Tag Archives: competition

Sharing Apps and Market Benefits

24 Saturday Jun 2017

Posted by in Markets, Transaction Costs

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Transaction costs prevent lots of trades. So many that we often aren’t aware of their potentiality. Michael Munger asserts that transaction costs are so prohibitive that we tend to accumulate a lot of stuff that we could otherwise do without. That’s what he says in “Why we can’t break up with our stuff — yet“.

Transaction costs of all kinds have fallen dramatically over time. One of the greatest innovations in “transactions technology” was the avoidance of barter with the broad acceptance of a medium of exchange (money). Without a medium of exchange, trade requires a “double coincidence of wants”, which often makes the effort to engage in trade impractical. No less important was the establishment of secure property rights such that the integrity of a contract or transaction was protected, whether enforced by possible repercussions from other traders or through the police power of the state. Secure property rights and the use of money facilitated the development of markets and pricing that conveyed better information about scarcity. Other historical developments that reduced transaction costs include better transportation, communication, packaging, and more efficient distribution and supply chain management. In a variety of complex transactions, such as real estate, standardization of contracts has reduced transaction costs.

Those costs have been reduced dramatically of late by new communication and computing technologies. The size of these reductions is difficult to quantify in such prominent examples as Uber ride-sharing and Airbnb home-sharing, but there is no question that the new supplies of rides and accommodations would not have materialized absent the enabling on-line “apps”. The ease, low-cost and minimal risk of these transactions is incredible.

Suppose that hotels in Soho average $400 per night for a suite and that Airbnb rentals in Soho average $300. It’s fair to say that the average Airbnb host in Soho, without Airbnb, faced transaction costs in arranging for qualified occupants of at least $100 plus Airbnb’s fees. Probably much more. Now, it’s true that the hotel suites and the Airbnb rentals are fundamentally different “products”, but they are alternatives for meeting a particular need.

Similar reductions in transaction costs are occurring across a wide variety of sectors besides transportation and vacation rentals: trading in new and used goods, handymen, concierge services, snow plowing, home-sitting, food delivery, and hook-ups are but a few examples.

Munger’s twist on this story is that dramatically lower transaction costs will mean we’ll all need to own much less “stuff” on average, because we can “share”, or at least buy what we need at minimal transaction cost. Or, what we have will be used more intensively because we can share it profitably.

Munger mentions the high cost of owning an auto that he uses for about 5 out of 168 total hours in a week. The costs include dedicated “storage” space, both at home and at work, and sometimes the extra cost of “storing” it in airport parking. He could certainly afford to arrange alternative forms of transportation. Is owning the auto worthwhile because the transaction costs of the alternatives are too high? Well, Munger owns a nice car and he probably likes to drive it, so there is more to it than transaction costs. Still, if we mention the “convenience” of having a car at one’s disposal, that is really an expression of transaction costs avoided via ownership.

If the cost of arranging an acceptable and ready alternative is minimal, why own a car? This decision is very real in certain congested locales with costly real estate (e.g., parking New York City). In short, Munger believes even fewer individuals will bother to own personal autos, or that those cars will be less idle (rented to users), as technology reduces transaction costs:

“Why do I pay to store my car rather than let other people use it and collect rent? Transaction costs. …But we are living in the beginning of a pivotal era that will transform our relationship to ‘stuff’ (we’ll need less of it) and to each other (we’ll share more). For all of human history until about 1995, the desire to reduce transaction costs was tied to the desire to sell a particular product. Now, entrepreneurs are combining three things — mobile platforms, software apps, and internet connections — to sell reductions in transaction costs with no product attached. And that combination will change everything.“

Will that also mean fewer personally-owned kitchen appliances? Home furnishings? Clothing? Power tools? Stereo components? Probably not. Even if it’s easy to find a willing renter for my power tools or stereo components from time-to-time, I might not want to bother with the required exchanges (at pick-up and return). I use power tools from time-to-time, but I won’t want to shlep back and forth to rent them from someone when I could own them myself at relatively low cost? Perhaps I’ll rent a tiller or a power washer, but not a power drill. Maybe I could hire a gopher on the Air-gopher app to get the tools I need and return them when I’m done, but that adds back to my transaction costs. So there are certain limits to how far this can go in reducing our “stuff”.

Nevertheless, there is no question that there will be many new trades and competitive opportunities to exploit as transaction costs fall, and that implies more choice, lower prices, and less waste in the larger allocative sense. Those, I believe, are the major benefits of sharing technologies. For example, if you enjoy cooking but are the sole member of your household, imagine an app that allows you to sell your extra preparations to other individuals, or to give them away at a minimal transaction cost. Or, if you are able to perform odd jobs but prefer to take them at your convenience, you will likely be able to bid for projects of your choice. If you have a talent for teaching guitar, you could solicit business and even provide the lessons remotely through an on-line app. The major impediment to the development of such market innovations is potential interference by government or other entrenched interests who wish to prevent competition. Licensing laws and various forms of regulation and taxes could easily smother or eliminate the benefits of sharing technologies, and that would be a shame.

I’ll close with a digression on Munger’s hypothesis: why do I own or keep a lot of “stuff? It’s not all about transaction costs. Most people harbor nostalgic feelings for their “stuff”. I hate parting with my old shirts, old drivers licenses, theater programs, and ticket stubs. Most of those things have approximately zero market value. Some people believe it’s just plain wasteful to pitch something that can be put back into working order, like an old lawnmower. Transaction costs might be to blame, but the failure to junk the mower in the first place may be driven by a depression-era instinct for penny-pinching. The hoarder might simply underestimate the benefits of a new mower, or perhaps they deserve credit for undertaking a restoration project they enjoy.

I find myself hoarding all kinds of things that I think might be useful to me somehow, someday. Particularly things like miscellaneous nuts & bolts, sundry pieces of hardware, wire, old fixtures, pieces of lumber, and my late Dad’s old tools. I’m certain I won’t ever use 95%+ of these items, but it’s reassuring to have the inventory. Then again, every time I need an odd item, I find myself in my basement work room searching through all that stuff. Invariably, I end up on my way to the hardware store to get what I need. So much for minimizing transaction costs. What would it cost me to pitch all of it? An afternoon of painful evaluation… yet that too represents a transaction cost!

Sins of American Health Insurance

22 Wednesday Feb 2017

Posted by in Health Care

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The advances in Health-Care seems to be putting some distance between the doctor and patient.

Health insurance in the U.S. suffers from many dysfunctions, but a couple of basic steps in its institutional evolution lie at the root of its worst shortcomings. I say this after coming across another great post by John Cochrane the other day, this time with some of his thoughts on fashioning an Obamacare replacement. He lays out a few basic principles, one of which is that “health insurance is not a payment plan for small expenses“, or shouldn’t be.

The best parts of Cochrane’s post, I think, relate to two longstanding features of the health insurance market in the U.S.:

“The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance. ‘Insurance’ then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.”

The last two sentences are insightful commentary on the inadequacy of coverage for pre-existing conditions, though “creating the pre-existing conditions problem” should probably read “foreclosed any easy solution to the pre-existing conditions problem“. During World War II, the government authorized the tax deduction for employer-provided health plans as a concession to labor interests frustrated by war-time wage controls. Cochrane should be forgiven for making this sound like a deal with the devil. Today, employer-provided coverage is almost always limited to one’s job tenure (plus 18 months under COBRA, since 1985). In the 1940s, the benefits might have been generous, but portability was probably the last thing on their minds, especially in light of the long job tenures of the day and the fact that many employers, at that time,  offered coverage to vested retirees. The dominance of employer-provided coverage after WW-II pretty much ruled out lifetime insurability in a world with relatively high job mobility.

The tax deduction also helped to institutionalize the faulty notion that “good” health insurance should cover a panoply of services involving small, recurring expenses that are properly considered normal health upkeep. Instead, insurance should cover large, unexpected expenses for services necessary to treat injuries or severe illness. In addition, the coverage and the premium should, at the buyer’s option, include a guarantee of future insurability at standard rates. This option should not be mandated, but a refusal to opt-in must come at the risk of potentially large future health care obligations.

Cochrane also says:

“Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.”

Competition and choice must exist in health care delivery and in the health insurance market to keep costs under control. But if person A is an identifiable health risk and person B is not, and if healthy B is forced to pay the same premium for health coverage as sickly A, then A is cross-subsidized by B. Competition will encourage B to bail out of the risk pool. If B is prohibited from doing so, costs will soar because the cross-subsidies create incentives for A to over-utilize services, even making allowance for A’s greater need. Thus, forcing A and B into the same risk pool ultimately exacerbates the plight of both A and B by raising costs. That’s where we find ourselves today.

Enabling competition and dismantling cross-subsidies can only occur if all consumers are able to purchase not just health insurance, but long-term health insurability. To avoid a painful transition, publicly-funded high-risk pools might be necessary for the existing type As of the world, who are already burdened by poor health and might not be able to afford the premium necessary for insurance. Going forward, those who refuse a future-insurability option must understand that if they fail to opt-in prior to developing a serious health condition, they will have to rely on Medicaid, private charity, or a risk-rated policy, if they can afford it.

Will Republicans abolish the ill-founded tax deduction? Almost certainly not. They are likely to extend it to the individual side of the market, despite the fact that this will have an additional inflating impact on health care costs. At least it will reduce the current advantage of employer-paid coverage, potentially broadening the market faced by individuals. Also, Republicans might take steps to restore choice, promote competition, and eliminate cross-subsidies. As Cochrane notes, there are also ideas in play to improve portability. Questions remain about many of the details, however, including Medicaid reforms. On the whole, I’m hopeful that we’ll see most of Obamacare’s short-sighted provisions and rules rolled back and replaced by legislation to encourage the development of the market for insurance coverage and for future insurability.

Hillary’s “Fix”: Obamacare Squared

26 Wednesday Oct 2016

Posted by in Obamacare

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One of Hillary Clinton’s “public positions” is that Obamacare needs a few “fixes”, a considerable understatement. Meanwhile, Wikileaks has revealed that she has “privately” rooted for the failure of Obamacare. For that reason, Bill Clinton’s recent slip-up, in which he portrayed Obamacare as a “crazy” system, had a certain Freudian quality. Indeed, Obamacare looks crazier every year, especially in the middle of premium-hike season.

One of Hillary’s so-called “fixes” is the creation of a “public option”, or health insurance offered by the government to compete on exchanges with private insurance. Private health insurers, with the expiration of the so-called “risk corridors”, do not have continuing access to the public purse to cover their losses; going forward, they must price coverage at rates covering the cost of their respective risk pools. The government, on the other hand, is likely to have pricing flexibility. If exercised, there will be little hope for private insurers to “compete” without bailout money. Health insurance coverage, then, is likely to devolve into a single-payer monopoly, and control over health care delivery will be increasingly monopolized as well.

Sally Pipes says the “public option” is a politically attractive way to make a single-payer system inevitable:

“But progressives face the same problem pushing single-payer they always have — the public won’t stand for it. So they’re dusting off an old idea that will get them to single-payer without using those words.“

So the path from Obamacare to a single-payer system is likely to involve a public option in one form or another. John C. Goodman points out that expanding Medicaid is one way to create a broad public option. Medicaid reimbursement rates are low, however, which is why many doctors refuse to accept patients with Medicaid coverage. Such might be the quality of future coverage under an “affordable” public option. And if Medicaid is enhanced so as to appeal to middle class families, it will be correspondingly more expensive. But for whom? More than likely, the tab will be paid by a combination of insureds and taxpayers. And more than likely, the number of competing Medicaid plans (most of which are now privately offered and managed (e.g., Centene Corporation)) will dwindle.

Christopher Jacobs says that when Obamacare became law, health insurers had every expectation that they’d be bailed out by the government indefinitely. Continuing reimbursement for losses was never guaranteed, however. The pressure to backstop the insurers’ profitability will be stronger as the debate over “fixing” Obamacare advances. But as Jacobs warns, ongoing bailouts mean that these insurers are essentially controlled by the government. The private insurers would essentially become heavily-regulated entities managing the operational details of a de facto single-payer system.

So, there are three distinct possibilities under a Hillary Clinton presidency, assuming she can get any of them though Congress: 1) a public option with no private bailouts; 2) a public option with ongoing bailouts; and 3) no public option with ongoing bailouts. Ultimately, all of these scenarios are likely to devolve toward a de facto single-payer system. So we will have monopoly, central control of health care, and/or bailouts. Who was it that said government is the way we wreck things together?

Hillary has some other “fixes” in mind. Some of these involve more regulation of coverage and pricing, such as mandatory provision of three free “sick” visits with a provider each year and in-network pricing for emergency procedures. These steps will add to the cost burden on private insurers.

Regulating drug companies more heavily is another favorite Hillary Clinton theme, but regulation is perhaps the primary reason why the drug development process is so lengthy and costly. The theory that government will be more effective at negotiating drug prices than insurers is suspect. Outright price regulation is likely to mean reduced availability of various medicines. Patent reform and an expedited drug approval process would be a more effective approach to reducing drug prices.

Clinton has also proposed a tax credit for out-of-pocket health care costs exceeding 5% of income. We’ll need higher tax rates, lower deductions and credits elsewhere, or higher deficits to pay for this one.

Finally, Hillary wants to expand eligibility for Medicare to anyone 55 and older, but as Goodman explains, the kind of Medicare Advantage plans that would be made available to “near seniors” under this proposal are similar to those already offered by private insurers, and at lower cost, and premia for these plans are often payable with pre-tax dollars, or the buyers may be eligible for tax subsidies. This proposal might sound appealing, but it is unlikely to accomplish anything except to create more administrative overhead, regulation and diminish existing offerings.

Obamacare has injected a high degree of central planning into the health care system with disastrous results. It has fallen far short of its own objectives for reducing the number of uninsured, “bending the cost curve” downward, and avoiding disruptions to existing coverage and patient-doctor relationships. Choices have narrowed in terms of coverage options and within networks. Obamacare has imposed unnecessary costs on providers and encouraged a monopolization of health care delivery, hardly a prescription for affordability. And Obamacare has proven to be a budget buster, contrary to the advance hype from its proponents.

I remember standing in a pharmacy shortly after Obamacare was enacted, and I heard a sharp-voiced leftist telling a clerk that Obamacare was just a bridge to single-payer health care. I tried to mind my own business, thinking it unproductive to engage such an individual in public. This fellow was quite pleased with the clever deception that was Obamacare. It was never a secret that the progressive left hoped single-payer would be the ultimate outcome, but it’s interesting to witness their discomfort with the way things are unfolding. Surely they must have known that if “fixes” were necessary, something would have to be broken. Perhaps they thought the politics would get simpler, but the shortcomings of the health care law have inflicted too much pain and shame.

I’m tempted to say that the health care system can be improved only by doing precisely the opposite of everything Clinton has proposed. There’s some truth in that, but it’s not quite that simple. The path to better and more affordable health care is to end the dominant role of third-party payers, placing responsibility on price-sensitive consumers, allowing a variety of choices in coverage, ending tax preferences, reducing regulation and encouraging real competition in the markets for coverage and medical care. Reform of the patent system could introduce more competition to markets for pharmaceuticals. The Medicaid system will have to be relied upon to cover those who otherwise can’t be insured at affordable rates. Proposals for federal funding of Medicaid through block grants to the states is an avenue for achieving greater efficiency and better health care outcomes.

Hillary Clinton’s “fixes” are all likely to exacerbate the worst failings of Obamacare for consumer-patients and taxpayers. More federal spending commitments will not solve the structural problems embedded in the health care law. It will magnify them. The hope among the progressive left remains that single-payer health care will evolve out of the Obamacare system once it is “fixed”. And what will we get? More complete monopolies in coverage and care, higher prices, central regulation, narrowed choice, waiting lists, denial of care, and some combination of higher taxes and deficits. In other words, a more radical version of Obamacare.

The Fascist Roader

04 Thursday Aug 2016

Posted by in Central Planning, fascism

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Obamas - fascist world government

 

 

 

 

 

 

 

 

President Obama is a believer in centralized social and economic management, despite the repeated disasters that have befallen societies whose leaders have applied that philosophy in the real world. Those efforts have often taken the form of socialism, with varying degrees of government ownership of resources and productive capital. However, it is not necessary for government to own the means of production in order to attempt central planning. You can keep your capital as long as you take direction from the central authority and pay your “fair share” of the public sector burden.

A large government bureaucracy can coexist with heavily regulated, privately-owned businesses, who are rewarded by their administrative overlords for expending resources on compliance and participating in favored activities. The rewards can take the form of rich subsidies, status-enhancing revolving doors between industry and powerful government appointments, and steady profits afforded by monopoly power, as less monied and politically-adept competitors drop out of the competition for customers. We often call this “corporatism”, or “crony capitalism”, but it is classic fascism, as pioneered by Benito Mussolini’s government in Italy in the 1920s. Here is Sheldon Richman on the term’s derivation:

“As an economic system, fascism is socialism with a capitalist veneer. The word derives from fasces, the Roman symbol of collectivism and power: a tied bundle of rods with a protruding ax.“

With that in mind, here’s an extra image:

Mussolini Quote

The meaning of fascism was perverted in the 1930s, as noted by Thomas Sowell:

“Back in the 1920s, however, when fascism was a new political development, it was widely — and correctly — regarded as being on the political left. Jonah Goldberg’s great book ‘Liberal Fascism’ cites overwhelming evidence of the fascists’ consistent pursuit of the goals of the left, and of the left’s embrace of the fascists as one of their own during the 1920s. … 

It was in the 1930s, when ugly internal and international actions by Hitler and Mussolini repelled the world, that the left distanced themselves from fascism and its Nazi offshoot — and verbally transferred these totalitarian dictatorships to the right, saddling their opponents with these pariahs.“

The Obama Administration has essentially followed the fascist playbook by implementing policies that both regulate and reward large corporations, who are only too happy to submit. Those powerful players participate in crafting those policies, which usually end up strengthening their market position at the expense of smaller competitors. So we have transformational legislation under Obama such as Obamacare and Dodd-Frank that undermine competition and encourage concentration in the insurance, health care, pharmaceutical  and banking industries. We see novel regulatory interpretations of environmental laws that destroy out-of-favor industries, while subsidies are lavished on favored players pushing economically questionable initiatives. Again, the business assets are owned by private cronies, but market forces are subjugated to a sketchy and politically-driven central plan designed jointly by cronies inside and outside of government. That is fascism, and that’s the Obama approach. He might be a socialist, and that might even be the end-game he hopes for, but he’s a fascist in practice.

As Sowell points out, Obama gains some crucial advantages from this approach. For starters, he gets a free pass on any claim that he’s a socialist. And however one might judge his success as a policymaker, the approach has allowed him to pursue many of his objectives with the benefit of handy fall-guys for failures along the way:

“… politicians get to call the shots but, when their bright ideas lead to disaster, they can always blame those who own businesses in the private sector.  Politically, it is heads-I-win when things go right, and tails-you-lose when things go wrong. This is far preferable, from Obama’s point of view, since it gives him a variety of scapegoats for all his failed policies, without having to use President Bush as a scapegoat all the time.

Thus the Obama administration can arbitrarily force insurance companies to cover the children of their customers until the children are 26 years old. Obviously, this creates favorable publicity for President Obama. But if this and other government edicts cause insurance premiums to rise, then that is something that can be blamed on the “greed” of the insurance companies.The same principle, or lack of principle, applies to many other privately owned businesses. It is a very successful political ploy that can be adapted to all sorts of situations.“

Obama’s most ardent sycophants are always cooing that he’s the best president EVAH, or the coolest, or something. But the economy has limped along for much of his presidency; labor force participation is now at its lowest point since the late 1970s; and median income has fallen on his watch. He has Federal Reserve policy to thank for stock market gains that are precarious, at least for those companies not on the fascist gravy train. Obama’s budgetary accomplishments are due to a combination of Republican sequestration (though he has taken credit) and backloading program shortfalls for his successors to deal with later. Obamacare is a disaster on a number fronts, as is Dodd-Frank, as is the damage inflicted by questionable environmental and industrial policy, often invoked via executive order.  (His failures in race relations and foreign policy are another subject altogether.)

Fascism is not a prescription for rapid economic growth. It is a policy of regression, and it is fundamentally anti-innovation to the extent that government policymakers create compliance burdens and are poor judges of technological evolution. Fascism is a policy of privilege and is regressive, with rewards concentrated within the political class. That’s what Obama has wrought.

 

Willing Exchange With Capitalists

18 Wednesday May 2016

Posted by in Capitalism, Marxism

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Now and then I’m inspired to blog on the misshapen language of political discourse. I recently wrote about the misuse of words by the American left, including their use of the term “liberalism”. This time, the particular word in play is “capitalism”, which I use to describe the ideal laissez faire economic order. I have always viewed it as a force for good. Real capitalism means free markets, consumer choice, strong private property rights, rewards to private initiative, and competition among producers. Even under conditions of concentrated market power, capitalism is preferable to government monopoly. Nevertheless, Gary Galles writes at The Beacon that capitalism is an inferior description of the laissez-faire ideal than”willing exchange“, or alternatively, unforced or voluntary exchange. Perhaps he has a point.

Capital and labor are the primary factors of production and both must be compensated. Labor earns a wage and capital earns a profit. Generally, the more capital a worker has available on the job, the greater the worker’s productivity and the greater the worker’s wage. However, any profit or return to capital is viewed by the left as an undeserved rent. The question of compensation is quite aside from the valuable social role profits play in directing resources to their most valued uses. Robert Murphy’s drives this home in an excellent recent essay entitled “There’s No Such Thing As Excessive Profits“. Here, here! In another post related to the crucial social role played by capital and profit, Patrick Barron explains “Why We Need Private Property To Deal With Scarce Resources“.

Again, any return to capital, normal or extra-normal, is seen by the left as a reward that should flow to labor in a just world. That is the upshot of Karl Marx’s labor theory of value. Thus, owners of capital are characterized as “takers”. Galles notes the belief that Marx coined the term “capitalism” in order to:

“…falsely imply that the system benefited capitalists at others’ expense, when, in fact, workers have been the greatest gainers from all the productivity enhancements the system has generated.“

He quotes Leonard Read on the value of “willing versus unwilling exchange” as an effective way to delineate and contrast the positions of adherents of laissez faire and statism:

“Standing for willing exchange, on the one hand, or for unwilling exchange, on the other, more nearly accents our ideological differences than does the employment of the terms in common usage…there is a minimum of verbal facade to hide behind.

Willing exchange…has not yet been saddled with emotional connotations …Further, its antithesis, unwilling exchange…no one, not even a protagonist, proudly acknowledges he favors that; it does offense to his idealism.

If we cut through all the verbiage used to report and analyze political and economic controversy…much of it boils down to a denial of willing and the insistence upon unwilling exchange. …

The concept of willing exchange unseats Napoleonic behavior—all forms of authoritarianism—and enthrones the individual. The consumer becomes king. Individual freedom of choice rules economic affairs… [It] is for me, and a willing seller, to decide; it is no one else’s business!“

The hallmark of the state as an actor is coercion. After all, it derives its power via “legitimized” coercion. Individuals are bound under its authority to participate in involuntary exchanges and to make do with a constrained set of willing exchanges. As much as we might amuse ourselves with the notion that our Constitution keeps the state in check, it grows and grows, and where it stops, nobody knows. One wonders how strongly the demonization of so-called “capitalists” plays into this process.

I often refer to voluntary exchange in one form or another. The term recommends itself by virtue of its implication of mutual benefit among parties. Nevertheless, I would have a difficult time abandoning the term “capitalism” in my writing. Here’s the thing: capitalism and free markets have had tremendous success over the last two centuries in improving material conditions and ending human poverty around the globe. Meanwhile, Marxism as a philosophy, and collectivism as a form of social organization, have done nothing to recommend themselves to humankind. So the joke’s on Marx, though we haven’t heard the last of the efforts to besmirch capitalism.

Major Mistake: The Minimum Opportunity Wage

06 Saturday Jun 2015

Posted by in Price Controls

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City leaders in St. Louis and Kansas City are the latest to fantasize that market manipulation can serve as a pathway to “economic justice”. They want to raise the local minimum wage to $15 by 2020, following similar actions in Los Angeles, Oakland  and Seattle. They will harm the lowest-skilled workers in these cities, not to mention local businesses, their own local economies and their own city budgets. Like many populists on the national level with a challenged understanding of market forces (such as Robert Reich), these politicians won’t recognize the evidence when it comes in. If they do, they won’t find it politically expedient to own up to it. A more cynical view is that the hike’s gradual phase-in may be a deliberate attempt to conceal its negative consequences.

There are many reasons to oppose a higher minimum wage, or any minimum wage for that matter. Prices (including wages) are rich with information about demand conditions and scarcity. They provide signals for owners and users of resources that guide them toward the best decisions. Price controls, such as a wage floor like the minimum wage, short-circuit those signals and are notorious for their disastrous unintended (but very predictable) consequences. Steve Chapman at Reason Magazine discusses the mechanics of such distortions here.

Supporters of a higher minimum wage usually fail to recognize the relationship between wages and worker productivity. That connection is why the imposition of a wage floor leads to a surplus of low-skilled labor. Those with the least skills and experience are the most likely to lose their jobs, work fewer hours or not be hired. In another Reason article, Brian Doherty explains that this is a thorny problem for charities providing transitional employment to workers with low-skills or employability. He also notes the following:

“All sorts of jobs have elements of learning or training, especially at the entry level. Merely having a job at all can have value down the line worth enormously more than the wage you are currently earning in terms of a proven track record of reliable employability or moving up within a particular organization.“

The negative employment effects of a higher wage floor are greater if the employer cannot easily pass higher costs along to customers. That’s why firms in highly competitive markets (and their workers) are more vulnerable. This detriment is all the worse when a higher wage floor is imposed within a single jurisdiction, such as the city of St. Louis. Bordering municipalities stand to benefit from the distorted wage levels in the city, but the net effect will be worse than a wash for the region, as adjustments to the new, artificial conditions are not costless. Again, it is likely that the least capable workers and least resourceful firms will be harmed the most.

The negative effects of a higher wage floor are also greater when substitutes for low-skilled labor are available. Here is a video on the robot solution for fast food order-taking. In fact, today there are robots capable of preparing meals, mopping floors, and performing a variety of other menial tasks. Alternatively, more experienced workers may be asked to perform more menial tasks or work longer hours. Either way, the employer takes a hit. Ultimately, the best alternative for some firms will be to close.

The impact of the higher minimum on the wage rates of more skilled workers is likely to be muted. A correspondent of mine mentioned the consequences of wage compression. From the link:

“In some cases, compression (or inequity) increases the risk of a fight or flee phenomonon [sic]–disgruntlement culminating in union organizing campaigns or, in the case of flee, higher turnover as the result of employees quitting. … all too often, companies are forced to address the problem by adjusting their entire compensation systems–usually upward and across-the-board. .. While wage adjustments may sound good for those who do not have to worry about profits and losses, the real impact for a company typically means it must either increase productivity or lay people off.“

For those who doubt the impact of the minimum wage hike on employment decisions, consider this calculation by Mark Perry:

“The pending 67% minimum wage hike in LA (from $9 to $15 per hour by 2020), which is the same as a $6 per hour tax (or $12,480 annual tax per full-time employee and more like $13,500 per year with increased employer payroll taxes…)….“

Don Boudreaux offers another interesting perspective, asking whether a change in the way the minimum wage is enforced might influence opinion:

“... if these policies were enforced by police officers monitoring workers and fining those workers who agreed to work at hourly wages below the legislated minimum – would you still support minimum wages?“

Proponents of a higher minimum wage often cite a study from 1994 by David Card and Alan Krueger purporting to show that a higher minimum wage in New Jersey actually increased employment in the fast food industry. Tim Worstall at Forbes discussed a severe shortcoming of the Card/Krueger study (HT: Don Boudreaux): Card and Krueger failed to include more labor-intensive independent operators in their analysis, instead focusing exclusively on employment at fast-food chain franchises. The latter were likely to benefit from the failure of independent competitors.

Another common argument put forward by supporters of higher minimum wages is that economic theory predicts positive employment effects if employers have monopsony power in hiring labor, or power to influence the market wage. This is a stretch: it describes labor market conditions in very few localities. Of course, any employer in an unregulated market is free to offer noncompetitive wages, but they will suffer the consequences of taking less skilled and less experienced hires, higher labor turnover and ultimately a competitive disadvantage. Such forces lead rational employers to offer competitive wages for the skills levels they require.

Minimum wages are also defended as an anti-poverty program, but this is a weak argument. A recent post at Coyote Blog explains “Why Minimum Wage Increases are a Terrible Anti-Poverty Program“. Among other points:

“Most minimum wage earners are not poor. The vast majority of minimum wage jobs are held as second jobs or held by second earners in a household or by the kids of affluent households. …

Most people in poverty don’t make the minimum wage. In fact, the typically [sic] hourly income of the poor appears to be around $14 an hour. The problem is not the hourly rate, the problem is the availability of work. The poor are poor because they don’t get enough job hours. …

Many young workers or poor workers with a spotty work record need to build a reliable work history to get better work in the future…. Further, many folks without much experience in the job market are missing critical skills — by these I am not talking about sophisticated things like CNC machine tool programming. I am referring to prosaic skills you likely take for granted (check your privilege!) such as showing up reliably each day for work, overcoming the typical frictions of working with diverse teammates, and working to achieve management-set goals via a defined process.”

Some of the same issues are highlighted by the Show-Me Institute, a Missouri think tank, in “Minimum Wage Increases Not Effective at Fighting Poverty“.

A higher minimum wage is one of those proposals that “sound good” to the progressive mind, but are counter-productive in the extreme. The cities of St. Louis and Kansas City would do well to avoid market manipulation that is likely to backfire.

Put Consumers In Charge

25 Wednesday Feb 2015

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The interests of consumers should always be placed first. That’s what happens in a free market economy, with the consent of competitive producers, and that is how public policy should be crafted.  Too often, however, regulations and the laws on which they are based are  written primarily with producer interests in mind. Don’t be cowed by the appealing names given to pieces of legislation or their ostensible purposes. These may be couched in terms of consumer protections, but more often than not they create barriers to entry, stifle innovation and confer advantages to big players, thus restricting competition. A case in point is occupational licensing, which inflates prices by preventing the entry of innovative and less costly competitors. In this political exchange, consumers gain “protections” that are often of questionable value, especially when incentives for improved service are blunted by the licensing rules.

Consumer primacy is of value in a general sense, as Richard Ebeling explains in “Consumers’ Sovereignty and Natural Vs. Contrived Scarcities“. When consumers are sovereign in their ability to decide for themselves among competing alternatives, including their own personal comparison of value to price, they essentially take charge of the flow of resources into and out of various uses. And they capture a positive gap between value and price as a personal gain in any transaction to which they are (by definition) a voluntary party. At the same time, producers must reckon with real costs, which reflect natural scarcities. But, by virtue of competition, it is in the interests of producers to deliver the best values to consumers at the lowest prices compatible with costs. Here is part of Ebeling’s introduction:

“One of the great myths about the capitalist system is the presumption that businessmen make profits at the expense of the consumers and workers in society. Nothing could be further from the truth. … In the free market, consumers are the sovereign rulers who determine what gets produced, and with what qualities and features. … The ‘captains of industry’ are not the businessmen, but the buying public who steer the directions into which production is taken.”

Ebeling gives a number of good examples demonstrating the ways in which this efficient market process is compromised by the hand of government. Regulations, mandates, licensure, price floors and ceilings, taxes and subsidies all act to distort the normal workings of the market, creating direct and indirect scarcities. The perverse effect is to generate a flow of economic rents to producer interests at the expense of consumers (and taxpayers). And that is why is those same producer interests are often inclined to seek market interventions. The successful rent-seeking effort ends in legally-sanctioned restraint of trade.

An example of contrived scarcity given by Ebeling results from protectionist trade policy, which ostensibly “protects” domestic producers and workers from “cutthroat” foreign competition. The plight of workers seems to be an easy sell to the public, though historically protectionism has inured to the benefit of relatively highly-paid workers, often unionized, who have an interest in restricting competition. Consistent with Ebeling’s point of view, Matt Ridley writes that trade policy should be driven by the benefits to domestic consumers, rather than producers. Ridley focuses on the UK’s interests in negotiating a free trade agreement between the United States and the European Union: the Transatlantic Trade and Investment Partnership. The following thoughts from Ridley should be taken to heart by anyone with an interest in trade policy, and especially those who fancy themselves liberal:

“The argument for free trade is paradoxical and much misunderstood. Free trade benefits consumers because it is the scourge of expensive or monopolistic national suppliers. It benefits both sides: yet it works unilaterally. Your citizens benefit if you let them buy cheap goods from abroad, while foreigners are punished if their government does not reciprocate. This creates more demand for local services and hence more growth and jobs in the importing country. 

Contrary to what most people think, therefore, it is imports that bring the greatest benefit, not exports — which are the price we have to pay to get the imports. At the centre of the debate lies David Ricardo’s beautiful yet counterintuitive idea of comparative advantage — that it will always pay a country (or a person) to import some goods from another, even if the first country or person is better at making everything. Truly free trade cannot be a predatory phenomenon.“

Border Integrity or Lines In The Sand?

02 Tuesday Dec 2014

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The constitutionality of President Obama’s recent amnesty order is debatable, to say the least, Obama himself having admitted that he simply “changed the law”. If that’s what he thinks he did, the law professor should know that his action was out-of-bounds from a constitutional perspective. The executive branch cannot make or change laws!

In “Legal but Still Poor: The Economic Consequences of Amnesty“, Joel Kotkin puts aside the constitutional question to focus on difficulties that are likely to be aggravated by amnesty. Kotkin emphasizes the economic distress that now hampers the working class. Illegals already compete for certain jobs, of course, a point Kotkin doesn’t mention. Nevertheless, the amnesty order will create new competition among workers for some positions, many of whom already face difficult conditions:

“… the country suffers from rates of labor participation at a 36 year low. Many jobs that were once full-time are, in part due to the Affordable Care Act, now part-time, and thus unable to support families. Finally there are increasingly few well-paying positions—including in industry—that don’t require some sort of post-college accreditation.”

Furthermore, the order might create incentives for new illegal immigration, leading to further labor market stress. Politically, the order is seen as an act of betrayal by legal immigrants who have gone to considerable effort and expense to obtain their status. It is also likely to be viewed as betrayal by some minority workers, who tend to be more heavily represented in parts of the labor market most vulnerable to the new competition:

“African-American unemployment is now twice that of whites. The black middle class, understandably proud of Obama’s elevation, has been losing the economic gains made over the past thirty years. … Latino-Americans have made huge strides in previous decades, but now are also falling behind, with a gradual loss of income relative to whites. Poverty among Latino children in America has risen from 27.5 percent in 2007 to 33.7 percent in 2012, an increase of 1.7 million minors.”

Kotkin mentions several other administration policies that are likely to diminish prospects for new and existing workers.

“Ironically, the places where the cry for amnesty has been the loudest—New York, San Francisco, Los Angeles, and Chicago—also tend to be those places that have created the least opportunity for the urban poor. … Whatever their noble intentions, these cities generally suffer the largest degree of income inequality, notes a recent Brookings study.”

The amnesty order will be expensive for taxpayers. Many newly legal immigrants will qualify for various forms of public assistance and benefits. The negative fiscal effects will be compounded if, as expected, those immigrants and the workers with whom they compete have greater difficulty finding jobs:

“Herein lies the great dilemma then for the advocates of amnesty. In much of the country, and particularly the blue regions, they will find very few decent jobs but often a host of programs designed to ease their poverty. The temptation to increase the rolls of the dependent—and perhaps boost Democratic turnouts—may prove irresistible for the local political class.”

Obama’s amnesty order attempts to deal head-on with the impossibility of deporting a large number of illegal immigrants. Unfortunately, many others will be made worse-off by the order: legal immigrants, relatively low-skilled workers and taxpayers are all likely to suffer negative consequences. And the order fails to deal adequately with the real economic need for more highly-skilled immigrants; it might well damage the prospects of achieving any near-term reform in this area. Instead of working with Congress to achieve more comprehensive reform, the President’s hasty action fuels suspicion that the real reason for his amnesty order is simply to build a larger constituency for a statist agenda.

If You Can’t Beat ‘Em, Defame ‘Em

02 Friday May 2014

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Can public and charter schools peacefully coexist? “Demonizing the Helpers” wouldn’t be a theme of so many posts if it wasn’t such a common defensive strategy adopted by entrenched interests. In this case, Thomas Sowell notes that “charter schools provoke the ire of those who have failed students up to now.” It’s good to reflect on the actual goals of our educational system and to weigh every option that could help to achieve those goals. Real outcomes show that changes in public education are sorely needed, and charter schools have proven that they can be part of the solution. Instead, stakeholders in the failing public education monopoly have sought only to protect their turf, engaging in a systematic campaign to vilify charter schools and their supporters.