Neither do I

Don Boudreaux, of Cafe Hayek, explains why he doesn’t care about income inequality. I agree. At the end his post, Boudreaux adds a great comment from Steve Horwitz.

I also agree with a couple of comments to the post that say that concern for income inequality isn’t necessarily “envy elevated to public policy,” as Boudreaux claims at one point.

While I think envy plays a role for some of those concerned with the income-inequality-shiny-object, I think others are motivated by what they view as unfair processes for achieving wealth, which is also a concern of Boudreaux’s.

It’s just that Boudreaux and these folks have different views on what constitute unfair processes. Which, I believe, should take the discussion to the next stage: What are those unfair processes and why are they unfair?

Boudreaux and libertarians generally see wealth acquired through market activities as fair and wealth acquired by scratching the back of a politician as unfair.  But, others tend to see it the other way around.

But, those who see it the other way around don’t explain the processes they deem as unfair. They assume income inequality is proof that the processes were unfair.

Here’s something else I’ve noticed. Ask them about the wealth Steve Jobs earned before his death or that of their favorite movie stars and you’ll hear why these particular wealthy people deserve it. It’s because they produced something these folks personally value.

Ask them about the wealth of an oil or pharmaceutical company CEO and you’ll get a sneer.

Their idea of “unfair processes” generally is their own arbitrary assessment of whether the person deserves the wealth or not.

 

The curious task of economics…

Russ Roberts, host of EconTalk podcast, often reminds his listeners and his Cafe Hayek blog readers that F.A. Hayek said:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

I think Edward Glaeser did a good job of fulfilling this task in last week’s EconTalk podcast when it comes to nice-sounding government policies that may have unintended consequences of hurting cities.

Here’s one consequence I hadn’t thought of regarding government policies meant to encourage more home ownership:

Having a very pro-home ownership policy also means you have an anti-urban policy, because typically single family houses are owner-occupied whereas multi-family dwellings are rented; on average more than 85% of multi-family dwellings with 5 or more units are rented, exactly the same percentage of households for single-family occupancy being owner-occupied. So if you are going to have federal policy which both directly, through let’s say the home ownership interest deduction, or indirectly, through Fannie Mae and Freddie Mac are going to subsidize owning, you are going to be stacking the deck against high rise houses.

Glaeser also comments on how school districts hurt cities (my parents moved to a suburb when I was a child primarily to get their kids into a better school district):

Now the last thing that artificially stacks the deck against cities is just the way our local education systems work. So, by your telling me your kids like to go tromping around in grass, that’s great; my kids do that. I have no problem with parents making those choices. However, I grew up in the streets of Manhattan and that can also work perfectly well. The problem is that we’ve created such a strong schooling incentive for people to move out of those cities that have weak school systems. I think anything that we can do that tries to somewhat reduces those spacial, those schooling-related, which are fundamentally government-created incentives to suburbanize, that’s probably a good thing.

As I heard Glaeser say this, I was reminded of how Arnold Kling decomposed freedom into having the power of voice and exit. People with bad ideas to use public schools as a means to achieve their desirable social goals took over many public school districts and drowned out the power of voice for many. They didn’t worry about it because public schools were free and they figured that folks would continue to send their kids there. What were they going to do, move?

Yes, that’s exactly what happened. They exercised their power of exit.

The neighborhood I grew up in was a nice, middle class neighborhood. It had been for 40 years from when it was first built. Sadly, it turned into a pit soon after we left. And not because that was the natural order of things. The public education system was failing to educate and that chased people away.

More people wanted out than wanted in. ’Supply and demand’ says that means home prices will go down. When prices fell, folks who couldn’t afford much because they hadn’t made good life choices, or simply didn’t care, moved in. I remember my grandparents finally moving from the home that I believe they bought new when they discovered their next door neighbors were crack addicts willing to do just about anything for their next score.

There are neighborhoods of similar age and design in different parts of the metro area that are subject to different public school systems and they are still thriving.

It’s amazing to me that the very people who love cities so much, the so-called intellectual elites, have done so much damage to them. But, it’s the perfect example of Hayek’s fatal conceit and the curious task of economics.

Russ Roberts on the minimum wage

Russ Roberts had some good recent posts about the minimum wage on Cafe Hayek. The paragraphs below are from his post about his follow-up thoughts to a debate he participated in to abolish the minimum wage:

Everyone, on the left and the right, agree that employers are eager to save costs and will substitute machines for workers or outsource production if those changes are profitable. Why will artificially higher wages created by minimum wage legislation not lead to similar substitutions?

No joke. But, of course, proponents of minimum wage will cite ‘empirical evidence’ that shows that raising the minimum wage has no effect on jobs or employment. And, of course, they never consider that these studies may not tell the whole story or have limitations.

They also seem to forget basic econ where we are taught that if a price floor is well below the going-market rate, it won’t have much affect on supply. In other words, if the minimum wage is well below the going market labor rate, then it won’t have much effect on jobs. For example, if I set a minimum wage at $0.50/hour, most people would intuitively know that’s so low, it doesn’t  effect anyone — employees or employers.

So, while minimum wage studies are often heralded as empirical support for raising the minimum wage, they are much more likely to be empirical support for that basic econ understanding of a price floor.

Next (emphasis mine):

The weird part of the debate over the magnitude of the employment effects, is that when someone uses the reductio ad absurdum of a minimum wage increase to say $50 or $100 an hour, everyone understands that won’t work because it would destroy the labor market. So where do those disemployment effects kick in? If the minimum wage is small enough so that it doesn’t cause job losses, then it can’t be having much of an effect boosting wages.

Yes. Where do the disemployment effects kick in? Great question and I never hear anybody ask it or answer. It’s similar to the ‘rich must pay their fair share’ tax debate where the answer is always ‘more’.

It occurred to me after reading this paragraph that the same people who cite empirical evidence that changes in the minimum wage don’t affect jobs (that price floors below the going market rate don’t change supply), don’t seem interested in asking about empirical evidence that raising the minimum wage actually increases wages.

I suppose they assume that if it doesn’t change the number of a jobs and a few people are marking more now, then wages must go up.  But, that assumes a lot. For example, it assumes other things don’t change — like the number of hours worked and the value of fringe benefits like employee discounts — to name a couple.

Now You’re Talking

I like some of the latest batch posts that I’ve read on minimum wage.  Here’s a roundup.

1. In this post on the minimum wage on Cafe Hayek, Russ Roberts does a great job articulating a world more complex than any of our models can replicate. True. That’s one reason cost benefit analyses suck. Models are to complex systems as caricatures are to people. They’re nice to hang on the wall, but they don’t talk or anything.

Here’s a sample:

So that when legislation artificially raises price, the debate is over the impact on quantity–how many jobs will be lost (or gained if you’re on the other side.)

But price and quantity are not the only way market forces work. And they are certainly not the only attributes of a job. There is how hard you have to work, how many breaks you get, how much training or mentoring or kindness. What amenities are in the workplace–snack bar, vending machine, nicely decorated walls and so on. When the government requires that wages be higher than what they would otherwise be, that creates an increase in the number of people who would like to work and reduces the number of opportunities available.

2. The Grumpy Economist, John Cochrane, suggests that discussing the minimum wage is “fiddling while Rome burns”, even if the economic magic of raising the minimum doesn’t effect employment were true.

3. Kudos to Russ Roberts’ co-blogger on Cafe Hayek, Don Boudreaux, for his response to a colleague who questioned why he spent so much time writing about the minimum wage:

I protest the legislated minimum-wage because I have a visceral hostility to shabby economics.

Encountering arguments premised on the (typically unconscious) notion that most employers routinely sit on figurative piles of excess profits or returns that can be tapped into by government diktat (“Raise your workers’ wages!”) without any compensating adjustments or reactions by employers makes my head ache.  Encountering otherwise respectable economists performing rococo theorizing in their attempts to explain why unskilled human labor is somehow exempt from the simple application of the law of demand makes my head ache.

Encountering otherwise respectable economists who lend credence, usually unawares, to the person-in-the-street creationist superstition – a creationist superstition held by non-economists on the ideological spectrum ranging from the likes of Harold Meyerson to Bill O’Reilly – that prices, wages, employment conditions, and other economic phenomena are determined arbitrarily, and more or less consciously, by someone in power rather than by decentralized and largely spontaneous market, competitive forces makes my head ache.  Letting stand unchallenged this Meyerson-O’Reilly sense that, therefore, the only question is which powerful group of people will determine prices and wages – the government or the oligarchs? – makes my head ache.

Encountering claims that human welfare can be increased so easily and so surely by mere diktat makes my head ache.

Challenging such claims is the equivalent, for me, of swallowing two aspirin tablets.

Some economists aren’t pathetic

While I agree with Nassim Taleb that economists are generally pathetic, not all are. Count Don Boudreaux, David Rose and David Henderson as economists who are not.

While there are many instances where Boudreaux proves his worth, this recent post of his on Cafe Hayek is ample evidence.

First, Boudreaux reprints a letter from economist David Rose that was published in the Wall Street Journal. Rose’s letter proves his worth. I’ve reprinted it below. It’s a must read.

Second, Boudreaux reminds us of a most excellent point made by David Henderson that proves his worth. Henderson pointed out that using the term wealth redistribution incorrectly implies in market economies that there was wealth distribution to begin with. There wasn’t. There was wealth creation from risk-taking and value discovery.

Here’s Rose’s letter:

In his Dec. 20 op-ed “America’s Dangerous Powerball Economy,” Arthur Brooks quite correctly points out that earned income, indeed earned success generally, affects our happiness very differently than unearned income or success.

I would like to extend his point further with something I’ve told my college students for years.

In general, the creation of wealth is edifying. When only voluntary transactions are permitted, the creation of wealth requires cooperation, and this brings out the best in us.

Piles of wealth, however, tend to be corrupting. The fixed nature of a pile is all about apportionment, not cooperation, and this zero-sum game tends to bring out the worst in us.

It follows directly that no matter how noble the ends, government redistribution (which is hardly voluntary) tends to bring out the worst in us. Rising government redistribution over the past 75 years has produced ample evidence of this point.

We are in this mess because we have allowed our culture to be dominated by those who are bent on spreading the false and self-serving narrative that our economy is a giant zero-sum game.

As such, we might as well have the government do the dividing.

Small wonder why our politics have become increasingly about who you are for rather than what you are for.

David C. Rose

Department of Economics

University of Missouri-St. Louis

St. Louis, Mo.

What is profit?

I’m looking forward to listening to the latest EconTalk podcast, where an organic farmer talks about profit and how she finds her teenage workers not quite ready to earn their keep. Her theory, similar to mine, is that kids have led a life up to the point of getting their first job where things are done for their benefit, rather than them having to make themselves useful to others.

EconTalk host, Russ Roberts, posted her interesting comments about this here. It’s worth repeating:

we hire some high school kids. And they are lovely people. But usually it’s one of their first jobs, like maybe they’ve mowed the lawn for their neighbor or maybe they did some babysitting. But by and large we’re their first job. So, everything else that’s happened in their life has happened for their benefit. They’ve gone to summer camp–that was for their benefit. They’ve gone to school–that was for their benefit. We as parents certainly do everything we can to benefit our children. And then they come to me and–yeah, there are a lot of programs that go on in the summer. And that’s not what this is. This is: You are going to work, and at the end of the week I’m going to give you money; and I expect that because you are here, I will make more money. And that’s a concept that I’ve had to explain to them. And it comes in really hard. And I have to say: Why would I have you here if I wasn’t going to end up with more money? Why on earth would I have you show up every day? And they kind of start to get that this should be a mutually beneficial arrangement, not just that I shouldn’t come out even because I think of–capitalism as me making money for the aggravation of having you here. And then we get the college kids; they’ve kind of gotten that kind of concept a little better. But then I’ll say: What do you want to do when you are done with college? And they’ll say: Oh, I want to work for a non-profit. And that one makes me angry. First, it’s like, well, non-profit, that could be a hospital, that could be a–like you haven’t thought about this any more–that could be a land trust, it could be anything. ‘Non-profit’ is huge. You don’t have any more direction than that you want to work for a non-profit? But also, they are telling me that profit is bad. So, I say: Well, look around at all this stuff you see, the tractors, the greenhouses, the walk-in cooler–like all this stuff. Ralph and I could have taken that money and even if we put it in the bank in a savings account we’d have earned like a percent or something, even now. But we’ve done this, and we’re risking that–it may not work out; we may not make any money from this; we may not get back the money we put in. Don’t we deserve a little more than what we could get in a bank by doing something safe? And they say: Oh, well yeah, of course you do. And I say: Well, that’s profit. And that’s all that profit is. And: Ohhhh. And then the light dawns. But they come with no idea about how capitalism works, even though capitalism is the economic system of our country.

I’d go a step further on profit.

I think it is unfortunate that we tend to only think of profit as a financial term. This causes us to see differently the actions undertaken by profit-seeking companies from the actions we undertake ourselves to conduct our daily lives. Those evil companies seek profit. How noble I am to give my time to charity.

But, a more general definition of profit is to derive benefit. What percent of your actions do you take to derive benefit?

Why did you show up to work? Probably for the same reason companies distribute their products, to earn money.

Why don’t you devote all of your time to charity? Probably because you need to have a shelter, you need food and clothes and you want quite a few other things. Companies, too, do not give all of their output to charity because they would soon have nothing left to give.

Why did you build the patio and fire-place in your backyard, instead of giving that money to charity? You did this for the same reason companies build lounges for workers and sell their products in pleasant surroundings.

Why did you replace your aging vehicle, instead of giving that money to charity? For the same reason companies replace their aging equipment.

How are the actions you take to derive benefit different from the actions companies take to derive benefit?

There are only two key differences that I see. First, companies more carefully record the money unit benefits of their actions because they have folks who hold them accountable, the owners. Second, they are trying to accrue those benefits for someone else, the owners instead of themselves, unless they happen work for an employee-owned company.

Profit is nothing more than a derived benefit. We profit a great deal from others, that’s why we are willing to pay them. Without that profit, we’d be living the short and lean lifestyle of a hunter-gatherer.

Interesting Reading Trifecta

Every now and again, I hit upon related topics in more than one reading in one day.

1. kludge…what?  Not sure I like the name, but I like the thought (via Marginal Revolution). Steve Teles writes about a real problem:

The fact that so much of our welfare state is jointly administered — either inter-governmentally or through contracting with private agents — makes it hard for Americans to attribute responsibility when things go wrong, thus leading blame to be spread over government in general, rather than affixed precisely, where such blame could do some good. The consequence of complexity, then, is diffuse cynicism, which is the opposite of the habit needed for good democratic citizenship.

Though, I’d say the government rarely gets the blame. Rather the blame is placed on the free market. When a heavily regulated and government subsidized health care market doesn’t seem optimal, I think there’s a tendency to overlook the government’s cause in the matter and blame the problems on the free market, simply because there exists some for-profit companies in that public-private morass. Same goes for housing and banking.

2. Don Boudreaux of Cafe Hayek quotes from Sandy Ikeda’s The Virtue of Market Inefficiencies:

…government policies that undermine the…reliability of money prices also make the discovery of inefficiencies profoundly problematic.

Using the rules of arithmetic, for example, it’s easy to see that the statement 1 + 2 = 4 is wrong, but what about  _ + _ = _ ?  What’s the solution to this “problem”?  Is there even a problem here?  Money prices fill in the blanks; they “create errors”—i.e., reveal mistakes that no one could see without them—that alert entrepreneurs might then perceive and correct. If mistakes and inefficiencies remain invisible, the search for better ways of doing things could never get off the ground.

3. But somebody had these guys beat by a couple hundred years as I coincidentally discovered on a plane this evening, I happened to start reading Thomas Paine’s Common Sense on my Kindle app and found this passage as he was building his case against the English Constitution:

I draw my idea of the form of government from a principle in nature…that the more simple any thing is, the less liable it is to be disordered, and the easier repaired when disordered.

Absolute governments (tho’ the disgrace of human nature) have this advantage with them, that they are simple; if the people suffer, they know the head from which their suffering springs, know likewise the remedy, and are not bewildered by a variety of causes and cures. But the constitution of England is so exceedingly complex, that the nation may suffer for years together without being able to discover in which part the fault lies, some will say in one and some in another, and every political physician will advise a different medicine.

Holy Schnikes, T. Paine!

The root cause of progressive taxation

Don Boudreaux of Cafe Hayek recently posted this bit of wisdom from  ”Walter J. Blum’s and Harry Kalven, Jr.’s 1963 “Introduction” to the ten-year-anniversary re-issue of their 1953 classic and insightful book, The Uneasy Case for Progressive Taxation“:

At the time of an emergency which brings about a tax increase, it appears that a sudden new burden can be more easily borne by the rich, thus suggesting that the tax system is made more progressive in the upper-income ranges.  When tax reduction is in the air, it appears that the less rich are more deserving of the reduction, thus suggesting that the system should not return to the tax pattern which prevailed before the increase brought on by the emergency.  It is almost as though tax reduction is viewed, not as the erasing of a prior tax burden, but as an independent distribution of a “bonus” by the government.  Neutrality in tax reduction … would in a simple fashion often require that higher-bracket taxpayers benefit from the tax cut substantially more than those in lower brackets.  But this symmetry is not likely to persuade the popular mind.

Yep.

For me, as soon as we start talking about ‘fair’ tax systems, we’ve gone too far because we’ve changed the conversation away from ‘what we want government to do’. We now have taken the bait and assumed that all functions of government, existing and proposed, are legitimate and the biggest problem we have is how to fund it.

Government should be something that everyone pays for so we will think very carefully about what we are getting for our money.

If (especially in non-emergency times) you want more government than you are willing to pay for, then I think you owe it to whomever asks to show your work without being grumpy.

My guess is, if you belong to an organization that has a group of people charged with figuring out how to spend money that you have put into the pot, like a church, that you also expect a reasonable accounting and justification for that spending from those folks.

When it comes to thinking about what we want government to do, I like to think of example a little closer to home like my Homeowner’s Association to check my rationale.

Each homeowner in my neighborhood pays a flat, relatively small, sum of money each year to maintain our neighborhood pool and common areas. I’m okay with the HOA overseeing those functions.

However, I’d get concerned if my neighbors started talking about setting HOA fees based on income because a) they want a ‘fairer’ collection of fees, b) they want more fees or c) they have other things they want to do and need more money.

I don’t think it would be hard for anyone to see this would lead to lower-income neighbors freeloading on the higher income neighbors (“sure we can afford that playground and shelter, as long as you are paying for it”), while simultaneously (and illogically) becoming a channel for lower-income neighbors to alleviate their envy for their higher income neighbors while also leading the HOA to want to do things beyond its initial charter of caring for the pool and common grounds without sound reasoning for doing so. Why do I want the guy in charge of hiring and paying the pool guy to also use our money for an unemployment insurance program for my neighbors?

Spend once shame on you, spend twice shame on us

 

I rarely disagree with Russ Roberts at Cafe Hayek. But I disagree with what he wrote in one of his recent posts:

Many people have excoriated President Obama for suggesting that entrepreneurs can’t claim credit for their success.

It appears that many of these critics have taken the President’s remarks out of context. (Full text here.) Never mind. Even out of context, the critics are wrong and the President is right.

Of course no one creates a business on their own. And yes, government played an important role as the President suggested–creating the schools that educated your workers (often poorly, but I’ll give him the benefit of the doubt), the roads that your product traveled on, the bridges your trucks crossed, etc.

First, I disagree that the critics have taken his comments out of context. The two sentences of the President’s in question are:

If you’ve got a business. you didn’t build that.  Somebody else made that happen.

Adding the full context of his remarks doesn’t change the meaning of these two sentences.

He repeats the same point twice in two sentences. To be in line with the rest of the speech, these two sentences would have looked more like:

If you’ve got a business, you didn’t make that happen all on your own. Others helped you make that happen.

Second, I disagree with Roberts that even with the straightforward meaning of these two sentences, that the President is right. He’s not.

I do believe that we tend oversimplify success and I agree there is usually more to the story than somebody who made it all happen on their own.

But to agree with these sentences, “even out of context”, I do not.

Russ Roberts has written books. Certainly, he couldn’t have done that without the help of a lot of people. The ideas presented in those books were not his own. Russ didn’t make the paper or ink or printing presses. He probably had a copy editor and colleagues who read the manuscript and offered suggestions. And, while writing the book he drove a car made by others, over government bridges and typed on computers built by others.

No disagreement there.

However, without Russ Roberts, those books would not have happened. He DID build that and nobody else made that happen for him. He took all the same inputs available to rest of us and shaped them into something that wasn’t there before and added some value in the process.

I do agree with the key point of Russ’s post, however. Government spending is out of control. This is a problem that needs to be addressed. I don’t like the idea of feeding this problem by taking more from the most productive members of society.

Thomas Sowell stated the obvious here:

Did the taxpayers, including business taxpayers, not pay for that road when it was built? Why should they have to pay for it twice?

Let’s quit busting the balls of successful business people. They pay their share for government and they create products that create value for the rest of us.

It’s inconsistent to bust their balls and complain about lack of jobs at the same time.

It’s time we start holding our government officials accountable. Successful business people are held accountable by their customers. If they make valuable things, customers buy and generate profits. If business folks spend more than the take in consistently, they fail and go out of business.

When government officials spend more than they take in, they whine about the wealthy not paying their fair share so they can take even more from them and spend even more.

Why do we listen to them? Why can’t we look objectively at their spending records and realize they have been woefully irresponsible?

Related articles

• Obama: “I Didn’t Say What You Heard Me Say” (nicedeb.wordpress.com)
• “Tell me at what point other people helping me made me your property.” -David Schmitz (ourdinnertable.wordpress.com)
• Government by Fallacy (ourdinnertable.wordpress.com)

 

Good reading

Sheldon Richman explains that the “market does not ration.” (HT: Cafe Hayek)

I liked how Arnold Kling worded this:

My own view is that these are two areas [health care and education] where outcomes depend largely on factors other than the services provided. Meanwhile, we have succumbed to the claims of suppliers that their services ought to be heavily subsidized. The subsidies lead to over-provision of education and health care services, well past the point where the marginal return from additional spending becomes negligible. In health care, this is known as the flat of the curve hypothesis. Perhaps the hypothesis also applies in education.

Eating apples is a good thing. But it’s not good to continue eating more and more apples every day.

George Schulz in this weekend’s Wall Street Journal, gives some good advice to would-be Presidents. When I read this, it made me think about the short-term thinking of Keynesian economics:

The political people would come in and say ‘You’ve got to be careful, Mr. President. There’s gonna be a recession [if the Federal Reserve tightens the money supply]. You’re gonna lose seats in the midterm election.’

“And he basically said, ‘If not us who? If not now when?’ And he held a political umbrella over [Fed Chairman] Paul Volcker, and Paul did what needed to be done. And by late ’82 early ’83, inflation was under control, the tax changes that he made were kicking in, and the economy took off. But it took a politician with an ability to take a short-term hit in order to get the long-run results that we needed.”

Government’s role is not to smooth GDP.  It’s job is to predictably protect our freedom:

“Let’s talk about football. . . . You want to know the rules and have an impartial referee, but you also want to make sure somebody isn’t going to come along and change the rules in the middle of the game. . . . Now it’s as though we have all these people who have money on the sidelines and we say ‘Come on and play the game,’ and they say ‘Well what are the rules?’ and we say ‘We’ll tell you later.’ And what about the referee? Well, we’re still struggling for who that’s gonna be. . . . That’s not an environment designed to get people to play.

We all learned this on the playground as we were growing up, didn’t we? We stopped playing tag and kickball with the kids who changed the rules in their own favor after every play. It wasn’t worth our time. Stop changing the rules.

Schulz also makes a good point about being cautious to use debt for true emergencies (and not GDP smoothing or buying votes, rewarding cronies and special interests):

Now remember something. Alexander Hamilton, our first secretary of the Treasury, and a very good one, redeemed all of the Revolutionary War debt at par value, and he said the ‘full faith and credit’ of the United States must be inviolate, among other reasons because it will be necessary in a crisis to be able to borrow. And we saw ourselves through the Civil War because we were able to borrow. We saw ourselves able to defeat the Nazis and the Japanese because we were able to borrow. We’ve got ourselves now to the point where if we suddenly had to finance another very big event of some kind, it would be hard to do it. We are exhausting our borrowing capacity.”

Finally, he reminds us what results with price controls:

“I fear that the approach to controlling costs in the health-care business is moving more and more to a wage-and-price-control approach. And one thing you know from experience is when you control the price of something, you end up getting less of it. So if you control the price of health-care providers, you will have fewer of them and that’s gonna wind up as a crisis. The most vivid expression of that . . . was Jimmy Carter’s gas lines.”