… from a recent Facebook post by Truong Bui; it’s a wise response to an article by Daniel Kuehn in which Kuehn argues that minimum-wage rates are best set locally rather than nationally:

Why don’t you take that “local approach” one step further, by allowing EACH firm to set its own wage levels? By your own reasoning, diverse circumstances of INDIVIDUAL FIRMS suggest that FIRM-LEVEL voluntary wage policies may be more appropriate than the one-size-fits-all approach of a state or even local minimum.

Yep.

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Quotation of the Day…

by Don Boudreaux on May 22, 2015

in Crony Capitalism, Seen and Unseen, Work

… is from page 223 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

Just as businesses seek to have government impose tariffs on imported goods that compete with their own products, so labor unions use minimum wage laws as tariffs to force up the price of non-union labor that competes with their members for jobs.

Clever economists whose priors tell them that government generally intends (and largely, if imperfectly, actually manages) to promote the public interest by apolitically applying scientific economic theory can no doubt spin a logically coherent theory to explain that tariffs are really meant to correct for market imperfections.

Many real-world importers who buy goods from foreign sellers, after all, do not face perfectly elastic supply curves when purchasing from foreign sellers goods that are meant for resale in the home country.  These importers, therefore, are said by such economists to have monopsony power.  The result (as freshman econ students can easily explain with pen and paper) is that these importers pay prices that, when judged by the standards of a perfectly competitive market, are too low.

The same freshman econ students can also explain, using the same pen and paper, that a tariff can optimally raise the prices that importers pay for the goods they buy from foreign sellers over whom these importers exercise monopsony power.  Of course, in the case of a tariff the proceeds of the resulting higher prices go to the government and not to the foreign sellers who are victimized by the importers’ monopsony power.  But (explains the clever economist) that’s a mere distributional detail: “The fact is that because it is possible to explain tariffs as a social-engineering tool that is wielded by governments to raise the prices paid for imports up to their socially optimal levels – and, as a result, also to increase the quantities imported – we should conclude that this excellent purpose is the one that is actually served, or at least meant to be served, by real-world tariffs.”

The clever economist further explains:

This monopsony power is not the result of any phenomenon so obvious as a government-created exclusive privilege or of a market situation in which each importer happens to be literally the only buyer of the goods that he or she purchases.  Rather, the monopsony power is the result of ‘frictions’ that, sadly, are very common in the real world.  These frictions make it practically unlikely that any foreign seller who has had a commercial relationship with an importer will easily enough find other buyers for its wares if the importer refuses to pay prices for these wares that are as high as the importer should pay.  Such frictions – which free-market economists blindly ignore (these economists have a naive understanding of reality, thinking, as they do, that reality literally is explained completely by the first few chapters of an intro econ text!) – mean that, in the real world, importers will pay prices for foreign wares that are too low by the efficiency standards of sound economics.  Tariffs are simply meant to correct the ill-consequences of this monopsony power.  It is, therefore, wrong to allege that governments enact tariffs for any reasons so crass as to protect domestic producers from competition.

….

I wonder how many are the economists who believe that modern minimum-wage legislation is chiefly a justified and helpful response to real-world monopsony power also would entertain seriously the argument that tariffs are chiefly a justified and helpful response to real-world monopsony power.  I’ll bet not many (but I could lose this bet).

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In this earlier post I argued that if real-world hikes in the minimum wage were in fact premised on scientifically sound economics – the economics that pro-minimum-wage economists point to in order to justify such hikes and without at the same time denying that the law of demand applies to low-skill labor – then there is no reason why such hikes would be phased-in over time rather than increased immediately.

Daniel Kuehn very quickly accused me of error.  (He did so in the comments to the above-linked post.):

The increases are nominal, that’s why they’re introduced gradually – to smooth the real value. That’s why the same people that want gradual nominal increases also want to peg to inflation.

In other words, my argument is factually mistaken (according to Mr. Kuehn) because in reality the Los Angeles city government’s phased increases of the minimum wage are meant only to keep pace with expected inflation between now and 2020 (when that legislated wage is scheduled to hit $15 per hour).

Mr. Kuehn’s argument, alas, still fails and my criticism of the L.A. government’s action remains valid and germane.  The reason is that – according to the very legislation that Mr. Kuehn and others celebrate as a scientific effort to raise the pay of low-skilled Angelenos without simultaneously destroying some jobs for these workers – there will be no minimum-wage hike in Los Angeles until July 1, 2016 (when it rises from its current level of $9.00 per hour to $10.50 per hour.  That’s more than 13 months from now.  Further, because of inflation between now and then – inflation that Mr. Kuehn plausibly notes the L.A. city council anticipates – there will actually be a minimum-wage decrease, in real terms, between now and July 2016.

So even if every scheduled nominal increase in L.A.’s minimum wage between July 1, 2016, and July 1, 2020 is designed (however roughly and imperfectly) simply to keep the wage adjusted for expected inflation over those four years, why wait until July 1, 2016 to raise the minimum wage?  Why not raise it now, in full with no phase in, to whatever level the government thinks will correct for problems caused by monopsony power?  The fact that this wage is not being raised immediately – now, in Spring 2015 – is strong evidence against the proposition that governments raise minimum wages in order to correct for the baneful consequences of alleged employer monopsony power.  If such monopsony power exists, there’s absolutely no reason to delay raising raise the minimum wage; there’s no need for any phase in of increases in the real value of the wage to whatever level government officials deem is textbook appropriate.

The only even remotely plausible way that I can see to salvage the L.A. government’s action in order to square it with Mr. Kuehn’s theory of what motivates governments to raise minimum wages is to claim that L.A. government officials believe that today – May 2015 – the $9 minimum wage is pretty close to being the textbook appropriate wage, and that all the L.A. government did is to arrange to index today’s minimum wage for expected inflation between now and 2020.

But of course if this claim is to carry the day, why all the hoopla about L.A. raising its minimum wage?  On this account, all the L.A. government did was to rather noisily index that city’s minimum wage for expected inflation starting in 2016 – meaning, in other words, that despite all the news coverage of the past few days, there has been no move by the government there to really increase in the minimum wage.

So I’ve a question for Mr. Kuehn: Do you believe that the recent, much-discussed action by the L.A. government actually did raise the real minimum wage or did it not do so?  If your answer is the latter, fine; we can join each other in being mystified at all the hoopla and celebration.  But if your answer is the former, then how do you justify or explain the L.A. government’s decision to delay until July 2016 any increase in this wage?  How do you square this delay with the monopsony model?

….

A fun exercise, which I just did but will leave to Cafe patrons themselves to do on their own, is to calculate the annual rates of inflation that, if Mr. Kuehn’s explanation of their actions is correct, the L.A. city council likely anticipates over the next five years.

….

In my opinion (which is shared by a large number of other economists), minimum-wage hikes, such as that recently done in Los Angeles, are not remotely motivated by government officials’ belief in, or even awareness of, the real-world relevance of textbook theories of monopsony power.  Such legislation is instead the harmful consequence of a combination of politicians pandering to economic ignorance and political pressure by labor unions and other rent-seeking groups who do stand to gain from legislation that prices some of the most vulnerable low-skilled workers out of jobs.

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Why Not $15 Per Hour Today?

by Don Boudreaux on May 21, 2015

in Crony Capitalism, Seen and Unseen, Work

The only economic case for raising the minimum wage that is even potentially theoretically sound is the case built upon the belief that employers of low-skilled workers possess monopsony power in the market for low-skilled workers.  (As argued here before, monopsony power is a necessary condition for a higher minimum wage not to reduce the employment prospects of low-skilled workers; it is not a sufficient condition.)

So what are we to make of the City of Los Angeles’s move to raise the hourly minimum wage there to $15 by 2020?  Why wait until 2020?  Why not immediately or, say, on June 1st 2015?

If this minimum-wage hike is truly justified by employer monopsony power, there’s no reason for any delay in hiking the wage.  If employers of low-skilled Angelenos truly have monopsony power of the sort that the best pro-minimum-wage economists assert is prevalent enough in reality to justify government-imposd minimum wages – and if government-imposed minimum wages really are ‘scientific’ responses to the prevalence of such monopsony power – then raising the minimum wage in Los Angeles from its current rate of $9 per hour all the way up to its ‘desired’ rate of $15 per hour should be done immediately.  Why the gradualism?  Why wait five years to raise the wage to its appropriate height?  The monopsony power that justifies raising the minimum wage, if it is real, exists today in full.  And if $15 per hour is the ‘right’ minimum wage to offset the baneful consequences of employers’ monopsony power, then economic theory is clear that there is nothing to be gained, and only gains for low-skilled workers to be foregone, by any delay in raising the minimum wage to $15 per hour.

Most readers of this blog know – not because they read this blog, but because they exercise economically informed common sense (of the sort, sadly, that is schooled out of too many non-GMU-type academic economists!) – that employers of low-skilled workers (especially those in large cities such as L.A.) have no monopsony power to speak of.  Employers certainly don’t have monopsony power in such magnitudes and so generally as to justify a government-imposed minimum wage.  So it’s unsurprising to me and, I’m sure, to most of this blog’s readership that L.A.’s massive minimum-wage hike is phased in over five years.  This phasing-in not only mutes and, hence, helps to hide, the ill-effects of the minimum wage; more significantly, this phasing-in is solid evidence that minimum-wage hikes are in fact not scientific responses by government to the prevalence of employer monopsony power.

It’s high time that tweedy academic economists stop lending their professional and scientific creds to politicians seeking only cheap applause and valuable votes from the economically uninformed masses (who too readily cheer policies with lovely titles) and kudos and campaign contributions from labor unions and other rent-seekers (who gain financially from government policies that price many of the lowest-skilled and most vulnerable workers out of jobs).

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The Wall Street Journal remembers Jack Templeton, who died this past Saturday at the age of 75.  (gated)  A slice:

In a note published almost 10 years ago on the Web page of the Yale Class of 1962, he [Templeton] questioned a “tolerance” that “demands incessantly that one abandons all judgment.” He went on to ask: “Should we tolerate a public educational system with its entrenched self interest in which virtually every inner-city parent knows is destroying any hope or possibility of their children achieving meaningful opportunity in a 21st Century Economy?”

Also from the Wall Street Journal is this outstandingly good essay by Martin Feldstein, explaining that “Today’s pessimists about the economy’s rate of growth are wrong because the official statistics understate the growth of real GDP, of productivity, and of real household incomes.”  (gated)  A couple of slices:

The measurement problem is particularly severe for new products. Consider a new drug that improves the quality of life, reducing pain or curing a previously incurable disease. The ability to buy that new product means that a dollar is worth more than it used to be, and that the properly measured level of real GDP is higher.

The official method of calculating the price index doesn’t incorporate this new product until total spending on it exceeds some threshold level. It is then added to the government’s price calculations, but only to record whether the cost of the drug goes up or down. The main effect of raising well-being when the drug is introduced is completely ignored. The same is true of other new products.

….

Americans are enjoying faster real income growth than the official statistics indicate, but we can achieve even faster growth with more capital accumulation, increased labor-force participation, and greater innovation that leads to new products and more efficient means of production. Better tax policies can help achieve all three.

(As the rate of new-product introductions increases, so too does the underestimation of economic growth.)

Jeff Tucker rightly condemns the Los Angeles City Council for raising the minimum wage in that city.  (Robert Reich will draw white-board graphs explaining why no unemployment will result; clever yet unwise economists will draw monopsony graphs to depict just how a higher minimum wage might actually increase the employment of low-skilled workers; politicians will draw campaign contributions from labor unions who greedily support minimum-wage legislation and from Hollywood types who are expert at putting their facile humanitarianism on public display; many low-skilled Angelenos will, if they are lucky, draw unemployment checks.)

Tim Worstall also justly weighs in on Los Angeles’s cruel treatment of low-skilled workers.

Writing in the Washington Post, Cathy Young brilliantly, passionately, and eloquently warns against the danger of the political left’s current efforts to re-define “rape.”  A slice:

Despite its scorn for reticence, the new sexual revolution has a deep puritanical streak. Consensual sex is viewed as always under control, the result of a rational, fully autonomous choice. In this vision, there is either unequivocal “enthusiastic consent” or reluctant submission. In real life, though, there are many other possibilities.

You could agree to have sex to please your partner despite not being in the mood, and get enthusiastic later.  You could be sexually eager but emotionally ambivalent, or vice versa. You could be torn between passionate desire and ethical or practical reasons not to act on that desire. You could get drunk to quiet your scruples, or hope to be coaxed into surrendering to temptation. (Obviously, “coaxed” does not equal “physically overpowered.”) Some of this behavior may be unhealthy or immature. But if it involves consenting adults—ones who can refuse sex without reasonable fear of harm—those adults should be free to make mistakes.

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A Plan to End Secret Trade Deals

by Don Boudreaux on May 21, 2015

in Trade

Here’s a letter to the Washington Post:

Ruth Marcus is right and Elizabeth Warren is wrong: the secrecy of the negotiations leading to the Trans-Pacific Partnership trade agreement is a poor excuse to oppose that agreement (“A bogus argument against the trade deal,” May 19).

Yet if Sen. Warren and her fellow Progressives really do worry that secret trade negotiations spawn corporate privileges and cronyism that deny ordinary Americans a say in their own economic affairs, they should call for a policy of unilateral free trade.  Uncle Sam need negotiate with no foreign government or governments in order to eliminate the many tariffs and other restrictions it now imposes on Americans’ commerce with foreigners.  Our government can enact this policy on its own and in bright sunshine.

The unilateral elimination of these trade restrictions is by far the best way to achieve many of the worthy goals that Progressives claim to champion.  A policy of unilateral free trade will instantly rid the U.S. economy of a principal species of corporate privilege and source of bloated profits – namely, protection from having to compete as vigorously as otherwise for customers.  It also will give to each and every American the freedom to choose, openly and diversely, how to spend his or her money without any fear of compulsion exercised furtively on behalf of politically powerful corporations.  The economic voice of American consumers will be amplified throughout the economy while that of corporations made far more quiet in the backrooms of Congress.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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Quotation of the Day…

by Don Boudreaux on May 21, 2015

in Hubris and humility, Man of System

… is from page 312 of NYU’s great economic-development economist William Easterly’s superb 2006 book, The White Man’s Burden – a book that explores the differences between economic development that is designed and imposed by “Planners” and economic development that is undesigned and generated by “Searchers”; in summary, “Planners” are ‘men-(and-women)-of-system’ who aim to improve whole societies with their consciously constructed plans imposed without competition from on top and, hence, without reliable feedback from the affected parties below; “Searchers” are entrepreneurs, investors, and other individuals who, constrained by the rules of private property, attempt – in competition with each other and without the ability to compel anyone to follow their leads – to improve only those relatively small parts of the economy or society that can be reasonably comprehended by any individual, in large part because their efforts are informed by reliable feedback (original emphasis):

If it were not for the U.S. Army trying to promote economic development [in places such as Afghanistan and Iraq], it would seem presumptuous for me as an economist to comment on military interventions.  Yet even without recent rhetoric [such as from Niall Ferguson about how the Pentagon should spend more resources “making the world safe for capitalism and democracy”], military intervention is too perfect an example of what this book argues you should not do – have the West operate on other societies with virtually no feedback or accountability.  The military is even more insulated from the interests of the poor than aid agencies are.  People don’t give reliable feedback at gunpoint.  Invading soldiers and covert destabilization are not great ways to ascertain local peoples’ interests.  The poor on the receiving end have few votes on whether they want the Americans to save them.  Military interventionists are inherently Planners; armies do not have Searchers.

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I generally (and with my nose held tightly) support trade deals such as the TPP.  I generally (and with my nose held tightly) support trade deals such as the TPP not because they make trade free.  They never do.  I generally support trade deals because, given political realities, they make trade freer.  Such deals usually are better than the alternative, which is even less liberalization of trade.  Genuine and full free trade – which is unambiguously good – requires simply that the domestic government remove all extra taxes and other artificial obstacles that it has in the past put in the way of its citizens who wish to buy from, and sell to, foreigners.  In order to achieve true free trade, no deal with any foreign country or organization is required.

True free trade is best achieved – and (were it not for political realities) easily achieved – unilaterally.  Nevertheless, again, in practice trade deals generally do make trade freer than otherwise – at least, that’s my take on the historical record.

That said, trade deals are economically surreal.  If people bought and sold cars the way governments negotiate trade deals, the negotiations in the auto dealerships would go something like the following:

Buyer: Although it would greatly improve my family’s standard of living, I don’t really want that new car you have for sale.  But my spouse – who wants you to hire her – is pressing me to buy it from you.  So I’ll give you $300,000 for it.

Dealer: Are you kidding?  I wouldn’t sell this car for anything more than $100.

Buyer: I know you slick sales types. You’re constantly trying to swindle buyers like me into paying less money and then foisting an even greater quantity of stuff on us than we bargained for.  But I’m on to you, buddy.  I’ll not pay less than $250,000 for this piece of junk – and only for this piece of junk!

Dealer: Piece of junk?!  This car is the finest you can find anywhere on the globe!  And before you accuse me of being a swindler, you oughta look in the mirror.  You people come in here all the time, high’n’mighty, trying to give us way too much in exchange for our cars.  You can’t fool me, sir.  But, in the spirit of cooperation, I’ll be a good neighbor and raise my asking price to $1,000 if you also agree to take a second new car from our dealership for free.

Buyer: Ha!  $1,000!  Is that all?  And an additional car to boot?!!  Do you see “FOOL” written across my forehead, ’cause I don’t!  Look, I’m doing you a favor by being willing to buy a car – but just one car – from you in the first place.  Why don’t you acknowledge my self-sacrifice?  I demand that you accept no less from me than $100,000 for this one car.  I won’t pay a penny less for this car and just this car.

Dealer: Look, Mac.  It’s just business.  It’s nothing personal, you gotta understand that.  And I don’t make the rules.  To close the deal, my manager might be willing to forget demanding that you take the second car for free, but he absolutely won’t let me sell this baby at any price higher than $5,000 – well, maybe $6,000 (he’s feeling generous today).  And he, too, is under pressure from our company’s shareholders: if he lets this car go at a price higher than, okay, $7,500, he’ll get fired.  You really gotta put yourself in his shoes.

Buyer: I don’t give a *bleep* about his shoes.  I, too, have a budget that demands my careful attention.  If I pay less than $75,000 for this car, my family will think I’m a fool – and they’d be right!  And my wife would probably divorce me.  But, you’re correct: we both are rational people trying to strike a mutually advantageous arms-length deal.  Tell you what: $50,000 – bottom offer, nothing less.

Dealer: Maacccc!  $50,000?  Do you want to bankrupt our company?  Seriously, mister.  I can’t sell this car at such an absurdly high price.  $40,000, tops.  Absolutely not a cent higher.

Buyer: Come on, dude.  Really?  Look, my wife is really impatient for me to do you the favor of buying this car from you so that you’ll hire her.  And I want to keep my lady happy.  So I’m going to make a personal sacrifice and lower my buying price to $45,000 – and not a cent lower.  Not. A. Cent. Lower.

Dealer (sighing in clear frustration): Ok.  Gimme a minute with my manager.

Forty-five minutes later the salesman walks back gamely to the buyer, forcing a smile, and congratulates the buyer on landing a new car at such a ridiculously high price.  They then sign the sales agreement and shake hands, each wondering silently to himself if he got screwed in the deal.

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… is from page 127 of volume III (“The Political Order of a Free People,” 1979) of Hayek’s Law, Legislation, and Liberty:

Current methods of taxation have been shaped largely by the endeavor to raise funds in such a manner as to cause the least resistance or resentment on the part of the majority who had to approve the expenditure.  They certainly were not designed to assure responsible decisions on expenditure, but on the contrary to produce the feeling that somebody else would pay for it….  The theory and practice of public finance has been shaped almost entirely by the endeavor to disguise as far as possible the burden imposed, and to make those who will ultimately have to bear it as little aware of it as possible.  It is probable that the whole complexity of the tax structure we have built up is largely the result of the efforts to persuade citizens to give the government more than they would knowingly consent to do so.

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Here’s a letter to the Washington Post:

Your recent photo-essay entitled “Humans’ staggering effect on Earth” – featuring pictures of the likes of crowded cities, debris in an ocean wave, and factory emissions – is from a new book entitled “Overdevelopment Overpopulation Overshoot.”  The intent, as revealed by the caption to the first of your series of photos, is to frighten viewers into believing that we are pointlessly destroying the environment with “materialism, consumption, pollution, fossil fuels and carbon footprints.”

This photo-essay is all emotion and no perspective.

Never mind that nearly half of the photos are from countries such as Brazil, Ghana, and Russia with poor records of protecting property rights and encouraging market activities that promote the modern industry, trade, and economic growth that the publishers of this book think are harmful.  Instead, consider running a follow-up photo-essay entitled “Industrialization’s staggering effect on humans.”  This photo-essay would feature full-color, hi-def pictures of benefits that would not exist without modern industrialization and global trade.  Photos, for example, of

– grandparents in Arizona smiling to reveal their own straight and gleaming white teeth (as opposed to the toothless gums of pre-industrial grandparents);

– the hard roof and solid floor of a middle-class home in London (as opposed to the dirt floors and thatched roofs of the flimsy huts that were the norm for most of human history);

– one of the central-heating ducts in that London home (as opposed to the sheep and goats that slept in pre-industrial families’ huts in order to help supply warmth for the family);

– a flush toilet in Marseilles (as opposed to a hole in the ground);

– antibiotic pills (as opposed to the dead bodies of children who were routinely killed by pneumonia or even by infections from simple cuts);

– an ordinary woman standing erect in jeans and a fashionable blouse in Vancouver (as opposed to a pre-industrial woman made stooped and hunched by malnutrition and dressed in drab and filthy homespun);

– a modern washing machine in Stockholm (as opposed to women carrying buckets of water from streams in order to do the laundry);

– a mother and father in Brooklyn surrounded by their three happy and healthy children (as opposed to the pre-industrial family in which the wife died while giving birth, one of the three children died of dysentery, and the still-surviving children with faces scarred by smallpox).

Such a list can be greatly extended.  Its point is to make clear that while economic growth isn’t costless, its benefits are easy to overlook precisely because they are today so common.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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