My friend Mike Long sent the following to me by e-mail, which I share here with Mike’s kind permission (ellipses are original).  (Mike’s note is in response to the U.S. Department of Labor’s newly imposed overtime-pay diktats.)

Others have probably commented on this possible effect of the new overtime rules but I haven’t read anything. In addition to more automation, I predict that these rules will accelerate the trend of companies outsourcing more and more work to contract labor vis a vis the “gig” economy, eventually eliminating almost all hourly employees from the payroll and their associated wages and benefits (think health care, vacation, sick time, etc). Eventually you will reach the point where the only employees a company has will be highly valued, highly compensated ones. This effect would probably have happened in any case but at a pace that would have given lower skilled employees more time to integrate themselves into the brave new world of “gig” work. Instead there will likely be massive disruptions to the labor market and peoples lives. The increases in minimum wages may also accelerate this trend.

To carry this concept a little further (and others probably have) . . .

It may even be the case that highly skilled workers will find it advantageous to be contract workers rather than employees. Many high tech startups already get started in this fashion, hiring programmers and design engineers on a contract basis. One possible scenario is that these “gig” contracts might include some kind of revenue sharing clause so the worker earns a share of future sales. As the time from initial concept to first revenue from a customer gets shorter and shorter this type of arrangement becomes more and more feasible. From the perspective of a founder this also has the advantage of requiring less up front capital to start a company, especially when there is no need for a large investment in capital equipment. Instead of selling their concept to venture capitalists founders will be selling it to the skilled and experienced workers they hire as contractors.

Taken to extremes this leads to “virtual companies” who have almost no employees, and no physical presence. And no payroll taxes, no reporting, no regulatory compliance, no discrimination, …..

And here’s another quotation from another-friend’s e-mail, the American Spectator‘s Ross Kaminsky:

The fundamental question [about these overtime-pay diktats is] “What business is this of the federal government’s?”

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Deirdre McCloskey wrote The Saturday Essay for today’s edition of the Wall Street Journal.  It’s entitled “How the West (and the Rest) Got Rich.”  Below are some slices (link added).  (Tonight at 8:30pm EDT on C-SPAN2’s BookTV there will air my April 21st Conversation with Deirdre.)

And these figures don’t take into account the radical improvement since 1800 in commonly available goods and services. Today’s concerns over the stagnation of real wages in the U.S. and other developed economies are overblown if put in historical perspective. As the economists Donald Boudreaux and Mark Perry have argued in these pages, the official figures don’t take account of the real benefits of our astonishing material progress.

Look at the magnificent plenty on the shelves of supermarkets and shopping malls. Consider the magical devices for communication and entertainment now available even to people of modest means. Do you know someone who is clinically depressed? She can find help today with a range of effective drugs, none of which were available to the billionaire Howard Hughes in his despair. Had a hip joint replaced? In 1980, the operation was crudely experimental.

….

Look around your room and note the hundreds of post-1800 ideas embedded in it: electric lights, central heating and cooling, carpet woven by machine, windows larger than any achievable until the float-glass process. Or consider your own human capital formed at college, or your dog’s health from visits to the vet.

The ideas sufficed. Once we had the ideas for railroads or air conditioning or the modern research university, getting the wherewithal to do them was comparatively simple, because they were so obviously profitable.

….

The Great Enrichment is the most important secular event since human beings first domesticated wheat and horses. It has been and will continue to be more important historically than the rise and fall of empires or the class struggle in all hitherto existing societies. Empire did not enrich Britain. America’s success did not depend on slavery. Power did not lead to plenty, and exploitation was not plenty’s engine. Progress toward French-style equality of outcome was achieved not by taxation and redistribution but by the Scots’ very different notion of equality. The real engine was the expanding ideology of classical liberalism.

The Great Enrichment has restarted history. It will end poverty. For a good part of humankind, it already has. China and India, which have adopted some of economic liberalism, have exploded in growth. Brazil, Russia and South Africa, not to speak of the European Union—all of them fond of planning and protectionism and level playing fields—have stagnated.

If you’ve not yet read it, read ASAP Deirdre’s new volume, Bourgeois Equality.

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I either had never learned, or I have completely forgotten, that in 2007 Nobel laureate economist Joseph Stiglitz predicted that Hugo Chavez’s brand of socialism in Venezuela would succeed.

Bad call.

(I thank the indispensable Yevdokiya Zagumenova for alerting me to Stiglitz’s 2007 positive assessment of Chavez’s economic policies.)

That Stiglitz said (quoting the above-report’s summary of his opinion) that “relatively high inflation isn’t necessarily harmful to the economy” is bad enough.  What’s worse is Stiglitz’s obliviousness to the inevitable ill-effects of the centralization of economic decision-making authority in state officials and its resulting insecurity of property rights.

F.A. Hayek or Milton Friedman or Ludwig von Mises or Adam Smith or Edwin Cannan or Deirdre McCloskey or Armen Alchian or Bill Allen or Elinor Ostrom or Harold Demsetz or Israel Kirzner or Bob Higgs or Russ Roberts or Steve Landsburg or Don Lavoie or Julian Simon or Warren Nutter or George Stigler or Gary Becker or Ronald Coase or Bruce Yandle or Roger Meiners or Andy Morriss or Hugh Macaulay or Randy Holcombe or Steve Pejovich or Dwight Lee or Vernon Smith or Larry White or James Buchanan or Gordon Tullock or Walter Williams or Thomas Sowell or Leland Yeager or Roger Garrison or Bob Tollison or Bob Ekelund or Mario Rizzo or Dan Klein or Roger Koppl or George Selgin or Sandy Ikeda or Steve Horwitz or Pete Boettke or Jim Gwartney or Dick Wagner or Bill Easterly or Ken Elzinga or Chris Coyne or Bryan Caplan or David Henderson or Arnold Kling or John Cochrane or John Taylor or Alex Tabarrok or David Friedman or Bob Murphy or Liya Palagashvili or Abby Hall Blanco or… (wow, the list can be extended much longer) would have predicted without hesitation in 2007 that Chavez’s highly interventionist policies would impoverish Venezuela’s masses regardless of how many goodies the Venezuelan state managed at first to bestow upon those masses

Indeed, a GMU economics major with a GPA higher than 1.9 would have predicted the same.

Good economists understand that while a wealthy, market-oriented society such as the United States can tolerate a bit of forced ‘redistribution’ and can mask the relatively small amounts of wealth and opportunities that are destroyed by the likes of a bit of occupational licensing, some government wage-setting, a dash of export subsidies, and comparatively modest tariffs, these policies over time nevertheless make most people poorer, not richer, than they would be in the absence of these policies.

Good economists are ever-attentive to unintended consequences as well as to the sound incentives generated by private-property-based free markets and the unsound incentives created by the ability to impose decisions by force.  Good economists understand the prudential case for not only having good rules (such as those of a system of private property rights) but also that rules become meaningless – they cease to exist – when they can be easily violated.  Good economists understand that the expression of excellent intentions is not remotely sufficient to achieve excellent results.  Good economists understand that sustainable economic prosperity can only emerge through the spontaneous-ordering forces of the market; there is no way that attempts to create prosperity by any different means will result in any outcome other than impoverishment of the masses and tyranny by government officials.  Joseph Stiglitz seems to be oblivious to these realities.

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Quotation of the Day…

by Don Boudreaux on May 21, 2016

in Hayek, Man of System

… is from page 80 of volume III (“The Political Order of a Free People,” 1979) of F.A. Hayek’s Law, Legislation, and Liberty:

It is one of the ironies of history that socialism, which gained influence by promising the substitution of the administration of things for the power over men, inevitably leads to an unbounded increase of power exercised by men over other men.

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Paul Krugman, very sadly, no longer even pretends to reason like an economist.  He instead reasons as if he’s a 19-year-old cultural-studies major.  Here’s a letter to the New York Times – a letter in which I grant, only for purposes of this letter, Krugman’s (and the Department of Labor’s) assumption that U.S. labor markets are uncompetitive.

Paul Krugman argues that the Obama administration’s new overtime-pay regulations for many salaried workers are part of a policy of “strengthening the bargaining power of lower-paid workers” (“Obama’s War on Inequality,” May 20).  Mr. Krugman is mistaken.  These regulations do not even pretend to affect workers’ ability to collectively bargain, and they neither intensify employers’ competition for workers nor ease workers’ abilities to quit jobs in order to search for better ones.

Indeed, far from strengthening workers’ bargaining power, these regulations decrease it by stripping them of a valuable bargaining chip – namely, the right to agree to work overtime for no extra pay in exchange for higher salaries and the greater flexibility afforded by salaried work (as opposed to hourly work).  The only way that governmental obliteration of this bargaining chip would help workers is if, first, employers do indeed possess excessive bargaining power (a proposition that the Department of Labor simply assumes and does nothing to prove) and, second, the lone possible effect of this excessive bargaining power is to enable employers to force salaried workers to work overtime for no extra pay.

Even if we grant, however, that employers have excessive bargaining power, forcing workers to work overtime for no extra pay is hardly the only way that this power can be used against workers.  Such employers will respond to these regulations by instead cutting some workers’ base salaries, by reducing other workers’ fringe benefits, and by converting yet other workers from the status of higher-paid salaried workers with flexible schedules and flexible working arrangements to that of lower-paid hourly workers with inflexible schedules and inflexible working arrangements.  In short, employers with excessive bargaining power will easily find ways around these regulations to continue to exploit workers.  But now workers – allegedly already suffering from too little bargaining power – are stripped also of the ability to bargain for higher salaries and more flexible working arrangements by agreeing to work overtime for no extra pay.

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

Here are three further points:

First, typical cultural-studies majors and other non-economists, unlike competent economists, understand that ‘excessive bargaining power’ is not ‘unlimited bargaining power.’  If employers had unlimited bargaining power, all workers would work for virtually zero wages.  But they obviously don’t.  Employees retain, even in the face of excessive employer bargain power, some ability to bargain for benefit A, B, or C by agreeing to work-condition X, Y, or Z.  This fact is why stripping salaried workers of the right to agree to work overtime for no extra pay harms these workers by reducing their bargaining power against even employers with monopsony power.

Put differently, even when employers have monopsony power, precisely because they ‘exploit’ that monopsony power fully, at the margin the monopsony power is spent.  At the margin workers have some real ability to bargain for benefit A, B, or C by agreeing to work-condition X, Y, or Z.

Second, in part because of the first point just above, many of the adjustments in competitive labor markets to overtime-pay mandates and other such government diktats will closely resemble the adjustments to such diktats in monopsonized labor markets.  For example, in both a monopsonized labor marked and in a competitive labor market, many salaried workers will find their base salaries reduced in response to overtime-pay regulations such as those imposed by the D.o.L.

Third, it’s empirically absurd to think that U.S. labor markets are generally uncompetitive.

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George Selgin is unimpressed with Eric Posner’s case for giving the Fed more discretionary authority.

Also over at Alt-M is my colleague Larry White’s careful assessment of the Great Recession and monetary policy.  Although Larry’s assessment is a bit wonky, it’s well worth reading.  Here’s his conclusion:

I suggest that real GDP has shifted to a lower path because of a shrinkage in the economy’s productive capital stock — a problem that better monetary policy (not feeding the boom) could have helped to avoid, but cannot now fix. During the housing boom, investible resources that could have gone into augmenting human capital, building useful machines and sustainable enterprises, and conducting commercial research and development, were instead diverted to housing construction. In the crisis it became evident that the housing built was not worth the opportunity cost of the resources allocated to it. That major misallocation of resources has lowered the path of the capital stock below its previous trend. I do not know precisely how the contribution of capital input is measured when the CBO estimates potential output, but I hypothesize that potential output is currently overestimated because capital wastage has not been fully recognized.

In this short video, my colleague Dan Klein identifies some problems with modern-day schooling.

Tim Worstall weighs in on the cruelty of politicians – such as Hillary Clinton and Bernie Sanders – who propose making disabled workers subject to minimum-wage requirements.

James Pethokoukis ponders the impact of the Obama administration’s economically uninformed new overtime-pay diktats.

Also warning of undesirable likely consequences of these new overtime-pay diktats is Dan Gerlernter.

Sarah Skwire corrects many myths about “traditional marriage.

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… is from page 133 of my teacher Leland Yeager’s, and of his co-author David Tuerck’s, still-vital 1966 volume, Trade Policy and the Price System (original emphasis):

Common sense and economics emphasize, instead, that real wages and living standards depend on how much goods and services workers produce, and not to any important extent on wishes or union demands or minimum-wage laws.

Indeed.

The only circumstances under which the above would not be true in reality is if (1) employers had monopsony power in the labor market (a theoretical possibility that no one with sound judgment thinks exists in American labor markets), or (2) nearly all employers refuse to fully exploit labor.

You read that correctly: apart from the existence of monopsony power in labor markets, the only way that non-market forces such as government-enforced labor-union demands or minimum-wage statutes could significantly and generally raise real wages is if the economy were filled almost exclusively with employers who refuse to exploit workers to the fullest.

To raise workers’ real wages by diktat without causing greater joblessness and in a way that lifts ordinary people’s living standards would require that nearly all workers are currently being paid wages below the values of these workers’ productivities.  Each employer is exploiting its workers by paying its workers too little.  A large chunk of the value of each worker’s output is being withheld from that worker and kept by his or her employer.  Each worker’s loss is employers’ gain.

Greedy, greedy employers.  Shame on them for being so obsessively focused on maximizing their profits that they underpay their workers!

In such a circumstance, government-dictated wage hikes can indeed generally raise real wages without causing any unemployment and that improves the living standards of workers (in this case by reducing the living standards of employers).  This situation, however, is not plausible; it is not, as economists say, an equilibrium.  This situation is one that prompts a process of self-interested actions by employers and by workers – actions that push workers’ pay up to the values of their productivities.

Were the disequilibrium situation described above to persist in reality (that is, were it to be an equilibrium), employers would have to consistently refuse to take advantage of the widespread opportunities to profit by bidding underpaid workers away from other employers.  In other words, the same employers who are so greedy for profits that they underpay their current workers would simultaneously have to be so uninterested in reaping further profits that they don’t attempt to add to their workforces the additional workers who they can hire at wages below the value of these additional-workers’ marginal productivities.

Such a situation is possible, but it’s too implausible to take seriously as a description of reality.*  Again, such a situation implausibly requires that employers simultaneously be greedy enough for profit that they underpay – we might say, “exploit” – their current workers but so indifferent to additional profits that they do not pursue – we might say, “refuse to exploit” – other underpaid workers.  This description of economic reality simply doesn’t make good sense.  It raises too many questions – most notably, “Why do greedy employers consistently fail to seize available opportunities to increase their profits?” and “Why do underpaid workers not quit their current jobs, and seek other jobs, in ways that cause greedy employers to raise workers’ wages in order to ensure that these employers continue to reap at least some excess profit off of workers?”

…….

* The range of what is possible is vast, yet nearly everything that is possible will never occur.  The range of what is plausible is far narrower than is the range of what is possible.  And the range of what is probable is even narrower than the range of what is plausible.  One benefit of learning the economic way of thinking – and of learning also history – is to gain and sharpen the good judgment necessary to distinguish the probable from the plausible, and to distinguish both of these from the merely ‘possible.’

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… is from page 63 of the final volume – Bourgeois Equality – of Deirdre McCloskey’s vital trilogy on the essence and role of bourgeois values in modern life:

Of course, if one raises wages artificially, by union or by statute, unemployment will result.  The argument one hears from, say, Paul Krugman – that raising wages is good for the company because workers will work harder as a result – seems implausible, considering that the company in such a case would already have raised wages, for its own good.  And working harder worsens the conditions of work.

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Reflecting on the two negative e-mails that I’ve gotten in response to my open letter to Hillary Clinton – in which I criticize Clinton for her call to make disabled workers subject to the minimum wage – I’m struck anew by people’s apparent belief in government’s ability to work miracles.

Suppose that scholarly research discovers that men who date or who marry only unattractive women are less happy than are men who date or who marry attractive women.  Driven by this empirical finding, Congress passes legislation mandating that all women who date or who marry men must be at least minimally attractive.

Proponents of this minimum-attractiveness legislation declare, in stentorian tones, that from this day forward America will finally fulfill its promise as a land in which no man suffers the indignity and misfortune of dating or marrying an unattractive woman.  Every woman who dates or who marries a man will from now on satisfy a minimum threshold of attractiveness, as determined by science and as set and enforced by government officials.

Many naive men support this legislation.  They believe that the mere declaration by government that every woman who dates or who marries a man must be at least minimally fetchin’ will in fact miraculously ensure that all dates that these men have from here on in will be with women who are indeed more attractive than were the women they dated prior to the implementation of this regulation.  And this happy outcome will transpire, of course, without reducing any man’s frequency of dating or marrying.

Sadly, of course, these men will later discover that they are unable to get dates or wives at all.  They’ll discover that their romantic fortunes, far from improving, have tanked.  Very few unattractive women, prohibited from dating and marrying, will be transformed by this regulation into at-least-minimally-attractive women.  Instead, unattractive women will be removed by government diktat from the dating & mating market.  Unattractive men – the ones who before the legislation dated and married unattractive women – were intended by the legislation to be given access to more-attractive women.  The result will be that these men get no women at all.

….

The above hypothetical sounds absurd.  “No one is stupid enough to believe that some men’s romantic fortunes would be improved by a government prohibition on their dating and marrying woman who fail to meet a minimum standard of attractiveness.  No one is ignorant enough to think that such a prohibition will miraculously result in men who once enjoyed only the romantic companionship of unattractive women now enjoying the romantic companionship of more-attractive women.”

But people who support minimum wages believe something equally absurd.  Minimum-wage supporters believe that by prohibiting employers from associating with workers who are not minimally productive that some miracle occurs to raise these workers’ productivity to levels high enough to justify their employment.  “Voila!  It is declared, so it will be!”

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Driving to campus a few minutes ago I was behind a residential garbage truck.  This truck, though – unlike every other garbage truck that I’ve seen – had no crew of workers riding on the back of it to leap off to chuck the contents of people’s garbage cans into the back of the truck.  This truck instead pulled up beside each garbage can left on the street curb and a set of mechanical arms reached out from its passenger side to lift up each can dump the can’s contents into the truck’s rear bed.  The operation is surprisingly fast.

Truck-110-Automated-Side-Loader

No job is more classically unskilled than that of “garbage man.”  Yet as wage rates rise, even for unskilled workers, it eventually pays firms to invest in labor-saving capital goods, such as mechanisms that dump the contents of individual garbage cans in to the backs of residential garbage trucks.

I’ve no idea if the impetus for the particular labor-saving device that I beheld this morning is a legislated minimum wage (either actual or expected) or simply the market forces that raise the market wages of even the lowest-skilled workers in wealthy area such as northern Virginia.  Either way, however, if garbage-disposal companies can implement effective labor-saving devices, no one should be doubt that legislated minimum wages will price some low-skilled workers out of jobs.

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