The Great Recession has shown us that markets have equilibrium, but that we sometimes need to give it a little push in the right direction or else we could spiral out of control; again. The Hoover Dam got money circulating and caused a multiplier effect that helped rejuvenate the economy, World War II (unfortunately) got men and women back to work and provided a much needed sense of purpose, the fiscal stimulus of 2009 (arguably) saved the United States from calamity, and automatic stabilizers such as unemployment insurance help to minimize the effects of a loss of wages on the overall economy. We have come a long way since 1929 and still have a long way to go. As an economist and a fiscal-conservative I disagree with an over-regulated market, price-floors, and an overreaching government; but as recent economic events have shown, markets are more complicated and synthetic to adjust appropriately on their own.
One example of this is from a recent article by The Brookings Institute that shows a serious, yet ubiquitous, problem in predatory lending: pay-day loans. I have already blogged about some other industries that thrive on predatory lending and pay-day loans are subject to the same nefarious business practices. The article summarizes that the Consumer Financial Protection Bureau (CFPB) passed legislation changing the nature of the vetting process for pay-day loan-sharking from debt-to-income ratios to a more reasonable ability-to-pay matrix for non-prime lenders as well as limiting the amount of loans they are able to take out. Will this industry change? Absolutely. Will market innovation create new opportunities to lend to non-prime borrowers? Absolutely. This market is littered with moral hazards so the only option is to keep a close eye on predatory financing. George Akerlof and Robert Shiller did a great job bringing phishing scams to light (Phishing for Phools), showing that with every market comes an opportunity to take advantage.
Another such push is the Department of Labor’s Wage and Hours Division’s expansion of the Fair Labor Act that increased the overtime salary exemptions from a minimum of $23,660/year ($455/week) to $47,476/year ($913/week). This should affect over 4 million people in the country and give a “meaningful boost to many workers’ wallets”. I am of two minds about this legislation and my fellow blogger Adam posted about this recently in THIS BLOG POST. The economic forces behind the need for price floors are tricky and sometimes self-defeating. A higher nominal wage could overheat the market and cause a lower real wage; meaning that if employers are forced to pay people more they will simply hire less people in an attempt to return to a balanced aggregate wage. This is not a one-for-one exchange, and often leads to lower aggregate wages and higher unemployment in the big picture. Over-time exemption criteria increases are a synthetic aspect of the labor wage market but necessary nonetheless. The unemployment rate has been lowering and overall consumption is up (www.bls.gov), this should (if Keynes was right) cause an increase in wages and inflation in the market, but it hasn’t. A higher wage will give existing employees a much-needed break, and it’s time, but this could also create a disincentive to hire future employees. I guess we’ll wait and see.
Fiscal policy is a relatively new addition to economics and we’re all trying to make sense of a post-recession world. Obviously, letting markets adjust naturally doesn’t work, but how far do we push regulation to make course corrections? It’s easy to see effects of fiscal policy with the luxury of hindsight and, as an armchair quarterback, I could write a dissertation on changing policies after the Great Recession, but we live in a world of uncharted waters and need to simply do the best we can with the information we have. Hopefully we can get it right once in awhile.