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The Zero Effect

Friday, September 13th, 2013

The idea of hiking the legal minimum wage just doesn’t go away, alas.

The usual thought experiment those with common sense use to elicit a modicum of sagacity in the minimum wage advocates’ addled synapses runs like this: You say you want a higher minimum wage, say $9 per hour. Why not $49 — or $490.00?

Every sensible person knows that wouldn’t work; you can’t simply force all wages up without dire consequences in lost jobs, businesses. But it’s a way to impart some sense of why prices are what they are, how supply and demand work.

But there’s another tactic: Make the counter-offer. “I want to help low-skilled workers find jobs. Set the minimum wage to $0!” Then ask:

Would people work for zero dollars?

Would all wages fall to nothing?

You’ll get a few absurd answers, but the logic should sink in, eventually: High-wage jobs are there not due to Santa Claus employers, but because of worker productivity.

With no minimum wage, there would be more low-wage jobs available, sure. And some of the jobs at the current minimum may indeed go down in pay, but there would be a lot more employment.

And no 5¢ an hour jobs for the same reason no one but interns today work for zero dollars. It wouldn’t be worth it, wouldn’t even cover the costs of getting to work. Folks do have other options: Keep looking; sponge off relatives; beg, borrow, steal; scrounge. Sell things on eBay.

That’s why now people reject some jobs.

Let others protest low wages. The rest of us should protest low productivity.

And a lack of common sense.

This is Common Sense. I’m Paul Jacob.

Protesting Gravity

Monday, September 9th, 2013

The continuing, ramped-up protests of low wages at low-end service jobs, like McDonalds and (to some extent) Walmart, put many of us in a bind. On the one hand, a decent person wants others to be happy in their work, and paid well. On the other, a wise person wants those others to face reality.

It does no good to protest the law of gravity, or blame nature for your limited skill set. We work with what we have, apply our intelligence and industry from our baseline situations. We adapt.

How?

Produce more of what someone else is willing to pay for. That’s how (some) other people earn more than $7.50 an hour. Or $17.50 an hour. Or $175.00 an hour. McDonalds doesn’t pay high wages. But there are many companies that do. Even in the restaurant biz there are better-paid burger-flippers — those burgers are priced higher (and taste better, and are served in posher places) thus allowing the purveyors of said hamburgers to afford the higher wages.

What do protestors really expect? If their wages go up, either their employers fire some workers and switch to automation (thus cutting costs) or up go the prices.

But if prices rise, who buys the burgers that pay for McDonalds’ workers’ wages? I’ll buy a McDonalds burger for a buck, or a premium burger for five bucks. But jack up the prices, and I go elsewhere.

Protesting low wages? Might as well protest gravity.

Or, since the economy’s in such a slump that folks would rather gripe than look for more productive jobs — which are, after all, unnaturally scarce — protest Obama.

This is Common Sense. I’m Paul Jacob.

Impossible, They Say

Monday, March 11th, 2013

Modern economics takes a long, circuitous route to the old wisdom of classical political economy: Laissez faire is best.

This ideal of free markets was pretty clearly established by Adam Smith, J.B. Say, David Ricardo, and others long ago. Frédéric Bastiat explained it best in layman’s terms.

But modern economic theory, with lots of math I don’t pretend to follow, often backs it up, too. Sure, sure: Much of modern theory sort of assumes unlimited government as the alternative to “market failure.” But the more you look (and look critically) at that theory — and increasing numbers of economists are doing just that — the more the case for government involvement falls flat.

This struck me as I was reading economist Garett Jones:

There’s an old story about a mathematician asking Paul Samuelson for one idea in economics that was simultaneously true and not obvious. Samuelson’s answer [was the Law of Comparative Advantage].  Today, I’ve got another: The Chamley-Judd Redistribution Impossibility Theorem.

Chamley and Judd separately came to the same discovery: In the long run, capital taxes are far more distorting tha[n] most economists had thought, so distorting that the optimal tax rate on capital is zero.  If you’ve got a fixed tax bill it’s better to have the workers pay it.

Jones goes on:

Under standard, pretty flexible assumptions, it’s impossible to tax capitalists, give the money to workers, and raise the total long-run income of workers.

Not, hard, not inefficient, not socially wasteful, not immoral: Impossible. 

Hard as policy wonks and their patrons, the politicians, may try, any redistribution from the owners of capital to workers will make workers worse off.

Jones discusses some of the niceties of the theory.

But I confess: to me it’s all déjà vu. Or, to conjure up another French term, laissez faire all over again.

This is Common Sense. I’m Paul Jacob.

Video: How Minimum Wage Laws Cause Unemployment

Saturday, February 16th, 2013

Thanks to the president, it’s the meme of the moment. Take it up a notch. With an understanding of the economics involved.

Demands and Supply

Friday, November 9th, 2012

A storm hits the east coast. Some homes are washed away. Others burn down. Millions lose power. Gasoline supplies are massively disrupted, even as mass transit is unusable for days.

Obviously, post-Hurricane Sandy, emergency measures are called for. It’s crucial, for instance, that the disrupted and reduced supplies of gasoline be gotten into the tanks of vehicles as inefficiently as possible, and by causing motorists to waste as much of their precious time as possible. Who but rational and well-informed persons could disagree?

To achieve this goal, rationing and laws against “price gouging” — in New Jersey, defined as adding more than ten percent to prices under normal conditions of supply and demand — come to the rescue! So Governor Chris Christie assures gas station owners that his government will “impose the strictest penalties on profiteers who . . . seek to capitalize on the misfortune of others in the midst of a crisis. . . .”

After all, what’s the alternative?

Well, it’s this: Let fuel prices rise to the height required to induce motorists who least urgently demand gas to give way to those who most urgently demand it. This would

  • shrink or prevent round-the-block gas lines;
  • encourage shipment of gas to those areas where prices have risen the highest, i.e., where gasoline is scarcest;
  • allow people to get back on their feet as quickly as possible by following their own best judgment in the face of local circumstances best known to themselves.

What do you call this strategy? Getting out of the way. Or laissez faire — but there’s nothing foreign about it. It used to be the American way.

This is Common Sense. I’m Paul Jacob.

Two Legacies

Tuesday, June 26th, 2012

Two great economists died this month.

Anna Schwartz, co-author with Milton Friedman of the classic A Monetary History of the United States, 1867-1960, passed away last Thursday, at age 96. For reasons known only to a few Swedes, she did not receive the Nobel along with her more famous research partner.Anna Schwartz and Elinor Ostrom

Elinor Ostrom, on the other hand, who died about two weeks earlier, at age 78, did manage to nab a Nobel.

While Mrs. Schwartz may not have received the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, she had received the more popular honor of being dubbed “the high priestess of monetarism.” She knew more about the history of banking and finance than just about anyone. Tellingly, her intellectual odyssey didn’t stop when she reached retirement age.

In recent years, she attacked the politically popular notion that bailouts are a good idea during economic downturns. She also came out against the reappointment of Ben Bernanke as Fed chairman, and argued that government was the main instigator of the 2008 financial bust.

She knew how to make waves.

Elinor Ostrom focused her work not on finance but on the problems associated with managing common-use resources. She found that government regulations tended to mismanage resources, while individuals and communities better negotiated creative and effective solutions to problems that previous economists deemed insoluble without government.

Like Anna Schwartz, she was much more than an armchair theorist. She didn’t merely draw equations on a blackboard and pontificate on how necessary it is for “government” to “fix it.” The evidence — which they collected — is in, government most often is the problem that must itself be fixed.

This is Common Sense. I’m Paul Jacob.

Will They Ever Learn?

Friday, February 10th, 2012

In which industries do prices and costs rise fastest? Those in which government is most involved.

The process is no mystery. Regulate supply by limiting entry into the business — to “increase quality,” of course — will raise prices, as producers behave oligopolistically. Government does this with health care providers, and have done so increasingly for the last century. If, at the same time, you subsidize the consumption, that amounts to increasing demand, which also puts upward pressure on prices. This has been accelerated in America since the beginning of Medicare, and with each additional healthcare program.

Typical government intervention double whammy.

Higher education is also not exempt from the play of supply and demand. One policy advocate’s explanation of this, which you can read excerpted, online, at National Review’s site, is worth considering. He explains what happens as vendors rake in profits under a regulated-and-subsidized system: they

sponsor crowd-pleasing sports events on weekends, building public goodwill. Other profits are used to hire professional lobbyists to plead for both more subsidies and more freedom to set prices. You also convince the government to allow you and other incumbent . . . sellers to form a private organization with the authority to decide whether new sellers can become “approved . . . vendors” for the purposes of receiving public subsidies. Unsurprisingly, few new sellers are approved.

Predictably, the analysis is followed by halfway measures that don’t lead to a free market in education at all. That’s just too radical.

Education policy wonks, like educators themselves, seem never to learn . . . economics.

This is Common Sense. I’m Paul Jacob.