Category Archives: Price Mechanism

BS Bernie Blames Bezos

12 Wednesday Sep 2018

Posted by in Labor Markets, Living Wage, Price Mechanism, Welfare State

≈ Leave a comment

Tags

, , , , , , , ,

Bernie Sanders keeps probing for ways to create a backdoor minimum income, and he’s eager to loot successful job creators and their customers in the process. Last month I wrote about the folly of his proposed legislation that would offer federal job guarantees to all. A new Sanders bill, introduced jointly with Rep. Ro Khanna (D – CA), is an equally bad idea called the Stop BEZOS Act, or the “Stop Bad Employers by Zeroing Out Subsidies Act”. It’s pretty obvious that the selection of the acronym preceded the naming of the bill. Imagine the fun his Senate staffers had with that! The logical flaws embedded in the title of the act are bad enough. The effort to garner attention by using the title to smear the name of a famous technology entrepreneur is sickening.

Jeff Bezos, of course, is the founder and CEO of Amazon, the online retailer, as well as the owner of the Washington Post. Amazon has been rewarded by consumers for its excellent service and aggressive pricing, and it is now valued at about $1 trillion. That makes Bezos a very wealthy man, and it is no coincidence that Sanders has chosen to make an example of him in an effort to inflame envy and classist passions.

While some details of the bill remain sketchy, firms with more than 500 workers would face a 100% tax on every dollar of federal benefits received by those employees. But the tax would apply only to “low-wage” employees, however that is defined, and not simply any employee receiving federal benefits. If the bill became law (and it won’t any time soon), it would require a costly federal administrative apparatus to coordinate between several agencies, including the IRS. Beyond the tax itself, the compliance costs for firms won’t be cheap, and it will create terrible incentives: if you own a business, you would have a strong incentive to avoid hiring workers with little experience or weak skills, or anyone you might deem likely to be a recipient of federal aid. If you have 499 employees, you’ll probably think hard about how to execute future growth plans. Nothing could do more to improve the return to investment in automation.

Is Amazon really a “bad” employer? That’s what the title of the Sanders bill says. In fact, the company has been accused of harsh labor practices in its fulfillment centers. Life for corporate managers is said to be no picnic, and labor turnover at Amazon is high. Nonetheless, the wages it pays attract plenty of applicants. Unskilled labor does not command a high wage, and that is no fault of an employer willing to provide them with work and experience. Yet the bill would punish those employers, as well as employers having part-time workers drawing federal aid.

An absence of punishment can hardly be described as a “subsidy”, as the bill’s title suggests. But that is exactly how leftists think, at least when they do the punishing. In this respect, the bill’s title is an assault on logic and a misuse of language. It would also represent a violation of constitutional principles like property rights and freedom of contract.

The idea of taxing employers to recoup any public aid received by their workers is intended to affect a de facto “living wage”. However, one benefit of an independent social safety net, as opposed to a living wage tied to that net, is that the former largely preserves the operation of labor markets, despite creating some nasty labor-supply incentives. Wage rates that approximate the value of worker productivity allow efficient matching of jobs with workers having the requisite skills, even if the skills are relatively low-grade. Those wages also minimize distortions in the economics of production within firms and across different industries. Furthermore, prices faced by buyers should reflect the real resource costs associated with demands for various goods. They should not be inflated by political decisions about the level of federal welfare benefits. Quite simply, preserving labor market efficiency enhances the ability of the economy to allocate resources to the uses for which they are most highly-valued.

There are independent questions about whether the structure and level of benefits provided by the welfare state are appropriate. Those are matters of legitimate policy debate, and those benefits must be funded by taxpayers, but they should be funded in the least distortionary way possible. Bernie Sanders imagines that the burden of those taxes can simply be imposed on large employers with no further consequences, but he is badly mistaken. Consumers will shoulder a significant part of that burden under his latest scheme. And, of course, Sanders’ beef with Bezos is a cynical political ploy. It amounts to cheap scapegoating intended to promote another one of Sanders’ bad policy ideas.

Racism And Minimum Wage Fairy Tales

02 Saturday May 2015

Posted by in Markets, Price Mechanism, Regulation

≈ 2 Comments

Tags

, , , , , , , , , , ,

unintended-consequences

The real history of the minimum wage is an unsavory tale unknown to most current observers. The myth that it had honorable origins is widespread, with special currency among the progressive Left. Their uncritical support for a higher wage floor reflects a failure to grasp its pernicious economic effects on low-skilled labor and an ignorance of its historical context as a mechanism enabling racial discrimination. In fact, minimum wage legislation was often motivated by racist economic concerns, as Carrie Sheffield explained a year ago in this commentary in Forbes. She quotes, among others, the great Thomas Sowell, an African-American economist, from this opinion piece:

“In an earlier era, when racial discrimination was both legally and socially accepted, minimum-wage laws were often used openly to price minorities out of the job market.“

Sowell cites historical examples of minimum wage legislation intended to harm the employment prospects of Japanese, Chinese and blacks, including the following:

“Some supporters of the first federal minimum-wage law in the United States — the Davis-Bacon Act of 1931 — used exactly the same rationale, citing the fact that Southern construction companies, using non-union black workers, were able to come north and underbid construction companies using unionized white labor.

These supporters of minimum-wage laws understood long ago something that today’s supporters of such laws seem not to have bothered to think through. People whose wages are raised by law do not necessarily benefit, because they are often less likely to be hired at the imposed minimum-wage rate.“

Walter Williams, another well-known African-American economist, provides more evidence of these origins of the wage floor in “Mandated Wages and Discrimination“:

“During the legislative debate over the Davis-Bacon Act, which sets minimum wages on federally financed or assisted construction projects, racist intents were obvious. Rep. John Cochran, D-Mo., supported the bill, saying he had ‘received numerous complaints in recent months about Southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.’ Rep. Miles Allgood, D-Ala., complained: ‘That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.’ Rep. William Upshaw, D-Ga., spoke of the ‘superabundance or large aggregation of Negro labor.’ American Federation of Labor President William Green said, ‘Colored labor is being sought to demoralize wage rates.’ The Davis-Bacon Act, still on the books today, virtually eliminated blacks from federally financed construction projects when it was passed.“

An article by Thomas C. Leonard in the Journal of Economic Perspectives, “Eugenics and Economics in the Progressive Era“, reinforces the point:

“The progressive economists believed that the job loss induced by minimum wages was a social benefit as it performed the eugenic service ridding the labour force of the unemployable.”

And if that isn’t enough for you, David Henderson has this to say:

“Unions don’t support minimum wage increases because their own members are working at the minimum wage. Virtually all union employees–I’ve never heard of an exception–work at wages above the minimum. Northern unions and unionized firms, for example, have traditionally supported higher minimum wages to hobble their low-wage competition in the South… 

… In a 1957 Senate hearing, minimum-wage advocate Senator John F. Kennedy of Massachusetts, who just four years later would be President of the United States, stated,

‘Of course, having on the market a rather large source of cheap labor depresses wages outside of that group, too – the wages of the white worker who has to compete. And when an employer can substitute a colored worker at a lower wage – and there are, as you pointed out, these hundreds of thousands looking for decent work – it affects the whole wage structure of an area, doesn’t it?’“

One can claim that JFK was advocating for a higher wage floor to benefit all workers, but it’s hard to avoid the conclusion that “protecting” white workers was his priority. And it strains credulity to deny that JFK was aware of the other side of the coin: there would be negative repercussions for low-skilled black workers. What is painfully obvious about minimum wage legislation is that the real beneficiaries are generally not those competing for minimum wage jobs, but more entrenched labor interests.

It is an unfortunate reality that blacks make up a disproportionately large share of the unskilled labor force. According to another commentary by Walter Williams, unemployment among blacks was not a chronic problem in the first half of the 20th century, even among teens, and male labor force participation among blacks was higher than for whites. Over the past 50 years, however, black unemployment has averaged twice the rate for whites. Minimum wage legislation has encouraged this disparity.

Today’s advocates of a higher minimum wage are inadvertently rooting for a policy that compounds the disadvantages faced by the least skilled workers. The minimum wage contributes to a negative disparate impact on black labor market outcomes and prevents blacks from gaining valuable job experience. It is impossible to regulate wages without impinging on hiring decisions, and it is impossible to regulate both wages and hiring without impinging on the survival of employers. To help the unskilled, the best thing policymakers can do is allow them to trade their labor freely.

Can Water Markets Drive the Nuts From California?

14 Tuesday Apr 2015

Posted by in Price Mechanism, Secondary Markets, Shortage

≈ 1 Comment

Tags

, , , , , , , , , , , , , , ,

Water Use CA

Leaders in California seem determined to deal with the state’s water shortage in the least effective and most intrusive ways possible. Governor Jerry Brown has ordered such “bold”, yet ultimately weak, actions as restricting urban water usage, fines on “water wasters”, and xeriscaping of public property. The plan includes additional state intrusions such as rebates for high-efficiency appliances, bans on certain types of faucets, toilets and residential lawn irrigation systems, and more rigorous monitoring of water use, which could ultimately include shower time. A $1 billion state investment in wastewater recycling and desalinization plants is also planned, and pundits advocate other huge projects such as new reservoirs. These efforts are costly, but they are also beguiling to politicians seeking the appearance of positive action.

Overlooked is a straightforward and relatively costless way to achieve effective conservation and relief from the shortage: use the price mechanism! This simple approach encourages conservation in many large and small ways that are beyond the  discernment of government planners. Obviously, it can also address the profligacy of certain agricultural uses. A market mechanism is the one sure way to find the most rational price for water, and it is sorely needed in the face of such a significant shortage.

The misallocation of water rights in California is truly staggering, as demonstrated by the graphic at the top of this post, which is from a post at Marginal Revolution (originally from Mother Jones):

“… as farmers are watering their almonds, San Diego is investing in an energy-intensive billion-dollar desalination plant which will produce water at a much higher cost than the price the farmer are paying. That is a massive and costly misallocation of water. … In short, we are spending thousands of dollars worth of water to grow hundreds of dollars worth of almonds and that is truly nuts.”

The Mises Daily blog makes the same point in an article entitled, “Drought and the Failure of Big Government in California“.

“When crops like pecans, which are native to Louisiana where it rains over fifty inches per year, are being grown in central California, we will have to ask ourselves if there is true comparative advantage at work here, or if the industry is really sitting upon a shaky foundation of government-subsidized and -allocated resources.

The rhetoric that’s coming out of the growers, of course, is that California growers are essential to the American food supply. Some will even suggest that it’s a national security issue. Without California growers, we’re told, we’ll all starve in case of foreign embargo. … But let’s not kid ourselves. North America is in approximately zero danger of having too little farmland for staple crops.” [Emphasis added.]

Last month, my post “Scarcity, Scarcity Everywhere, And Water Pricing Stinks” addressed the mispricing of water and the promise of marketable use permits for water conservation. Details may vary, but in this sort of arrangement, residential, industrial and agricultural users would receive a base assignment of water rights at a relatively low, uniform price. The base assignment can be a function of historical usage. A secondary market then allows consumers and other users to purchase additional use permits or to sell permits exceeding their own usage:

“The price of water on the secondary market will rise to the point at which users no longer perceive a benefit to marginal flows of water above cost. A higher price encourages voluntary conservation in two ways: it is a direct cash cost of use above one’s base water rights, and it is an opportunity cost of foregoing the sale of permits on water use up to the base assignment. Those best-prepared to conserve can sell excess rights to those least prepared to conserve.”

Price incentives and their power for conservation are discussed in this post at Marginal Revolution. Market pricing is the single-most effective method of fostering sustainable patterns of resource use. Increasingly scarce conditions naturally lead to higher prices, which both discourage excessive use and create incentives for investments in reuse and other efficiencies. Yet politicians are highly averse to the idea of pricing resources rationally via the market. Instead, as exemplified by Governor Brown’s restrictions, they promulgate a seemingly endless series of measures that play on “green guilt” without adequate consideration of alternatives.

A colorful example of this misguided philosophy is the low-flow toilet, as described in this post entitled “Americans Destroyed Indoor Plumbing“. Mandatory recycling presents a classic case of conflicting policy goals: another sacred cow of environmental dogma, it increases water use in California because containers must be washed before they go to the curb. And there are other conflicting environmental goals, such as an effort to protect the Delta Smelt in San Francisco Bay by diverting over 300 billion gallons of water away from the Central Valley.

Meanwhile, big government Republicans are thumping their chests over their self-described success in planning for water needs in Arizona. This consists of infrastructure projects that capture runoff and store water in underground reservoirs, which are fine as far as they go (and, if available, better than above-ground storage subject to evaporation). However, these projects involve considerable public expense, and they have not prevented the imposition of mandatory conservation requirements. It should also be mentioned that current drought conditions in Arizona are mild compared to California. The point here is that market-oriented pricing and conservation reduces the need for such costly projects and intrusions. Administered water prices are expected to rise in Arizona, and they probably should. But it’s noteworthy that the last link, a summary of what is purported to be a careful study of water pricing issues, makes no mention of trade in water use permits and market pricing. As Glenn Reynolds might say, unlike big infrastructure and intrusive regulations, market-oriented policies and efficient pricing may not entice politicians with sufficient opportunities for graft.

Risk Takers and Ingrates

31 Friday Oct 2014

Posted by in Cafe Hayek, Carpe Diem, Don Boudreaux, Mark Perry, Markets, Oil Prices, Price Mechanism, Short Position, Shortage, Speculation, Surplus

≈ 1 Comment

Jack Beanstalk Commodity

Just a few months ago, reactionary leftists were eager to blame “evil speculators” for driving up oil prices. Mark Perry asks: why don’t leftists give any credit to speculators when oil prices fall?

In the spring, there were concerns about Iraqi and Libyan oil supplies, as well as the usual seasonal increase in gasoline demand. In fact, under such conditions, it is never in any speculator’s interest to bid oil prices upward to “excessive” levels, above what is justified by underlying conditions. That would be a losing bet for the speculator. But when they bid prices upward in anticipation of tightening market conditions, speculators and market prices are broadcasting a forecast, providing information upon which other interested parties can act. In particular, the upward price movement encourages reduced consumption and conservation, and it creates incentives that bring forth additional supplies. Thus, by taking risks, the speculators play a valuable social role. Don Boudreaux of Cafe Hayek posted a letter he sent to Senator Ben Cardin on this topic back in June. It’s a fun read, but I doubt that it had any influence on Cardin.

As it happened, oil prices peaked in June. The increase in U.S. production from the shale boom has helped to ease conditions, as has strong Saudi production. Speculators can profit under such conditions by taking short positions in oil. In so doing, they encourage prices to fall, sending a signal to the market that production is too strong and that costly conservation measures have less value. The upshot is that such price adjustments prevent a surplus of oil and wasteful use of resources. Again, speculators take significant risks in the hope of earning an adequate return, and in so doing they fulfill a valuable social function. If anything, they should be lauded, not vilified.