On This Mother’s Day…

by Don Boudreaux on May 10, 2015

in Civil Society

… I share again the tribute that I wrote for my mom just after she died seven years ago.  As I hope this tribute makes clear, I believe that it is in the ways that children are raised that, above all, determine how society’s institutions are forged.

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Joan McDonald, a home-schooling mom, writes to ask if I can explain what we economists mean when we say that “institutions matter.”  I’ll give it a shot. Read the full post →

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Quotation of the Day…

by Don Boudreaux on May 10, 2015

in Civil Society, War

… is from Sheldon Richman’s February 2015 essay “The Poison Called Nationalism“:

Nationalism is a poison.  It attacks the mind, short-circuits thinking, and makes self-destruction look appealing.  Nationalism sows the seeds of hate and war.  It makes the title warrior an honorific instead of the pejorative it ought to be.

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Bonus Quotation of the Day…

by Don Boudreaux on May 9, 2015

in Curious Task, Hubris and humility

… is from page 90 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

Industry and commerce are not just a matter of routine management, with profits rolling in more or less automatically.  Masses of ever-changing details,within an ever-changing surrounding economic and social environment, mean that the threat of losses hangs over even the biggest and most successful businesses.  There is a reason why business executives usually work far longer hours than their employees, and why only 35 percent of new companies survive for ten year.  Only from the outside does it look easy.

Much of the criticism and hostility leveled at successful entrepreneurs and firms is premised on the mistaken notion that managing a business is routine and rather easy work – routines and work-effort so ‘easy’ and transparent that these routines and efforts can be appropriately and productively second-guessed by outsiders such as politicians, bureaucrats, ‘consumer advocates,’ ‘labor representatives,’ ‘community organizers,’ and all manner of PhD-sporting academics.  Such itching-to-intervene people regularly assert that this business practice, that financial arrangement, these contractual agreements, and those marketing procedures are inefficient, wasteful, ‘wrong,’ or otherwise socially unjustified.  Yet when it is suggested to those who officiously issue their complaints or outside assessments that they themselves enter the market to compete against the practices and arrangements that they so confidently proclaim to be inefficient, they rear back on their haunches and object with hot indignation: “How dare you suggest such a thing!  We don’t have the skills or knowledge or aptitudes to actually do enterprise!  We specialize only in criticizing it from afar, with nothing seriously at stake!”

Such people are not only insufferably arrogant but – as judged by their actions (although not by their clever words) – also are remarkably ignorant about much of what they claim to be expert in.  They know so little that they don’t even know that there exists a deep, vast, and turbulent pool of intricately detailed information and knowledge relevant to each of the myriad private-sector practices, firms, industries, and contractual arrangements about which, in their ignorance, they profess to be ‘experts.’

….

The theory seems to be that we are to trust less the judgment of those who put their own resources at stake when making business decisions, and trust more the judgment of academic or government ‘experts’ who, putting nothing of their own at stake in such ventures (and, indeed, explicitly protesting that they personally have no ability to do so with any prospect of success), put at stake only resources commandeered from other people as they – these ‘experts’ – second-guess the judgment of those who actually do put their own resources at stake.  (Acceptance of this strange theory is considered in most polite circles today to be “progressive.”  In fact, acceptance of this strange theory is profoundly irrational.)

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Some Links

by Don Boudreaux on May 9, 2015

in Books, Civil Society, History, Immigration, Innovation, Trade, Work

Tomorrow (Sunday) I’ll be a guest on The Bob Zadek Show out of the Bay Area (9am PDT; 12pm EDT).  (The show is broadcast on San Francisco’s KKSF 910 AM.)  The topic will center around the new book I edited and published by the Fraser Institute, What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity.

Speaking of this new book, my frequent co-author and former student Liya Palagashvili is interviewed on the radio regarding the book, to which she contributed a splendid chapter.

Jason Kuznicki explores that connection between choice and happiness.

Citing the work of regular Cafe patron Jon Murphy, Mark Perry explains that increased imports and higher trade deficits in the U.S. – that is, more valuable stuff for Americans to consume and increased investment in the U.S. – are not economic bads.

Speaking of Jon Murphy, he uses here the occasion of Hayek’s 116th birthday to reflect on minimum-wage legislation.

David Henderson explores the contours of free speech.

The more one learns about the history of labor unions, especially the history of their political influence, the more one is repulsed by them.

The poor in America are getting richer.

Bob Murphy has some informative fun with people who do not understand trade.  (Bob’s post reminds me of this Cafe Hayek post from 2005.)

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Here’s a letter to Robert Reich – who, it is especially interesting, and perhaps even scary, to recall here was once U.S. Secretary of Labor.  Note that the Reich video mentioned in the letter below is different from the one addressed in yesterday’s posts (here, and here):

Mr. Reich:

In one of your recent videos endorsing a 100-plus percent (!) hike in the national minimum wage, you repeat the popular-in-Progressive-circles assertion that (quoting you) “we subsidize low wage employers” through government welfare programs such as food stamps, Medicaid, and housing assistance.

Basic economic reasoning reveals your argument to be backwards.  Welfare payments of the sort that you mention make work a relatively less attractive option for welfare recipients and, thus, reduce the labor supply.  One consequence is that wages paid by employers to their low-skilled workers are raised (and not, contrary to your mistaken suggestion, lowered).  Thus, far from being subsidized by most government welfare programs, Wal-Mart, McDonald’s, and other employers of many low-wage workers are harmed by them.

Don’t believe me?  Here’s Arindrajit Dube, one of the most prominent economists today who favors raising the minimum wage: “[M]eans tested public assistance programs are not tied to work, and we should not expect them to lower wages.  Let’s take food stamps, which are available to eligible families whether or not a family member works or not.  Indeed, when people are not working, they are more likely to be eligible for food stamps since their family incomes will be lower.  Therefore, SNAP is likely to raise, and not lower a worker’s reservation wages – the fallback position if she loses her job.  This will tend to contract labor supply (or improve a worker’s bargaining position), putting an upward pressure on the wage.”

Your failure to grasp even the most fundamental of economic principles makes your arguments for a higher minimum wage especially dubious.

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

In stark contrast to traditional and more common forms of government welfare payments – such as those mentioned by Reich – the supply of labor is increased by the Earned Income Tax Credit.  It is, however, revealing of Reich’s depth of economic understanding that he doesn’t mention the EITC and, instead, singles out for mention Food Stamps, Medicaid, and housing assistance – welfare programs each of which, in a society where even the poorest person lives well above subsistence, decreases the supply of labor.

(HT to Tim Worstall for the pointer to the Dube post.  See also this EconLog post by my colleague Bryan Caplan, as well this 2004 Cafe Hayek post by me.)

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Quotation of the Day…

by Don Boudreaux on May 9, 2015

in Politics, Reality Is Not Optional

… is from page 14 of George Stigler‘s entertaining 1988 autobiography, Memoirs of an Unregulated Economist:

A large number of successful businessmen have gone on to high administrative posts in the national government, and many – I think most – have been less than distinguished successes in that new environment.  They are surrounded and overpowered by informed and entrenched subordinates, they must deal with legislators who can be relentless in their demands, and almost everything in their agency that should be changed is untouchable.

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Judge for yourself if Robert Reich, in this video promoting a 107% increase in the national minimum wage in the U.S., presents an unbiased interpretation of the data.  (Other problems – oodles of them – swarm throughout Reich’s video.  But let’s ignore these other problems for now.)

About 45 seconds into this video Reich begins his comparison of the real value of today’s minimum hourly wage ($7.25) to the inflation-adjusted value of the minimum wage in 1968.  In 1968 the minimum wage was $1.60; according to Reich’s inflation adjustment, this nominal value in 1968 is the equivalent of $10.52 today.  Because $10.52 is significantly higher than today’s minimum wage of $7.25, we’re supposed to conclude that some great injustice is being visited upon today’s minimum-wage workers.

But as the graph below reveals, Reich’s selection of 1968 as the year to use for a comparison of the real value of today’s minimum with that of some presumed past golden era is almost certainly not random.

FT_14.09.08_MinimumWage This graph – taken from this September 2014 study issued by the Pew Research Center – shows the nominal (green line) and inflation-adjusted (yellow line; in 2013 dollars) values of the national minimum wage in the U.S. dating back to the modern American minimum-wage’s origin in 1938.  1968 happens to be the year in which the inflation-adjusted value of this minimum wage was highest.

Indeed, eyeballing the chart shows that, save for the years of the recent Great Recession (hardly a time when one would wish for especially high minimum wages!), one has to go back to the early 1980s before encountering a time when the real value of the minimum wage was as high as is the real value of today’s minimum wage.  While it’s true that for most (although not all) of the 15-or-so-year period between the mid 1960s and the early 1980s the real value of the national minimum wage was generally higher than is the real value of today’s minimum wage, this value was seldom anywhere near the high magnitude that Reich’s comparison of today’s real-minimum-wage value with that of the real value of 1968 would lead you to believe.

And consistently from the early 1960s back to 1938 – the year of the national minimum-wage’s unfortunate (and decidedly non-immaculate) conception – the real values of minimum wages were quite below that of the real value of today’s minimum wage.  Even during the 1950s – a decade celebrated nostalgically by many as a glorious one, economically, for ordinary Americans – the real value of the minimum wage was well below that of the real value of the minimum wage today.  Go figure.

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Former U.S. Secretary of Labor Robert Reich recently did a short video in which he endorses a policy of raising the national minimum wage in the U.S. to $15 per hour.  That’s a 107 percent (!) increase over its current level of $7.25.  Amazingly, Reich seems seriously to believe that it is mere ‘scare-mongering’ to suggest that more than doubling the minimum wage will destroy jobs for any, much less many, low-skilled workers.

Nearly every sentence out of Reich’s mouth in this video is flawed.  No matter what you might think of the rather esoteric exceptions to the economic case against the minimum wage – such as ‘labor markets are filled with monopsony power’ – the reality is that foolishness such as that peddled here by Reich is the kind and quality of argument that drives the minimum-wage debate in the popular press and in popular culture (and, hence, in politics).  The fact that such manifest idiocy as is on display in this video is taken seriously by so many people speaks to the vital need for more widespread, basic economic education.

When Cafe Hayek was down, David Boaz generously offered me some space at Cato’s excellent blog, Cato@Liberty, to blog on Reich’s video.  I did so here.  And later here at the Cafe I’ll likely highlight and challenge some other of the many flaws that infect this video.

In this slice from my post at Cato@Liberty I use a reductio ad absurdum – an argument that I almost never use in the minimum-wage debate because, usually, such an argument isn’t appropriate in this debate.  But the reductio is indeed appropriate given Reich’s premises and assumptions:

If Reich is correct that raising the minimum wage by $7.75 per hour will do nothing but enrich all low-wage workers to the tune of $7.75 per hour because workers will spend all of their additional earnings in ways that make it profitable for their employers to pay them an additional $7.75 per hour, then it can legitimately be asked: Why not raise the minimum wage to $150 per hour?  If higher minimum wages are fully returned to employers in the form of higher spending by workers as Reich theorizes, then there is no obvious limit to the amount by which government can hike the minimum wage before risking an increase in unemployment.

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… is from page 95 of the 1976 Vol. II (“The Mirage of Social Justice”) of F.A. Hayek’s Law, Legislation, and Liberty:

Any protection of an accustomed [economic] position is thus necessarily a privilege which cannot be granted to all and which, if it had always been recognized, would have prevented those who now claim it from ever reaching the position for which they now demand protection.  There can, in particular, be no right to share equally in a general increase incomes if this increase (or perhaps ever their maintenance at the existing level) is dependent on the continuous adjustment of the whole structure of activities to new and unforeseen circumstances that will alter and often reduce the contributions some groups can make to the needs of their fellows.  There can thus be in justice no such claims as, e.g., those of the American farmer for ‘parity’, or of any other group to the preservation of their relative or absolute [economic] position.

Today is the 116th anniversary of the birth of F.A. Hayek.

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