“WHY DO PEOPLE STILL ADVOCATE THIS?!”
The question was a great one. It gave us an opportunity to discuss how the incentives faced by policymakers may mean economically detrimental policies persist. But the student’s question got me thinking. Every year on campus there are always students staging some kind of demonstration. Sometimes it’s as innocuous as signing people up for a social club or organizing a sporting event. Other times, it’s a direct assault on what a university campus should be, a place where students can be free to express and explore ideas, a place where students are exposed to different kinds of people and new ways of thinking.
This second kind of activity is happening all across the country. From establishing “free speech zones” on college campuses, to school officials seizing Hanukkah candles from a student’s dorm because of a supposed “fire hazard” (note students were allowed to smoke in the same dorm), there is a disturbing trend of limiting liberties on college campuses. What’s more worrisome is that it’s not just political actors who advocate such polices, but students.
The question to ask is why? When there is no clear incentive for a person to advocate a particular policy, how do we answer this question? In one of my favorite papers, the late Nobel Laureate James Buchanan argued that individuals will continue to advocate for policies that reduce prosperity, cripple civil liberties, and grow the size of government. The reason—people are afraid to be free. He states,
[T]he attitude here is akin to that of the child who seeks the cocoon-like protection of its parents, and who may enjoy its liberty, but only within the limits defined by the range of such protection. The mother or father will catch the child if it falls, will bandage its cuts.... Knowledge that these things will be done provides the child with a sense of order in its universe, with elements of predictability in uncertain aspects of the environment.
[T]he state—steps in and relieves the individual of his responsibility as an independently choosing and acting adult. In exchange, of course, the state reduces the liberty of the individual to act as he might choose.
In discussing many current policy issues, from unemployment benefits, to healthcare, to education, to public prayer, there are really two courses of action. One course allows people the liberty to choose for themselves, to do as they will and not impose their preferences on others. The other option relegates these decisions into the hands of supposedly benevolent bureaucratic actors. In some cases, removing responsibility from individuals may sound appealing. But it is important to remember that such a decision involves costs. In many cases, the cost may be our individual liberties.
In my courses I aim to challenge my students. I want them to question their prior assumptions so they can critically examine the world around them. I encourage them to recognize that there are a variety of obvious and hidden costs to any policy, what Bastiat referred to as “what is seen and what is not seen.” College students should be lots of things. They should be curious, and question, and explore. They should pursue new passions and discover what the world has to offer. But there are things students shouldn’t do. I try to convince them they shouldn’t put off their homework until an hour before it’s due. They shouldn’t allow someone else to chart their course. They shouldn’t let someone else make their decisions. They shouldn’t be afraid to be free.
Friday, September 19, 2014
Thursday, September 18, 2014
I recently came across a link on Facebook to a claim that "Over Half of all Statements Made on Fox News are False," based on a story in theTampa Bay Times' PunditFact. My first reaction was that I had no more reason to trust the Tampa Bay Times than to trust Fox, making the story pure partisan assertion, so I followed the link to see what support it offered. To their credit, they listed the statements on Fox that they based their claim on and provided the basis for their conclusions. But looking at them in detail, their evaluation was clearly biased in favor of what they wanted to believe.
The clearest case was one where they said a claim they liked was mostly true when, on their evidence, it was false. The claim was: The people who want President Barack Obama impeached "are all white, they're all older, and guess what, they're in the far right wing of the Republican Party." According to the poll information they cited, about 33 percent of the public wanted Obama impeached. There is no way that older whites in the far right wing of the Republican party could make up anything close to 33 percent of the public. According to the poll information, about 17% of non-whites wanted Obama impeached—a lower percentage than of whites, but quite a lot more than zero. The statement should have been rated as mostly false.
To their credit, PunditFact takes advantage of the opportunity provided by hypertext to provide detailed explanations of their ratings. Looking at those explanations, I conclude that:
1. PunditFact interprets disagreement with them and the experts they choose to consult as either false or mostly false.
2. PunditFact judges statements they like not by whether they are actually true but by whether a much weaker claim along similar lines is. Thus they implicitly convert "they're all white, they're all older, and guess what, they're in the far right wing of the Republican Party," a claim that is clearly false, into "people who are white, older, and right wing Republicans are more likely to want Obama impeached than people who are not," and then judge it mostly true.
They take the opposite approach to statements they don't like. Converting what Dobbs actually said to "Because of President Barack Obama’s failure to "push job creation" I would rate as "pants on fire"—a flat lie by PunditFact.
Wednesday, September 17, 2014
The Law of Demand and the minimum wage: It applies to number of hours worked, not the level of employment | AEIdeas
The Law of Demand and the minimum wage: It applies to number of hours worked, not the level of employment | AEIdeas
Let me attempt to reconcile the apparent inconsistency between: a) economic theory, which clearly predicts a negative relationship between the minimum wage and the quantity of unskilled workers demanded by employers, and b) some of the empirical evidence that finds no negative employment effects following minimum wage hikes. Here’s the key point: The negative relationship predicted by economic theory is not: a) between minimum wage hikes and the number of unskilled workers employed, but b) between minimum wage hikes and thenumber of unskilled work demanded by employers.The two charts above help to illustrate that difference:
In the top chart, we see a negative relationship between an increase in the minimum wage and the number of hours of unskilled work demanded by employers in the 12-month period following the increase in the hourly price of unskilled labor (to capture the effects on future hiring). Like an increase in the cost of any other labor input or other input like food, energy, raw materials, machinery, equipment rental, or building rent, employers facing a 39% increase in the cost of unskilled labor (from $7.25 to $10.10 an hour) would have no other choice than to reduce the number of unskilled work hours – it would simply be a necessary strategy for survival. As I pointed out recently, a minimum wage increase to $10.10 per hour would be the equivalent to an annual tax of more than $6,000 per full-time worker earning the minimum wage.
The various strategies employers might use to reduce their demand for unskilled work hours over the 12-month period following a 39% minimum wage hike might include: a) reducing the number of hours worked per week by entry-level unskilled workers, e.g. cutting their hours from 40 to 30 per week, or from 30 to 20, etc., b) reducing the number of unskilled workers currently employed through layoffs, c) reducing the number of unskilled workers that employers might have previously been planning on adding to staffing levels in the future, d) substituting skilled workers for the now relatively more expensive unskilled workers, and e) investing in technologies that would substitute automation, mechanization, robotics, and self-serve options for unskilled workers. Although the effect of a 39% minimum wage hike on employment levels might be uncertain, the negative effect on the number of hours of unskilled labor demanded by employers would be much more certain and predictable according to the Law of Demand. The bottom chart shows graphically how it would be possible that an increase in the minimum wage might not adversely affect the number of unskilled workers employed by looking at the relationship between the average weekly compensation for unskilled workers (and not the hourly monetary wage) and the number of unskilled workers.
Suppose that employers realistically respond to a 39% increase in the minimum wage by: a) cutting hours for minimum wage employees and b) reducing or eliminating non-monetary forms of compensation that might include free or reduced cost food, merchandise, uniforms or parking, bonuses/profit-sharing, educational reimbursement, paid holidays and company parties/picnics, health care benefits, etc. Following a reduction in hours and non-monetary benefits, the average compensation per minimum wage employee might be unchanged, as could be the number of workers employed at the minimum wage. That is, if the employer can completely offset the monetary increase in the minimum wage by a reduction in hours and fringe benefits, there will be no need to reduce overall staffing levels. In that case, empirical evidence may find no negative relationship between increases in the minimum wage and employment levels, even when there’s a predictable and negative effect on the number of hours of unskilled work demanded by employers.Bottom Line: It’s more accurate to say that the Law of Demand predicts: a) a negative relationship between higher wages and the number of hours of unskilled work demanded by employers, rather than b) a negative relationship between higher wages and the number of unskilled workers employed. Therefore, it’s possible that a minimum wage hike won’t always negatively affect employment levels for entry-level unskilled workers, but will affect thenumber of hours demanded by employers for unskilled labor. That’s how we can reconcile the apparent inconsistency between economic theory and some of the empirical evidence…..
Critics of “industrial farming” spend most of their time concerned with the processes by which food is raised. This is because the results of organic production are so, well, troublesome. With the subtraction of every “unnatural” additive, molds, fungus, and bugs increase. Since it is difficult to sell a religion with so many readily quantifiable bad results, the trusty family farmer has to be thrown into the breach, saving the whole organic movement by his saintly presence, chewing on his straw, plodding along, at one with his environment, his community, his neighborhood. Except that some of the largest farms in the country are organic—and are giant organizations dependent upon lots of hired stoop labor doing the most backbreaking of tasks in order to save the sensitive conscience of my fellow passenger the merest whiff of pesticide contamination. They do not spend much time talking about that at the Whole Foods store.
The most delicious irony is this: the parts of farming that are the most “industrial” are the most likely to be owned by the kind of family farmers that elicit such a positive response from the consumer. Corn farms are almost all owned and managed by small family farmers. But corn farmers salivate at the thought of one more biotech breakthrough, use vast amounts of energy to increase production, and raise large quantities of an indistinguishable commodity to sell to huge corporations that turn that corn into thousands of industrial products.
We Can’t Change Nature
The largest producer of pigs in the United States has promised to gradually end the use of hog crates. The Humane Society promises to take their initiative drive to outlaw farrowing crates and poultry cages to more states. Many of the counties in my own state of Missouri have chosen to outlaw the the building of confinement facilities. Barack Obama has been harshly critical of animal agriculture. We are clearly in the process of deciding that we will not continue to raise animals the way we do now. Because other countries may not share our sensibilities, we'll have to withdraw or amend free trade agreements to keep any semblance of a livestock industry.
We can do that, and we may be a better society for it, but we can't change nature. Pigs will be allowed to "return to their mire," as Kipling had it, but they'll also be crushed and eaten by their mothers. Chickens will provide lunch to any number of predators, and some number of chickens will die as flocks establish their pecking order.
The Omnivores’ Delusions
Michael Pollan, in an 8,000-word essay in the New York Times Magazine, . But his truly radical prescriptions had to do with raising of crops. Pollan, who seemed to be aware of the nitrogen problem in his book , left nuance behind, as well as the laws of chemistry, in his recommendations. The nitrogen problem is this: without nitrogen, we do not have life. Until we learned to produce nitrogen from natural gas early in the last century, the only way to get nitrogen was through nitrogen produced by plants called legumes, or from small amounts of nitrogen that are produced by lightning strikes. The amount of life the earth could support was limited by the amount of nitrogen available for crop production.
In his book, Pollan quotes geographer Vaclav Smil to the effect that 40 percent of the people alive today would not be alive without the ability to artificially synthesize nitrogen. But in his directive on food policy, Pollan damns agriculture's dependence on fossil fuels, and urges the president to encourage agriculture to move away from expensive and declining supplies of natural gas toward the unlimited sunshine that supported life, and agriculture, as recently as the 1940s. Now, why didn't I think of that?
Well, I did. I've raised clover and alfalfa for the nitrogen they produce, and half the time my land is planted to soybeans, another nitrogen producing legume. Pollan writes as if all of his ideas are new, but my father tells of agriculture extension meetings in the late 1950s entitled "Clover and Corn, the Road to Profitability." Farmers know that organic farming was the default position of agriculture for thousands of years, years when hunger was just around the corner for even advanced societies. I use all the animal manure available to me, and do everything I can to reduce the amount of commercial fertilizers I use. When corn genetically modified to use nitrogen more efficiently enters the market, as it soon will, I will use it as well. But none of those things will completely replace commercial fertilizer.
Norman Borlaug, founder of the green revolution, estimates that the amount of nitrogen available naturally would only support a worldwide population of 4 billion souls or so. He further remarks that we would need another 5 billion cows to produce enough manure to fertilize our present crops with "natural" fertilizer. That would play havoc with global warming. And cows do not produce nitrogen from the air, but only from the forages they eat, so to produce more manure we will have to plant more forages. Most of the critics of industrial farming maintain the contradictory positions that we should increase the use of manure as a fertilizer, and decrease our consumption of meat. Pollan would solve the problem with cover crops, planted after the corn crop is harvested, and with mandatory composting. Pollan should talk to some actual farmers before he presumes to advise a president.
Pollan tells of flying over the upper Midwest in the winter, and seeing the black, fallow soil. I suppose one sees what one wants to see, but we have not had the kind of tillage implement on our farm that would produce black soil in nearly 20 years. Pollan would provide our nitrogen by planting those black fields to nitrogen-producing cover crops after the cash crops are harvested. This is a fine plan, one that farmers have known about for generations. And sometimes it would even work. But not last year, as we finished harvest in November in a freezing rain. It is hard to think of a legume that would have done its thing between then and corn planting time. Plants do not grow very well in freezing weather, a fact that would evidently surprise Pollan.
And even if we could have gotten a legume established last fall, it would not have fixed any nitrogen before planting time. We used to plant corn in late May, plowing down our green manure and killing the first flush of weeds. But that meant the corn would enter its crucial growing period during the hottest, driest parts of the summer, and that soil erosion would be increased because the land was bare during drenching spring rains. Now we plant in early April, best utilizing our spring rains, and ensuring that pollination occurs before the dog days of August.
A few other problems come to mind. The last time I planted a cover crop, the clover provided a perfect habitat in early spring for bugs, bugs that I had to kill with an insecticide. We do not normally apply insecticides, but we did that year. Of course, you can provide nitrogen with legumes by using a longer crop rotation, growing clover one year and corn the next. But that uses twice as much water to produce a corn crop, and takes twice as much land to produce the same number of bushels. We are producing twice the food we did in 1960 on less land, and commercial nitrogen is one of the main reasons why. It may be that we decide we would rather spend land and water than energy, but Pollan never mentions that we are faced with that choice.
His other grand idea is mandatory household composting, with the compost delivered to farmers free of charge. Why not? Compost is a valuable soil amendment, and if somebody else is paying to deliver it to my farm, then bring it on. But it will not do much to solve the nitrogen problem. Household compost has somewhere between 1 and 5 percent nitrogen, and not all that nitrogen is available to crops the first year. Presently, we are applying about 150 pounds of nitrogen per acre to corn, and crediting about 40 pounds per acre from the preceding years soybean crop. Let's assume a 5 percent nitrogen rate, or about 100 pounds of nitrogen per ton of compost. That would require 3,000 pounds of compost per acre. Or about 150,000 tons for the corn raised in our county. The average truck carries about 20 tons. Picture 7,500 trucks traveling from New York City to our small county here in the Midwest, delivering compost. Five million truckloads to fertilize the country's corn crop. Now, that would be a carbon footprint!
Pollan thinks farmers use commercial fertilizer because it is easier, and because it is cheap. Pollan is right. But those are perfectly defensible reasons. Nitrogen quadrupled in price over the last several years, and farmers are still using it, albeit more cautiously. We are using GPS monitors on all of our equipment to ensure that we do not use too much, and our production of corn per pound of nitrogen is rapidly increasing. On our farm, we have increased yields about 50 percent during my career, while applying about the same amount of nitrogen we did when I began farming. That fortunate trend will increase even faster with the advent of new GMO hybrids. But as much as Pollan might desire it, even President Obama cannot reshuffle the chemical deck that nature has dealt. Energy may well get much more expensive, and peak oil production may have been reached. But food production will have a claim on fossil fuels long after we have learned how to use renewables and nuclear power to handle many of our other energy needs.
Monday, September 15, 2014
Dear Ultra-Rich Man : The Freeman : Foundation for Economic Education
You probably don’t know me, but unlike you, I am one of the 99 percent, a proud and unapologetic advocate of free and open markets. I’m writing you because your letter to other rich guys has gone viral. Each time I saw it, I thought, “Somebody should respond to this guy.” I got tired of waiting. So I hope you’ll read this. I leave your prose in italics so I can address your major points in turn.
You probably don’t know me, but like you I am one of those .01%ers, a proud and unapologetic capitalist.I admit I’m already suspicious. If you were a proud and unapologetic capitalist, I doubt you’d write the things you did. Now, maybe you’re an apologetic investor, or even an entrepreneur. But to my mind, a capitalist is one who understands and advocates for a system of free and open markets—as opposed to other economic systems—such as State capitalism, crony capitalism, mercantilism, or Keynesian interventionism. If by capitalist, you mean, “guy who likes to make money in business,” then great. I just want to make sure we’re not talking past each other.
I have been rewarded obscenely for my success, with a life that the other 99.99 percent of Americans can’t even imagine. Multiple homes, my own plane, etc., etc.Did you create something of value for people, or make it possible for people to get something of value in return? Did they willingly hand over what economist Walter Williams calls “certificates of performance”? Or did you take subsidies or lobby the government for competitive advantages? If the former, I certainly don’t begrudge you your airplane. If the latter, then you are a crony capitalist (crapitalist), or rent-seeker. There is a big difference.
I was so excited by the potential of the web that I told both Jeffs that I wanted to invest in whatever they launched, big time. It just happened that the second Jeff—Bezos—called me back first to take up my investment offer. So I helped underwrite his tiny start-up bookseller. The other Jeff started a web department store called Cybershop, but at a time when trust in Internet sales was still low, it was too early for his high-end online idea; people just weren’t yet ready to buy expensive goods without personally checking them out (unlike a basic commodity like books, which don’t vary in quality—Bezos’ great insight). Cybershop didn’t make it, just another dot-com bust. Amazon did somewhat better. Now I own a very large yacht.What if the other Jeff had called first? You might be living next door to me. The point is not that you were successful, but rather that—at that time—the capital you gave to either Jeff could not be used for any other purpose. As it happens, Jeff Bezos was a good steward of your capital. He has created value for hundreds of millions of people, so both you and he have since been rewarded for being good stewards of capital. Without either of you, there would have been no Amazon (and thus no Amazon Prime, which lets me watch good TV cheaper than cable).
What sets me apart, I think, is a tolerance for risk and an intuition about what will happen in the future. Seeing where things are headed is the essence of entrepreneurship. And what do I see in our future now? I see pitchforks.We might quibble about the essence of entrepreneurship. You get it partially right, at least. But if you see pitchforks, it’s only because egalitarian ideologues are spreading bad economic ideas and fomenting the worst instincts in people: cruder emotions such as envy. Yet the poorest quintile of Americans is wealthier and healthier than two-thirds of the entire world. We should not be brandishing pitchforks at you. We should keep on sending you our certificates of performance—if, that is, you keep satisfying our wants and needs, and solving our problems.
At the same time that people like you and me are thriving beyond the dreams of any plutocrats in history, the rest of the country—the 99.99 percent—is lagging far behind.Guess what? I, too, am thriving beyond the dreams of any plutocrats in history! Later, in this very letter, you admit that on the things that matter, there isn’t really much of a gap between us at all. You write, “I earn about 1,000 times the median American annually, but I don’t buy thousands of times more stuff. My family purchased three cars over the past few years, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men.” Looks to me like we’re pretty equal where it counts. Because when it comes to consumption power, we little guys also have it made, yachts notwithstanding. (You’re more likely to find me on a pontoon boat. That’s okay.) You leave those surpluses to be used as capital—hopefully by other able entrepreneurs.
The divide between the haves and have-nots is getting worse really, really fast. In 1980, the top 1 percent controlled about 8 percent of U.S. national income. The bottom 50 percent shared about 18 percent. Today the top 1 percent share about 20 percent; the bottom 50 percent, just 12 percent.Accepting this statement on its face: So what? These statistical abstractions tell us nothing about how well people live today compared with the past. The more important questions are: Compared to 1980, is any one of us more likely to have greater access to the goods and services we need to live a decent life? Can plebs like me get mobile devices we couldn’t in 1980? Are we living longer than in 1980? Can we buy food, shelter, pants, TVs, transportation—on a website? Is total compensation (including non-wage benefits) more than it was in 1980? (Yes, yes, yes, yes, and yes.)
Now, might any of this have to do with entrepreneurs and investors directing capital to productive uses?
According to Michael Shermer, writing in of all places, the American dream is not dead.
The top-fifth income earners in the U.S. increased their share of the national income from 43 percent in 1979 to 48 percent in 2010, and the top 1 percent increased their share of the pie from 8 percent in 1979 to 13 percent in 2010. But note what has not happened: the rest have not gotten poorer. They’ve gotten richer: the income of the other quintiles increased by 49, 37, 36 and 45 percent, respectively.
Not only that, but all quintiles have access to Netflix, Trader Joe’s, and mobile devices.
Now, there are desperately poor people out there. But worrying about what the desperately poor lack is very different from worrying about what the ultra-rich have. Surely guys like you can find creative solutions to helping the least advantaged without making them dependent on State largess, or without placing any more burdens on business.
Our country is rapidly becoming less a capitalist society and more a feudal society. Unless our policies change dramatically, the middle class will disappear, and we will be back to late 18th-century France. Before the revolution.This could be true, but not for the reasons you think. Again, there is a big difference between those who lobby politicians to transfer resources into their coffers through subsidies, regulations, and other political means and those who actually serve customers in order to make their lives better. The former should be called “crapitalists,” and there are way too many of them in the world. But crapitalism is a consequence of too much government power, power that ends up on auction. Such was the case in Rome, Paris, and Saint Petersburg. As long as poor people aren’t systematically excluded from entrepreneurial opportunities, the pitchforks will pitch hay.
(Note: Minimum wage laws can exclude poor people from opportunities.)
In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out. You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. It’s not if, it’s when.Sure there are counterexamples: Singapore. Hong Kong. Switzerland. These days the pitchforks are coming out in societies where the poor don’t have access to real property, collateral, and low-cost legal institutions that help them become upwardly mobile—places like Egypt, Brazil, and Turkey. (See the work of ). The pitchforks come out not when there is inequality of outcomes, but when political power is being sold to the highest bidder, or put differently, where political powers pick winners and losers and where business and government collude unfairly to become a “.” Pitchforks come out when the welfare well runs dry, as in Greece.
Many of us think we’re special because “this is America.” We think we’re immune to the same forces that started the Arab Spring—or the French and Russian revolutions, for that matter. I agree. We are certainly not immune to populist uprisings. But this is no justification for wealth redistribution or minimum wage hikes, which are likely—revolution or no—to make those with the pitchforks worse off than they would otherwise have been. "People don’t like that other people have gotten rich" is not an argument for confiscating wealth.
The model for us rich guys here should be Henry Ford, who realized that all his autoworkers in Michigan weren’t only cheap labor to be exploited; they were consumers, too. Ford figured that if he their wages, to a then-exorbitant $5 a day, they’d be able to afford his Model Ts. What a great idea. My suggestion to you is: Let’s do it all over again. We’ve got to try something. These idiotic trickle-down policies are destroying my customer base. And yours too.Wait, didn’t you say you were “rewarded obscenely”? Looks to me like your customer base is doing just fine. Do you really want to use the “company town” as the model for the good society? Good luck with that. Now, if we’re being charitable in interpreting you, we might point to companies like Costco that pay more for labor. It works for them. If it works for you, then what’s stopping you? If any such model works so splendidly, people will replicate it.
Finally, don’t you think it’s a bit rich (no pun) to call “trickle-down” policies “idiotic” and then propose them in the same breath? What’s more “trickle-down,” after all, than the notion that raining free money from on high—whether via fiat wages or welfare checks—will “stimulate” a middle class to burgeon? If anything, it will stimulate them to do more of less. These tired Keynesian nostra only end up in perfectly good capital being misallocated. (Burning planks from a ship at sea might keep you warm for a night, but it won’t get your ship to port.)
It’s when I realized this that I decided I had to leave my insulated world of the super-rich and get involved in politics.Why not help people with charity? Why not create better-faster-cheaper goods? Politics, at its root, is just some group compelling other people with the threat of violence to try to refashion the world as they see it in their minds. If that’s not inequality, I don’t know what is. But more importantly, you have already demonstrated that you can make the world a better place. It is better with Amazon than without. People are employed. I buy products and services from you that enrich my life. Thank you. Now, if you have more money than you can spend, why not build more businesses that solve more human problems? Why not engage in superphilanthropy instead of amateur economics?
I wanted to try to change the conversation with ideas—by advancing what my co-author, Eric Liu, and I call “middle-out” economics. It’s the long-overdue rebuttal to the trickle-down economics worldview that has become economic orthodoxy across party lines—and has so screwed the American middle class and our economy generally. Middle-out economics rejects the old misconception that an economy is a perfectly efficient, mechanistic system and embraces the much more accurate idea of an economy as a complex ecosystem made up of real people who are dependent on one another.So far neither you nor Mr. Liu have demonstrated anything to suggest you understand the nature of the economy as an ecosystem. You seem to be selling the same old ideas that brought us mechanistic economics like “priming the pump” or “fixing” the economy with economic stimulus, fiscal transfers, and price controls—none of which takes into account effects on real flesh-and-blood people involved in that , and instead reduces them to macroeconomic abstractions. (I’m bracing for more Keynesianism from you, Mr. Hanauer.)
Which is why the fundamental law of capitalism must be: If workers have more money, businesses have more customers. Which makes middle-class consumers, not rich businesspeople like us, the true job creators. Which means a thriving middle class is the source of American prosperity, not a consequence of it. The middle class creates us rich people, not the other way around.Ah, more magical thinking from Keynes. First, it’s simply a myth that the American middle class is disappearing. And Mr. Hanauer: You get things entirely wrong about the sources of prosperity. Most of the planet is poor, in fact, though it’s getting richer all the time.
The question we have to ask ourselves—inequality notwithstanding—is: Why did the rich countries get rich to start with? If we go by your logic, all we have to do to make sub-Saharan Africa rich is transfer massive amounts of wealth there until a “middle class” has enough money to go buy stuff. (Oh yeah, that didn't work.) But the arrow of causation doesn’t run that way. Instead, wealth originates from people like the pillow makers in your family—perhaps starting small—operating within stable rules, creating goods and services that people value enough to trade their time and labor for it—that is, if they have nothing else to trade. Economies of scale and specialization kick in. Then, like a great coral reef, the economic ecosystem emerges through distributed processes of interdependency that flow from within simple rules (such as property, prices, and profit-or-loss).
Of course, time and labor are not enough to make society wealthier. If they were, then we really could dig ditches and fill them up again, as Keynes suggested, to become rich. Yes, entrepreneurs figure into a wider economic ecosystem that includes consumers. But Hong Kong did not become the richest rock on earth because of wealth transfers. It became rich because entrepreneurs and investors did not squander capital, but rather used it in wildly diverse ways to expand the base of capital goods so entrepreneurs could produce consumer goods and services—better, faster, and more cheaply. It started with little sweatshops and ended up with megacompanies. But this required savings, investment, ideas, innovation and entrepreneurship. Lather, rinse, repeat. You can try to shortcut this process with Keynesian manna. But rich guys have to get rich by creating wealth first.
So, without Henry Ford, no company town. Without a stable business environment, no Henry Ford. Yes, the open market is a virtuous ecosystem, but it is not improved by zero-sum (or negative sum) wealth transfers like you’re proposing. The ecosystem is seeded with ideas that make people more productive. More productivity creates surpluses that end up as investment in more capital goods or more consumption goods—all of which feeds better ideas that make people more productive and create further surpluses. Creative entrepreneurs, willing to take risks, get the ball rolling (not the other way around). They are the prime movers.
On June 19, 2013, Bloomberg published an I wrote called “The Capitalist’s Case for a $15 Minimum Wage.” Forbes it “Nick Hanauer’s near insane” proposal. Forbes was right. I’m sorry. But it is near insane. Price controls don’t work in the energy markets. Price controls don’t work in healthcare. Why would price controls work in labor markets? Your proposal amounts to nothing more than price controls. But prices are information signals wrapped in incentives. When you try to control prices, you’re distorting both the information and the incentives.
You go on to brag that your idea saw implementation in Seattle. I’m surprised a businessman of your caliber would do that. You see, we have to look at outcomes, not inputs. I know, you said you left business to go into “politics.” And politics is that bottomless well of aspirations in which people reward themselves for good intentions—that is, for getting things passed. But what are the effects of a policy?
Back in the business world, people have to live with the consequences of politics. And so far, the minimum wage in Seattle has already resulted in . As businesses are forced to adapt—cutting back labor, hours, and substituting labor with technology—your policy hastens this process. You may think you’re making big companies pay their “fair share,” but you’re hurting small businesses: restaurateurs with slim margins, someone opening a little child care center, maybe a guy who runs a body shop. And more importantly, you’re depriving people of opportunities. When you raise the minimum wage by 25 percent, you are raising the costs of hiring a minority teenager by 25 percent. If the minimum wage makes it too costly to open another store, the business owner won’t open another store.
The thing about us businesspeople is that we love our customers rich and our employees poor.This doesn’t sound like a sentence written by a businessperson at all. Labor, like any other market phenomenon, has a market value. That may sound crass. But it’s true. If it weren’t true, we could set the minimum wage to $150 per hour. Now, it may be that some companies want to pay their workforces more than comparable wages in an area—perhaps in exchange for loyalty, or so that they’ll spend more at the company store. Maybe they attract better, more reliable workers. For some employers, it’s worth it: They value the labor that much based on their particular circumstances. In North Dakota, Walmart employees are being offered . Why? Labor supply and demand. For other companies, it might be a form of charity. But the truth is, we don’t know from one company to the next. One thing we do know, however, is that blanket policies don’t do a good job of determining which companies have which circumstances.
Every time the capitalists said exactly the same thing in the same way: We’re all going to go bankrupt. I’ll have to close. I’ll have to lay everyone off. It hasn’t happened. In fact, the data show that when workers are better treated, business gets better. The naysayers are just wrong.The most comprehensive study of minimum wages is by (and you can buy it on Amazon). These scholars have determined that the net effects of minimum wage laws over the years have been primarily deleterious. (And predictably so.) Treating an employee “better” may or may not have positive effects for a given business. But the thing about entrepreneurs is they are highly attuned to such opportunities. And if such opportunities are a win-win, they will pursue them. But the net effect of assuming you or anyone else knows what’s best for all companies has been shown to be negative in theory and in practice.
Most of you probably think that the $15 minimum wage in Seattle is an insane departure from rational policy that puts our economy at great risk. But in Seattle, our current minimum wage of $9.32 is already nearly 30 percent higher than the federal minimum wage. And has it ruined our economy yet? $9.32 versus $15.00? That’s a big difference. Normally politicians set minimum wages right around where they might otherwise be—say in a large, gentrified area like Seattle—and so the ill effects go away pretty quickly as companies adapt, if they need to at all. Politicians do this to create the illusion that they are making things better with policy, when actually they are getting out in front of a trend in order to take credit for it. But if entry-level wages are hovering around $9 in Seattle or San Francisco, they aren’t in Stockton (where the unemployment rate is 14 percent). Indeed, no one should believe for a second that a jump of more than 50 percent is going to be easy for companies to adapt to, and won’t require wrenching ill effects. Again, the labor pool and conditions are heterogeneous, so blanket policies are ill-advised. Remember, you said yourself the economy is like an ecosystem, not a machine. Wage rates can’t be set by a single rheostat.
The two cities in the nation with the highest rate of job growth by small businesses San Francisco and Seattle. Raise it to $15 tomorrow and you’ll slam on the brakes. Or you’ll see lots of small businesses with fewer employees or just the owners.
Guess which cities have the highest minimum wage? San Francisco and Seattle. The big city in America? Seattle. My show my home city Austin is the fastest growing, despite a minimum wage of $7.25. Other major Texas cities—sucking in Californians by the day—have similar minimum wages. But let’s not facts get in the way of your hypothesis.
Fifteen dollars isn’t a risky untried policy for us. It’s doubling down on the strategy that’s already allowing our city to kick your city’s ass.Did I mention I live in Austin, one of four Texas cities among the 10 fastest growing? How is this kicking our ass? While San Francisco’s unemployment rate may be low and its small start-ups doing okay for now, the rest of the state is a mess. You’ll have to look at other factors besides wage rates to see why.
It makes perfect sense if you think about it: If a worker earns $7.25 an hour, which is the national minimum wage, what proportion of that person’s income do you think ends up in the cash registers of local small businesses? Hardly any.It would make perfect sense if there weren’t so many counterexample cities that completely belie your claim—many here in Texas. But what’s more, the United States already has an income support system called the Earned Income Tax Credit (EITC). That means rich people like you already subsidize wages for workers under a certain income threshold. So it’s not clear to me why shifting the burden directly onto individual businesses is going to create some sort of magic. If your argument is that there should be a bigger EITC, that’s a separate discussion.
Please, please stop insisting that if we pay low-wage workers more, unemployment will skyrocket and it will destroy the economy. A $15 per hour wage is not likely to destroy the economy. It will certainly destroy prospects for groups like African-American teens, whose unemployment rate currently . Minimum wages don’t destroy the economy, they remove the bottom rungs of the income ladder for people who need to gain skills and experience to be upwardly mobile. And they often raise prices for consumers, including those making low wages.
The most insidious thing about trickle-down economics isn’t believing that if the rich get richer, it’s good for the economy. It’s believing that if the poor get richer, it’s bad for the economy.It depends upon which straw man you’re beating up here, Mr. Hanauer, but neither of your “trickle down” claims is true. The rich getting richer is an effect, not a cause. The poor getting richer is an effect, not a cause. If all groups are becoming better off—as they have been (I refer you to the Shermer citation above) then the causes of those improvements across quintiles are good for the economy.
Indeed, what is good for the economy—and human well-being—is when people get richer due to becoming more productive, solving more problems, and satisfying more wants and needs. The value of a worker’s effort is determined according to the subjective valuations of individual entrepreneurs in unique circumstances. You can’t possibly know these circumstances, Mr. Hanauer, because you are not treating the economy like a complex ecosystem. How do I know? Because you say…
In order for us to have an economy that works for everyone, we should compel all retailers to pay living wages—not just ask politely.But again, a “living wage” is a numerical abstraction—detached from any real economic ecosystem. If we were to view the economy as an ecosystem, we would have to reckon with its complexity and heterogeneity. Price controls treat the economy as a static thing that can be jump-started by edicts from a central committee.
[Instead of buying stuff…] I sock my extra money away in savings, where it doesn’t do the country much good. What makes you think your savings don’t do the country much good? If it’s gaining interest at all, then it most certainly is doing the country good. You seem to be laboring under the mistaken notion that consumption drives production. But consider for a moment that Lord Keynes was wrong. When you save, somebody is going to use that money for something (unless the Fed has other ideas). Now, if you’re just letting it sit in a zero-interest account, or you’re bathing in dollars, I would encourage you to diversify and/or use your savvy to create more wealth for both yourself and the country. If you’re a true capitalist, you know more interest/income is a signal that you’re doing something right—that you’re making the world a better place, even if you’re just leaving your money in the bank.
Bottom line: If you don’t agree, you can always give it away. One wonders why you haven’t.
So forget all that rhetoric about how America is great because of people like you and me and Steve Jobs. You know the truth even if you won’t admit it: If any of us had been born in Somalia or the Congo, all we’d be is some guy standing barefoot next to a dirt road selling fruit. It’s not that Somalia and Congo don’t have good entrepreneurs. It’s just that the best ones are selling their wares off crates by the side of the road because that’s all their customers can afford.If this were true, Hong Kong would be a backwater, poor as it was 100 years ago. As Nobel Laureate Douglass North said in his :
The organizations that come into existence will reflect the opportunities provided by the institutional matrix. That is, if the institutional framework rewards piracy then piratical organizations will come into existence; and if the institutional framework rewards productive activities then organizations—firms—will come into existence to engage in productive activities.
And entrepreneurs start firms. In the Congo, piratical organization is rewarded by the institutional matrix. It’s been a corrupt dictatorship for years, so people who take bribes and join the army get the rewards. Make no mistake: Changes to Congo’s institutional matrix—along with the entrepreneurial culture—will give rise to dramatic changes in living standards, as they did in Hong Kong. There are 75 million potential customers in the Congo.
So why not talk about a different kind of New Deal for the American people, one that could appeal to the right as well as left—to libertarians as well as liberals? Edge of my seat.
If people are getting $15 an hour or more, they don’t need food stamps. They don’t need rent assistance. They don’t need you and me to pay for their medical care. Raising the minimum wage is effectively no different than raising the corporate tax for welfare benefits for assistance, except that one has greater potential to harm businesses. In both cases, people are getting something for nothing.
If the consumer middle class is back, buying and shopping, then it stands to reason you won’t need as large a welfare state. How’s that? If fewer poor people are being hired—a la Neumark and Wascher—more poor people will require assistance.
And at the same time, revenues from payroll and sales taxes would rise, reducing the deficit.If all these positive effects were to come about, how does this address the so-called “problem” of inequality? If you’re correct that all this crazy consumption is going sustainably to push up company revenues (which I doubt), aren’t guys like you still going to get richer under your theory?
There are three main problems with any proposal to raise the minimum wage in lieu of welfare:
First, there are better, more pragmatic proposals out there for a minimum income, including the negative income tax (i.e., expanding the EITC and getting rid of welfare). Charles Murray’s In Our Hands is a good start, though his numbers might need updating. That proposal reduces the direct burden on companies compared with your proposal, because it redistributes after profits rather than before. Minimum wage laws are indifferent to whether a firm is profitable, which makes them dangerous by degree.
Second, any policy that simply transfers wealth can have incentive effects that discourage upward mobility. That being said, I will grant that your proposal would help people avoid “welfare traps” if there were no negative effects on employment. But if your government-set wage rates are pricing people out of the labor market, there will be just as many unemployed workers, if not more.
Third, any such grand compromise ideas about minimum income—as much as we might like to think about them—are very likely not to be implemented. How do you plan to combat the welfare-industrial complex? There are armies of vested interests in the welfare bureaucracy. They will be extremely difficult to send packing.
Capitalism, when well-managed, is the greatest social technology ever invented to create prosperity in human societies. But capitalism left unchecked tends toward concentration and collapse. I think you might be confused about what capitalism is. If by capitalism, you mean crapitalism, then you’re right. It’s not sustainable. And only checking the State’s power to assist cronies will we rein in the excesses of crapitalism. If by capitalism, you mean free and open markets, then you are simply mistaken. In competitive environments, it’s very difficult for firms to hold on to market dominance for very long. Firms have to consistently deliver on quality and price. Almost all monopolies and cartels are created and shored up by corporate-State collusion. And corporate-State collusion almost always starts with the State trying to “manage” capitalists. Regulation is inherently anticompetitive.
Now there will be resource concentrations in a free and open market, as with any natural system, but they too are difficult to maintain over time. In other words, there is incredible churn at the top—because only the best stewards of capital can stay there.
My family, the Hanauers, started in Germany selling feathers and pillows. They got chased out of Germany by Hitler and ended up in Seattle owning another pillow company. Three generations later, I benefited from that. Then I got as lucky as a person could possibly get in the Internet age by having a buddy in Seattle named Bezos. You may feel guilty about this. After all, your forebears were real value creators. Maybe you inherited a fortune and got lucky knowing Jeff Bezos. Maybe you really aren’t that good at predicting the future, identifying trends, etc.—just lucky. Maybe Bezos just called you first and you simply rode the wave. Still, we shouldn’t begrudge you your fortune, any more than we should pity a guy who loses at the tables.
Things get tight for me and my family. We’re trying to figure out how to fix the fender on my car (my fault) and renovate the old house we just bought. But at least we’ve got a car to fix. We’ve got a house to fix up. We eat nutritious food. My son has a Kindle Fire. And my wife and kid are about the best family a guy could have. We don’t have much, but we have enough to make Louis XVI positively green.
Yeah, you might be lucky, Mr. Hanauer. But so am I.
Max Borders is author of Superwealth: Why we should stop worrying about the gap between rich and poor, which you can buy for your Kindle at Amazon.
Sunday, September 14, 2014
The Most Unconscionable Drug Price Hike I Have Yet Seen. In the Pipeline:
As has been pointed out, a price hike like this would be very hard to maintain without a government-protected monopoly.
As has been pointed out, a price hike like this would be very hard to maintain without a government-protected monopoly.
There's a drug called Thiola (tiopronin) that most people have never heard of....Retrophin bought the marketing rights earlier this year (a move complicated by the company's CEO, investor Martin Shkreli, who may have let the news of the deal leak on his Twitter account).
That link mentions part of Shkreli's business plan as "acquiring the rights to obsolete remedies Shkreli says can be put to new and lucrative purposes", and by gosh, that's certainly accurate. Retrophin is increasing the price of Thiola from $1.50 per pill to over $30 per pill. Because they can - they stated when they bought the drug that their first move would be to raise the price. New dosages are formulations are also mentioned, but the first thing is to jack the price up as high as it can be jacked. Note that patients take several pills per day. Shkreli is probably chortling at those Mission Pharmacal hicks who didn't realize what a gold mine they were sitting on.
Now, there have been somewhat similar cases in recent years. Colchicine's price went straight up, and (infamously) so did the progesterone formulation marketed as Makena. But in both those cases, the small companies involved took the compound back through the FDA, under an agency-approved program to get marketing exclusivity. I've argued here (see those last two links) that this idea has backfired several times, and that the benefit from the clinical re-evaluation and re-approval of these drugs has not been worth their vastly increased cost. I think that drug companies should be able to set the price of their drugs, because they have a lot of failures to make up for, but this FDA loophole gives people a chance to do minimal development at minimal risk and be handed a license to print money in return.
But this isn't even one of those cases. It's worse. Retrophin hasn't done any new trials, and they haven't had to. They've just bought someone else's old drug that they believed could be sold for twenty times its price, and have put that plan right into action. No development costs, no risks whatsoever - just slap a new sticker on it and put your hands over your ears. This is exactly the sort of thing that makes people go into fist-clenching rages about the drug industry, and with damn good reason. This one enrages me, and I do drug research for a living.
So thank you, Martin Shkreli. You've accelerated the progress of the giant hammer that's coming down on on all of us over drug pricing, and helped drag the reputation of the pharmaceutical industry even further into the swamp. But what the hell do you care, right? You're going to be raking in the cash. The only thing I can say about Shkreli and Retrophin is that they make the rest of the industry look good in comparison. Some comparison.
Feminist Theory, Human Nature and the Punch Seen ‘Round the World : The Other McCain
Watching the video in which Ray Rice knocked out his fiancée (now wife) Janay, the thought occurs: What was she so angry about?Everybody has focused on the obvious horror of Rice’s punch — the brute force of a 200-pound professional athlete used against a woman — and nobody seems interested in what Janay did immediately before the punch. The couple were in a confined space, inside an elevator, when Janay “got in his face,” screaming and lunging toward Rice. Of course, Janay’s behavior does not justify Rice hitting her, but one wonders why she acted that way, just as one wonders whether the circumstance of being trapped in an elevator with this enraged woman in some way explains Rice’s reaction. That is to say, if her angry rage triggered Rice’s fight-or-flight instinct, he couldn’t flee from her while they were on the elevator, and his adrenalin surge produced an autonomic reflex: BOOM.
That’s one possible reading of the scene, at least, but I’m sure that any attempt to explain what Ray Rice did will be condemned as an attempt todefend or justify what Ray Rice did, so that political correctness erects a wall obstructing access to a knowledge of the motives involved.
Because progressives view humans in collective groups, the problems of Ray Rice and his wife Janay are not personal, but political. The fact that Janay’s husband has lost his lucrative employment, and that an African-American family has thus suffered economic harm — an outcome that seemingly contradicts progressive “social justice” goals — is ignored because, as the feminists say, these two people are “a mere microcosm of a larger systemic injustice.” Whereas the O.J. Simpson trial was viewed through the prism of race-based “injustice,” the case of Ray Rice is viewed through the feminist prism.
Whatever the context, this collectivist worldview lends itself easily to paranoid fears. Instead of viewing humans as individuals, capable of acting rationally in their own self-interest and harmonizing their actions in voluntary cooperation, progressives insist that human life is “socially constructed,” and that our behavior is influenced — if not actuallycontrolled — by impersonal forces. That is to say, everything we do is viewed by progressives not as our individual action, but rather in terms of what our actions mean for our membership in collective groups. Are we male or female? Black, white, Hispanic, Asian? Native or immigrant? Rich or poor? The psychological effect of this worldview is to tell us that we lack personal agency, and are not in control of our own destiny. The collectivist worldview encourages us to externalize responsibility, to blame others for our failures and hardships, so as to exempt ourselves from criticism — “Don’t blame me! It’s not my fault! I’m a victim!”....“Boys don’t hit girls” — my wife and I have insisted on that moral maxim in raising two daughters and four sons. This was what our parents taught us and, in transmitting this basic code of civilization to our children, we expect them to live up to it and pass it on to future generations.
Instilling this code into young people requires boys to understand that the male’s general superiority of physical strength should never be used to harm or threaten women, but rather to protect women from harm. And it requires teaching girls that under no circumstance should they tolerate male violence against them. No man will ever get a second chance to hit you, because the first time he lays a hand on you, it’s over — and he had better pray to God your brothers never find out.
This stringent zero-tolerance policy — “Boys don’t hit girls” – sets up a problem: What happens if a woman loses her temper, behaves in an insulting manner, and even acts violently against a man? Some women are simply crazy, and some women have been spoiled rotten by over-indulgent parents who put up with tantrums. The “Daddy’s Precious Darling” Syndrome, as I call it, involves an entitlement mentality that makes it impossible for some women to admit wrongdoing or to accept criticism. If she can’t get what she wants, or if her bad behavior exposes her to criticism, Daddy’s Precious Darling can’t deal with it. She flies into a rage, and whoever she blames for thwarting her will — failing to kowtow to imperious demands or daring to criticize her selfish attitude — will become the target of unrestrained hatred.
OK, what if Janay was not a girl?
What if, instead of going to the casino with a date, Ray Rice had gone to the casino with a male buddy who got drunk and caused a scene? What if, after Ray and his buddy got on the elevator, the buddy had started yelling angrily at him, “getting in his face”?
BOOM.There’s your equality. How do you like it?
Of course, feminists don’t believe in this kind of equality, an equality which would make women and men equally vulnerable to the consequences of “getting in the face” of a 200-pound pro athlete. However, as a skinny man who doesn’t enjoy pain, I can absolutely guarantee you that I would never make the mistake of engaging in a face-to-face shouting match with a guy like Ray Rice.
Here’s some helpful advice: Just walk away.
This advice applies to anyone who is tempted to provoke a confrontation, and it also applies equally to anyone who finds themselves confronted with a helpless fool looking for trouble. It especially applies to any man whose girlfriend or wife loses her temper, goes into a rage and begins insulting or threatening him.
Just walk away.
She’s challenging your manhood. She’s calling you every insulting name she can think of, accusing you of every kind of evil.
Just walk away.That was what was so glorious in the way Ashley Wilkes responded after Scarlett O’Hara slapped him. Just two minutes earlier, she had been gushing about how much she loved him, but when he insisted that he loved and intended to marry Melanie Hamilton, the evil in Scarlett’s heart came pouring out in a torrent of hateful insults. And when she slapped his face, the conversation was over.
Just walk away.A good man doesn’t deserve to be treated that way. And a good man doesn’t have to hit a woman to prove his point.
Just walk away.Alas! “We’re not gentlemen and we have no honor,” as Rhett told Scarlett, and no feminist has any respect for honorable gentlemen. Nor can feminists tolerate Christianity and its ideals of unselfish love. Feminist theory views all male/female relationships as a power struggle, wherein men oppress and subjugate women, so that there can be no possibility of voluntary cooperation between them.
No love. No courtesy. No kindness. No mercy.
None of this makes sense in the context of radical equality, where the selfish quest for power turns man and woman into rivals.
BOOM.There’s your equality. How do you like it?
Saturday, September 13, 2014
Though the economic literature on the subject is mixed, a comprehensive review done in 2013 by the National Bureau of Economic Research found most studies do find a small but measurable increase in unemployment in response to minimum wage hikes. The effects tend to be concentrated in a few industries that employ lots of low-wage workers, often teens and seasonal employees.
That a rising minimum wage would have only a small impact on unemployment shouldn't be terribly surprising, because government regulation doesn't have that large an immediate effect on jobs anywhere. The Bureau of Labor Statistics regularly asks employers the reason behind layoffs. Those attributed to "government regulations/intervention" are routinely less than 0.5 percent of the total.
...none of this makes a vastly higher minimum wage a good idea. Higher labor costs will encourage businesses to automate more tasks and, over time, look for creative ways to avoid filling vacancies. This will encourage elimination of many of the easiest-to-replace jobs. And while mass insolvencies and rampant unemployment may be unlikely, there will certainly be some effect. Some already teetering businesses will almost certainly be pushed over the edge and some jobs that could have been taken by teenagers, the disabled and those lacking familiarity with work itself will never be created in the first place.
What's more, raising the minimum wage is simply a terrible way to help the poor. Only about 7 percent of those below the federal poverty line work a full-time job of any sort. Meanwhile, many of those who earn the minimum wage aren't poor at all. Roughly 42 percent live with a parent or relative, while another 18 percent are married second income earners, which helps explain why the average family income of a minimum wage earner is $53,000 per year.
Expanding the Earned Income Tax Credit, a direct subsidy for those who work for modest wages, is a much better and much more direct way to help the working poor. Changes to healthcare, nutrition and education programs could do still more to help those in poverty. By comparison, a $15 minimum wage, even if not as disastrous as some market advocates claim, is likely to do more harm than good.