More on the minimum wage

Mark Perry, on his blog, Carpe Diem has a couple of posts on the minimum wage worth reading:

1. An New York Times editorial to get rid of the minimum wage?!? It’s from 1987. Amazing how much of shift there has been since then.

2. Perry also points to these wise words from Henry Hazlitt, author of the highly recommended Economics in One Lesson (and available for free .pdf download for any of your reading devices):

Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored. People who would be among the first to deny that prosperity could be brought about by artificially boosting prices, people who would be among the first to point out that minimum price laws might be most harmful to the very industries they were designed to help, will nevertheless advocate minimum wage laws, and denounce opponents of them, without misgivings.

The first thing that happens, for example, when a law is passed that no one shall be paid less than $9.00 per hour [updated) is that no one who is not worth $9 per hour to an employer will be employed at all. You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.

 

Shrinking middle class prop

Two non-pathetic economists, Don Boudreaux and Mark Perry (one has bought me beer), write in the Wall Street Journal today that the shrinking middle class is a nothing more than a political prop.

You should read their criticisms of cost and wage measurements. But, here are a few points that are more compelling to the average joe. First, the basics have never cost us less:

According to the Bureau of Economic Analysis, spending by households on many of modern life’s “basics”—food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities—fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today.

Second, gadgets of prosperity are available to all:

Today, the quantities and qualities of what ordinary Americans consume are closer to that of rich Americans than they were in decades past. Consider the electronic products that every middle-class teenager can now afford—iPhones, iPads, iPods and laptop computers. They aren’t much inferior to the electronic gadgets now used by the top 1% of American income earners, and often they are exactly the same.

Finally, a true measure. Would you trade what you earn and have today with someone from the 1950s or 70s?

Even though the inflation-adjusted hourly wage hasn’t changed much in 50 years, it is unlikely that an average American would trade his wages and benefits in 2013—along with access to the most affordable food, appliances, clothing and cars in history, plus today’s cornucopia of modern electronic goods—for the same real wages but with much lower fringe benefits in the 1950s or 1970s, along with those era’s higher prices, more limited selection, and inferior products.

I can’t believe anyone buys the shrinking middle class barb. For those of us that have been around for more than a couple of decades, we don’t need economists to point out that the suburban blossom of mcmansions and the roads becoming clogged 4×4 family passenger trucks occurred during this period where the middle class supposedly shrunk.

Teaching someone to fish vs. Giving them a fish — Foreign Aid Style

Mark Perry (another economist is not pathetic, and not only because he bought me a beer)    posted on his blog, Carpe Diem, a Kenyan economist who points to foreign aid as part of the problem in Africa, rather than the solution.

Here’s a snippet of what James Shikwati had to say:

Huge bureaucracies are financed (with the aid money), corruption and complacency are promoted, Africans are taught to be beggars and not to be independent. In addition, development aid weakens the local markets everywhere and dampens the spirit of entrepreneurship that we so desperately need. As absurd as it may sound: Development aid is one of the reasons for Africa’s problems. If the West were to cancel these payments, normal Africans wouldn’t even notice. Only the functionaries would be hard hit. Which is why they maintain that the world would stop turning without this development aid.

Even pop singer Bono seems to be coming around on this point.

But more people get to go

Jeff Jacoby wrote in The Boston Globe about how the government’s efforts to make college more affordable has had the unintended consequence of making it less affordable. Indeed. Have you been to college campus lately? It seems all those extra dollars flowing into education has gone to making the student’s experience more resort-like.

As I asked at the end of my previous post, can you name any part of the economy where the price level has increased faster that inflation for long periods of time that did not have major interventions from government?

(Thanks to Mark Perry at Carpe Diem for the link to Jacoby’s column).

Some of my liberal friends might say, But, that means that the government’s efforts have made it possible for more people to go to college. The cost has increased due to increased demand. That’s a good trade-off. Do you want to be the one to tell some of those folks they can’t go to college?

Of course, what these friends miss is that nobody has to be the one to tell someone they can’t go to college. Those someones make that decision on their own by weighing their options and picking the path they feel is best for them.

Instead of using aid, accumulating $100k in student loans and spending four years in college earning a liberal arts degree that prepares them for competing against high school grads for entry-level jobs, those someones might do something more productive like work their way up to management at their local retail store, or start a fence building business  that eventually employs 10 people, go to a trade school to learn a vocation like dental cleaning or something like that.

Innovation welfare

Here and here I wrote about how competition is good for consumers because it gives them more options to choose from, even if those options are among government-provided services. If one police department, school district, fire or road department isn’t doing a good job, perhaps the one next town is better.

In this post at Carpe Diem, Mark Perry writes about how the Mayo Clinic is beginning to offer more choices in health care for Canadians. From his post:

According to this news report about Mayo’s insurance programs for Canadians, “the publicly funded health system in Canada decreases the choices available to patients, and can also result in delayed diagnosis and treatment. That’s why, within the national system, it’s good to offer choices for those who need diagnosis confirmation or even treatment for serious illness.”

Then Perry asks a great question:

Where will Americans go when/if we adopt Canadian-style medicine?

I believe that one thing that makes it possible for other countries to socialize their medical care without full implosion (though with long wait-times and less effective treatments and other negative trade-offs) is the existence of what’s left of the free market in medical care in the U.S. and other parts of the world.

The U.S. medical market helps in at least two ways.

First, it gives those country’s citizens a choice. If they can’t get treatment in a timely manner, or at all, in their country, they can come to the U.S.

Second, the free market in the U.S. still spawns a great deal of innovation in medical care that the health systems in other countries can adopt. In this sense, the free market in medicine has been supplying government health systems — not particularly known for innovation (which makes sense if you understand the incentives) — a kind of innovation welfare.

Without these two positive effects, there would be many more disaster stories from these countries that would sink their medical systems politically.

If we clamp down on the free market in the U.S. and these two positive effects go away, I will expect to see socialized medical systems deteriorate so quickly that it would start a general political trend back toward accepting more free market in medicine.

Unfortunately, in the meantime, we will have lost or delayed countless life saving innovations.

The forgotten viewpoint

Mark Perry, at Carpe Diem, reminds us of some good advice from French economist, Frederic Bastiat:

Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.

Let’s apply this advice to some common situations.

Minimum wage.  Here’s a good story about how consumers pay for higher minimum wages (HT: Don Boudreaux, Cafe Hayek). The costs to the consumer includes higher prices and fewer options. Some of the cost is also born by low-skilled workers who will have fewer employment opportunities.

Credit card regulations: Don Boudreaux does a nice job in his Pittsburgh Tribune column, Help That Hurts, of looking at the credit card regulations from the viewpoint of consumers.  Here’s an excerpt:

Congress, the White House and most of the news media describe CARD [Credit Card Accountability, Responsibility and Disclosure Act of 2009] as “pro-consumer.” At first glance this description seems accurate. After all, don’t consumers benefit when the fees and interest rates they must pay are reduced?

Although the answer to this question is “yes,” this isn’t the correct question.

The correct question is, “Don’t consumers prefer to have the option of paying higher fees and interest rates if the alternative is having no access to credit at all?”

Not everyone is financially careful or responsible. Traditionally, credit-card issuers dealt with this fact not by refusing to lend to consumers with poor credit scores but, instead, by using an ingenious approach that helps both those consumers with poor credit scores as well as the banks that lend to them. That approach is to charge delinquent customers significant fees for late payments and to raise interest rates on delinquent balances.

Here are a couple more things where the consumer viewpoint is usually ignored:

  • Foreign trade – Who would be hurt by restricting access to foreign goods? Consumers.
  • Labor unions – Who funds the generous wages and benefit packages of unions? Consumers.

I’ve added a new category to my blog, Consumer Viewpoint, to remind me to continue to apply Bastiat’s advice as I encounter various situations.

Where does the Laffer Curve bend?

Laffer Curve

What is t*?

Thomas Sowell says that when tax rates are raised on high-income individuals, they respond to incentives by arranging their financial affairs differently to minimize those taxes.

Folks, like blogger Megan McArdle, lecture/patronize opponents of tax increases that current marginal tax rates are not near the bend in the Laffer Curve (the point where increasing tax rates would reduce revenue).

This is from Mark Perry’s blog, Carpe Diem:

The U.K. government is learning about the economic lesson that “if you tax something, you get less of it.”  Following an increase in the top marginal income tax rate to 50%, tax revenues from high-income taxpayers are falling, and are not going up, as the Treasury somehow expected by ignoring the economic lesson that “people respond to incentives.” A U.K. Treasury official explained the disappointing drop in tax revenues by saying it “was partly due to highly-paid individuals arranging their affairs to avoid paying the 50% rate.”  Duh.

Suggestion: Stop protesting and demanding and do something productive

Here are a couple interesting videos.  Thanks to Mark Perry at Carpe Diem.

Video 1: Stratification in the OWS society

Apparently, in the OWS society in Zucotti Park, enclaves formed that were reminiscent of the classes in society that OWS was protesting.  I love the we-should-all-have-access-to-iPads, but-not-my-iPad guy.

Video 2: “Patriotic” Millionaires demand higher taxes, but are unwilling to pay up

Here’s the video (thanks to W.E. Heasley for pointing me to the Youtube version):

In this video, reporter Michelle Fields asks millionaires if they’d like to make a voluntary donation to the Treasury, since they are demanding their taxes be raised.

Unsurprisingly, they all said no.  “It wouldn’t make a big enough difference to solve the problem.”

Great job Michelle!

If the 1 Percenters who appeared in this video are out there somewhere, I’d like to pose these follow up questions:

1.  What “problem” exactly are you hoping to solve?

a. Deficit

b. Income inequality

c. Paying your “fair share”

d. Other?

2.  Don’t you think it’s important to lead by example? Maybe if you made a donation that would lead others to make donations and that could help, couldn’t it?

3.  What keeps you from using this same logic (“my contribution won’t make a difference”) when donating to charity?  After all, a contribution of $100,000 to charity will have the same impact of $100,000 to government, right?  Why or why not?

4.  By how much do you think taxes should be raised and specifically on who (e.g. income over $1 million)?

4a.  If taxes are raised by that amount on that group, how much extra government revenue will that generate?  How does that compare to the size of the deficit?

4b.  What’s to keep government from raising taxes on you, spending that extra money (if it generates extra money) and not reducing the deficit by a penny?

5.  Do you have any thoughts on how large a percentage government spending should be of the economy?

6.  Are you also asking your politicians to exercise more fiscal responsibility in spending?

“…not a cent more”

George Will wrote an excellent piece refuting Elizabeth Warren’s collectivist logic.

Mark Perry posted about it on his blog Carpe Diem.

Responding to Mark Perry’s post and on this debate about how much the wealthy “owe to society“, mike k writes:

They owe exactly what everyone else owes and not a cent more.

The reason I like mike k’s statement is that it attacks the underlying assumption that a substantial portion of Bill Gates’ success is somehow due to ‘society’.

If this society assumption were true, then most of us would wind up to be as wealthy as Bill Gates, since we’re all in the same society.

But we don’t, so there must be explanations, other than society, that substantially account for his wealth.

Also missing from the assumption that the super wealthy ‘owe it to society’ is an accounting of what the wealthy has already contributed to society.

We ignore that his wealth resulted from what he has already contributed to society.

He earned his wealth by creating things that others in society found useful and valuable — enough so that they were willing to trade away some of their own hard-earned productivity to gain additional productivity and value from Gates’ products.

Creating products valued by the rest of us in society seems like enough payback to society already to me.

It’s only by ignoring the value that he has already added to society through his products that we arrive at the clumsy conclusion that Gates owes some part of his wealth to society (in the form of taxes — charity is also acceptable).

This notion of having the wealthy payback society twice (first when they create value and second when they receive the benefits of creating value) seems a lot like charging the guy who stopped to help you fix a flat tire on the side of a highway for using your tools and taking up your time while he fixed it.