TV’s a day for $1,200 but that doesn’t mean his MRP is $1,200 a day, and it doesn’t mean Walmart can afford to pay him $1,000 per day or $250,000 per year. Walmart had to deliver the customer something more than just the employee’s labor to secure $1,200 in sales: namely three televisions plus other cost factors. Hence the total cost of securing marginal revenue—labor plus wholesale, capital, marketing, interest on borrowing, etc.—includes “Marginal Factor Cost,” a concept we’ll examine in future columns. 

But we'll continue using just straight wages and MRP to keep the discussion simple.


Although minimum wage fallacies are overwhelmingly committed by its proponents, the first fallacy MRP helps us dispel is the rare one more commonly made by minimum wage opponents. 

But future columns will be dominated by pro-minimum wage fallacies.

We often hear the claim made that “If the minimum wage is raised to $15 per hour, there will be a disastrous surge in the unemployment rate as countless millions are laid off.”

While that might be true during major downturns like the Great Depression, such a sweeping generalization rarely plays out, particularly in strong economic recoveries.

MRP explains it.

While some workers will lose their jobs if the minimum wage is raised to $15 per hour, the reality is that only a small segment of the overall workforce will be impacted. Unfortunately that segment contains the most vulnerable members of the labor force: those with low skills.

To illustrate, let’s consider four sample workers: 

A. An unemployed teen with zero skills whose MRP is $5 per hour.

B. The aforementioned Subway worker whose MRP is $10 per hour.

C. A software engineer whose MRP is $60 per hour (about $120,000 a year)

D. Our skilled doctor whose MRP is $150 per hour (about $300,000 a year)

Remember, these aren’t salaries but rather the amount of revenue their labor can bring in for their employers.

Under the current federal $7.25 per hour minimum wage, employees B, C, and D are gainfully employed since their MRP’s are greater than the minimum wage. 

But employee A is and has already been chronically unemployed because he simply can’t generate a marginal $7.25 an hour for an employer due to his lack of skills. 

Incidentally Employee A already explains why teen unemployment is 13% today, was 26% during the Great Recession, and why black teen unemployment is 18% today and was 48% during the Great Recession. Many teens and especially minority teens simply can’t produce sufficient MRP to be employable under even the current federal minimum wage.

Now in a new scenario the federal government mandates a minimum wage of $15 per hour. 

Employee A, who was already hopelessly jobless, remains even more hopelessly jobless. 

Employee B, whose MRP of $10 per hour made him employable at $7.25 per hour, is now a moneyloser at $15 and almost certainly loses his job (more on variables surrounding B’s fate in Part 2).

However employees C and D are still gainfully employed because their MRP’s were previously and still remain far above $15 per hour.

In short, a hike in the minimum wage tends to idle only those workers whose MRP is between the old wage floor and the new one. Workers whose MRP was below the old minimum wage were never employable to begin with, and those whose MRP was above the new minimum wage are not threatened.

Or put in plainer terms, $15 per hour will threaten the jobs of many fast food restaurant workers, sanitation workers, hospitality workers, etc… but very few doctors, architects, engineers, airline pilots, lawyers, nurses, or even skilled blue-collar workers will feel the impact.

Thus some of the most vulnerable members of society are hurt by a higher minimum wage while the jobs of the better off are mostly unscathed.

The Economics Correspondent doesn’t have immediate access to the number of American workers earning between the current minimum wage in their state and $15 per hour, but he suspects that the total represents a minority of America’s total workforce albeit a more sizable minority than during past, less aggressive minimum wage hikes.

Then there’s strong economic expansions or recoveries.

If the minimum wage is raised to $15 per hour in the middle of a brisk economic recovery the bulk of over-$15 MRP workers will gainfully find jobs while low-skilled workers will fare much worse.

But since there are far more workers with over-$15 MRP than those between $15 and $7.25 (or whatever their local minimum wage might be) the final calculus nationwide will still produce an overall reduction in the unemployment rate.

That is, millions of highly-skilled workers find jobs while hundreds of thousands of low-skilled workers lose theirs. And the final math conceals the blow to low-skilled workers as the broader unemployment rate falls.

This could lead to the pro-$15 per hour crowd committing their own fallacy in turn: pointing to the falling unemployment rate and declaring “See, the higher minimum wage didn’t hurt anyone!”

One last note about the employee whose MRP is above $15 per hour.

We mentioned previously that the wage hike tends to affect only those employees whose MRP’s are below $15. However, it is still possible for a small number of employees with higher MRP to be hurt also.

Consider if a nationwide minimum wage hike results in 10% of a fast food company’s nationwide staff being laid off or replaced by machines. While the low-skilled employees feel the brunt of the pain, the company also now has less need for support staff in HR, building or equipment maintenance, payroll, etc… So a handful of higher-skill workers with MRP’s above $15 an hour can still become collateral damage and find themselves fired.

We’ll discuss MRP a little more in Part 2.

Sunday, May 9, 2021

Left Coast Correspondent: Followup on Wikipedia's Slanted Search Previews: Communist Mass Murderers

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3 MIN READ - A followup on Wikipedia’s softball search previews for communist mass murderers from The Cautious Optimism Correspondent for Left Coast Affairs and Inexplicable Phenomena.

Stalin erases NKVD chief Nikolai Yezhov from Soviet history after his execution

Given the “pass” communism, the Soviet Union, and Joseph Stalin get in Wikipedia search previews (“Leader of the Soviet Union from 1924 to 1953”) and among so many western academics, the Correspondent would like to share an illuminating quote from Stalin biographer and Princeton historian Stephen Kotkin comparing the Soviet despot to Adolf Hitler.

Not to give Hitler a pass either since Nazi Germany’s national socialism was its own brand of state evil writ large, but Kotkin describes one of many key areas where the murderous and super-paranoid Stalin was even worse: the Great Terror where he purged the Soviet communist party of countless real and imagined enemies. 

And the Purge is hardly the only atrocity where Stalin out-Hitlered Hitler.

(A few factoids about the 1936-1938 Great Terror appear at the bottom of this column)

Professor Stephen Kotkin:

“Let’s imagine for a second Hitler, who is generally speaking not considered let’s say… an unbloody ruler.

(audience laughter)

“Let’s imagine Hitler decides to murder 90% of his upper officer corps, accuse them of false crimes, have them tortured to testify that they committed those false crimes, that they were working the whole time for Judeo-Bolshevism as they were building up the Nazi regime.

“And let’s imagine that the population in Germany accepts that 90% of the upper officer corps were working the whole time for Judeo-Bolshevism. 

“And then they get shot. He shoots his own officers.

“Let’s imagine he does that also to all the Gauleiters and the provincial Nazi Party machines. That is he gets them to testify that they were working for Judeo-Bolshevism the whole time that they were Nazis.

“And let’s imagine he does that for his diplomatic corps

"And his intelligence operations

"And he does it for his cultural figures.

“And then he does it to the Gestapo! He murders the Gestapo because they’re agents of Soviet influence. They’re Soviet agents wearing Gestapo uniforms.

“And moreover he destroys the Gestapo while the Gestapo is destroying everyone else, not after but during. 

"While they’re killing army officers, and while they’re killing the party and state officials, he’s killing the police officials.

“Let’s imagine Hitler does all of that, and the populace of Germany accepts that they were all these traitors.

“Can we actually imagine that? This is Hitler after all. 

“There’s no way to imagine it for Hitler. It’s impossible to think of.

“First of all, could Hitler have actually enacted that? Who would have done all of that on his behalf if he gave those orders? And how could his regime have survived such a self-destabilization?...

“…In fact Hitler didn’t murder his officer corps. He retired them when he didn’t like them and gave them a gigantic pension and let them live in Berlin… not fearing that they would plot against him after they sacked hm.

“Hitler in the middle of Stalin’s Great Terror said ‘this guy Stalin is sick in the head.’ This is Hitler talking about Stalin. The lines are so good, you’d think I invented them.”


A few facts about the 1936-1938 Great Terror launched by the paranoid despot Wikipedia describes as “Leader of the Soviet Union from 1924-1953”:

-Of the 1966 delegates who attended the 1934 17th Soviet Communist Party Congress, only 858 returned to the 1939 18th Party Congress, the rest mostly shot or sent to the Arctic gulag.

-Historians believe Stalin executed 81 of his 103 top generals and admirals with most of the remaining sent to the gulag. The hollowed out, rudderless military leadership was a major factor in the Soviet army's string of stunning defeats in the opening phases of the 1941 Nazi invasion.

-KGB archives, opened to the public after the fall of the Soviet Union, contain thousands of blood-stained confessions signed by Stalin's innocent victims under torture.

-NKVD interrogation reports reviewed by Stalin, also stored in the archives, contain his handwriting in the margins countless times instructing secret police operatives on how to more effectively torture prisoners and identifying which ones to pressure the hardest.

-Virtually every Russian city, town, and village was directed to meet regular execution quotas. Directives often read "You are ordered to find 500 enemies of the people and execute them next month." With so little time to find so many "guilty" traitors, the NKVD arrested anyone accused by a neighbor with a score to settle, or simply grabbed innocent people on the street, accused them of false crimes, and had them shot.

-Stalin had two consecutive NKVD chiefs executed during the purge as well: Genrikh Yagoda for not being ruthless enough and then his successor, the particularly sadistic Nikolai Yezhov, was shot and replaced with Lavrentiy Beria who survived until Stalin’s death only to be executed himself by order of Nikita Khrushchev.

Beria is famous for coining the phrase "You show me the man and I'll find you the crime."

-Of the seven founding members of the original 1917 Soviet Politburo, only Stalin survived past 1940. Lenin died in 1924 from a brain hemorrhage leading to Stalin's rise to power. Stalin had the remaining five executed. Grigory Zinoviev, Lev Kamenev, Grigori Sokolnikov, and Andrei Bubnov were all arrested, show trialed, and executed during the Purge. Leon Trotsky, criticizing Stalin from exile in Mexico City, was assassinated in his study by NKVD agent Ramón Mercader.

-The Purge was finally wound down only because the planned economy was beginning to suffer from the loss of so many bureaucrats and productive civilians.

To read more about the Great Purge, go to:

Saturday, May 8, 2021

Left Coast Correspondent: Wikipedia's Search Previews Slanted Bigtime Left

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The Cautious Optimism Correspondent for Left Coast Affairs and Other Inexplicable Phenomena is generally a fan of Wikipedia despite the frequent criticism and ridicule it receives in online discussions. While the platform is far from perfect, the Correspondent appreciates that Wikipedia articles nearly always have a “criticism” or “other side of the debate” section when discussing controversial subjects. 

Good luck ever finding any mention of “the other side” from our largest media websites, newspapers, or television networks.

However in a disturbing trend reminiscent of loaded/biased Google searches, the Correspondent has recently noticed some major inconsistencies in Wikipedia’s preview descriptions for controversial political figures, political parties, political movements, and media personalities. In the attached screenshots observe the pairs, and sometimes trios, of like public figures on what would be considered the left and right of the political spectrum.

The Correspondent acknowledges the sole notable exception of Adolf Hitler who is soft-glove previewed as “Leader of Germany from 1934 to 1945,” but this is definitely the exception and not the rule—as seen in the descriptions of Benito Mussolini, Augusto Pinochet, and Francisco Franco.

In case the prepared screenshots are too small or difficult to read, refer to this written list of results from the Correspondent's search previews.

Proud Boys: “Far-right and neo-fascist male-only organization”
Antifa: “Anti-fascist political activist movement”

Francisco Franco: “Spanish general and dictator”
Joseph Stalin: “Leader of the Soviet Union from 1924 to 1953”

Benito Mussolini: “Italian dictator and founder of fascism”
Mao Zedong: “Chairman of the Central Committee of the Communist Party of China”

Augusto Pinochet: “Former dictator of the Republic of Chile”
Pol Pot: “20th-century Cambodian Communist revolutionary and politician”

Hermann Goring: “German Nazi war criminal, politician, and military leader”
Nicolae Ceausescu: “General Secretary of the Romanian Communist Party (1965-1989)”

Jean-Marie Le Pen: “French right-wing nationalist politician”
Kim Il-sung: “Founder and first leader of North Korea”
Kim Jong-il: “Second supreme leader of North Korea”
Kim Jong-un: “Current General Secretary of the Workers’ Party of Korea and supreme leader of North Korea”
Fidel Castro: “Leader of Cuba from 1959 to 2011”
Siad Barre: “Somali military official and president (1969-1991) of the Somali Democratic Republic

Sturmabteilung (brown shirts): “Nazi Party’s original paramilitary wing”
Red Guards: “1966-67 social movement during the Chinese Cultural Revolution”

David Irving: “British author and Holocaust denier”
Walter Duranty: “Anglo-American journalist”

John Birch Society: “American radical right advocacy group”
Communist Party USA: “American political party”

Dinesh D’Souza: “Indian-American political commentator filmmaker, author, convicted-felon, conspiracy theorist”
Bill Ayers: “American professor and activist”
Michael Moore: “American filmmaker and author”

Fox News: “American conservative cable television news channel”
CNN: “American news channel”
MSNBC: “American television news channel”

Sean Hannity: “American television host, conservative political commentator”
Rachel Maddow: “American television news host and political commentator”

Tucker Carlson: American conservative political commentator from California”
Don Lemon: “American journalist and news anchor”

Wednesday, May 5, 2021

Flashback: Noam Chomsky Praises Hugo Chavez's Socialism in Caracas

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff offers a brief followup on his recent article about hyperinflation in Venezuela with this obscure video of American left-socialist intellectual Noam Chomsky’s 2009 visit to Caracas (go to 3:57).

Noam Chomsky: “I would like to thank President Chavez for the kind and generous words. He said that I write about peace and criticize the barriers to peace; that's easy. What's harder is to create is a better world and what's so exciting about at last visiting Venezuela is that I can see how a better world is being created and speak to the person who’s inspired it.”

Why didn’t the Economics Correspondent ever see this video on NBC or CNN before? And with Venezuela now universally agreed to be a humanitarian disaster-tragedy why aren't they playing it again--along with similar videos of visits and praise by Sean Penn, Danny Glover, Michael Moore, Oliver Stone, Naomi Campbell, Nobel-laureate economist Joseph Stiglitz, UK Labour Party leader Jeremy Corbyn, or Bernie Sanders?

By the time of Chomsky's visit Chavez's government had long-since seized major domestic and international productive assets and the country was experiencing high inflation and chronic shortages of water, milk, food, and other basic necessities plus frequent power blackouts.

Monday, May 3, 2021

Venezuela Launches One Million (But Really 100 Trillion) Bolivar Banknote

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4 MIN READ - Some historical and MMT observations on the Venezuelan bolivar’s continuing collapse from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

Venezuela introduced a new 1,000,000 bolivar note in March—worth 52 U.S. cents at the time.

If this sounds like just another manifestation of the socialist state’s hyperinflation problem… well, that’s not the least of it.

The Economic Correspondent would like to remind readers that these new banknotes are denominated in the recent “bolivar soberano” (BsS), not the original pre-Hugo Chavez bolivar.

A little bolivar history:

From 1879 to 2007 the official currency of Venezuela was the bolivar (Bs).

After losing much of its purchasing power through the Chavez years, the currency underwent a reform whereby citizens’ bolivars were converted to the new “bolivar fuerte” (BsF) at a rate of 1,000-to-1, shaving three zeroes off the old bolivar's banknote denominations.

Put another way, for every 1,000 bolivars a Venezuelan submitted to a commercial bank, he/she received a single bolivar fuerte in return. Bank accounts were also automatically converted via central bank directive.

In a cruel irony, “bolivar fuerte” translates to “strong bolivar.”

Inflation accelerated throughout the rest of Chavez’s presidency up to his death and continued into the Maduro presidency.

The newer bolivar fuerte lost 99% of its value from 2007 to 2013, a period when global oil prices were still high. But the currency’s collapse worsened—into hyperinflation—when worldwide oil prices began a prolonged decline in late 2015.

By 2018 BsF banknote denominations had grown so large that another currency reform was announced. The bolivar fuerte was replaced by the bolivar soberano (BsS or “sovereign bolivar”) at a conversion rate of 100,000-to-1, effectively shaving five zeroes off the old denomination.

And today Venezuelans have started carrying 1-million BsS notes in their wallets that by the time of this writing are worth less than 50 cents.

So don’t let the 1-million bolivar banknote fool you. When accounting for past currency reforms:

1,000 Bs = 1 BsF

100,000 BsF = 1 BsS

…it’s really a 100-trillion bolivar note.

Yes, Venezuela has joined the Zimbabwe club, although it took several years longer to get there and multiple currency reforms have manipulated banknote denominations to deceptively low levels—like 1-million BsS.

On a side note, many MMT devotees (although not so much the academics) have claimed Venezuela’s tragic hyperinflation is not due to moneyprinting but rather a collapse in economic output. A few of the faithful even argue inflation is not caused by money at all.

As the explanation goes, Venezuela’s socialist policies have produced such a decline in the production of domestic goods and services that there are just too few things to buy with the money available. It’s the lack of things to buy to blame, not too much money. An ironic attribution given how many MMT'ers openly call for socialist policies themselves.  

Well production has indeed declined in Venezuela, but the math doesn’t come close to adding up. 

Setting aside higher velocity which admittedly is a secondary factor in hyperinflations, a 100 trillionfold increase in prices would require real GDP to collapse by 99.999999999999% (that’s twelve nines after the decimal place), a far lower level of output than even indigenous natives managed centuries before the arrival of the Spanish.

Twelve nines after a decimal place is hard to fathom, so let’s put a 99.999999999999% collapse in output in terms of the U.S. economy. If such a decline were to occur in the United States, our $22 trillion GDP economy would contract to 22 cents in real terms.

So if a loaf of bread costs one dollar, the entire annual economic annual output of the United States would be reduced to six slices of bread.

That’s it. No production of anything else: houses, cars, medicine, transportation, clothing, energy. The productive effort of the entire USA would yield six slices of bread for the whole country to eat meaning literally the entire country would starve to death.

As bad as Venezuela’s production problems are, reduced output simply can’t explain that kind of hyperinflation.

More sophisticated MMT’ers argue the real problem is Venezuela broke MMT's rules and was dumb enough to borrow in U.S. dollars and, as its currency weakened, the government was forced to print more and more bolivars to repay its dollar-denominated obligations.

But then why was Venezuela “dumb enough” to borrow in dollars? Why didn’t it follow MMT rules: borrow and promise to repay international creditors in Venezuelan bolivars?

The answer is pretty obvious if you’re an international creditor. No one outside Venezuela would also be dumb enough to lend on those terms because they wouldn’t trust the Chavez and Maduro regimes not to inflate away the value of their debt obligations. 

If you lend a million U.S. dollars today and agree to be paid back at the official exchange rate on that day (say you're promised 1-trillion BsS), sure you might get your 1-trillion BsS back in a few years but they’d be worth less than a loaf of bread too.

Which is one of the many problems with the MMT adage that “sovereign issuers of currency can print enough money to pay all their bills so long as they borrow in their own currency.” As Austrian economist Robert Murphy says, you might get away with that for a while so long as you’re responsible with your currency and maintain a clean reputation with other countries. But the moment the world sees you abusing your privilege as a sovereign currency issuer, you quickly lose the privilege and they stop lending to you in your currency. And then you wind up like Argentina or Greece in the 1980's.

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