Some Links

by Don Boudreaux on September 4, 2015

in Competition, Crony Capitalism, Immigration, Myths and Fallacies, Regulation, Work

Inspired by Bryan Caplan’s recent posts on labor economics, my colleague Alex Tabarrok chimes in at Marginal Revolution with a truly splendid post on the same.  Here’s a slice, but please do read the whole post:

The firm v. worker framing focuses attention on the threat to the worker of unemployment. From this perspective it seems as if the firm can “bargain” the worker down to the least the worker is willing to accept and, given the threat of unemployment, that isn’t much.

The firm versus worker framing, however, obscures a point that Tyler and I make in Modern Principles: Buyers don’t compete against sellers, buyers compete against other buyers (and sellers compete against other sellers). Firms buy labor and they are competing primarily not against workers but against other firms. Firms versus Firms! Now that is a real battle!

When firms are thinking about wages what they are thinking about is the threat from other firms. When a firm is hiring it knows it must pay the worker at least as much as other firms are willing to pay.

Note also the data that that Alex includes near the end of his post on the number of worker quits versus the number of worker layoffs: these data strongly suggest that, at least in the labor market as a whole, no monopsony power exists.

And, on another matter, here’s more insight from Alex.

Celebrating the legacy of the late, great Gordon Tullock.

Here’s Cato’s Peter Van Doren (talking with my former student Caleb Brown) praising Jimmy Carter’s economic record while in the White House.  Seriously.

My GMU Econ colleague Tom Rustici has signed on to lead presidential candidate Ben Carson’s economic team.  (I’m assured by reliable sources close to Tom that he, Tom, will not be part of any campaign that endorses the minimum wage.)

I agree with George Leef that a great blunder was committed when government workers were allowed to unionize.

My intrepid former student Alex Nowrasteh is rightly unimpressed with research done by the Center for Immigration Studies’ Steve Camerota.

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Perspective Is Important

by Don Boudreaux on September 4, 2015

in Myths and Fallacies, Seen and Unseen, Trade

Here’s a letter to a long-time skeptical Cafe Hayek patron:

Mr. Ken Quinn

Dear Mr. Quinn:

Thanks for your e-mail.  I did indeed read the letters in today’s Wall Street Journal defending Donald Trump’s plea for protectionism against my case for free trade.  You’ll be unsurprised to learn that I’m less impressed than you are with Ramon Nitzberg’s assertion that lower-priced imports (to quote Mr. Nitzberg) make only “some Americans are better off.  Some of the Americans, those who used to supply these goods and services, are not better off.  They are unemployed Americans.”

Mr. Nitzberg’s assertion is the product of a perspective that’s far too squinty. From a wider and more mature perspective, evidence and economic reasoning contradict this assertion with a vengeance.

The root flaw in Mr. Nitzberg’s assertion is its implication that the number of jobs is fixed and, therefore, that whenever an American loses a job to a change in consumer demand or to a newly exploited means of supplying that good or service using fewer domestic workers, the number of jobs in America declines permanently.  History, however, falsifies this implication. For example, in 1800 three in every four jobs in America were on farms.  In 2015, farm work accounts for only 2 in 100 jobs.  Yet despite this massive destruction of agricultural jobs, today tens of millions more Americans are gainfully employed than were employed in 1800 – and nearly all are employed at jobs that pay much higher wages than were paid in the past.

So while the destruction of most agricultural jobs did indeed leave some workers unemployed, no one (not even, I’ll bet, Mr. Nitzberg) would deny that Americans have been made better off by the ultimate source of this job destruction – namely, consumers’ and producers’ freedom to discover and to exploit lower-cost, labor-saving options.  Only if you and Mr. Nitzberg honestly believe that the economic freedom that yesterday destroyed agricultural jobs in America can be said to have made only some Americans better off do you have any grounds to dispute the claim that the economic freedom that is today destroying manufacturing jobs in America makes Americans better off.

Donald J. Boudreaux
Professor of Economics
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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Carolyn Weaver, RIP

by Don Boudreaux on September 4, 2015

in Current Affairs, Social Security

I just learned the very sad news that Carolyn Weaver has died, at the too-young age of 63.  Carolyn was a talented economist who earned her PhD in economics from Virginia Tech (in 1977) when Jim Buchanan, Gordon Tullock, and the other pioneering members of the Center for Study of Public Choice were in Blacksburg.

No one was more insightful and clear-eyed about Social Security than was Carolyn (as her contribution on this topic in the Concise Encyclopedia reveals).  For many years – from the mid-1980s until at least the mid-1990s – Carolyn was a regular speaker at the annual Public Choice Outreach seminar at George Mason’s Fairfax campus.  Jenny Roback-Morse (who ran the seminar during this period) regularly joked that Carolyn’s engaging, logical, and data-rich lectures were the intellectual equivalent of a horror movie for the students who attended: Carolyn made clear that young people have every reason to be scared for their future finances by Uncle Sam’s mismanagement of the funds they ‘contribute’ to Social Security.

Carolyn is survived by her husband, Bob Mackay, who also for many years lectured brilliantly at the Public Choice Outreach seminar.

She will indeed be missed.

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… is from pages 220-221 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

Making it illegal to pay less than a given amount does not make a worker’s productivity worth that amount – and, if it is not, that worker is unlikely to be employed.  Yet minimum wage laws are almost always discussed politically in terms of the benefits they confer on workers receiving those wages.  Unfortunately, the real minimum wage is always zero, regardless of the laws, and that is the wage that many workers receive in the wake of the creation or escalation of a government-mandated minimum wage, because they either lose their jobs or fail to find jobs when they enter the labor force.  The logic is plain and an examination of the empirical evidence from various countries around the world tends to back up that logic, as we shall see.

Sowell then goes on to summarize this empirical evidence.

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Here’s Bob Higgs at his best.  And again here – from which comes this slice:

The USA has become a legal nightmare of perfectly legal injustice, and aside from the lawyers, who thrive on this vast body of injustices, hardly anyone has an inkling of just how enormous and pervasive it really is.

Speaking of which, Jason Kuznicki explains that ignorance of today’s “laws” is indeed often a genuinely good (even if not often enough a “legally” acceptable) excuse.

From the “Yet Another Environmentalist Myth Is Busted” files, Reason’s Katherine Mangu-Ward explains the enormous economic benefits of plastic bags.  (HT David Henderson)

My colleague Bryan Caplan ruminates insightfully on some issues in labor economics.  A slice:

More importantly, the “unemployment is worse for janitors than corporate lawyers” story implies that employers prefer to hire desperate workers.  In the real world, the opposite is true.  Employers favor currently employed applicants over unemployed applicants, and short-term unemployed applicants over long-term unemployed applicants.  That’s why workers who are desperate for a new job doctor their resumes to look less desperate, not more.

Recently minted GMU Econ PhD Abby Hall reflects on the economic calamity that is Venezuela.

Mark Perry relates yet another instance of the cruelty of minimum-wage legislation.

Speaking of the cruelty of minimum-wage legislation….  (HT Bruce Berlin)

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Quotation of the Day…

by Don Boudreaux on September 3, 2015

in Adam Smith, Economics

… is from page 335 of the original edition of Edwin Cannan’s 1927 collection, An Economist’s Protest; specifically, it’s from an essay – “Adam Smith on Twentieth-Century Finance  ” – that  Cannan contributed, marking the 200th anniversary of the birth of Adam Smith, to the June 1923 issue of Economica; the bulk of this quotation is a ‘quotation’ that Cannan (who was a great Smith scholar) imagines Smith would have written had he, Smith, been around to observe the state of economics in 1923 (links added):

We can picture his [Smith’] somewhat contemptuous tolerance of

“the very ingenious speculations of Mr. Jevons, Mr. Marshall, Mr. Edgeworth and others, who have introduced a sort of algebra or geometry into the science of political economy.  The followers of that system are very numerous; and as men are fond of appearing to understand what surpasses the comprehension of ordinary people, the cypher, as it may be called, in which they have concealed, rather than exposed, their doctrine, has perhaps contributed not a little to increase the number of its admirers.  While it has been of scarce any service to the statesman and has done little to provide either a plentiful subsistence for the people or a sufficient revenue for the sovereign, it has at least given rise to much thought and speculation among the youth at the universities, more especially at that of Cambridge, which in my time was sunk in a torpor, no less profound, I believe, than that of Oxford.”

Those of us who have read carefully much of Adam Smith’s works, and have studied his life, can well imagine Smith actually writing the above, and in that precise style, were Smith still alive at the age of 200.

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A Tale

by Don Boudreaux on September 2, 2015

in Reality Is Not Optional, Scientism, Seen and Unseen, Work

Once upon a time in the town of Crowville, somewhere deep in the heartland of America, the town elders secured the imposition of a poll tax to be paid by everyone in Crowville who votes in any political election in that handsome burgh.  The tax took the form of a flat $100 fee to be paid by every man and woman each time he or she seeks admission to a polling place in Crowville.

The elders further arranged for the proceeds of this tax to be used to subsidize transportation to the polls of low-income Crowvillians.

The elders heartily patted themselves on their backs for their wisdom and charity.  “This tax – er, really, a magnanimous benefit to Crowville’s poor – will increase the political participation of poor Crowvillians.  The poor will now find voting to be less costly as a result of this tax.  The poor will therefore vote in larger numbers than before – and, certainly, not in smaller numbers.  Yeah for us!!”

A small cadre of skeptical Crowvillians frowned.  These skeptics (they thought of themselves as realists, so that is what we will call them from here on in) asked the elders: “How do you figure that imposing a tax on the act of voting will increase people’s willingness to vote?  Aren’t you worried that the monetary value to poor Crowvillians of whatever transportation subsidy you supply will be far less than the direct cost to each of them of the poll tax that they must now pay in order to vote?  Surely a Crowvillian who is too poor to buy a bus ticket to a polling place, or who can’t find a friend to drive him or her, will be very negatively affected by your poll tax.  The final result will be less, not more, voting.”

The elders snarled at the realists.  “Don’t be so simple-minded, you ideologues you.  Yes, in simple textbook theory raising the cost of voting with a poll tax discourages voting, especially of the poorest of our citizens.  But the real-world is much more complicated than your basic theory.  First, we’re recycling the bulk of the proceeds of the tax into our ‘Transportation to the Polls” initiative.  Second, it’s really an empirical question of whether or not a poll tax in fact discourages voting.  One should not prejudge the matter based merely upon theory.  And you do realize, don’t you, that people’s demand to vote is such that they are unlikely to be dissuaded from voting merely by a extra monetary charge to do so?”

The realists’ jaws dropped.  Never mind the obvious logical inconsistency in the elders’ argument for why a poll tax is unlikely to discourage voting.  The realists were flabbergasted that the elders really were confident that conditions affecting real-world voting were such that their poll-tax scheme would not discourage voting.

The realists pointed out to Crowville’s elders that they – the realists – actually have several empirical studies that show that poll taxes do in fact, as common sense suggests, reduce people’s willingness to vote.  The elders snarled even more dismissively, insisting that those empirical studies are naive and flawed.

The elders continued: “On our side are the best politimetricians in the world.  These quant-jocks have done serious empirical research into the effects of poll taxes on voting and they conclude that, when the models are properly specified and all the relevant real-world trends are correctly accounted for, higher poll taxes do not reduce voting.  To deny these results is to deny Science.  To deny these result is to substitute ideology for fact.  We elders have Science on our side!  The poll tax is supported by Science!”

The realists responded with more – and more elaborate – empirical studies of their own.  The realists’ studies found that, when the models are properly specified and all the relevant real-world trends are correctly accounted for, higher poll taxes do indeed reduce voting.

There ensued a duel of quantitative studies.  This duel went on endlessly; indeed, the duel continues down to this very day.  (One of the elders’ most popular studies is the study that found that while in fact voting did decline in jurisdictions in which poll taxes were raised, when controlling for the independent – ‘exogenous’ – trend of a decline in voting in those jurisdictions, the higher poll taxes in fact appear not to discourage voting at all.)  Study after study, each one more elaborate and technical and minutely specified than its predecessor, poured forth.

Astonishingly (for it is, isn’t it, astonishing?) the elders’ studies always found that poll taxes do not discourage voting while the realists’ studies found that poll taxes do indeed discourage voting.

The elders, while they cannot be said to have won the scientific argument, won the public-relations argument.  The elders successfully portrayed the poll tax as a way to help poor voters; the elders’ intentions were oh-so-good and noble.  The people sided overwhelmingly with the elders, and the poll tax was raised (and, indeed, indexed to inflation!).  And all realists were ridiculed as unfeeling knuckle-draggers when they pointed out that the empirical record in favor of the poll tax is far too weak – and the logical argument against it is far too strong – to justify a poll tax.  The elders’ self-professed morality and good intentions gave credence to their dismissal of the realists’ concerns and to their assurances to the people that science is clear that poll taxes do not discourage voting.

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Quotation of the Day…

by Don Boudreaux on September 2, 2015

in Reality Is Not Optional, Scientism, Seen and Unseen, Work

… is from page 233 of Milton & Rose Friedman’s great 1980 book, Free To Choose (first emphasis original; second emphasis added):

Moreover, the ability of unions to raise the wages of some workers does not mean that universal unionism could raise the wages of all workers.  On the contrary, and this is a fundamental source of misunderstanding, the gains that strong unions win for their members are primarily at the expense of other workers.

The key to understanding the situation is the most elementary principle of economics: the law of demand – the higher the price of anything, the less of it people will be willing to buy.  Make labor of any kind more expensive and the number of jobs of that kind will be fewer.

For example, while in practice a legislated minimum wage will reduce over time the number of jobs for low-skilled workers, in principle the negative effects of the minimum wage can be manifested almost exclusively in changes in the kinds of jobs filled by low-skilled workers.  A minimum wage could, in principle, cause nearly all of the jobs filled by low-skilled workers to become so much more demanding for workers, more dangerous to workers, or otherwise less desirable for workers to hold (yet more productive from the standpoint of employers) that the number of such jobs doesn’t decline.  This ‘change-in-the-nature-of-the-jobs’ effect is one among many reasons why empirical studies that purport to find no negative consequences of minimum-wage legislation for low-skilled workers should be approached with enormous helpings of skepticism: no such quantitative studies can possibly measure accurately the adjustments that occur on the many margins along which employment relations are defined in reality.

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Mr. Bob Keener
Business for a Fair Minimum Wage

Dear Mr. Keener:

In your latest e-mail proclaiming the alleged merits of a government-enforced rise in the minimum wage, you quote Doug Havron, owner of Gabby’s Burgers and Fries in Nashville, as saying that “Raising the minimum wage is good business.  Paying people good money leads to better service and self-motivated behaviors.  It is smart in the short and long run.”

Because absolutely nothing prevents Mr. Havron from raising his workers’ pay now, and without being forced to do so by government, the fact that he evidently hasn’t yet done so means that Mr. Havron doesn’t really believe what he’s quoted as saying or that as a businessman he’s cartoonishly incompetent.  Either way, rather than Mr. Havron’s remarks serving to strengthen your case for a higher minimum wage, they do quite the opposite by revealing Mr. Havron to be someone whose advice should be completely ignored by everyone.

Donald J. Boudreaux
Professor of Economics
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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Reason’s Jim Epstein just produced this superb video on how Uber is creatively destroying New York City’s baneful taxicab monopolization system.

 A temptation is to feel sorrow or pity for taxicab-medallion owners whose personal wealth, insofar as it has been based on these medallions, is now plummeting.  Do not feel any sorrow or pity for these medallion owners.  The wealth they are now losing to competitive forces was the product of government-imposed unnecessary restrictions on competition – restrictions that, for 78 years now, have artificially reduced the supply of taxi services in New York City and artificially raised the prices that taxi customers had to pay.  Against the concentrated pain now being suffered by these former monopolists (or, put differently, by these former willing suppliers in a monopolized system) we must weigh the dispersed pain suffered by taxi customers in Gotham from 1937 until the arrival of Uber.

This dispersed pain is much harder to see than is the concentrated pain now being suffered by medallion owners.  This reality, however, does not make this dispersed pain less real or significant than it would be were it more concentrated and (hence) more visible.  This dispersed pain was suffered for decades, every minute of every day, by tens of millions of ordinary people seeking surface transportation in Manhattan and New York City’s four other boroughs.  Every taxi rider in NYC, from 1937 until today, paid a price higher than the forces of competition would yield.  This higher price was the product of an unholy alliance between medallion owners, taxi drivers, and New York City political officials.  This higher price was the bitter fruit of cronyism.

And this dispersed pain, spread out over nearly eight decades and over tens of millions of people, while much less visible than is the concentrated pain suffered now by medallion owners, is in total much greater than is the concentrated pain.  The taxi-medallion system was a clever cronyish method of hourly picking the pockets of unfortunate millions in order to line the pockets of a fortunate few.  And while many of the fortunate few did indeed win genuine fortunes as a result of this corrupt system, a great deal of the money picked hourly, day after day and decade after decade after decade, from the pockets of innocent people was transferred to no one: it was simply wasted on supply restrictions.

Hail Uber!  (But don’t hail a cab in NYC.)

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