Truly, Money is NOT All that Matters

by Don Boudreaux on April 22, 2006

in Myths and Fallacies

"Oh, you economists!  You think that the only thing people care about is money.  How ridiculous!" — such runs a typical accusation by people who know nothing about economics.

Economists, as a matter of fact, are especially aware that people care about much more than money.  That’s why, for example, economists understand that even low-skilled workers who find or retain jobs in the wake of a hike in the legislated minimum wage might nevertheless be worse off than if the minimum-wage had not been raised.

My latest column in the Pittsburgh Tribune-Review explains.

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{ 31 comments }

spencer April 22, 2006 at 10:40 am

Actually, on 5 April 1979 Jimmy Carter began the phased decontrol of oil prices and from April 1979 to April 1980 the price of oil rose from $15.85/bbl to $39.50/ bbl peak that has only recently been surpassed.

Moreover, this was a peiod of massive oil exploration as the rig count reached an all time record level — almost double the previous record in the early 1950s.

During 1979 domestic oil and gas production rose sharply and the only source of supply that fell was imports. I've been waiting about 20 years for someone to explain how domestic price controls in the US caused the supply of oil imports from OPEC to fall.

Can you do that?

liberty April 22, 2006 at 12:39 pm

Where are the gas lines today, spencer?

happyjuggler0 April 22, 2006 at 1:02 pm

The whole point of having a price ceiling is to make the price lower than if market forces had set the price. If the good in question is global, how can such price controls do anything but cause shortages as producers sell to the highest bidder elsewhere?

No one but a person using communist-think (sorry, but a rose is a rose) would imagine anyone thinking: "Hey, I used to be able to make $16 per unit in the US. Now I can make $26 by selling in the US, but I can make $27 by selling in Japan. The difference between them is only a dollar, and $10 is a more than reasonable increase over what I used to sell it for, so I'm happy enough to settle for that instead of getting all I can for it."

My point is the price can go to $300 per barrel in the US, but if someone else is willing to pay $300.25 then it will go to the higher price of course. Therefore in order for the person offering $300.00 to get the barrel, he has to offer at least that much. If all the sellers already are willing to sell to someone else at $300.25, then he really has to offer more than that, not the same price.

Price ceilings stop this process from working, and cause shortages. Even price ceiling far higher than whatever the current price is have a negative effect on supply. They discourage new domestic production (or in the case of oil, exploration), and these R&D dollars (which is basically what they are) go elsewhere. Then if the price ever goes high enough to hit the ceiling, you have less supply than you otherwise would have had, and more shortages than otherwise.

happyjuggler0 April 22, 2006 at 1:42 pm

A good history and analysis of oil prices, complete with cool charts:

http://www.wtrg.com/prices.htm

spencer April 22, 2006 at 2:50 pm

The point is that price controls in 1979 had essentially nothing to do with the shortages that were caused by a drop in OPEC production.

I happen to agree that price controls are a bad thing.

But I also happen to think that "POOR" economic analysis is also a bad thing.

My reason for posting is the horible analysis I see here that spreads incorrect information.

Note that the source happyjuggler0 refers to also states that the reason for shortages in 1979 was development in the mideast that had nothing to do with price controls.

I happen to have enough faith and belief in free markets that I do not think I have to run around making up incorrect memes about it.

happyjuggler0 April 22, 2006 at 6:42 pm

The price soared because of developments in the MidEast. The US shortages (aka gas lines) occurred because of price ceilings that were lower than the global price for oil. To recap my explanation above, no one was going to export oil to the US when they could get more for it elsewhere, unless they were under contract to do so.

Where is the horrible economic analysis in that paragraph?

Patrick R. Sullivan April 22, 2006 at 7:23 pm

' I've been waiting about 20 years for someone to explain how domestic price controls in the US caused the supply of oil imports from OPEC to fall.'

Who has made that claim?

donny April 22, 2006 at 11:13 pm

Don Boudreaux didn't say that Opec sold less oil because of fixed prices; he said that more oil would be produced (not necessarily by OPEC), if gas and oil prices were allowed to rise.
The site posted by HappyjugglerO mentions only domestic oil price controls, so that the "phased decontrol of oil prices" mentioned by Spencer would only apply to domestic supply, and domestic supply did go up in 1979.

donny April 22, 2006 at 11:39 pm

"if gas and oil prices were allowed to rise."
whoops. I guess if opec oil were at world prices and domestic oil and gas were fixed, then more expensive opec oil wouldn't have been as profitable to process into gasoline once it was brought into the U.S. Might not have been profitable at all.
War may have lowered opec production independent of American policy, but relatively rich (even in the 1970s) Americans, given a free hand, could perhaps have increased their share of opec's exports.

blink April 23, 2006 at 12:14 am

Unexpectedly, I discovered in the Tribune-Review column a new reason to raise the minimum wage – at least from the government’s perspective: if workers are induced to substitute wages for non-monetary compensation, tax revenues will rise. Of course, the increase must be modest; otherwise a reduction in employment will reduce tax revenues. Ironically, this tax increase saddles the least productive workers while higher earners continue to enjoy their non-monetary (and un-taxed) benefits. So, money may not be all that matters to the employer and employee, but for the tax collector there is nothing else.

happyjuggler0 April 23, 2006 at 12:51 am

Good point blink. It is also worth noting that businesses pay various payroll taxes on the monetary wages that their employees earn, but not any non-monetary benefits.

On the topic of minimum wage, if the government would abolish all payroll taxes and also raise the minimum wage by the amount saved on those earning the mimimum wage, and also raised the general corporate tax rate by the amount left "unpaid for", then it would be revenue neutral, and also a raise for minimum wage earners without ncreased unemployment.

Alternatively, they could simply abolish payroll taxes and raise the general corporate tax rate the same amount "lost" in revenue, and this should lower the unemployment rate at the expense of productivity enhancing machine spending which is now tazed at a higher rate.

Yet another alternative is to abolish payroll taxes, which have got to be the stupidest idea for taxes around, and not offset the lost revenue at all, or not offset it by any kind of investment tax anyway, such as corporate taxes, capital gains taxes, dividend taxes etc. and offset it by a tax increase elsewhere. Either way should slash the unemployment rate without hurting productivity enhancing capital investments.

happyjuggler0 April 23, 2006 at 12:55 am

Oops. The first part would not be entirely revenue neutral because part is being used to raise the minimum wage, but I suspect it would be close enough, especially after the increased revenue from formerly unemployed people, and the decreased government spending on those people.

Close enough to revenue neutral overall for government work anyway.

Ed April 23, 2006 at 8:11 am

I like the new column, though I think what you call non-monetary still effectively is monetary. If I trade .10 an hour for more breaks, the breaks have a value, and calling them non-monetary doesn't mean that they have not been monetized.

The other thing I think everyone misses on minimum wage is that the employer may not be able to do things like make up for higher wages by taking away breaks, etc. but rather may have to take the money straight out of profits.

In other words, imagine three pizza parlors, all of whom deliver pizza in an area. The market for pizza delivery is clear. Let's assume they each profit $1 per pizza sold at $10 including all costs going in (including labor). The demand for pizza is 1,000 pizzas each Friday night.

Now if you increase minimum wage, let's say that the profit per pizza drops to $.95. The lost $.05 cannot be passed on to the consumer. Why? Because pizzas already would have been selling for $10.05 before since the companies obviously were maximizing sales prices until the supply demand curve intersected. More than $10 presumably would cause buyers to get frozen pizzas, go out to dinner, whatever.

So the pizza seller will fire someone? No, presumably they only hired who they needed and were already trying to get them to maximize their output. Otherwise, the pizza companies were not acting too rationally before the wage hike.

Will they take away or lower benefits? How could they? They would have done that already if they could and were acting rationally to maximize their profits before the min wage increase.

Thus, the only possibility is to absorb the lost profit (or switch their capital to a more profitable enterprise perhaps)

Now, you can certainly object to this on libertarian grounds, but I don't see how raising the minimum wage hurts the worker.

johngaltline April 23, 2006 at 10:26 am

Actually, the business does pass some of the .05 on to consumers. The business owner has alternative investments that are less affected by the minimum wage, and he can only absorb so much of a wage hike before he will switch his capital to one of those alternatives.

The price hike does not eliminate the sale of pizza, but it does reduce the amount sold.

The reduced sales reduce demand for employees, and so hours (or employees) are also cut.

The smaller business reduces the required plant size, and the business owner realizes this as a portion of his capital that is no longer returning. So he eventually sells an oven, or perhaps he relocates to a smaller shop.

The savings are then invested in something more profitable, which implies something that employs less minimum wage help. In the end, the minimum wage workforce is smaller, and unskilled workers find fewer opportunities to get on the bottom rung.

Meanwhile, there is less pizza, even though there are the same number of mouths to feed. This is realized as inflation in the price of pizza. The reduced pizza production means more would-be pizza consumers must be excluded.

spencer April 23, 2006 at 12:17 pm

Patrick Sullivan — the facts made that claim. In 1979 domestic oil and gas output rose sharply and imports fell sharply. The shortage of oil was because of a fall in OPEC production not domestic production.

So I am still waiting for someone to exdplain how price controls caused OPEC output to fall while domestic production was rising.

liberty April 23, 2006 at 1:44 pm

>Now, you can certainly object to this on libertarian grounds, but I don't see how raising the minimum wage hurts the worker.

1. They can go out of business, if they are that tightly maximizing profits. A raise in the minimum wage for all of their workers may cost more than 5c per pizza and it may not be worth continuing in the business.

2. They can cut staff in half or not expand or close one branch, which may allow them to reduce costs. Rents may differ at different locations, it may have been worth it to invest in a new shop, but now with reduced profits it isn't worth the risk of a higher rent location – which might have brought more profits than this location but which is now out of the budget.

3. Reducing hours is often a good way to re-maximiza profits after a wage hike. For example, rent is a major factor in costs – it may no longer be worth staying open during the week if they could rent out the space to another business during the week (might not be possible for pizza, but for other small business it is) which means cutting worker's hours down.

I could go on, but the bottom line is that reducing profits always hurts the worker – because profits are why firms are in business, they are why they expand, they are why they give out raises, etc etc. What hurts the firm hurts the worker. Also, Walmart employees own stock… anything that hurts the profit hurts the stock….

Patrick R. Sullivan April 23, 2006 at 1:54 pm

'Patrick Sullivan — the facts made that claim.'

Iow, you made it up out of whole cloth. The facts appear to be that due to the Iranian Revolution and the ensuing Iran-Iraq war OPEC oil production was severely curtailed.

Partly due to domestic price controls in force since 1973 non-OPEC oil wasn't increased enough to offset the shortage. Hence service stations cut back on hours of operation since they could sell all the gas they could get in those reduced hours.

Since January 1981, thanks to the first official action of President Ronald Reagan, we haven't had price controls nor gas lines.

happyjuggler0 April 23, 2006 at 1:54 pm

Spencer,

First of all you changed your question. Your orignal question was:

I've been waiting about 20 years for someone to explain how domestic price controls in the US caused the supply of oil imports from OPEC to fall.

While your new question is:

So I am still waiting for someone to exdplain how price controls caused OPEC output to fall while domestic production was rising.

Do you see the difference? US price controls wouldn't reduce OPEC production, not by 79 or 80 anyway. But they would logically reduce imports, as many here have tried to explain to you. In fact, not only is it likely to expect that imports would fall when there is a domestic price ceiling lower than the world price, but it is highly implausible to think that anything but a drop in imports would happen.

I don't recall the exact methodology of Carter's price controls, but one thing you can be sure of is that he would make the price ceiling lower than world oil prices, or there would be no point to the ceiling.

Therefore, in lieu of an exact analysis, I'll give you a hypothetical example. Suppose technology is such that a $10 per barrel price of oil, with a market price markup at the time of 20% at the time which translates into a $1 gallon of gasoline at the pump. I am making these numbers up since I don't know what the real ratios would be in general, but the important thing is the principle. Now also suppose that this is linear, that $20 per barrel equals $2 per gallon, $30 equals $3 per gallon etc.

Now suppose that the world price (i.e. no price controls elsewhere) for oil is $20 per barrel, while the US says that gasoline this month can't rise above $1.67 per gallon. Why would anyone import oil this month under such a scenario? While there is no basic loss, there is no profit, so you are tying up capital that could be making a return elsewhere. $1.67 plus the 20% "normal" world markup equals $2.004 per gallon, thus $1.67 is the profitless cost of the gasoline, before the "normal" 20% markup.

Imagine instead that the US decides a 10% markup on price "is reasonable", and anything above that is "price gouging", both of which are otherwise arbitrary terms, and that price gouging is illegal. You still have the same effect. Owners of overseas oil can make a profit selling in the US, but they can make a bigger profit by selling outside the US, so they do.

Therefore Spencer, what your real puzzle ought to be is why anyone would import any oil at all under price controls that make it less profitable than selling at an uncontrolled overseas price. At the very least it ought to be painfully obvious now why oil imports would drop in the US under price controls. Whether or not OPEC's oil output is going up or down is totally irrelevant.

My best guess as to why there were any oil imports at all is that some clever (or lucky) importers locked in a price under contract that is lower than what the future world price turned out to be, or that some unlucky (or "unclever") importers locked in a price under contract that was higher than what the future price of US legal price ceilings of gasoline. Either way, the imports would be because of previous contracts before the price ceiling was set.

happyjuggler0 April 23, 2006 at 2:11 pm

liberty,

You left out an important factor. Imagine you are an entrepreneur. You are looking to start a business, and you have plenty of capital to do so. You have several industries to choose from. Which one would you choose? Most people would choose the most profitable one. Raising the minimum wage, not to mention having a minimum wage in the first place, reduces the profitibility of any business that employees very low skill workers. Thus it reduces the number of new businesses in these industries, and thus reduces the future employment rate of low skill workers.

The same logic applies to existing businesses as well that have choices on how to expand. They expand into a low skill labor intensive line of business that has artificially and arbitrarily rising costs, or they can gointo one with higher skill content that is high enough off the minimum wage for it to not affect profits. This also reduces future employment rate of unskilled workers.

liberty April 23, 2006 at 2:31 pm

>You left out an important factor.

I left out several. As I said, it affects profits and anything that affects profits will affect the workers. You are exactly right about, especially small, entrepreneurs. Many small businesses begin by paying their workers a very low wage – while in training, for the first 6 months or so as they learn the skills and gain the trust of the employer – and then they get a raise. If the minimum wage is raised the employer will not be able to hire as many of these new workers, or won't be able to offer them a raise, or won't be able to afford the rent for the new branch, etc. Workers come with capital costs – be it a new oven, a larger store or new branch, or tools, training or transport costs. When profits are reduced by a hike in the wage, its often easier to simply not hire more workers.
Fewer hirings means not only higher unemployment but also lower wages – as competition for labor is reduced.

The old socialist idea of hurting the greedy profiteer and helping the worker is simply a fallacy. If you hurt the employer, you hurt the employees. That's a fact.

Scott April 23, 2006 at 3:16 pm

In addition to the comments above, here are a few more examples of how raising the minimum wage can hurt workers.

Capital investment can also be replace labour if it is now more economical. Suppose there is a PizzaMaker 3000 that can replace some labour but reduces the profit on pizza to $0.97 per pizza. Under the old minimum wage it made sense to use labour because the profit was $1.00 per pizza,. However, if using the same labour at the new minium wage now reduces profit to $0.95, it now makes sense to replace workers with the PizzaMaker 3000.

Another alternative is that while the number of workers stays the same, the individual workers performing those jobs are different. The old workers are replaced with new workers who are more productive and justify the higher wage. This doesn't change labour expenses but it does mean that lower skilled workers are replaced with slightly higher skilled workers.

spencer April 23, 2006 at 4:43 pm

My origninal comment pointed out that Carter lifted price controls on 5 April 1979
when the price of oil was 15.85 and a year later it was 39.50.

Moreover, domestic production of oil peaked in 1969. In addition in the first 10 years after Reagan lifted controls the averge annual change in domestic oil production was -1.8% — that right after Reagan lifted price controls oil production fell.

happy jugler — maybe you might be able to convince someone that you know something if you did not guess but actually tried to use some facts in your analysis.

The facts that show prior to 1990 the refiner acquisition cost of imported oil was always higher then the refiner acquisiton costs of domestic oil. Since 1990 the reverse has always been true.

Why don't you now expain why domestic oil production peaked in 1969 about a decade before Carter lifted the price controls do you can continue to display your ignorance.

spencer April 23, 2006 at 4:46 pm

happyjuggler — why don't you show everyone what a fool i am by explaining the role of the Texas Railroad Commission in the operation of the "free" market for oil.

happyjuggler0 April 23, 2006 at 6:27 pm

Ah Spencer. You ask for help, then lash out at those who try to help you. Not a good strategy for receiving further help.

Carter started the process, with an emphasis on process, of decontrolling prices in April of 79. It is not clear to me why didn't simply abolish price controls like Reagan did on his first day in office, since those price controls led to needless gas lines, as economic theory said they would.

It is not at all clear to me how you can claim that Carter lifted price controls, then claim that Reagan lifted them, then claim I am ignorant about Carter having price controls. I suggest you get your facts straight.

You wanted an explanation why oil imports *could* drop because of price controls. I gave you an explanation. I also, among other posters, explained to you that price controls led to gas lines, which you seem to want to ignore.

You can choose to pretend that supply and demand can be changed by government fiat by the Left. It can't. Supply and demand raise and lower the price of something, and while the government can foolishly fix the price, prices too low means lines, or shortages if you prefer that term. Setting the price too high means you get a shortage of buyers. Two examples of a shortage of buyers are employers for low skill workers due to minimum wages, and also price floors of various sorts for agriculture, which also lead to overproduction and to farming on marginal land that has better uses.

If I'm wrong, then perhaps you can explain why we had gas lines in the US but in virtually the rest of the world they didn't. I've been waiting 25-35 years for someone to explain that Spencer.

Hubbert's Peak explains why US oil production peaked about 35 years ago. I'm not sure the relevance here, but you can google to find out about it if you want.

I never claimed there was a free market for oil under The Texas Railroad Commission. We basically don't have a free market now either, in basically anything, although it is much more free in the US compared to what we had before with regards to oil. The best description of what we have in the US in most of our markets is a freer market.

Christopher Taylor April 23, 2006 at 8:16 pm

To recap my explanation above, no one was going to export oil to the US when they could get more for it elsewhere, unless they were under contract to do so.

That seems like a valid analysis and excellent point. I found a good article at Coyote Blog that deals with this as well: Why Aren't We Seeing Long Gas Lines?
http://www.coyoteblog.com/coyote_blog/2005/07/why_arent_we_se.html

and on my blog I have an article Oily Politics
http://networdblog.blogspot.com/2006/04/oily-politics_22.html

in which I examine the steps that we all can take to lower gas prices. Much of it is in our hands: drive less, buy less gas, and they'll lower the prices to generate more customers; but there are several things the government can do – even if some of them Liberty considers communist ;)

liberty April 23, 2006 at 11:32 pm

The question, Christopher Taylor, is if you understand the problem with price caps, why would you *want* to begin an investigation into "price gouging" as you suggest on your site?
… since you aren't a commie ;-)

happyjuggler0 April 24, 2006 at 12:25 am

Christopher,

Just when I thought I had encountered the rare intelligent article (I'm talking about your linked blog) about our surrent oil situation with useful suggestions about what to do, you started spouting off about corporate responsibility and such. I won't add too much as I think Economic Liberty put it better than I could, although I had to admit I thought at first I was reading a rewritten (much better than I did) response of one or more of my posts here when I read it. Lol.

However this one I had to answer:

"I agree that most business should be left unmolested, market forces will deal with prices in most cases. Non critical business such as burger stands, shoe stores, limousine drivers, yacht builders, and so forth are fine without much government attention at all, outside of taxation. But businesses critical to the economy of the nation and the people that live there fall into a different sort of category to me."

So you think the free market is basically thebest way to handle things, except when they are important? It is this type of thinking that has our K-12 industry being run by incompetent governments and is the laughing stock of the developed world, while our higher education which is mostly in private hands is the envy of the world.

I'll add one further thought. Or two. High prices discourage demand. Browbeating oil company CEO's to reduce prices misses the fact that prices are rising due to lack of new supply in the face of rising demand in China and elsewhere.

CEO pay is between the CEO and the shareholders, and is none of our business. The Exxon CEO was the best in the business according to his peers, and it would not have done Exxon or the American public any good in terms of gasoline prices if he had gone to work for BP (Beyond Pathetic) instead. Although he almost certainly would have done more to beef up BP's shoddy safety and quality work in its pipelines and plants, and this may well have prevented a nasty leak of BP's recently (google for it), and saved some Texans lives in another incident.

Overall a nice post anyway though, despite the populist foolishness here and there.

And I notice you published the link that I made earlier in this thread. :)

donny April 24, 2006 at 7:28 am

I agree that most business should be left unmolested, market forces will deal with prices in most cases. Non critical business such as burger stands, shoe stores, limousine drivers, yacht builders, and so forth are fine without much government attention at all, outside of taxation. But businesses critical to the economy of the nation and the people that live there fall into a different sort of category to me."

So you're saying that businesses essential to the welfare of the people should be molested?
I never understand how people can be against big greedy corporations and think that the answer is to give more power to the biggest greediest corporation of all–
government.

spencer April 24, 2006 at 9:15 am

Happyjuggler0 — you just keep doing the same thing of putting forth hypothetical explanations that do not conform to the facts of the situation. You are right Carter had a phased decontrol, but in the first year of his decontrol prices rose from $14.85 to $39.50. Yes, it would have been better to completely decontrol, but the regulations he followed did not prevent firms from passing cost increases through.

Yes, it was easy for Reagan to decontrol when prices had already been falling for over a year when he took office.

Your statement: "Therefore Spencer, what your real puzzle ought to be is why anyone would import any oil at all under price controls that make it less profitable than selling at an uncontrolled overseas price."

shows you do not know what your are talking about. According to refiner's acquisition prices, import prices were higher then domestic prices in 1979. But that was essentially always true prior to 1990 and the reverse was almost always true after 1979. Price controls never limited the ability of oil companies to pass through higher import prices — they only limited the ability of the firms to raise the price of oil from preexising wells.

But the core of the dispute is you never explain the supply situation that in 1979 domestic production rose sharply and imports fell. The entire supply shortfall stemmed from the drop in imports and there were no limits on oil companies ability to pass higher import prices through.

The bottom line is that you are making the argument that something that did not exist — price controls on oil imports –caused the shortages in 1979.

liberty April 25, 2006 at 1:15 am

> LOL! You'd probably have a better job of calling Tucker than I would. Maybe you should ask Hawkins to do it.
by abel on 2006-04-25 00:07:12

Weren't there price controls both in '73 and '79?

donny April 26, 2006 at 7:01 am

"The bottom line is that you are making the argument that something that did not exist — price controls on oil imports –caused the shortages in 1979."
What about the price controls on gas itself? I don't recall any long lineups for oil.

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