I’ve no inclination to address each of his seven points. I’ll content myself here to expose just one example of Reich’s penchant for poor reasoning - an example so stunning that it should discredit everything the man says about any matter touching on economics.
Reich writes that “A $15/hour minimum is unlikely to result in higher prices because most businesses directly affected by it are in intense competition for consumers, and will take the raise out of profits rather than raise their prices.”
Reich is correct that businesses are in intense competition for consumers. What he misses, however, is the fact that, precisely because of this intense competition, businesses have none of the excess profits that Reich presumes will be tapped into to pay the higher mandated wages.
This error exposes Reich’s inability to grasp even the most elementary economic concepts. Intense competition eliminates excess profits; with no excess profits firms cannot, contra Reich, simply pay workers higher wages. Firms instead must respond to a higher minimum wage by some combination of hiring fewer low-skilled workers, working their remaining low-skilled workers harder and reducing these workers’ non-wage pay, and charging higher prices for their outputs. The fact that Reich misses this reality - the fact that he does not understand that intense competition ensures that firms cannot possibly react to a higher minimum wage by tapping into their profits - tells any thinking person all that he or she needs to know about Reich’s analytical skills.
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
….
Several people – pro and con – sent to me this post by Reich. I thank them.
But what about persistent unemployment of Negroes and increasing unemployment among teenagers? The observations are not disputed, but the interpretation advanced by the critiques [of the free market] is rejected. This interpretation emerges again through an impressionistic short-cut. The contention ‘inherent market failures’ is not subsumed under a testable theory of market processes. It occurs in a cognitive limbo as a valuational judgment attached to the observations cited. On the other hand, we do possess a highly confirmed hypothesis explaining the response of distinct labor types to increases in minimum wages. This successfully explains the patterns of persistent unemployment pockets. The hypothesis in question implies nothing with respect to our values. It says nothing about whether we should help the poor or the rich. It only says that if we help the poor by raising minimum wages, then the frequency of unemployment among the poor will rise.
It is necessary to distinguish between two types of belief, the notional and the action-impelling. The distinction corresponds to that between cheap talk and credible commitment (“putting your money where your mouth is”).
Politicians, pundits and economics professors who’ve read [and who accept the conclusions of] the Congressional Budget Office’s February report on raising the minimum wage to $10.10 per hour, yet who continue to endorse a higher minimum wage, evidently believe that it’s morally acceptable to steal $15,000 annually from some poor workers if the proceeds are given to other workers.
Emile Durkheim said that when all of the members of a tribe or clan come together, they can sanctify the sacred and experience a spiritual “effervescence.” Friedrich Hayek suggested that certain genes and instincts still dispose us toward the ethos and mentality of the hunter-gatherer band, and that modern forms of political collectivism have, in part, been atavistic reassertions of such tendencies. Picking up on Hayek, Klein (2005) has suggested a combination of yearnings: 1) a yearning for coordinated sentiment (like Smithian sympathy); and 2) a yearning that the sentiment encompass “the people,” that is, some focal and seemingly definitive set of “we.” This paper reports on an experiment designed to explore the demand for encompassment by having subjects sing together. In each trial, one person in the room was designated not to sing unless every one of the others in the room had made a payment sufficient so as to have that person sing. Our evidence of a demand for encompassment is threefold: Subjects chose to sacrifice money to achieve encompassment 47.4 percent of the time, with 59.6 percent of the subjects doing so in at least one trial. An exit questionnaire showed that subjects’ chief reason for making such a sacrifice was a belief that the singing would be more enjoyable if it encompassed the whole group. Furthermore, the subjects reported significantly higher enjoyment when they had experienced encompassment. We are well aware of the significant differences between the situation of the experiment and the situation of actual political life. We nonetheless discuss the experiment as a parable for a penchant toward political collectivism, a parable that helps to clarify the role of encompassment in the sentimental facets of Hayek’s ideas about the psychology of political collectivism.
Many of the incentives and constraints behind the patterns of intellectuals apply to another group – politicians – whose decisions as government officials can greatly magnify the influence of intellectuals. It is virtually axiomatic that, in an era when governments legislate, regulate and finance an ever more sweeping range of activities, there is no given individual with the amount or depth of consequential knowledge to competently make such a range of decisions. The net result is that politicians, like intellectuals, achieve public recognition when they go beyond the bounds of their competence, which they must do at least as often as public intellectuals, especially when many politicians have no special area of expertise, except in the art of getting elected.
Because our President is such a smart man, we cannot doubt that he is correct to explain pay differences across broad groups of workers (such as “men” and “women”) as resulting from unjust discrimination against members of the lower-paid groups. But our smart President (no doubt because of his super-busy schedule) missed an instance of even greater pay inequity: that between young workers and older workers. Bureau of Labor Statistics data show that workers aged 16-24 make only 54 cents for every dollar earned by workers 25 and older!* It’s embarrassing that our nation tolerates such discrimination.
Free-market ideologues will excuse this grotesque difference in pay with assertions such as “young workers aren’t as productive as older workers.” But our smart President isn’t fooled by these corporate apologetics. He understands that worker pay is set arbitrarily by firms run by executives with biases against people who are not like them - biases so deep and powerful that each of these executives willingly sacrifices the extra profits that could be made by offering to hire, at slightly higher pay, underpaid young workers (and women) away from rival firms.
Because Mr. Obama knows that worker pay is determined by employers’ whims and prejudices, he will understand that the only sensible explanation for the disgracefully low pay of young workers is discrimination against those workers. And so I look forward to our President signing executive orders aimed at closing this shameful pay gap.
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
These gender-disparity claims are also economically illogical. If women were paid 77 cents on the dollar, a profit-oriented firm could dramatically cut labor costs by replacing male employees with females. Progressives assume that businesses nickel-and-dime suppliers, customers, consultants, anyone with whom they come into contact—yet ignore a great opportunity to reduce wages costs by 23%. They don’t ignore the opportunity because it doesn’t exist. Women are not in fact paid 77 cents on the dollar for doing the same work as men.
Far too many policy proposals are premised on the absurd notion that privately available profit opportunities exist but remain unnoticed by all but professors, politicians, pundits, and preachers – officious observers who never offer to stake their own funds and efforts on seizing these opportunities. Seizing with their own private initiative these opportunities (if these opportunities are real) would not only yield well-deserved profits to the these professors, politicians, pundits, and preachers, but it would also solve the very problems that they assert are so awful. But instead, these officious know-it-alls cower in their punditry and preaching; they restrict their own actions to instructing the government on how to force other people to spend money and to act.
This reality describes those who insist that women are consistently underpaid – and it describes also economists who insist that minimum-wage legislation is justified by alleged monopsony power in the market for low-skilled workers.
But as closer inspection shows, the opposite was true. Enron Gas Services, the gas-trading division that made Enron famous, was enabled by the “infrastructure socialism” of mandatory open access, a regime imposed by the Federal Energy Regulatory Commission on interstate pipelines beginning in the mid-1980s. Enron Capital & Trade Resources, the successor to Enron Gas Marketing, tried to promote and exploit similar infrastructure socialism in the electricity industry.
Apologists for this novel agency structure, such as the bureau’s Godmother and now-Senator Elizabeth Warren of Massachusetts, contend that its extreme independence from external controls (such as congressional appropriations oversight) or internal controls (a bipartisan commission structure) are necessary to avoid the distorting effects of special interest pressures.
But political scientists have also identified a number of pathologies to which bureaucracies succumb when set adrift without sufficient public accountability: a tendency toward imperialistically expanding their reach and a tunnel vision focus that ignores the full cost of their regulations on the economy.
Tyler Cowen isn’t impressed with Paul Krugman’s assessment of the distribution of the costs of inflation. By the way, some of the very best analyses of both the efficiency effects and the distribution effects of inflation were done by the late Armen Alchian – an economist whose insights, on this and other matters, are consistently ignored by Krugman and too many other contemporary economists. Alchian’s works here include his and Reuben Kessel’s important December 1962 Journal of Political Economy paper “Effects of Inflation“; Alchian’s and Kessel’s 1959 Science paper “Redistribution of Wealth Through Inflation“; and Alchian’s 1976 study “Problems of Rising Prices.” (These – and all other of Alchian’s important papers – are collected in this vital two-volume series edited by Dan Benjamin. I urge especially the young economists who read this blog to buy Alchian’s collected works and read carefully every word in them. Then read them again. If by the end of your careful reading you understand even half of Alchian’s insights, you will be a better economist than at least 20 percent of economic Nobel laureates.)
And here is a long-ago brief conversation about inflation between Alchian and Hayek:
Does it really matter whether Americans can put Ukraine on a map? Previous research would suggest yes: Information, or the absence thereof, can influence Americans’ attitudes about the kind of policies they want their government to carry out and the ability of elites to shape that agenda. Accordingly, we also asked our respondents a variety of questions about what they thought about the current situation on the ground, and what they wanted the United States to do. Similarly to other recent polls, we found that although Americans are undecided on what to do with Ukraine, they are more likely to oppose action in Ukraine the costlier it is – 45 percent of Americans supported boycotting the G8 summit, for example, while only 13 percent of Americans supported using force.
However, the further our respondents thought that Ukraine was from its actual location, the more they wanted the U.S. to intervene militarily. Even controlling for a series of demographic characteristics and participants’ general foreign policy attitudes, we found that the less accurate our participants were, the more they wanted the U.S. to use force, the greater the threat they saw Russia as posing to U.S. interests, and the more they thought that using force would advance U.S. national security interests; all of these effects are statistically significant at a 95 percent confidence level. Our results are clear, but also somewhat disconcerting: The less people know about where Ukraine is located on a map, the more they want the U.S. to intervene militarily.
Ignorance, it appears, isn’t merely bliss; it’s also ballistic.
Lest “Progressives” get all snooty about this finding – thinking, perhaps, that Republican doofuses in benighted locales such as Alabama, Texas, and Orange County, CA, have some monopoly on pressing for policies out of sheer ignorance – I’ll bet that a survey asking people to identify, say, the average age and family circumstances of the typical minimum-wage earner would find that the more likely a respondent is to give an incorrect answer the more likely that respondent is to support government intervention to raise the minimum wage. And I’ll bet that similar survey questions about the specifics of, say, international trade – for example, “What is a trade deficit?” or “What portion of American imports are used as inputs in production in the U.S.?” would likewise show a statistically significant positive correlation between the likelihood of incorrect answers to these factual questions and the likelihood that respondents support tariffs and other trade-restricting policies.
Ignorance is not only bliss; it’s fertile ground on which politicians can grow their political careers.
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