Economics, Politics, Quick Fix

Why Linking The Minimum Wage To Inflation Can Backfire

Last week I explained how poor decisions by central bankers (specifically failing to spur inflation) can make recessions much worse and lead to slower wage growth during recovery.

(Briefly: inflation during recessions reduces the real cost of payroll, cutting business expenses and making firing people unnecessary. During a recovery, it makes hiring new workers cheaper and so leads to more being hired. Because central bankers failed to create inflation during and after the great recession, many businesses are scared of raising salaries. They believe (correctly) that this will increase their payroll expenses to the point where they’ll have to lay many people off if another recession strikes. Until memories of the last recession fade or central bankers clean up their act, we shouldn’t expect wages to rise.)

Now I’d like to expand on an offhand comment I made about the minimum wage last week and explore how it can affect recovery, especially if it’s indexed to inflation.

The minimum wage represents a special case when it comes to pay cuts and layoffs in recessions. While it’s always theoretically possible to convince people to take a pay cut rather than a layoff (although in practice it’s mostly impossible), this option isn’t available for people who make the minimum wage. It’s illegal to pay them anything less. If bad times strike and business is imperiled, people making the minimum wage might have to be laid off.

I say “might”, because when central bankers aren’t proving useless, inflation can rescue people making the minimum wage from being let go. Inflation makes the minimum wage relatively less valuable, which reduces the cost of payroll relative to other inputs and helps to save jobs that pay minimum wage. This should sound familiar, because inflation helps people making the minimum wage in the exact same way it helps everyone else.

Because of increasingly expensive housing and persistently slow wage growth, some jurisdictions are experimenting with indexing the minimum wage to inflation. This means that the minimum wage rises at the same rate as the cost of living. Most notably (to me, at least), this group includes my home province of Ontario.

I think decreasing purchasing power is a serious problem (especially because of its complicated intergenerational dynamics), but I think this is one of the worst possible ways to deal with it.

When the minimum wage is tied to inflation, recessions can become especially dangerous and drawn out.

With the minimum wage rising in lockstep with inflation, any attempts to decrease payroll costs in real terms (that is to say: inflation adjusted terms) is futile to the extent that payroll expenses are for minimum wage workers. Worse, people who were previously making above the minimum wage and might have had their jobs saved by inflation can be swept up by an increasingly high minimum wage.

This puts central bankers in a bind. As soon as the minimum wage is indexed to inflation, inflation is no longer a boon to all workers. Suddenly, many workers can find themselves in a “damned if you do, damned if you don’t” situation. Without inflation, they may be too expensive to keep. With it, they may be saved… until the minimum wage comes for them too. If a recession goes on long enough, only high-income workers would be sparred.

In addition, minimum wage (or near-minimum wage) workers who are laid off during a period of higher inflation (an in this scenario, there will be many) will suffer comparatively more, as their savings get exhausted even more quickly.

Navigating these competing needs would be an especially tough challenge for certain central banks like the US Federal Reserve – those banks that have dual mandates to maintain stable prices and full employment. If a significant portion of the US ever indexes its minimum wage to inflation, the Fed will have no good options.

It is perhaps darkly humorous that central banks, which bear an unusually large parcel of the blame for our current slow wage growth, stand to face the greatest challenges from the policies we’re devising to make up for their past shortcomings. Unfortunately, I think a punishment of this sort is rather like cutting off our collective nose to spite our collective face.

There are simple policies we could enact to counter the risks here. Suspending any peg to inflation during years that contain recessions (in Ontario at least, the minimum wage increase due to inflation is calculated annually) would be a promising start. Wage growth after a recession could be ensured with a rebound clause, or better yet, the central bank actually doing its job properly.

I am worried about the political chances (and popularity once enacted) of any such pragmatic policy though. Many people respond to recessions with the belief that the government can make things better by passing the right legislation – forcing the economy back on track by sheer force of ink. This is rarely the case, especially because the legislation that people have historically clamoured for when unemployment is high is the sort that increases wages, not lowers them. This is a disaster when unemployment threatens because of too-high wages. FDR is remembered positively for his policy of increasing wages during the great depression, even though this disastrous decision strangled the recovery in its crib. I don’t expect any higher degree of economic literacy from people today.

To put my fears more plainly, I worry that politicians, faced with waning popularity and a nipping recession, would find allowing the minimum wage to be frozen too much of a political risk. I frankly don’t trust most politicians to follow through with a freeze, even if it’s direly needed.

Minimum wages are one example of a tradeoff we make between broad access and minimum standards. Do we try and make sure everyone who wants a job can have one, or do we make sure people who have jobs aren’t paid too little for their labour, even if that hurts the unemployed? As long as there’s scarcity, we’re going to have to struggle with how we ensure that as many people as possible have their material needs met and that involves tradeoffs like this one.

Minimum wages are just one way we can do this. Wage subsidies or a Universal Basic Income are both being discussed with increasing frequency these days.

But when we’re making these kind of compassionate decisions, we need to look at the risks of whatever systems we choose. Proponents of indexing the minimum wage to inflation haven’t done a good job of understanding the grave risk it poses to the health of our economy and perhaps most of all, to the very people they seek to help. In places like Ontario, where the minimum wage is already indexed to inflation, we’re going to pay for their lack of foresight next time an economic disaster strikes.

All About Me, Politics

What I learned knocking on thousands of doors – thoughts on canvassing

“Hi I’m Zach. I’m out here canvasing for Catherine Fife, Andrea Horwath, and the NDP. I was wondering if Catherine could count on your support this election…” is now a sentence I’ve said hundreds of times.

Ontario had a provincial election on June 7th. I wasn’t fond of the Progressive Conservative (PC) Party’s leader, one Doug Ford, so I did what I could. I joined the PC party to vote for his much more qualified rival, Christine Elliot. When that failed, I volunteered for Waterloo’s NDP Member of Provincial Parliament (MPP), Catherine Fife.

As a volunteer, I knocked on more than a thousand doors and talked to more than two hundred people. I went out canvassing eight times. According to Google Maps and its creepy tracking, I walked about 24 kilometers while doing this (and have still-sore feet to prove it).

Before I started canvassing, I knew basically nothing about it. I knew I’d be knocking on people’s doors, but beyond that, nadda. Would I be trying to convince them? Handing out signs? Asking for money?

The actual experience turned out to be both scarier and more mundane than I imagined, so I’ve decided to document it for other people who might be interested in canvassing but aren’t sure what it entails.

The first thing you need to know about canvassing by foot is that it can be physically draining. Water was a must, as some of the days I canvassed featured 31ºC (88ºF) temperatures, full sunlight, and 70% humidity. I sweated more canvassing than I did hiking in Death Valley a few weeks before. Death Valley was hotter, but as anyone who has experienced a summer in Ontario can attest, humidity is what really makes heat miserable. From what I’ve heard, even the worst summer heat and humidity still beats canvassing in the winter.

The campaign helpfully supplied sunscreen and water bottles. They didn’t provide anything to carry all the leaflets in though. After the first day, I brought a messenger bag along. It turns out carrying hundreds of leaflets for several hours without resting can leave your arms hurting for a week. I only made that mistake once.

(Plus, as the campaign wore on, we switched to smaller literature. Literally every canvasser I talked to was very, very excited by the switch.)

The second thing you need to know about canvassing is that it’s an emotional rollercoaster. Not because of the people, but because of the lack of people.

Depending on the time of day and the neighbourhood, I spoke to somewhere between one person for every five doors I knocked on and one person for every fifteen doors I knocked on. I’d get myself psyched up, mentally rehearse my speech, double check the house number, walk up to it, press the doorbell… then wait foolishly while nothing happened.

Sometimes I suspected the doorbell was broken. When I was pretty sure it was, I’d knock as well. Sometimes the knocking did indeed result in someone answering the door, but most of the time the house was just empty. I did have one person hide behind some equipment in their kitchen as I walked up to the door. They ignored the doorbell and my soft, confused knock. I saw them checking if the coast was clear as I trudged away from the front step.

The constant build-up of energy, followed by the all-to-common let down and dejected walk back to the sidewalk exhausted me more than talking with people did. More than half of the people we talked to were supporting our candidate or leaning towards her (she won the vote with 51% support, a crushing margin in a system where many candidates win with support just over 40%) so a majority of my conversation were energizing. It’s fun to discover shared purpose with strangers.

I can’t tell you how much I was grateful to all of the strangers I talked to. I know intellectually that some people really dislike the NDP and don’t like anything it stands for, but you wouldn’t know it from telling more than 200 random people whose dinner you just interrupted that you support the NDP. Not one single person said a mean thing to me.

Many were annoyed by the state of politics. Some didn’t like the party’s policies. Some weren’t interested in politics. But everyone heard me out politely. Some quickly asked me to leave, but no one slammed a door in my face. One man did close his door in my face, but not even the most uncharitable person couldn’t call it a slam. Besides, he said bye and made sure I wasn’t going to be hit by the door.

Many people followed up “sorry, I’m voting for the conservatives”, with “but good luck out there”. Several people asked if I needed a break, some shade, some water. Maybe things would have been different if I’d been out for the Liberals (who were deeply unpopular after 15 years governing) or the Conservatives (with their polarizing leader), but as it was I was impressed by the kindness and politeness of my fellow citizens.

(If you see a canvasser on your doorstep and don’t agree with their party’s positions, please be nice to them. They’re doing what they’re doing out of a sincere desire to make the world a better place. Even if you think they’re misguided, you aren’t going to change anything by being nasty to them. On the flip side, if you find yourself canvassing, it will never be in your interest to be nasty to anyone. I learned that someone high up in the campaign started volunteering for the NDP when a Conservative candidate was rude and patronizing to him at the door. “Be nice” was the very first rule of canvassing.)

Canvassing really isn’t about convincing people. We had scripts for that, but as far as I know, most people didn’t use them much. The doorstep really isn’t the best place to try and change someone’s political views and the time we would spend trying to convince people was normally considered better spent knocking on more doors.

Our actual objective was to figure out who our supporters were and who was open to being convinced. After each conversation, we’d jot down a level of support, any alternative parties being considered, and any issues the person cared about. We had specific shorthands for common occurrences, like people who were ineligible to vote, who had moved, or who didn’t want to talk to us (if you tell a canvasser not to bother you, they will stop coming to your house; this is a corollary of “be nice”, as the last thing we want is to annoy someone into helping our opponents). We’d also offer people literature about our platform. If no one was home, we’d leave it in the mailbox. I was told the notes we took could influence future phone calls (e.g. if we said “hospitals”, people might be talked with about healthcare policy) or help Catherine when she went canvassing

We were working from lists provided by Elections Ontario and augmented by the party databases. We knew what people had told past canvassers about their support for the NDP, going all the way back to 2012. These lists were correct about 80-90% of the time. Most often, mistakes were the fault of Elections Ontario; they were particularly bad at telling us when people were actually permanent residents and ineligible to vote. Beyond “not home” and “won’t say”, “ineligible to vote” become my third most common annotation.

Part of our job was to update these lists for the next election. That entailed asking for names, if someone new was living there and verifying phone numbers. I hated verifying phone numbers. I understand the necessity behind it, I really do, but it was far and away the most awkward part of canvassing. Right when every social instinct I had was telling me my interaction with someone was over, I had to ask for a piece of information they probably didn’t want to give me. I’m sure I’ll get used to it – the experienced canvasser who taught me the ropes was particularly adept at asking for numbers – but it was far and away my least favourite part.

Much easier to ask about was advanced polling, signs, and volunteering. These questions only got asked to our strongest supporters, so we knew we were getting a friendly audience. I had three people agree to take signs over my eight days of canvassing, which is less than the experienced canvasser who showed me the ropes got in our first night out. I hope one day to be as good at getting people to show support as he was.


What else? Kids are the best part. I got to watch as a father explained to his little girl that the NDP wasn’t the type of party that had cake. I got to watch a little girl jump up and down with enthusiasm for Catherine. She had seen her at a school visit and thought she was the coolest thing ever. This really struck home the importance of representation in politics to me. Maybe that girl will never lose her admiration and will grow up to seek office herself someday. Would as many girls be able to imagine themselves as MPPs if they only ever saw men in that role?

There were less happy moments. I met a woman who quizzed me in depth on our healthcare platforms before telling me that if that’s what we stood for, we had her vote. Her husband was in the hospital. I saw a notation on a canvassing sheet that said “do not bother – funeral”. I talked with a man who had been turned away at a poll, despite the fact that he was a citizen. I met a mother who relied on the Hydro tax credit to make ends meet.

Their voices were important and I did what I could to make sure they’d be heard, but I can see how people can lose themselves in politics. What is “enough” when someone is hurting in front of you? I like cold equations and cost-benefit analyses. It’s the type of person I am. But when you see someone hurting, all of that flies out of your head and you want to shake the system until someone helps them.

Or at least, I wanted to.

The great political theorist Hannah Arendt once said: “And the first thing I’d like to say, you see, is that going along with the rest—the kind of going along that involves lots of people acting together—produces power. So long as you’re alone, you’re always powerless, however strong you may be. This feeling of power that arises from acting together is absolutely not wrong in itself, it’s a general human feeling. But it’s not good, either. It’s simply neutral. It’s something that’s simply a phenomenon, a general human phenomenon that needs to be described as such. In acting in this way, there’s an extreme feeling of pleasure.”

When I read this, the first time, I skimmed over it. To me, the important thing was what she said next, about “merely functioning” and how thinking is a vehicle to doing good, the concerns that defined her work.

But after my second time canvassing, I read this again and I teared up. “How did she know?”, I wondered.

The answer, of course, is that she participated in politics and knew the joys of acting as a group, of organizing, of working together for a common goal, a common good. And I feel so incredibly privileged that I now know that joy, that “extreme pleasure” too.

For that, I’d like to thank everyone in Catherine Fife’s campaign and everyone in Waterloo who put up with me on their doorstep. Thank you, all of you, for being part of what makes politics and representative democracy work.

Model, Politics, Quick Fix

The Awkward Dynamics of the Conservative Leadership Debates

Tanya Granic Allen is the most idealistic candidate I’ve ever seen take the stage in a Canadian political debate. This presents some awkward challenges for the candidates facing her, especially Mulroney and Elliot.

First, there’s the simple fact of her idealism. I think Granic Allen genuinely believes everything she says. For her, knowing what’s right and what’s wrong is simple. There isn’t a whole lot of grey. She even (bless her) probably believes that this will be an advantage come election time. People overwhelming don’t like the equivocation of politicians, so Granic Allen must assume her unequivocal moral stances will be a welcome change

For many people, it must be. Even for those who find it grating, it seems almost vulgar to attack her. It’s clear that she isn’t in this for herself and doesn’t really care about personal power. Whether she could maintain that innocence in the face of the very real need to make political compromises remains an open question, but for now she does represent a certain vein of ideological conservatism in a form that is unsullied by concerns around electability.

The problem here is that the stuff Granic Allen is pushing – “conscience rights” and “parental choice” – is exactly the sort of thing that can mobilize opposition to the PC party. Fighting against sex-ed and abortion might play well with the base, but Elliot and Mulroney know that unbridled social conservatism is one of the few things that can force the province’s small-l liberals to hold their noses and vote for the big-L Liberal Party. In an election where we can expect embarrassingly low turnout (it was 52% in 2014), this can play a major role.

A less idealistic candidate would temper themselves to help the party in the election. Granic Allen has no interest in doing this, which basically forces the pragmatists to navigate the tricky act of distancing themselves from her popular (with the base) proposals so that they might carry the general election.

Second, there’s the difficult interaction between the anti-rational and anti-empirical “common sense” conservatism pushed by Granic Allen and Ford and the pragmatic, informed conservatism of Elliot and Mulroney.

For Ford and Granic Allen, there’s a moral nature to truth. They live in a just world where something being good is enough to make it true. Mulroney and Elliot know that reality has an anti-partisan bias.

Take clean energy contracts. Elliot quite correctly pointed out that ripping up contracts willy-nilly will lead to a terrible business climate in Ontario. This is the sort of suggestion we normally see from the hard left (and have seen in practice in places the hard left idolizes, like Venezuela). But Granic Allen is committed to a certain vision of the world and in her vision of the world, government getting out of the way can’t help but be good.

Christine Elliot has (and this is a credit to her) shown that she’s not very ideological, in that she can learn how the world really works and subordinate ideology to truth, even when inconvenient. This would make her a more effective premier than either Granic Allen or Ford, but might hurt her in the leadership race. I’ve seen her freeze a couple times when she’s faced with defending how the world really works to an audience that is ideologically prevented from acknowledging the truth.

(See for example, the look on her face when she was forced to defend her vote to ban conversion therapy. Elliot’s real defense of that bill probably involves phrases like “stuck in the past”, “ignorant quacks” and “vulnerable children who need to be protected from people like you”. But she knew that a full-throated defense of gender dysphoria as a legitimate problem wouldn’t win her any votes in this race.)

As Joseph Heath has pointed out, this tension between reality and ideology is responsible for the underrepresentation of modern conservatives among academics. Since the purpose of the academy is (broadly) truth-seeking, we shouldn’t be surprised to see it select against an ideology that explicitly rejects not only the veracity of much of the products of this truth seeking (see, for example, Granic Allen’s inability to clearly state that humans are causing climate change) but the worthwhileness of the whole endeavour of truth seeking.

When everything is trivially knowable via the proper application of “common-sense”, there’s no point in thinking deeply. There’s no point in experts. You just figure out what’s right and you do it. Anything else just confuses the matter and leaves the “little guy” to get shafted by the elites.

Third, the carbon tax has produced a stark, unvoiced split between the candidates. On paper, all are opposing it. In reality, only Ford and Granic Allen seriously believe they have any chance at stopping it. I’m fairly sure that Elliot and Mulroney plan to mount a token opposition, then quickly fold when they’re reminded that raising taxes and giving money to provinces is a thing the Federal Government is allowed to do. This means that they’re counting on money from the carbon tax to balance their budget proposals. They can’t say this, because Ford and Granic Allen are forcing them to the right here, but I would bet that they’re privately using it to reassure fiscally conservative donors about the deficit.

Being unable to discuss what is actually the centrepiece of their financial plans leaves Elliot and Mulroney unable to give very good information about how they plan to balance the budget. They have to fall back on empty phrases like “line by line by line audit” and “efficiencies”, because anything else feels like political suicide.

This shows just how effective Granic Allen has been at being a voice for the grassroots. By staking out positions that resonate with the base, she’s forcing other leadership contestants to endorse them or risk losing to her. Note especially how she’s been extracting promises from Elliot and Mulroney whenever possible – normally around things she knows they don’t want to agree to but that play well with the base. By doing this, she hopes to remove much of their room to maneuver in the general election and prevent any big pivot to centre.

Whether this will work really depends on how costly politicians find breaking promises. Conventional wisdom holds that they aren’t particularly bothered by it. I wonder if Granic Allen’s idealism blinds her to this fact. I’m certainly sure that she wouldn’t break a promise except under the greatest duress.

On the left, it’s very common to see a view of politics that emphasizes pure and moral people. The problem with the system, says the communist, is that we let greedy people run it. If we just replaced them all with better people, we’d get a fair society. Granic Allen is certainly no communist. But she does seem to believe in the “just need good people” theory of government – and whether she wins or loses, she’s determined to bring all the other candidates with her.

This isn’t an incrementalist approach, which is why it feels so foreign to people like me. Granic Allen seems to be making the decision that she’d rather the Conservatives lose (again!) to the Liberals than that they win without a firm commitment to do things differently.

The conflict in the Ontario Conservative party ­– the conflict that was surfaced when his rivals torpedoed Patrick Brown – is around how far the party is willing to go to win. The Ontario Conservatives aren’t the first party to go through this. When UK Labour members picked Jeremy Corbyn, they clearly threw electability behind ideological purity.

In the Ontario PC party, Allen and Ford have clearly staked out a position emphasizing purity. Mulroney and Elliot have just as clearly chosen to emphasize success. Now it’s up to the members. I’m very interested to see what they decide.

Economics, Model, Quick Fix

Not Just Zoning: Housing Prices Driven By Beauty Contests

No, this isn’t a post about very pretty houses or positional goods. It’s about the type of beauty contest described by John Maynard Keynes.

Imagine a newspaper that publishes one hundred pictures of strapping young men. It asks everyone to send in the names of the five that they think are most attractive. They offer a prize: if your selection matches the five men most often appearing in everyone else’s selections, you’ll win $500.

You could just do what the newspaper asked and send in the names of those men that you think are especially good looking. But that’s not very likely to give you the win. Everyone’s tastes are different and the people you find attractive might not be very attractive to anyone else. If you’re playing the game a bit smarter, you’ll instead pick the five people that you think have the broadest appeal.

You could go even deeper and realize that many other people will be trying to win and so will also be trying to pick the most broadly appealing people. Therefore, you should pick people that you think most people will view as broadly appealing (which differs from picking broadly appealing people if you know something about what most people find attractive that isn’t widely known). This can go on indefinitely (although Yudkowsky’s Law of Ultrafinite Recursion states that “In practice, infinite recursions are at most three levels deep“, which gives me a convenient excuse to stop before this devolves into “I know you know I know that you know that…” ad infinitum).

This thought experiment was relevant to an economist because many assets work like this. Take gold: its value cannot to be fully explained by its prettiness or industrial usefulness; some of its value comes from the belief that someone else will want it in the future and be willing to pay more for it than they would a similarly useful or pretty metal. For whatever reason, we have a collective delusion that gold is especially valuable. Because this delusion is collective enough, it almost stops being a delusion. The delusion gives gold some of its value.

When it comes to houses, beauty contests are especially relevant in Toronto and Vancouver. Faced with many years of steadily rising house prices, people are willing to pay a lot for a house because they believe that they can unload it on someone else in a few years or decades for even more.

When talking about highly speculative assets (like Bitcoin), it’s easy to point out the limited intrinsic value they hold. Bitcoin is an almost pure Keynesian Beauty Contest asset, with most of its price coming from an expectation that someone else will want it at a comparable or better price in the future. Houses are obviously fairly intrinsically valuable, especially in very desirable cities. But the fact that they hold some intrinsic value cannot by itself prove that none of their value comes from beliefs about how much they can be unloaded for in the future – see again gold, which has value both as an article of commerce and as a beauty contest asset.

There’s obviously an element of self-fulfilling prophecy here, with steadily increasing house prices needed to sustain this myth. Unfortunately, the housing market seems especially vulnerable to this sort of collective mania, because the sunk cost fallacy makes many people unwilling to sell their houses at a price below what they paid for it. Any softening of the market removes sellers, which immediately drives up prices again. Only a massive liquidation event, like we saw in 2007-2009 can push enough supply into the market to make prices truly fall.

But this isn’t just a self-fulfilling prophecy. There’s deliberateness here as well. To some extent, public policy is used to guarantee that house prices continue to rise. NIMBY residents and their allies in city councils deliberately stall projects that might affect property values. Governments provide tax credits or access to tax-advantaged savings accounts for homes. In America, mortgage payments provide a tax credit!

All of these programs ultimately make housing more expensive wherever supply cannot expand to meet the artificially increased demand – which basically describes any dense urban centre. Therefore, these home buying programs fail to accomplish their goal of making house more affordable, but do serve to guarantee that housing prices will continue to go up. Ultimately, they really just represent a transfer of wealth from taxpayers generally to those specific people who own homes.

Unfortunately, programs like this are very sticky. Once people buy into the collective delusion that home prices must always go up, they’re willing to heavily leverage themselves to buy a home. Any dip in the price of homes can wipe out the value of this asset, making it worth less than the money owed on it. Since this tends to make voters very angry (and also lead to many people with no money) governments of all stripes are very motivated to avoid it.

This might imply that the smart thing is to buy into the collective notion that home prices always go up. There are so many people invested in this belief at all levels of society (banks, governments, and citizens) that it can feel like home prices are too important to fall.

Which would be entirely convincing, except, I’m pretty sure people believed that in 2007 and we all know how that ended. Unfortunately, it looks like there’s no safe answer here. Maybe the collective mania will abate and home prices will stop being buoyed ever upwards. Or maybe they won’t and the prices we currently see in Toronto and Vancouver will be reckoned cheap in twenty years.

Better zoning laws can help make houses cheaper. But it really isn’t just zoning. The beauty contest is an important aspect of the current unaffordability.

Economics, Politics, Quick Fix

Cities Are Weird And Minimum Wages Can Help

[6-minute read]

I don’t understand why people choose to go bankrupt living the most expensive cities, but I’m increasingly viewing this as a market failure and collective action problem to be fixed with intervention, not a failure of individual judgement.

There are many cities, like Brantford, Waterloo, or even Ottawa, where everything works properly. Rent isn’t really more expensive than suburban or rural areas. There’s public transit, which means you don’t necessarily need a car, if you choose where you live with enough care. There are plenty of jobs. Stuff happens.

But cities like Toronto, Vancouver, and San Francisco confuse the hell out of me. The cost of living is through the roof, but wages don’t even come close to following (the difference in salary between Toronto and Waterloo for someone with my qualifications is $5,000, which in no way would cover the yearly difference in living expenses). This is odd when talking about well-off tech workers, but becomes heartbreaking when talking about low-wage workers.

Toronto Skyline
Not pictured: Selling your organs to afford a one-bedroom condo. Image Credit: Abi K on Flickr

If people were perfectly rational and only cared about money (the mythical homo economicus), fewer people would move to cities, which would bid up wages (to increase the supply of workers) or drive down prices (because fewer people would be competing for the same apartments), which would make cities more affordable. But people do care about things other than money and the network effects of cities are hard to beat (put simply: the bigger the city, the more options for a not-boring life you have). So, people move – in droves – to the most expensive and dynamic cities and wages don’t go up (because the supply of workers never falls) and the cost of living does (because the number of people competing for housing does) and low wage workers get ground up.

It’s not that I don’t understand the network effects. It’s that I don’t understand why people get ground up instead of moving.

But the purpose of good economics is to deal with people as they are, not as they can be most conveniently modeled. And given this, I’ve begun to think about high minimum wages in cities as an intervention that fixes a market failure and collective action problem.

That is to say: people are bad at reading the market signal that they shouldn’t move to cities that they can’t afford. It’s the signal that’s supposed to say here be scarce goods, you might get screwed, but the siren song of cities seems to overpower it. This is a market failure in the technical sense because there exists a distribution of goods that could make people (economically) better off (fewer people living in big cities) without making anyone worse off (e.g. they could move to communities that are experiencing chronic shortages of labour and be basically guaranteed jobs that would pay the bills) that the market cannot seem to fix.

(That’s not to say that this is all the fault of the market. Restrictive zoning makes housing expensive and rent control makes it scarce.)

It’s a collective action problem because if everyone could credibly threaten to move, then they wouldn’t have to; the threat would be enough to increase wages. Unfortunately, everyone knows that anyone who leaves the city will be quickly replaced. Everyone would be better off if they could coordinate and make all potential movers promise not to move in until wages increase, but there’s no benefit to being the first person to leave or the first person to avoid moving [1] and there currently seems to be no good way for everyone to coordinate in making a threat.

When faced with the steady grinding down of young people, low wage workers, and everyone “just waiting for their big break“, we have two choices. We can do tut-tut at their inability to be “rational” (aka leave their friends, family, jobs, and aspirations to move somewhere else [2]), or we can try to better their situation.

If everyone was acting “rationally”, wages would be bid up. But we can accomplish the same thing by simple fiat. Governments can set a minimum wage or offer wage subsidies, after all.

I do genuinely worry that in some places, large increases in the minimum wage will lead to unemployment (we’ll figure out whether this is true over the next decade or so). I’m certainly worried that a minimum wage pegged to inflation will lead to massive problems the next time we have a recession [3].

So, I think we should fix zoning, certainly. And I think we need to fix how Ontario’s minimum wage functions in a recession so that it doesn’t destroy our whole economy during the next one. But at the same time, I think we need to explore differential minimum wages for our largest cities and the rest of the province/country. I mean this even in a world where the current minimum $14/hour wage isn’t rolled back. Would even $15/hour cut it in Toronto and Vancouver [4]?

If we can’t make a minimum wage work without increased unemployment, then maybe we’ll have to turn to wage subsidies. This is actually the method that “conservative” economist Scott Sumner favours [5].

What’s clear to me is that what we’re currently doing isn’t working.

I do believe in a right to shelter. Like anyone who shares this belief, I understand that “shelter” is a broad word, encompassing everything from a tarp to a mansion. Where a certain housing situation falls on this spectrum is the source of many a debate. Writing this is a repudiation of my earlier view, that living in an especially desirable city was a luxury not dissimilar from a mansion.

A couple of things changed my mind. First, I paid more attention to the experiences of my friends who might be priced out of the cities they grew up in and have grown to love. Second, I read the Ecomodernist Manifesto, with its calls for densification as the solution to environmental degradation and climate change. Densification cannot happen if many people are priced out of cities, which means figuring this out is actually existentially important.

The final piece of the puzzle was the mental shift whereby I started to view wages in cities – especially for low-wage earners – as a collective action problem and a market failure. As anyone on the centre-left can tell you, it’s the government’s job to fix those – ideally in a redistributive way.


[1] This is inductive up to the point where you have a critical mass; there’s no benefit until you’re the nth + 1 person, where n is the number of people necessary to create a scarcity of workers sufficient to begin bidding up wages. And all of the people who moved will see little benefit for their hassle, unless they’re willing to move back. ^

[2] For us nomadic North Americans, this can be confusing: “The gospel of ‘just pick up and leave’ is extremely foreign to your typical European — be they Serbian, French or Irish. Ditto with a Sudanese, Afghan or Japanese national. In Israel, it’s the kind of suggestion that ruins dinner parties… We non-indigenous love to move. We don’t just see it as just good economic policy, but as a virtue. We glorify the immigrant, we hug them at the airport when they arrive and we inherently mistrust anyone who dares to pine for what they left behind”. ^

[3] Basically, wages should fall in a recession, but they largely don’t, which means inflation is necessary to get wages back to a level where employment can recover; pegging the minimum wage to inflation means this can’t happen. Worse, if the rest of the country were to adopt sane monetary policy during the next bad recession, Ontario’s minimum wage could rise to the point where it would swallow large swathes of the economy. This would really confuse price signals and make some work economically unviable (to do in Ontario; it would surely still be done elsewhere). ^

[4] I think we may have to subsidize some new construction or portion of monthly rent so that all increased wages don’t get ploughed into to increased rents. If you have more money chasing the same number of rental units and everything else remains constant, you’ll see all gains in wages erased by increases in rents. Rent control is a very imperfect solution, because it changes new construction into units that can be bought outright, at market rates. This helps people who have saved up a lot of money outside of the city and what to move there, but is very bad for the people living there, grappling with rent so high that they can’t afford to save up a down payment. ^

[5] No seriously, this is what passes for conservative among economists these days; while we all stopped looking, they all became utilitarians who want to help impoverished people as much as possible. ^

Economics, Falsifiable, Politics

Franchise Economics: Why Tim Hortons Has Become A Flashpoint In The Minimum Wage Fight

Since the minimum wage increase took effect on January 1st, Tim Hortons has been in the news. Many local franchisees have been clawing back benefits, removing paid breaks, or otherwise taking measures to reduce the costs associated with an increased minimum wage.

TVO just put out a piece about this ongoing saga by the Christian socialist Michael Coren. It loudly declares that “Tim Hortons doesn’t deserve your sympathy“. Unfortunately, Mr. Coren is incorrect. Everyone involved here (Tim Hortons the corporation, Tim Hortons franchisees, and Tim Hortons workers) is caught between a rock and a hard place. They all deserve your sympathy.

This Tim Hortons could be literally anywhere in suburban or rural Canada. Image Credit: Marek Ślusarczyk via Wikipedia Commons

It is a truism that a minimum wage increase must result in either declining profits, cuts to other costs, or rising prices. While supporters of the minimum wage increase would love to see it all come out of profits, that isn’t reasonable.

Basic economics tell us that as we approach a perfect market, profits should fall to zero. The key assumptions underpinning this are global perfect information (so no one can have any innovations that allow them to do better than anyone else) and zero start-up costs (so anyone can enter any market at any time). Obviously, these assumptions aren’t true in reality, but when it comes to fast food, they’re fairly close to true.

It is relatively cheap to start a fast-food restaurant (compared to say opening a factory). The start-up costs for a McDonalds, KFC, or Wendy’s are $1,000,000 to $2.3 million, while a Subway costs about $100,000 to $250,000 to start. This means that whenever someone sees fast-food restaurants making large profits in an area, they can open their own and take a fraction of the business, driving everyone’s profits down.

They’re probably driven down much lower than you think. If you had to guess, what would you say the profit margins for a fast-food restaurant are? If you’re anything like people in this study, you probably think something like 35%. The actual answer is 6% [1].

In addition to telling me that the average fast food restaurant has a 6% profit margin, that link helpfully told me that 29% of operating expenses in a fast-food restaurant come from labour costs. Raising those labour costs by 20% by increasing wages 20% increases total costs by 6% [2]. The minimum wage isn’t making fast-food restaurant owners make do with a little less in the way of profits. It’s entirely wiping out profits.

Now maybe your response to that is “well my heart doesn’t really bleed for that big multinational losing its profits”. But that’s not how Tim Hortons works. Tim Hortons, like almost all fast-food restaurants is a franchise. Tim Hortons the corporation makes money by collecting fees and providing services to Tim Hortons the restaurants, which are owned by the mythical small business owners™ that everyone (even the proponents of the minimum wage increase) claim to care so much about.

Most of these owners aren’t scions of wealthy families, but are instead ordinary members of their communities who saw opening a Tim Hortons as an investment, a vocation, or as a way to give back. They need to eat as much as their workers.

Faced with rising labour costs and no real profit buffer to absorb them, these owners can only cut costs or raise prices.

Except they can’t raise prices.

That’s the rub of a franchise system. The corporate office wants everything to be the exact same at every store. They set prices and every store must follow them. But there’s divergent incentives here. Tim Hortons the corporation makes a profit by selling supplies to its franchises; critically, they make a profit on supplies whether those franchisees turn a profit or not. They really don’t want to raise prices, because raising prices will hurt their bottom line.

It’s well known that (in general) the more expensive something is, the less people want it. Raising prices will hurt the sales volume of Tim Hortons franchises, which will decrease the profits at corporate Tim Hortons. The minimum wage hike affects Tim Hortons the corporation very little. They might see slightly increased shipping costs, but their costs are far less dependent on Canadian minimum wage labour. Honestly, the minimum wage increase probably is a net good for Tim Hortons the corporation. More money in people’s pockets means more money spent on fast-food.

Tim Hortons the corporation probably won’t say it, because they don’t want to antagonize their franchisees, but this minimum wage hike is great for them.

So, Tim Hortons franchisees have to cut costs or run charities. Given that they are running restaurants and not charities, we can probably assume that they’re going to cut costs. Why does it have to be labour costs that get cut? Can’t they just get their supplies for cheaper?

Here the franchise system bites them again. If they were independent restaurateurs, they might be able to source cheaper ingredients, reduce the ply of the toilet paper in their bathrooms, etc. and get their profits back this way.

But they’re franchisees. Tim Hortons the corporation has a big list of everything you need to run a Tim Hortons and you are only allowed to buy it from them. They get to set the prices however they want. And what they want is to keep them steady.

The only cost that Tim Hortons the corporation doesn’t control is labour costs. So, this is what franchisees have to cut.

There are two ways to decrease your labour costs. You can “increase productivity”, or you can cut wages and benefits. “Increase productivity” is the clinical and uninformative way of saying “fire 20% of your workers and verbally abuse the others until they work faster” or “fire 20% of your workers and replace them with machines”. While increased productivity is generally desirable from an economics point of view, it is often more ambiguous from a moral point of view.

Given that the minimum wage was just raised and it is illegal to pay any less than it, Tim Hortons franchisees cannot cut wages. So, if they’re against firing their employees and want to keep making literally any money, they have to cut benefits.

This might make it seem like corporate Tim Hortons is the bad guy here. They aren’t. The executives at Tim Hortons labour under what is called a fiduciary duty. They have a legal obligation to protect shareholder interests from harm and to act for the good of the corporation, not their own private good or for their private moral beliefs. They are responding to the minimum wage hike the way the government has told them to respond [3].

Minimum wage jobs suck. For all that economists claim there is no moral judgement implied in a wage, that it merely shows the intersection of the amount of supply of a certain type of labour and the demand for that labour, it can be hard to believe that there is no moral dimension to this when people making one wage struggle to make ends meet, while those earning another can buy fancy cars they don’t even need.

It is popular to blame business owners and capitalists for the wages their workers make and to say that it shows how little they value their workers. I don’t think that’s merited here. Corporate Tim Hortons has crunched the numbers and decided that if they raise prices, fewer people will buy coffee, their profits will decrease, and they might be personally liable for breach of fiduciary duty. In the face of rising prices, franchisees try and do whatever they can to stay afloat. We can say that caring about profits more than the wages their workers make shows immense selfishness on the part of these franchisees, but it’s little different than the banal selfishness anyone shows when they care more about making money for themselves than making money and giving it away – or the selfishness we show when we want our coffee to be cheaper than it can be when made by someone earning a wage that can comfortably support a family.


[1] As long as there are other available investments approximately as risky as opening a fast-food restaurant that return at least 6%, profits shouldn’t drop any lower than that. In this way, inefficiencies in other sectors could stop fast food restaurants from behaving like they were in a perfectly free market even if they were. ^

[2] This calculation is flawed, in that there are probably other costs making up total labour costs (like benefits) beyond simple wage income. On the other hand, it isn’t just wages that are going up. Other increased costs probably balance out any inaccuracies, making the conclusions essentially correct. This is to say nothing for corporate taxes, which further reduce profits. ^

[3] We can’t blame fiduciary duty, because fiduciary duty is how investing at all can happen. You might not like investing, but without investing, saving for retirement or having a national pension plan is impossible. If your response to this is to say “well let’s just tear down capitalism and start over”, I’d like to remind you that people tried that and it led to a) famine, b) gulags, c) death squads, d) more famine, and e) persistent shortages of every consumer good imaginable, including food ^


Westminster is bestminster

[6-minute read]

I’ve been ranting to random people all week about how much I love the Westminster System of parliamentary government (most notably used in Canada, Australia, New Zealand, and the UK) and figured it was about time to write my rant down for broader consumption.

Here’s three reasons why the Westminster System is so much better than the abominable hodgepodge Americans call a government and all the other dysfunctional presidential republics the world over.

1. The head of state and head of government are separate

And more importantly, the head of state is a figurehead.

The president is an odd dual-role, both head of government (and therefore responsible for running the executive branch and implementing the policies of the government) and head of state (the face of the nation at home and abroad; the person who is supposed to serve as a symbol of national unity and moral authority). In Westminster democracies, these roles are split up. The Prime Minister serves as head of government and directs the executive branch, while the Queen (or her representative) serves as head of state [1]. Insofar as the government is personified in anyone, it is personified in a non-partisan person with a circumscribed role.

This is an excellent protection against populism. There is no one person who can gather the mob to them and offer the solutions to all problems, because the office of the head of state is explicitly anti-populist [2]. In Westminster governments, any attempt at crude populism on the part of the prime minister can be countered by messages of national unity from the head of state [3].

It’s also much easier to remove the head of government in the Westminster system. Unlike the president, the prime minister serves only while they have the confidence of parliament and their party. An unpopular prime minister can be easily replaced, as Australia seems happy to demonstrate over and over. A figure like Trump could not be prime minister if their parliamentarians did not like them.

This feature is at risk from open nominating contests and especially rules that don’t allow MPs to pick the interim leader during a leadership race. In this regard, Australia is doing a much better job at exemplifying the virtues of the Westminster system than Canada or the UK (where Corbyn’s vote share is all the more surprising for how much internal strife his election caused) [4].

2. Confidence

To the Commonwealth, one of the most confusing features of American democracy is its (semi-)regular government shut downs, like the one Trump had planned for September [5]. On the other side, Americans are baffled at the seemingly random elections that Commonwealth countries have.

Her Majesty’s Prime Minister governs only so long as they have the confidence of the house. A government is only sworn in after they can prove they have confidence (via a vote of all newly elected and returning MPs). When no party has an absolute majority, things can get tense – or can go right back to the polls. We’ve observed two tense confidence votes this year, one in BC, the other in the UK.

In both these cases, no party had a clear majority of seats in the house (in Canada, we call this a minority government). In both BC and the UK, confidence was secured when a large party enlisted the help of a smaller party to provide “confidence and supply”. In this situation, the small party will vote with the government on budgets and other confidence motions, but is otherwise free to vote however they want.

The first vote of confidence isn’t the only one a government is likely to face. If the opposition thinks the government is doing a poor job, they can launch a vote of no confidence. If the motion is passed by parliament, it is dissolved for an election.

But many bills are actually confidence motions in disguise. Budgets are the “supply” side of “confidence and supply”. Losing a budget vote – sometimes archaically called “failing to secure supply” – results in parliament being dissolved for an election. This is how Ontario’s last election was called. The governing party put forward a budget they were prepared to campaign on and the opposition voted it down.

This feature prevents government shutdowns. If the government can’t agree on a budget, it has to go to the people. If time is of the essence, the Queen or her representative may ask the party that torpedoed the budget to pass a non-partisan continuing funding resolution, good until just after the election to ensure the government continues to function (as happened in Australia in 1975).

By convention, votes on major legislative promises are also motions of confidence. This helps ensure that the priorities laid out during an election campaign don’t get dropped. In a minority government situation, the opposition must decide whether it is worth another election before vetoing any of the government’s key legislative proposals. Because of this, Commonwealth governments can be surprisingly functional even without a legislative majority.

Add all of this together and you get very accountable parties. Try and enact unpopular legislation with anything less than a majority government and you’ll probably find yourself shortly facing voters. On the flip side, obstruct popular legislation and you’ll also find yourself facing voters. Imagine how the last bit of Obama’s term would have been different if the GOP had to fight an election because of the government shutdown.

3. The upper house is totally different

Many Westminster countries have bicameral legislatures, with two chambers making up parliament (New Zealand is the notable exception here). In most Westminster system countries with two chambers, the relationship between the houses is different than that in America.

The two American chambers are essentially co-equal (although the senate gets to approve treaties and budgets must originate in the house). This is not so in the Westminster system. While both chambers have equal powers in many on paper (except that money bills must often originate in the lower chamber), in practice they are very different.

By convention (and occasionally legislation) the upper chamber has its power constrained. The actual restrictions vary from country to country, but in general they forbid rejecting bills for purely partisan reasons or they prevent the upper house from messing with the budget.

The goal of the upper house in the Westminster system is to take a longer view of legislation and protect the nation from short-sighted thinking. This role is more consultative than legislative; it’s not uncommon to see a bill vetoed once, then returned to the upper chamber and assented to (sometimes with token changes, sometimes even with no changes). The upper house isn’t there to ignore the will of the people (as embodied by the lower house), just to remind them to occasionally look longer term.

This sort of system helps prevent legislate gridlock. Since the upper house tends to serve longer terms (in Canada, senators are appointed for life, for example), there is often a different majority in the upper and lower chambers. If the upper chamber was free to veto anything they didn’t like (even if the reasons were purely partisan) then nothing would ever get done.

Taken together, these features of the Westminster system prevent legislative gridlock and produce legitimate outputs of the political process. This obviates populist “I’ll fix everything myself” leaders like Trump, who seem to be an almost inevitable outcome in a perpetually gridlocked and unnavigable system (i.e. the American government).

Insofar as the Westminster system has problems, they are mostly problems of implementation and several Westminster countries have demonstrated that fundamental reform of the system is possible within the system itself. New Zealand abolished the upper house of their parliament when it proved useless. Australia switched to an elected upper house and has come up with a set of constitutional rules that prevent this from causing gridlock (here I’m thinking of the double dissolution election and joint session permitted by Australian law in response to repeated legislative failures).

Among certain people in Canada, electoral and senate reform have become contentious topics. It’s my (unpopular in millennial circles) opinion that Canada has no need of electoral reform. Get a few beers in most proponents of electoral reform and you’ll quickly find that preventing all future Conservative majorities is a much more important goal for them than any abstract concept of “fairness”. I’m not of the opinion that we should change our electoral system just because a party we didn’t like won a majority government once in the last eight elections (or three times in the past ten elections and past fifteen elections).

Senate reform may have already been accomplished, with Prime Minister Trudeau’s move to appoint only non-partisan senators and dissolve the Liberal caucus in the senate. Time will tell if this new system survives his tenure as prime minister.

In one of the articles I linked above, Prof. Joseph Heath compares the utter futility Americans feel about changing their electoral system with the indifference most Canadians feel about changing theirs. In Canada, many proponents of electoral reform specifically wanted to avoid a plebiscite, because they understand that there currently exists no legitimacy crisis sufficient to overcome the status quo bias most people feel. Reform in Canada is certainly possible, but first the system needs to be broken. Right now, the Westminster system is working admirably.


[1] Israel took many cues from Westminster governments. Its president is non-partisan and ceremonial. If Canada was every forced to give up the monarchy, I’d find this sort of presidential system acceptable. ^

[2] It’s hard to tell which is less populist; the oldest representative of one of the few remaining aristocracies, or (like in Israel or the governor-generals of the former colonies), exceptional citizens chosen for their reliability and loyalty to the current political order. ^

[3] See Governor General David Johnston’s criticism of some of Steven Harper’s campaign rhetoric. ^

[4] I’ve of the opinion that Corbyn’s “popularity” is really indicative of PM Teresa May’s unpopularity bolstered by his ability to barely surpass incredibly low expectations. ^

[5] Since rescheduled to December, in light of Hurricane Harvey. ^

Economics, Politics

Why Don’t we Subsidize Higher Wages? Or: Public Policy is Expensive

[7 Minute Read]

Epistemic Status: Started as a reduction ad absurdum.

It used to be a common progressive grumbling point that the social safety net subsidized the low wages of McDonald’s and Walmart (and many less famous and less oft grumbled about enterprises). The logic went that employees at those companies just weren’t paid enough; they wouldn’t be able to survive – a necessary prerequisite to showing up at work – without government assistance. The obvious fix for this would be forcing these companies to pay their employees more – raising the minimum wage.

In my last piece on the minimum wage, I said the existing evidence pointed towards minimum wage hikes having few negative consequences. Recent evidence from Seattle suggests this may not be the case (although there are dueling studies, further complicated by accusations of academic misconduct against the scientists who found the hike had no effect). If my earlier prediction proves false, it will be because $15/hour is much higher – and a much larger percentage increase, then any of the past studies looked at.

If a $15/hour minimum wage “fails” [1] then we will face a choice. Do we give up on higher minimum wages? Do we accept higher unemployment (and all of its associated disconnection, wrenching poverty, and mental health costs)? Do we try something radically different?

Certainly, there exist other potential programs that we can use to accomplish some of the goals of a minimum wage increase if an increase itself proves untenable. A guaranteed basic income (GBI) [2], while expensive, would accomplish many of the same economic security goals as a higher minimum wage, but it wouldn’t fix the fact that some people see their wage as a reflection on their moral value, instead of a commentary on the supply and demand of various skills. This could become quite the sticking point; one reason that libertarians get behind a GBI is that it would allow us to abolish minimum wage laws.

Eliezer Yudkowsky (don’t groan, this really is relevant) has an interesting theory about the left. He thinks that the left doesn’t hate capitalism – they just hold it to the same ethical standards they hold people to. It might be people on the right who claim that corporations are people, but it’s the left who treat corporations like people.

If we accept Yudkowsky’s theory, there are a lot of people for whom paying someone $8/hour is an unacceptable slur on that person’s value as a human being [3]. This seems to match what I see from time to time on Facebook or in editorials. Here’s one out of Seattle; it ends with: “Finally, let’s be mindful that a minimum wage is about more than keeping the poor from starving. It’s also about attaching dignity to a person’s labor”.

Dignity being on the line changes the minimum wage debate. People can squabble over the economic pie endlessly. But make it about dignity and workers can’t back down. Even if a higher minimum wage leads to price increases or lost jobs.

And the Seattle Times article I linked is far too sanguine about price increases [4]. It is correct when it points out that well-off people can eat price increases with nary a change in behaviour, but I don’t know how it can so calmly ignore how much of a struggle it is for low-income families to deal with price increases.

Of course, raising the minimum wage might give people some breathing room. But that breathing room is wasted if prices immediately increase to match the new incomes. Have you ever watched someone on a treadmill?

The real effect of increased prices will be felt by people living on fixed incomes. Price increases are especially rough on seniors, who often can’t work even if they wanted to. Although I suppose we could use inflation to deal with the truly scary unfunded pension liabilities that many governments now have to deal with.

Raising the minimum wage will have to result in higher prices if it doesn’t lead to improved productivity (and therefore laying off the least productive workers). Retailers can absorb wages up to about $11/hour and still turn a profit. Beyond that, they can only raise prices, raise productivity, or run a charity. They won’t do the third.

But look, steadily rising wages are nice. They’re an excellent anesthetic for discontent. They alleviate poverty. If it was worth the cost, the government could make the complaints of subsidization true by literally subsidizing wages.

For the government to carry out this subsidization in Ontario, the cost would be something like $9 billion dollars [5]. This is equivalent to about 6% of the current budget – a bit less than the amount Ontario pays to service its debt. It wouldn’t be impossible to raise revenue for this – a progressive 1-5% tax increase would cover it handily [6], with the median Ontario worker seeing about $10.00 come off each paycheque with the new taxes.

There would obviously need to be some pretty strict rules in place here. What company would chip in $13 or $14 when their worker would be paid the same if they instead chipped in $11.60 (the current minimum wage)? We might get around this by making subsidization depend on the number of workers you employ (although this will tend towards monopolization and give the big retail giants quite an advantage) or their low productivity (but this has terrible incentives).

We still don’t know if the minimum wage hike will result in lost jobs. It’s also an open question how much we should (at a policy level) be aiming for full employment. But raising the minimum wage is a massive, $9 billion undertaking. Who pays for it (and if it happens at all) is deeply tied into questions about fairness, dignity, good governance and regressiveness. The least regressive way to do it is probably via subsidies; unfortunately, subsidies are the most corruptible of all options.

I previously mentioned the guaranteed basic income. My crude calculations give a (no doubt slightly high) estimate of $37 billion [7] for a GBI in Ontario, much higher than I’ve seen in the estimates from proponents. I’m personally worried that a GBI would be absorbed into raised rents [8], another example of a treadmill effect.

Economics policy is difficult enough as a scientific discipline. But tied up in ancillary questions (like “what is fair?”) as it is, it is uniquely susceptible to corruption by what people wish, rather than what is true [9]. When it can’t be corrupted, it is often ignored. Public policy has a cost. Resources are still limited. For every dollar spent, there must be a dollar raised (if not now, then eventually).

When we focus only on what we feel is fair or justified and not on what is achievable, we aren’t doing anyone any favours. Raising the minimum wage to $15/hour might cause job losses or spiralling inflation, or it might require subsidies and tax raises. These aren’t the consequences of greedy corporations. They’re the predictable results of people making reasonable decisions in a massively complicated system.

Disturb it at your own peril.


[1] Failure (to me) means increased unemployment. A decrease in labour force participation would probably represent a return to single income families, unless preceded by high unemployment of the sort that drives people to give up looking for work. There’s also the failure mode of “causes spiralling inflation”, but that seems more likely to end the whole experiment prematurely. ^

[2] Unanswered questions I still have about a guaranteed minimum income include: “how can we pay for?”, “are you sure it won’t cause massive inflation in rents?”, and “no seriously, just saying it was fine when the Fed did QE isn’t good enough! Why won’t all that money chasing the same desirable housing cause the housing to become more expensive?” ^

[3] It’s weird to see the left capitulating here and more or less agreeing that a person’s value is at all tied to their wage. I think it’s important to strongly reject all attempts to link the intrinsic human value of a person with their economic value. Economic value maps to supply and demand, not intrinsic worthiness, so it’s an inherently fragile thing to base any moral worth on. ^

[4] It also makes a horrendous false equivalence between worker pay and CEO pay. Walmart’s CEO makes $21.8 million. Walmart has 2.3 million “associates”. Let’s say they average 20 hours per week, 50 weeks per year, for 2.3 billion employee hours per year. Removing the CEO’s salary would free up enough cash to pay the workers one extra cent per hour ($10/year). CEO salaries are a very tiny drop in the bucket compared to total compensation for companies with huge workforces. ^

[5] 1.7 million people make less than $15/hour. Assume they all make $11.60/hour, that they all work 40 hour weeks, 50 weeks a year and we end up with $11.6 billion. Since all of these are overestimates, this gives us an upper bound. $9 billion is my guess at a more realistic number. ^

[6] Here’s my calculations, based on the really excellent Statistics Canada data available here. I’ve made some simplifying assumptions (e.g. that everyone in each bracket makes the exact centre value of the bracket, that higher taxes won’t make people look for more ways to avoid them), but this should be broadly accurate. If you want to play around with the workbook, leave a comment with your email address and I’ll send it your way.

Note that “Total Revenue”, “Total Tax”, and “Tax as percent of income” are calculated by adding the “Tax at Midpoint” value to the “Taxes For Entire Bracket” values for all previous brackets. This is how the taxman does it. ^

[7] Calculations:

Not pictured: any adjustment for the percent of people who are married. The simplest approach (50% of Ontarians are married and couples receive 30% less, so the cost should be 15% lower) brings the cost down to a “mere” $37 billion. This is the cost I quote above. ^

[8] Rent control is the only possible solution, but it might be worse than what it seeks to cure. The economist Assar Lindbeck claimed that “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” This was falsified by communist Vietnam, according to a speech by its onetime foreign minister: “The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy”. ^

[9] On all sides. For every Bernie bro convinced we need socialism right now, there’s someone who believes in the explicitly anti-empirical assertions of the Austrian School. ^

Model, Politics

To have lobbyists on your side

There is perennial debate in Canada about whether we should allow a “two-tiered” healthcare system. The debate is a bit confusing – by many measures we already have a two-tiered system, with private clinics and private insurance – but ultimately hinges on the ability of doctors to mix fees. Currently it is illegal for a doctor to charge anything on top of the provincially mandated fee structure. If the province is willing to pay $3,000 for a procedure, you cannot charge $5,000 and ask your patients (or their insurance) to make up the difference.

Supporters of a mixed system argue that it will alleviate wait times for everyone. Detractors argue that it will create a cumbersome, unfair system and paradoxically increase wait times. It’s enough to convince me that I don’t know what the fuck a two-tier healthcare system would have as its first order effects.

But I oppose it because I’m pretty sure I know what the second order effects would be.

It is a truth universally acknowledged that an industry, temporarily in possession of good fortune, must be in want of a really good lobbyist to make that possession permeant.

This is how we end up with incredibly detailed tax and regulatory law. There are a whole bunch of exceptions and special cases, vigourously lobbied for by special interest groups. These make us all a bit worse off, but each exception makes a certain person or small group of people very much better off. They care far more about preserving their loophole or unfair advantage than we do about getting rid of it, so each petty annoyance persists. Except, the annoyances aren’t so petty anymore when there are hundreds or thousands of them.

I dearly don’t want to add any more “petty” annoyances to healthcare.

As soon as we allow doctors to mix public funding with direct payments from patients or insurance, we’ll unleash a storm of lobbying. Everything from favourable tax treatment for clinics (we don’t charge HST on provincial care, it’s unfair to charge it on their added fees!) to tax breaks for insurance, to inflated fees for private clinics to handle some public cases will be on the table.

If the lobbyists do their job well, the private system will perch like a mosquito on the public system, sucking tax dollars from the public purse and using them to subsidize private care. This offends me on a visceral level, sure. But it’s also bad policy. Healthcare costs are already outpacing general inflation; we should not risk throwing fuel on that fire. We might end up with having the same sort of cost disease as America.

If we can keep healthcare relatively simple, we can keep it relatively cheap. One of the most pernicious things about cost disease is that it mainly affects things the government pays for. Because of this, the government has to collect more and more tax dollars just to provide the same level of service. As long as healthcare, education, and real estate are getting more expensive in real (inflation adjusted terms), we have to choose between raising taxes or making do with less service. When there are two systems, it’s clear that the users of the private system (and their lobbyists) would prefer decreased public services to increased taxes.

When there is only the public system, we force the lion’s share of those who plan to lobby for better care to lobby for better care in the public system [1]. This is true not just in healthcare; private schools are uncommon in most Canadian provinces. Want better school for your children? Try and improve the public schools.

There is always option to lobby for subsidies for private systems, but this has generally been unproductive when the public system is effective and entrenched. Two-tiered healthcare is back in the news because of a court case, not because any provincial government is committing political suicide by suggesting it. When it comes to schools, offering to subsidize private schools may have played a role in dooming John Tory’s bid for the premiership of Ontario in 2007.

I wonder if there isn’t some sort of critical mass thing that can happen. When the public system (be it healthcare, education, or anything else) is generally good, all but the wealthiest will use it. The few who use private systems won’t have the lobbying clout to bring about any specific advantages for their system, so there will be a stable equilibrium. Most people will use the public system and oppose changes to it, while the few who don’t won’t waste their time lobbying for changes (given the lack of any appetite for changes among the broader public).

If the public system gets substantially worse, those with the means to will leave the public system for the private. This would explain why generally liberal B.C. (with its decade of nasty labour disputes between the government and teachers) has much higher enrollment in private schools than in conservative and free-market-worshipping Alberta (which has poured decades of oil money largesse into its schools) [2].

Of course, the more people that use the private system, the more lobbying clout it gains. This model would predict that B.C. will begin to see substantial government concessions to private schools (although this could be confounded if the recent regime change proves durable). This model would also predict that if we open even a small crack in the unified public healthcare system, we’ll quickly see a private system emerge which will immediately lobby to be underwritten with public dollars.

From this point of view, one of the best things about public systems is that they force the best off to lobby for the worst off. Catch-all public systems yoke the interests of broad parts of society together, increasing access to important services.

If this model is true, then getting healthcare and education right are just the table stakes. It is vitally important that the provinces institute uniform rules and subsidies for embryo selection and future genetic engineering technologies. Because if they don’t, then in the words of Professor Jennifer Doudna, we will “transcribe our societies’ financial inequality into our genetic code”.

Both IVF and genetic screening are becoming easier and quicker. According to Gwern, it’s already likely a net positive to screen embryos for traits associated with higher later earnings (he lists seven currently screenable traits: IQ, height, BMI, and lack of diabetes, ADHD, bipolar disorder, and schizophrenia), with a net lifetime payoff estimated at $14,653 [3]. Unfortunately, this payoff is only available to parents who can afford the IVF and the screening.

Recently, Ontario began covering one round of IVF for couples unable to conceive. This specifically doesn’t include any genetic testing or pre-implantation diagnosis, which means that if we see a drop in heritable genetic diseases in the next generation, that drop will only be among the better off. Hell, even though Ontario already “covers” one round of IVF, they don’t cover any of the necessary fertility drugs, which means that IVF costs about $5,000 out of pocket. This is already outside the reach of many Ontarians.

Not a lot of people are running analyses like Gwern’s. Yet. We still have time to fix the coverage gap for IVF and put in place a publicly funded embryo selection program. If we wait too long here, we’ll be caught flat footed. The most effective way for rich people to get the reproductive services they will want wouldl be by lobbying for tax breaks and help for their private system, not for the improvement of a good-enough public system.

There’s a risk here of course. IVF isn’t particularly fun. It might be that the people with the longest time horizons (who are perhaps likely to be advantaged in other ways) will be the only ones who would use a public embryo selection system. This would have the effect of subsidizing embryo selection for whichever groups have the longest time horizons and the most ability to endure short-term discomfort for long term payoff.

But anything less than a public option on embryo selection makes entrenching social divides as genetic divides almost inevitable. We could ban all non-medical embryo selection, which, as Gwern points out, would just move it to China. Or Singapore [4]. Or even America. This would shrink the problem, in that fewer people would have access to embryo selection, but wouldn’t stop it altogether.

Embryo selection is just the beginning here too. Soon enough, we’ll see treatments for genetic diseases using CRISPR. Hot on the heels of that, we’ll see enhancements. Well, we ostensibly won’t in Canada, at least without some amendments to the Assisted Human Reproduction Act [5], which bans changes to the DNA of germline cells. I say “ostensibly” because it’s the height of naivety to assume that you can end demand simply by banning something, but then, that’s Canada for you.

The advent of CRISPR should usher in a sudden surge in genetically engineered humans. Parents will optimize for intelligence, height, and lower disease risk/load. It will be legal somewhere and therefore some Canadians will do it. If we have a legal, public system in Canada, then it will be available to anyone who wants it. If we don’t, then it will become very hard for the children of normal Canadians to compete with the children of our elites.

Throughout this post, I’ve assumed cost is no object. That’s probably a bad assumption. We’re talking about horrendously expensive voluntary medical procedures here. Gwern gives the cost of an IVF cycle with embryo selection at $22,000. There are 393,000 babies born in Canada every year. If this technology was both subsidized and adopted by 10% of all parents seeking to conceive, the total cost would be something like $864 million, or an increase in total healthcare spending of about 0.4%. Given that healthcare spending is allowed to grow by 3% per year, this would eat up more than 10% of the total yearly increase.

I’m not holding my breath for that sort of new spending on reproductive medicine. A more practical system would probably be a lottery, with enough spots for 1% of prospective parents. That has a more reasonable price tag of $86.4 million. While they’re at it, the government could start paying surrogates, egg donors, and sperm donors and institute a similar lottery there. I can dream about Canada having a functional fertility services industry, right?

A lottery isn’t my preferred solutions. Wealthy people who put their name in and aren’t drawn will still go elsewhere. But it could help with the lobbying problem. A lottery establishes a plausible path towards a broader system, which people would at least consider lobbying to expand. It won’t capture everyone. It might not even capture a majority. But if an expanded public system is the most palatable system politically, it might just win in the long run.

If you take just one thing from this post, I want it to be “it’s really important to have good public systems, so that lobbying effort is focused on improving those systems”. If you have room in your mind for another, it should be “having a public embryo selection and genetic engineering program in place is very important if we don’t want to social stratification to become much more permanent”.

Epistemic Status: Model


[1] In this post, I’m talking about industries where there is either a clear need to serve the public good, a market failure, or both. In these cases, “use markets to lower prices and increase services” is an unappealing alternative. ^

[2] This would also predict that America, with its cluster-fuck of a public school system would have generally higher rates of private schooling than neighbouring (and better performing on standardized tests) Canada. This is true – ten percent of American children are in private schools, compared to eight percent of Canadians. I think there is a smaller gap between the two then there otherwise might be, due to the extreme heterogeneity of American schooling. That is to say that Canadian public schools might be better than American public schools on average, but everything I’ve heard suggests that the standard deviation is much higher in America. Well off students going to good public schools may account for why America’s private school enrollment isn’t higher. ^

[3] This number will get higher and higher as we better understand the genetic determinants of IQ. ^

[4] Singapore has a history of hosting the biotech advances the west finds distasteful^

[5] This bill could perhaps be more truthfully be called the No Assisted Human Reproduction Act. In addition to banning germline genetic engineering, it also bans any paid surrogacy, egg donation, or sperm donation. This had the predictable effect of inconveniencing the wealthy not at all, while making it impossible for anyone else to find any surrogates, egg donors, or anonymous sperm donors. With a side-helping of encouraging surrogacy in countries where surrogates have the fewest legal protection (remember, my whole thesis here is that if you don’t give people a good pro-social option, they often optimize for maximum personal gain). ^

Economics, Politics

Whose Minimum Wage?

[Epistemic Status: I am not an economist, but…]

ETA (December 2017): Preliminary studies from Seattle make me much more pessimistic about the effects of the Ontario minimum wage hike. In addition, this post is lacking a discussion of “sticky wages” and how they may be a big problem with a minimum wage that is indexed to inflation. I’d like to write about that sometime in 2018. 

There’s something missing from the discussion about the $15/hour minimum wage in Ontario, something basically every news organization has failed to pick up on. I’d have missed it too, except that a chance connection to a recent blog post I’d read sent me down the right rabbit hole. I’ve climbed out on the back of a mound of government statistics and I really want to share what I’ve found.


Reading through the coverage of the proposed $15/hour minimum wage, I was reminded that the Ontario minimum wage is currently indexed to inflation. Before #FightFor15 really took off, indexing the minimum wage to inflation was the standard progressive minimum wage platform (as evidenced by Obama calling for it in 2013). Ontario is actually aiming for the best of both worlds; the new $15/hour minimum wage will be indexed to inflation. The hope is that it will continue to have the same purchasing power long into the future.

In Canada, inflation is also called the “consumer price index” or CPI. The CPI is based on a standard basket of goods (i.e. a list that includes such things as “children’s sneakers” and “French fries, curly”), which Statistics Canada assesses the price of every few months. These prices are averaged, weighted, and compared to the previous year’s prices to get a single number. This number is periodically reset to 100 (most recently in 2002). The CPI for 2016 is 128.4; in 2016, it cost $128.40 to buy a basket of goods that cost $100.00 in 2002.

The problem with the CPI is that it’s just an average; when you look at what goes into it category by category, it becomes clear that “inflation” isn’t really a single number.

Here’s the last few years of the CPI, with some of the categories broken out:

Table Source: The Canadian Consumer Price Index Reference Paper > Summary Tables; click the table to view the data in Google Sheets.

Every row in this table that is shaded green has decreased in price since 2002. Rows that are shaded blue have increased in price, but have increased slower than the rate of inflation. Economists would say that they’ve increased in price in nominal (unadjusted for inflation) terms, but they’ve decreased in price in real (adjusted for inflation) terms. Real prices are important, because they show how prices are changing relative to other goods on the market. As the real value of goods and services change, so too does the fraction of each paycheque that people spend on them.

The red, yellow, and orange rows represent categories that have increased in price faster than the general rate of inflation. These categories of goods and services are becoming more expensive in both real and nominal terms.

There’s no other way to look at the CPI that shows variation as large as that between categories. When you break it down by major city, the CPI for 2016 varies from 120.7 (Victoria, BC) to 135.6 (Calgary, AB). When you break it down by province, you see basically the same thing, with the CPI varying from 122.4 in BC to 135.2 in Alberta.

Looking at this chart, you can see that electronics (“Home Entertainment”) have become 45% cheaper in nominal (unadjusted for inflation) terms and a whopping 58% cheaper in real (adjusted for inflation) terms. Basically, electronics have never been less expensive.

On the other hand, you have education, which has become 60.8% more expensive in nominal terms and 25% more expensive in real terms. It costing more and more to get an education, in a way that can’t just be explained by “inflation”.

Three of the four categories with the biggest increases in prices rely on the labour of responsible people. The fourth is tobacco; prices increases there are probably driven by increased taxation and its position is a bit of a red herring. It’s potentially worrying that the categories where things are getting cheaper (e.g. electronics, clothes) are in the industries that are most amenable to automation. This might imply that tasks that cannot be automated are doomed to become increasingly expensive [1].


I’m certainly not the first person to make the observation that “inflation” isn’t a single number. Economists have presumably known this forever, related as it is to the important economics concept of “cost disease“. More recently, you can see this point made from two different directions in Scott Alexander’s “Considerations on Cost Disease” (which tries to get to the bottom of the price increases in healthcare and education) and Andrew Potter’s “The age of anti-consumerism has passed” (which looks at the societal changes wrought by many consumer goods becoming much cheaper). As far as I know, no one has yet tied this observation to the discussion surrounding the new Ontario minimum wage.

Like I said above, the new minimum wage will still be indexed to inflation; the “$15/hour” minimum wage won’t stay at $15/hour. If inflation follows current trends (this is a terrible assumption but it’s all I’ve got), it will rise by about 1.5% per year. In 2020 it will be (again, bad extrapolation alert) $15.25 and in 2021 it will be $15.50.

Extrapolating backwards, the current Ontario minimum wage ($11.40/hour) was equivalent to $8.88/hour in 2002 (when the CPI was last reset). If instead of tracking inflation generally, the minimum wage had tracked electronics, it would be $4.84 today. If it tracked education, it would be $14.28. Next year, the minimum wage will be $14/hour (it will take until 2019 for the $15/hour wage to be fully phased in), which will make 2018 the first time that students working minimum wage are getting paychecks that will have increased as much as the cost of education.

This won’t last of course. The divergence in prices shows no signs of decreasing. The CPI will continue to climb upwards at a steady rate (the target is 2%, last year it only rose 1.4%), buoyed up by large increases in education costs (2.8% last year) and held down by steady decreases in the price of electronics (-1.6% last year). Imagine that the $15/hour minimum wage allows a student to pay a year’s tuition with a summer’s worth of work. If current trends continue, in 15 years, it would only cover 75% of tuition. Fifteen years after that it would cover about 60%.


There’s a funny thing about these numbers. The stuff that’s getting more expensive more quickly is largely stuff that younger people have to pay for. If you’re 50, have more or less raised your kids, and own a house, then you’re golden even if you’re working a minimum wage job (although by this point, you probably aren’t). Assuming your wage has increased with inflation over your working lifetime, a lot of the things you’re looking to buy (travel, electronics, medical devices) will be getting cheaper relative to what you make. Healthcare service costs (e.g. the cost of seeing a doctor) might be increasing for you in theory, but in practice OHIP has you covered for all your doctor’s visits [2].

It’s younger people who are really shafted. First, they’re more likely to be earning minimum wage, with nearly 60% of minimum wage earners in Canada in the 15 to 24 age bracket. Second, the sorts of things that younger people need or aspire to (education, childcare, home ownership) are big ticket items that are increasing in cost above the rate of inflation. Like with the tuition example above, childcare and home ownership are going to slip out of the grasp of young workers even if you index their wage to inflation.

I happen to like the idea of a $15/hour minimum wage. There’s a lot of disagreement among economists as to whether they’ll be ill effects, but this meta-analysis (complete with funnel plot!) has me more or less convinced that the economy will do just fine [3]. Given that Ontario will still have an economy post wage-hike, I think increasing the minimum wage will be good for workers.

But a minimum wage increase leaves the larger problem of differing rates of inflation unsolved. Even with a minimum wage indexed to inflation, we’re going to have people waking up twenty-five years from now, realizing that their minimum wage job doesn’t pay for university/food/utilities/childcare/transit the same way their parents’ minimum wage job did. This will be a problem.

I’m game to kick the can down the road for a bit if it means we can make the lives of minimum wage workers better right now. But until we’ve solved this problem for good, it will keep coming back [4].


[1] I’m not sure this is exactly a bad thing, per se. Money is a means of signalling that you’d like your preferences satisfied. It becoming more expensive to pay actual humans to do things could mean that actual humans have so many good options that they’re only going to waste their time satisfying your preferences if you really make it worth their while. Looked at this way, this means we’re steadily freeing ourselves from work.

On the other hand, this seems to apply mainly to responsible/competent/intelligent people and not everyone is responsible/competent/intelligent, so this could also imply that we have a looming crisis, with a huge number of people simply becoming economically unnecessary. This is really bad, because high-quality life should be possible for everyone, not just those who’ve lucked into economically valuable traits and under capitalism it is really hard to have a high-quality life if you aren’t economically valuable. ^

[2] For readers outside of Ontario, OHIP is the Ontario Health Insurance Plan. It covers all hospital and clinic care for all legal residents of Ontario, as well as dental and ophthalmological care for minors. OHIP is a non-actuarial insurance program; premiums come from provincial income tax and payroll tax revenues, as well as transfer payments of federal tax revenues. All Ontarians enrolled in OHIP (i.e. basically all of us) have a health card which allows us to access all covered services free of charge (beyond the taxes we’ve already paid) any time we want to. ^

[3] No effect on the unemployment rate does not mean no effect on the employment of individual people. A $15/hour minimum wage will probably tempt some people back into the labour force (I’m thinking here that this will mostly be women), while excluding others whose labour would not be valued that highly (unfortunately this will probably hit people with certain mental illnesses or disabilities the hardest). ^

[4] I think it’s especially pernicious how the difference in inflation rates between types of goods is kind of by default a source of inter-generational strife. First, it makes it more difficult for each succeeding generation to hit the same landmarks that defined adulthood and independence for the previous generation (e.g. home ownership, education, having children), with all the terrible think-pieces, conflict-ridden Thanksgiving dinners, and crushed dreams this implies. Second, it can pit the economic interests of generations against each other; healthcare for older people is subsidized by premiums from younger ones, while the increase in the cost of homes benefit existing players (who skew older) to the determinant of new market entrants (who skew younger). ^