Tag Archives: Unintended Consequences

Price Controls: Political Gut Reaction, Gut Punch To Public

06 Thursday Jan 2022

Posted by in Price Controls, Shortage

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In a gross failure of education or perhaps memory, politicians, policymakers, and certain academics seem blithely ignorant of things we’ve learned repeatedly. And of all the dumb ideas floated regarding our current bout with inflation, the notion of invoking price controls is near the top. But watch out, because the Biden Administration has already shifted from “inflation is transitory” to “it only hurts the rich” to “it’s fine because people just want to buy things”, and now “greedy businessmen are the culprits”. The latter falsehood is indeed the rationale for price controls put forward by a very confused economist at the University of Massachusetts-Amherst named Isabella Weber. (See this for an excerpt and a few immediate reactions.) She makes me grieve for my profession… even the frequently ditzy Paul Krugman called her out, though he softened his words after realizing he might have offended some of his partisan allies. Of course, the idea of price controls is just bad enough to gain favor with the lefty goofballs pulling Biden’s strings.

To understand the inflation process, it’s helpful to distinguish between two different dynamics:

1. When prices change we usually look for explanations in supply and demand conditions. We have supply constraints across a range of markets at the moment. There’s also a great deal to say about the ways in which government policy is hampering supplies of labor and energy, which are key inputs for just about everything. It’s fair to note here that, rather than price controls, we just might do better to ask government to get out of the way! In addition, however, consumer demand rebounded as the pandemic waned and waxed, and the federal government has been spending hand over fist, with generous distributions of cash with no strings attached. Thus, supply shortfalls and strong demand have combined to create price pressures across many markets.

2. Economy-wide, all dollar prices cannot rise continuously without an excess supply of a monetary asset. The Federal Reserve has discussed tapering its bond purchases in 2022 and its intention to raise overnight interest rates starting in the spring. It’s about time! The U.S. money supply ballooned during 2020 and its growth remains at a gallop. This has enabled the inflation we are experiencing today, and only recently have the markets begun to react as if the Fed means business.

Weber, our would-be price controller, exhibits a marked ignorance with respect to both aspects of price pressure: how markets work in the first instance, and how monetary profligacy lies at the root of broader inflation. Instead, she insists that prices are rising today because industrialists have simply decided to extract more profit! Poof! It’s as simple as that! Well what was holding those greedy bastards back all this time?

Everyone competes for scarce resources, so prices are bid upward when supplies are short, inputs more costly, or demand is outpacing supply for other reasons. Sure, sellers may earn a greater margin on sales under these circumstances. But the higher price accomplishes two important social objectives: efficient rationing of available quantities, and greater incentives to bring additional supplies to market.

So consider the outcome when government takes the advice of a Weber: producers are prohibited from adjusting price in response to excess demand. Shortages develop. Consumers might want more, but that’s either impossible or it simply costs more. Yet producers are prohibited from pricing commensurate with that cost. Other adjustments soon follow, such as changes in discounts, seller credit arrangements, and product quality. Furthermore, absent price adjustment, transaction costs become much more significant. Other resources are consumed in the mere process of allocating available quantities: time spent in queues, administering quotas, lotteries or other schemes, costly barter, and ultimately unsatisfied needs and wants, not to mention lots of anger and frustration. Lest anyone think this process is “fair”, keep in mind that it’s natural for these allocations to take a character that is worse than arbitrary. “Important people” will always have an advantage under these circumstances.

Regulatory and financial burdens are imposed on those who play by the rules, but not everyone does. Black market mechanisms come into play, including opportunities for illegal side payments, rewards for underworld activity, along with a general degradation in the rule of law.

Price controls also impose rigidity in relative prices that can be very costly for society. “Freezing” the value of one good in terms of others distorts the signals upon which efficient resource allocation depends. Tastes, circumstances, and production technology change, and flexible relative prices enable a smoother transitions between these states. And even while demand and/or input scarcity might increase in all markets, these dynamics are never uniform. Over time, imbalances always become much larger in some markets than others. Frozen relative prices allow these imbalances to persist.

For example, the true value of good A at the imposition of price controls might be two units of good B. Over time, the true value of A might grow to four units of good B, but the government insists that A must be traded for no more than the original two units of B. Good B thus becomes overvalued on account of government intervention. The market for good A, which should attract disproportionate investment and jobs, will instead languish under a freeze of relative prices. Good B will continue to absorb resources under the artificial tradeoff imposed by price controls. Society must then sacrifice the gains otherwise afforded by market dynamism.

The history of price controls is dismal (also see here). They artificially suppress measured inflation and impose great efficiency costs on the public. Meanwhile, price controls fail to address the underlying monetary excess.

Price controls are destructive when applied economy-wide, but also when governments attempt to apply them to markets selectively. Posturing about “strategic” use of price controls reveals the naïveté of those who believe government planners can resolve market dislocations better than market participants themselves. Indeed, the planners would do better to discover, and undo, the damage caused by so many ongoing regulatory interventions.

So beware Joe Biden’s bluster about “greedy producers” in certain markets, whether they be in “Big Meat”, or “Big Oil”. Price interventions in these markets are sure to bring you less meat, less oil, and quite possibly less of everything else. The unintended consequences of such government interventions aren’t difficult to foresee unless one is blinded with the scientism of central planning.

The Left Always Hurts the Ones They “Love”

28 Monday Jun 2021

Posted by in law enforcement, Leftism, Lockdowns

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The policies foisted upon the country by the Left always hurt those constituencies they think they’ll help, and they backfire in very predictable ways. There are too many instances of that truism to recount, but just a couple of examples follow.

Economic Perils of Precaution

We can start with the interminable non-pharmaceutical interventions (NPIs) imposed in many states during the pandemic. These included shelter-at-home orders, limits on public gatherings, school closures, and the like. These lockdown measures were more severe in so-called blue states controlled by the Democrat Party. But NPIs were a policy failure and did little to stem the pandemic or excess deaths. Moreover, they resulted in the closure of many businesses and massive job losses. The economic burden fell especially hard on low wage earners, as the following chart shows:

For high earners (the red line), the employment decline at the start of the pandemic was small and relatively brief. Less fortunate were those earning under $27,000 annually (the blue line). They suffered a much larger initial decline in employment and had a continuing loss of almost 24% of jobs. While those who lost jobs ultimately received enhanced unemployment compensation and other benefits, the idleness and loss of work experience inflicted long-term damage to health, psyches, and future prospects. Thus, the party with pretensions of championing the cause of the downtrodden was pleased to intervene with policies that undercut the working poor.

But Some Precautions Are “Racist”

Another prominent case in which leftists have harmed those for whom they claim to advocate is the effort to “defund the police”. Low income and minority populations do not favor such a policy because they understand the value of protection against criminal elements who victimize their communities. The residents of these communities are most at risk from gangland violence and homicide. Furthermore, nearly all “victims” of police homicides are armed, and police homicides are closely associated with crime. And again, the sad fact is that crime is heavily concentrated in minority neighborhoods. The statistics do not support assertions of bias in policing. Obviously, these citizens have taken notice that the riots cheered on by the Left have been destructive to their communities.

Crime has spiked in Minneapolis and elsewhere since last summer, when George Floyd’s death sparked interest in the “defund the police” mantra promoted by the Left. And there followed a reduction in police budgets of about 5.2% in aggregate in the 50 largest cities in the country (though not all of these cities made cuts). Moreover, the effectiveness of policing has been undercut more broadly by the substantial legal risk now facing officers who earnestly attempt to enforce the law, as well as more restrictive use-of-force policies.

These changes are an unambiguous disaster for so many good people having the misfortune to live in high-crime areas. And the political disaster is starting to sink in among Democrats, who are already attempting to change the narrative (and see here). It’s pretty transparent that the “black lives matter” dialectic appeals to Democrats primarily as a selling point of convenience, and not so much when there’s actual blood in the streets.

Only the Obvious Matters

Destructive lockdowns and efforts to “defund the police” are just two examples of a perverse phenomenon. It’s well known to keen observers of the history of Marxism in action that it usually victimizes its presumed beneficiaries. That dynamic is at play under school discipline policies that seek to avoid “disparate impacts” on minority students, leaving other minority school children in disruptive learning environments; gun control initiatives making it difficult for minority residents and businesses to protect themselves; rent controls leading to a deteriorating stock of low-cost housing; wage floors causing low-skilled workers to lose hours, benefits, and jobs; energy policies with regressive impacts on household budgets; tax policies destroying incentives for job creation; and a welfare state creating disincentives to work and promoting family instability. This list goes on and on.

The difficulty leftists have in coming to grips with these unintended consequences is that they can’t see past first-order effects. Like spoiled children, they grasp only the ostensible benefits of their demands. And like bad parents, they behave as if to seek approval of the most spoiled among their presumed charges.

Coerced Fairness: Wronging Every Right

14 Thursday Apr 2016

Posted by in Discrimination, Liberty, Tyranny

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A nurse says, “If I can bring myself to treat a patient tattooed with a swastika, then a baker can bake a cake for a gay wedding.” Of course, the statement ignores any differences in the values held by these individuals, their right to hold different values, or at least their right to act peacefully on those values. It makes an arbitrary presumption about what is “fair” and what is “unfair”, which is seldom well-defined when two parties hold sincere but conflicting beliefs. Yes, the baker can bake the cake, but should he be forced to do so under state compulsion? Coerced behavior is the product of aggression, but declining business for personal reasons is not an act of aggression, though the “safe-space” crowd would do its best to convince us otherwise. Sorry, hurt feelings don’t count!

Imposing the machinery of the state on private decisions about how and for whom one’s art must be practiced invites even more coercive action by the state going forward. Jeffrey Tucker addresses this in “Must a Jewish Baker Make a Nazi Cake?“, using the teachings of Ludwig von Mises on the implications of voluntary and coerced behavior.

Discrimination occurs in markets in many forms. Consumers discriminate between sellers and products based on quality, price, convenience and trust. In turn,  producers or sellers discriminate between workers based on skill, effort, wages and trust. They discriminate between local markets or areas of specialization based on profitability. They discriminate between buyers based upon ability and willingness to pay. All of these forms of discrimination are rational because they result in better value for the discriminating consumer or better profitability for the discriminating producer. In other words, these forms of discrimination align with economic self-interest.

Other forms of discrimination do not align strictly with economic self-interest, but they may be preferred by the individual based on other criteria. It’s probably not possible to justify these forms of discrimination from all perspectives. Some may be abhorrent to most observers, including me. Certainly more consensus exists on some than on others. Nevertheless, these non-economically motivated forms of discrimination are always costly to the discriminator. For example, a consumer who refuses to frequent certain establishments owned by members of an out-group will forego opportunities for more varied experiences. Also, she will tend to pay higher prices due to her lack of interest in the competitive effort made by the out-group. An employer who refuses to hire certain minorities faces a more limited labor pool. He is likely to face a higher wage bill and will get a less efficient mix of skills in his workers. A seller who discriminates against certain groups by turning them away foregoes revenue, and the action may have negative reputational consequences. Obviously, other competitors can profit from another seller’s discriminatory behavior. Almost by definition, markets impose penalties on discrimination not borne out of economic self-interest.

Anyone with doubts about the effectiveness of markets and capitalism to overcome this latter type of discrimination should look no further than the broadly integrated activity that occurs within markets every day, and at the extent to which markets have become more diverse over time. Here is a choice quote of Tucker:

“Commerce has a tendency to break down barriers, not create them. In fact, this is why Jim Crow laws came into existence, to interrupt the integrationist tendencies of the marketplace. Here is the hidden history of a range of government interventions, from zoning to labor laws to even the welfare state itself. The ruling class has always resented and resisted the market’s tendency to break down entrenched status and gradually erode tribal bias.

Indeed, commerce is the greatest fighter against bigotry and hate that humankind has ever seen. And it is precisely for this reason that a movement rooted in hate must necessarily turn to politics to get its way.“

The hypertext within the quote links to an excellent piece by Andrew Berstein on “Black Innovators and Entrepreneurs Under Capitalism”, which covers the sad history of efforts to use government to undermine black commercial success.

Social justice activists argue that the state has a compelling interest in ending all discrimination, but the courts have followed a circuitous path in thrashing out whether (and what parts of) the U.S. Constitution might protect individuals or groups against private discrimination. But my interest is in what happens when the state endeavors to end discrimination in markets that are otherwise self-regulating: the state infringes on other rights that are clearly and definitively enshrined in the Constitution, and it arrigates power to itself that far exceeds the limits defined there. It may compromise the freedom of association, the freedom of religion, the right to private property, and the right to privacy. I believe the government has a compelling interest in protecting those rights, which apply to all individuals. It is also worth noting the absence of a limiting principle in defining what counts as fairness or discrimination. The Left finds it easy to denigrate and dismiss these as selfish concerns, proving how little regard they have for individual liberty. Establishing government control over the extent of those rights represents the end of our Constitutional Republic and is a prescription for tyranny.

Consider the ways in which government often attempts or is asked to create accommodations for marginalized groups, through laws on hate speech, compulsory service, hiring quotas, admission quotas, lending fairness, pricing equity, wage laws, work rules, mandatory facilities and the forced transfer of income. Tucker argues that this complex web of resource manipulation and mandatory and proscribed behaviors has several “unintended” consequences. I already mentioned the obvious abridgment of freedoms. Another negative consequence is that this approach does not promote unity; it breeds resentment and is likely to end in greater disunity. Furthermore, self-sufficiency is undermined by policies that hamper economic growth, and all of the general measures just mentioned redound to the detriment of that objective. Finally, many of these “fairness” policies run directly counter to the interests of the marginalized, such as wage floors that eliminate employment opportunities for the least-skilled, and means testing that discourages labor market effort through income “cliff” incentives.

The most menacing aspect of the effort to stamp out all forms of discrimination is a state with power to impose its own rules of legal “fair” treatment. Tucker appeals to Mises’ views on this point:

“[Mises] said that a policy that forces people against their will creates the very conditions that lead to legal discrimination. In his view, even speaking as someone victimized by invidious discrimination, it is better to retain freedom than build a bureaucracy that overrides human choice. …

Sacrificing principle for the sake of marginalized groups is short-sighted. If you accept the infringement of human rights as an acceptable political weapon, that weapon will eventually be turned on the very people you want to help. As Dan Sanchez has written, ‘Authoritarian restriction is a game much better suited for the mighty than for the marginalized.’“

Proponents of legal, compensatory  handicapping by the state in favor of those pressing any and all grievances ask us to compromise basic constitutional rights, including the rights of association, free expression, privacy and private property. A corresponding effect is to grant the state more complete coercive power in almost every aspect of life. The unavoidable focus of such policies is not unity, but group identity, a divisive result that should give us pause. The power granted to the state in this context is as arbitrary as the currently fashionable definition of “fairness”, and it cannot be rolled back easily. Furthermore, economic vitality is not easy to restore once basic institutions and freedoms have been destroyed. This is evident from the sad history of socialism throughout the world. Ultimately, the coercive power granted to the state can be used in ways that should horrify today’s proponents of social and economic redress for every real or imagined inequity.

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Addendum: Just over a year ago, I made a qualified defense of the right of a business to refuse service based on religious principles in my post “Suit Me, Or Face a Lawsuit: Adventures In Litigationland“. There, I made a distinction between “public accommodations” versus work for which a business-person must use her art, which is a form of expression, to provide customized service to a potential customer. I had the baker in mind, or the photographer asked to work a gay wedding. As I have in this post, I maintained that if a business-person finds some aspect of a request objectionable for any reason, she has the right to discriminate by refusing the business as a matter of freedom of expression.

I left a huge loose end in the argument I made in the earlier post. It had to do with the presumed requirement to serve all potential customers through the “public accommodations” of a private business. However, if the baker creates a beautiful “love cake” for sale to the general public, why can’t he refuse to sell it to a gay couple for their wedding as a matter of freedom of expression? After all, it involves the baker’s art. If a stationer has created an artful collection of cards for sale to the public, why can’t she refuse to sell them to a gay couple for their wedding invitations on account of her religious convictions? And what about the nurse? If he is in private practice, can’t he refuse to practice his art of healing on the “swastikaner” as a matter of free expression? I believe that’s a constitutional absolute, though professional oaths may dictate that care be delivered. An emergency room nurse would not have any choice but to deliver care under federal law, but it is not clear whether the law would withstand a constitutional challenge by a private hospital on these grounds. As things stand, the nurse can only refuse employment or resign if the rules are not to his liking.

 

 

Leftist Ad Hominid Species Screams “White Racists!”

03 Wednesday Feb 2016

Posted by in Discrimination, Equality, racism

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Lately I hear that all white people are racists, and I feel compelled to examine the intellectual grounding of such an inflamatory claim. Consciousness of race is not racism, as some would suggest. Indeed, solutions to racial division offered by activists usually require that we bear race in mind as a primary differentiator. Insofar as one must consider the worth of another person in any context, people of good faith simply do not care about a person’s race. Rather, they care about traits that count, such as honesty, skills, work ethic and perhaps affability. Should they somehow care more? What would vindicate them?

Inflammatory Claims

There are probably several motives for the charge of universal white racism. On one level, it represents political agitation. Posts carrying the charge on social media always involve a measure of “virtue signaling” to like-minded friends, or perhaps before the Gods. (I’m sure the posters will be forgiven.) Such posts might represent acts of social contrition to allay deep-seated feelings of guilt. The posters might fancy that they are raising the consciousness of others, proudly imagining the important lesson they are teaching. The bad news for them is that most people of good faith are rightly skeptical of proselytization like this. In fact, the agitation probably does more to breed skepticism than anything else.

Voluntary Sorting Behavior

What some view as racial division is often an innocent consequence of voluntary sorting based upon the shared subcultures most compelling to individuals at a given time. There are many subcultures into which a person might fit: work, school, profession, sports, music, religion, politics, hobbies, geography, ancestry, ethnicity and race. And there are micro-cultures within all of these categories. These cultural segments differ in many respects, and they may overlap in many cases. The extent of sub-cultural overlap may be viewed as a gauge of assimilation.

In any given context, people tend to voluntarily sort themselves into the sub-culture they find most compelling. This voluntary sorting does not yield a fixed social distribution of individuals across groups. Individuals can choose to associate with different sub-cultures to which they belong on a day-to-day basis.

There is a pronounced tendency for sorting to occur within larger “populations”, such as cafeteria-goers in a large office or in a large school. People from particular work groups might sit together: there is some sorting by age, by gender, and by race. African-Americans often sit together. There is mixing of members of these subgroups as well. People are brought together by work or school, but the shared work or school culture is frequently less compelling to individuals in their choice of a lunch table than other sub-cultures to which they belong.

Isolation or Assimilation

Assimilation does not mean that cultural differences must disappear, but it does mean that subcultures must at least be tolerant of others. A key question is whether one subgroup would welcome a member of another subgroup to join them. There might be reasons to refuse in some circumstances, such as a group of accountants who wish to avoid economists. Lol. However, a group of Caucasians who prefer to remain exclusive, making African Americans feel unwelcome, are guilty of racism, and vice-versa. As for the converse, an African American individual who prefers not to join a group of Caucasians, and vice versa, there is usually a good rationale for presuming the individual to be innocent of racism: they are simply choosing a more compelling sub-culture.

Certain sub-cultures may be especially amenable to selection from across sub-groups. For example, team sports often foster racial mixing, as do music and various professions. Religion and economic stratum can be powerful shared sub-cultures, drawing members across racial groups. In other words, mixing of sub-cultures will occur when a compelling sub-culture is shared. That is a form of successful assimilation.

When voluntary sorting takes place, the parties seek commonalities. That’s a form of discrimination that may be quite healthy and not racist in any way. On the other hand, accepting diversity implies respect for other cultures and subcultures. Voluntary sorting allows those cultures to function, but it does not necessarily imply exclusion of others who might be curious and wish to learn and take part in a culture’s traditions, or who might even wish to become a part of a different community.

Counterproductive Compulsion

The insistence that racism is widespread is often an expression of support for compelled remedies or paying reparations of some kind to alleged victims. In a free society, the kind of voluntary sorting discussed above will always be a reality; any attempt to prevent it would require extreme coercion. Reparations for historical injustices, legal or economic, raise ethical questions about the treatment of those who must bear the costs. They also carry high administrative costs and tend to breed resentment and division. There are well-known downsides to quotas in hiring and in school admissions. Not only do quotas lead to reverse discrimination, they also can place the intended beneficiaries into situations of vulnerability to failure.

Markets Are Not Racist

Then there is the allegation that private markets are a source of “systemic racism”, having “disparate impacts” on certain minorities. However, it should be noted that the market mechanism tends to penalize racism. A consumer who chooses to avoid sellers of a different race will tend to pay a higher price for the privilege. An employer with a “taste for discrimination” must choose from a smaller labor pool and may lose the opportunity to hire the best talent. In other words, racists must pay for their preference. They also forego the creative benefits that diverse organizations tend to enjoy.

Certain minorities have struggled to achieve success in the private economy, but there are much better explanations for that difficulty than market forces, which provide the best opportunity for growth and assimilation. There is no question that institutional obstacles have had extremely harsh effects on groups starting from lower rungs of the socioeconomic ladder. A few examples: the failed public education has been especially burdensome for urban and rural minorities; various public policies have effectively excluded minorities from markets, including Jim Crow laws, the minimum wage and the Davis-Bacon Act; the so-called social safety net is rife with features that penalize work and reward fragmentation of families, making it as much a trap as a net; the drug war creates illicit market opportunities which present catastrophic but unappreciated risks for both the participants and their families; rent controls, zoning laws and restrictions on new construction limit the stock of affordable housing; heavy regulation makes starting a business difficult for those without the financial and legal resources to deal with it; and the ugly tradition of cronyism tends to reduce social mobility by entrenching privilege rather than rewarding economic value. The deck is stacked in many ways against economic mobility by public policy, and racial minirities have borne much of the burden.

Immigration Hotspot

Another controversy is whether racism is manifest in the negative views of many Americans toward immigrants. These claims allege ethnic and religious discrimination, including the hatred of Muslims. No doubt there are Americans who harbor racist attitudes toward immigrants. Some of this is grounded in unreasonable economic fears. There are also fears that terrorists may be among new immigrant populations, especially refugees, but that fear is hardly unreasonable given the recent experience of Europe and the difficulty of establishing reliable background information on some of these individuals.

Sharing Freedom

Racism still exists and it will never go away entirely. However, our dedication to freedom compels us to protect speech as long as it is not threatening. Racial discrimination by participants in markets can be difficult to detect, but racists must pay an economic price imposed by the market mechanism, and there are often legal remedies if racial discrimination in markets can be proven. Fortunately, racism today is not as widespread as the agitators would have you believe. The best policy for assimilation and acceptance is to promote a shared culture of freedom and economic opportunity.

Horizons Lost To Coercive Intervention

27 Wednesday Jan 2016

Posted by in Human Welfare, Price Controls, Regulation

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ceiling prices

Every action has a cost. When you’re on the hook, major decisions are obviously worth pondering. But major societal decisions are often made by agents who are not on the hook, with little if any accountability for long-term consequences. They have every incentive to discount potential downside effects, especially in the distant future. Following Frederic Bastiat, Don Boudreaux writes of three levels of “What Is Not Seen” as a consequence of human decisions, which I summarize here:

  1. Immediate foregone alternatives: Possession, use and enjoyment of X is not seen if you buy Y.
  2. Resources not directed to foregone alternatives: The reduction in X inventory is not seen, compensating production of X is not seen, and extra worker hours, capital use and flow of raw materials needed for X production are not seen.
  3. The future implied by foregone alternatives: Future impacts can take many forms. X might have been a safer or healthier alternative, but those benefits are unseen. X might have been lower quality, so the potential frustration and repairs are unseen. X might have been less expensive, but the future benefits of the money saved are unseen. All of these “unseens” have implications for the future world experienced by the decision-maker and others.

These effects take on much more significance in multiples, but (2) and (3) constitute extended unseen implications for society at large. In multiples, the lost (unseen) X production and X labor-hours, capital and raw materials are more obvious to the losers in the X industry than the winners in the Y industry, but they matter. In the future, no vibrant X industry will not be seen; the resources diverted to meet Y demand won’t be seen at new or even old X factories. X might well vanish, leaving only nontransformable detritus as a token of its existence.

Changes in private preferences or in production technologies create waves in the course of the “seen” reality and the “unseen” world foregone. Those differences are caused by voluntary, private choice, so gains are expected to outweigh losses relative to the “road not traveled”. That’s not a given, however, when decisions are imposed by external authorities with incentives unaligned with those in their thrall. For that reason, awareness of the unseen is of great importance in policy analysis, which is really Boudreaux’s point. Here is an extreme example he offers in addressing the far-reaching implications of government intrusions:

“Suppose that Uncle Sam in the early 20th century had, with a hypothetical Ludd Act, effectively prohibited the electrification of American farms, businesses, and homes. That such a policy would have had a large not-seen element is evident even to fans of Bernie Sanders. But the details of this not-seen element would have been impossible today even to guess at with any reliability. Attempting to quantify it econometrically would be an exercise in utter futility. No one in a 2015 America that had never been electrified could guess with any sense what the Ludd Act had cost Americans (and non-Americans as well). The not-seen would, in such a case, loom so large and be so disconnected to any known reality that it would be completely mysterious.“

Price regulation provides more familiar examples. Rent controls intended to “protect” the public from landlords have enormous “unintended” consequences. Like any price regulation, rent controls stifle exchange, reducing the supply and quality of housing. Renters are given an incentive to remain in their units, and property owners have little incentive to maintain or upgrade their properties. Deterioration is inevitable, and ultimately displacement of renters. The unseen, lost world would have included more housing, better housing, more stable neighborhoods and probably less crime.

A price floor covered by Boudreaux is the minimum wage. The fully predictable but unintended consequences include immediate losses in some combination of jobs, hours, benefits, and working conditions by the least-skilled class of workers. Higher paid workers feel the impact too, as they are asked to perform more (and less complex) tasks or are victimized by more widespread substitution of capital for labor. Consumers also feel some of the pain in higher prices. The net effect is a reduction in mutually beneficial trade that continues and may compound with time:

“As the time span over which obstructions to certain economic exchanges lengthens, the exchanges that would have, but didn’t, take place accumulate. The businesses that would have been created absent a minimum wage – but which, because of the minimum wage, are never created – grow in number and variety. The instances of on-the-job worker training that would have occurred – but, because of the minimum wage, didn’t occur – stack up increasingly over time.“

Regulation and taxation of all forms have such destructive consequences, but policy makers seldom place a heavy weight on the unobserved counterfactual. Boudreaux emphasizes the futility of quantifying the “unseen” effects these policies:

“… those who insist that only that which can be measured and quantified with numerical data is real must deny, as a matter of their crabbed and blinding scientism, that such long-term effects … are not only not-seen but also, because they are not-seen, not real.“

The trade and welfare losses of coercive interventions of all types are not hypothetical. They are as real as the losses caused by destruction of property by vandals. Never again can the owners enjoy the property as they once had. Future pleasures are lost and cannot be observed or measured objectively. Even worse, when government disrupts economic activity, the cumulative losses condemn the public to a backward world that they will find difficult to recognize as such.

 

Major Mistake: The Minimum Opportunity Wage

06 Saturday Jun 2015

Posted by in Price Controls

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government-problem

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.

Labeling Exemptions Subvert Law’s Phobic Intent

26 Sunday Oct 2014

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Predictably, Vermont’s new GMO labeling law is proving to be another classic failure of big government, as noted by The Farmer’s Daughter. Her post provides some of the gory details, including specific exceptions written into the drafted rules and “sworn statement” exemptions, both of which mean it will be of much less value to the public as a informational mechanism.

“The statement requires the signer to swear the food was not made from genetically engineered seeds and it was not co-mingled with any other GMO food. As you can imagine, such a system creates an odd set of regulations. On the one hand, a farmer has to keep all the GMO and GMO-free food separate, fill out these statements for each product, hope that nothing got mixed up, and risk perjury if it did. Alternatively, the grocery store has to keep the food separate, keep track of which sworn statement goes with which product (will they keep them in the display?), and hope that customers don’t mix up the products in the display.”

Obviously, the law will impose substantial compliance costs on farmers and grocers, and it will create barriers to trade across Vermont’s state lines that might ultimately meet a challenge under the Commerce Clause.

Meanwhile, debates over GMO labeling rage in a few other states, such as Oregon and Colorado, with measures on their ballots this November. The American Association for the Advancement of Science (publisher of Science magazine) is opposed to the Oregon’s initiative, as is the Oregonian newspaper, which published this editorial:

“Choice, in fact, is one reason to support the status quo, which provides organic and voluntarily labeled non-GE products for anyone who cares to buy them, usually at a higher price. The poor are protected, meanwhile, because, as the Washington report notes, ‘Volunteer labeling concentrates the costs on the target group able and willing to pay more for GMO-free products’ while ‘mandatory labeling imposes costs on everyone and not just those that desire GMO-free goods.’”

Here’s the Denver Post’s opinion on the Colorado measure:

“Colorado’s sugar beet growers could be seriously undermined. They grow genetically modified beets, so sugar from them would have GMO labels. Yet the beet growers argue that the end product is indistinguishable from other sugar because the GMO protein in the beets is removed in processing.

The same is true of vegetable oils from corn or canola seed that come from GMO plants.“

Unintended Consequences: Living (Without a) Wage

02 Thursday Oct 2014

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Nick Gillespie makes a good case for what should be obvious to any thinking person: to help the poor, direct transfers are a better alternative than raising the minimum wage. Most people would probably agree, regardless of their views of the appropriate role of government in society, that governments are better-suited to writing checks than to complex market interventions, and labor markets are no exception. State or federal wage floors,  minimum wages, or “living wages” — whatever politically expedient name happens to be in vogue, they are the same thing — diminish employment opportunities for the least skilled members of the labor force. These workers have the most to gain from employment experience. Hence, their losses extend beyond a mere loss of current income into lost opportunities to build human capital and future income.

Mark Perry puts a fine point on the folly of raising the wage floor: “Instead of $10.10 per hour, think of the proposed minimum wage as a $5,700 annual tax per full-time unskilled worker.”

Transfers can be targeted at the poor more effectively than a living wage. First, it is relatively easy to qualify households falling below poverty-level. Second, a significant share of low-wage earners are not members of low-income households. Third, as noted above, employers can respond to wage mandates by reducing employment, but also by cutting the hours of their low-skilled employees. Both actions tend to nullify an otherwise positive impact of a higher wage floor on income.

There are few who question the need for a safety net for those truly in need, but policy should be designed to limit the need for public support. Wage floors do not promote either of those goals. However, I’d also caution that some of the transfer programs mentioned by Gillespie (food stamps and housing subsidies) are, in fact, market interventions that have unintended consequences of their own, including price distortions. Cash transfers avoid these kinds of difficulties if they are crafted to minimize negative incentives on work effort and job search activity.

Deductible Concept Sprung On Newly Insured

19 Saturday Jul 2014

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No, the monthly premium on your Obamacare coverage does NOT cover your deductible and copayments. You’re still on the hook for those bills. Apparently, that reality comes as a shock to many of the newly insured. And apparently, that reaction was unexpected by the drafters of the ACA as well as HHS, the state exchanges, and various organizations involved in the implementation of Obamacare. So, many of the previously uninsured, intended as the chief beneficiaries of the ACA, are feeling disillusioned, even jilted, by the terms of their coverage. As if the poor risk profile of enrollees weren’t bad enough, and amid continuing doubts about whether those purchasing coverage under Obamacare are actually paying their premia, the confusion among this constituency is a bad omen for the sustainability of the program.