More examples of signals rather than causes

Being a homeowner makes one responsible.  More likely: Responsible people become homeowners.

Going to preschool improves ones chances of success. More likely: Having parents that do a lot of things, including sending kids to preschool, improves ones chances of success.

A college degree increases your earnings. More likely: Ambitious folks find ways to make more money. I’ve heard of studies that look at non-college graduates that have similar ambition and work ethic as college graduates that show that they have about the same earnings as college graduates.

Countries with government health care have better health, as measured by life expectancy and infant mortality, than the U.S. More likely: Other factors like health habits, diet choices, demographics, lifestyle choices and differences in the way these health stats are tracked from country to country have bigger impact than whether the health care system is provided by government or not.

Can you think of any?

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Lost in translation

Seth Godin on signals vs. causes. When we simplify the complex world around us, it is easy to mistake a signal for a cause. As Seth G. writes:

People who order wine with dinner might be bigger tippers, but persuading someone to order a bottle probably won’t change the way he tips.

Yet, so much of what we are told to do is based on things like teaching servers how to sell a bottle of wine because folks who order wine are bigger tippers. The world is complex. Sometimes we lose things in translation when trying to understand it.

Here’s another nice example from Godin’s post:

…it turns out that people who eat before bed are believed to gain more weight than those that don’t.

More likely…The kind of person who makes a habit out of eating when bored (just before bed) might very well be the kind of person that has to wrestle with weight.

Learned Helplessness

Recent discussion in the comments of this blog about poverty reminded me of a caller I heard on a local radio show I heard within the last year.  The caller was a teacher and he shared the results of an assignment he has always done with students in his 30 years of teaching in an urban school district.

He said that he has always done this assignment to encourage his students to think about their futures and how they will earn their keep.

The first part of the exercise is to think about and write down the things they may want to have someday — homes, cars, jewelry, boats, etc.  In the second part of the assignment, they think about what they’ll do to afford those things — like earn money as a nurse, or firefighter or start a business.

He then commented on how he has seen the responses to that exercise change over the years.

In his early years, his students would want to become nurses, firefighters and teachers to be able to earn money to buy what they want.

But, now he’s more likely to get these types of responses: I’ll just use the check or card that comes from the government to buy it, like Mom does.

I doubt much has changed. My guess is that the students normally say they’ll do whatever it is they see their parents or aunts and uncles doing.  The future nurses of 20 years ago probably had a Mom who was a nurse.

Which reminds me of this post where I linked to and quoted from a Wall Street Journal piece by Arthur Brooks about earned success and learned helplessness.

It also reminds me of the story Dr. Carson told in his speech about how his Mom would not allow Dr. Carson or his brother to accept excuses for their failures or their lot in life.

 

Walter Williams: Good Intentions

Walter Williams makes a good case that the war on poverty was making things worse in 1985. This was a PBS documentary now available to all of us through the wonders of the Internet and Youtube. I recommend watching all 28 minutes.

Part I:

 

Part II:

 

Part III:

 

Here’s Walter Williams home page to see more of his work. I recommend adding his weekly column to your normal reading rotation. You will learn a lot.

Thanks to Wally & Mike for — as usual — a good and productive discussion in the comments.

Give the Governor Harumph!

In this week’s EconTalk podcast, guest Glenn Reynolds says well something I think about often:

 …it’s always funny to me that the people who go on the most about sustainability in other areas seem the least concerned about sustainability when it comes to things like government and spending.

Here he sums why government grows:

…there is a scene in it [the movie Blazing Saddles]–which I regard as one of the most powerful metaphors for our political situation every produced–and it’s the one where Mel Brooks, playing Governor Le Petomane, has all his cronies around a big conference table and he says: Gentlemen, we’ve got to protect our phony-baloney jobs. And the problem with making the government smaller is it threatens a lot of people’s phony-baloney jobs.

LOL

This immediately follows his plea to protect their phoney-baloney jobs:

Here Reynolds mentions what motivates politicians, something that should get more airtime:

I think it’s a mistake that a lot of economists make–not just economists but a lot of other critics of government–to think that the only question is just sort of money. I think the other issue that people guard almost as vigorously, and maybe more vigorously, is the non-monetary economy of self-importance.

Which I think for politicians is really what drives them more than anything else. I think the sense of being a big man.

It’s funny to me that it is assumed by default that CEOs are motivated by greed, but this motivation of a politician goes past society nearly undetected. Rather, politicians are often considered to be ‘serving the people’, when all they’re doing is spending other people’s money and getting their kicks out of being loved and a big shot.

Reynolds offers a nice rebuttal to a previous guest, Louis Michael Seidman’s, position that we shouldn’t be beholden to the Constitution.

If you are the President, if you are a member of Congress, if you are a TSA agent, the only reason why somebody should listen to what you say instead of horse-whipping you out of town for your impertinence is because you exercise power via the Constitution. If the Constitution doesn’t count, you don’t have any legitimate power.  …if we are going to start ignoring the Constitution, I’m fine with that; the first part I’m going to start ignoring is I have to do whatever they say.

Though, in Seidman’s defense, I think Russ and Reynolds are missing something in Seidman’s argument (even though they kind of mention it in the podcast, but don’t connect the dot back to Seidman’s argument). I hear Seidman basically saying that what ‘we’ consider the Constitution has evolved over time, without necessarily being updated through the official amendment process. I believe this is a fundamental point made by libertarian-minded folks like F.A. Hayek. Law isn’t the set of rules written on paper. That’s legislation. Law is the set of norms and customs by which people get along with one another. When legislation lines up with the customs, it looks like we are following the written rules (like stopping at red lights). But, when legislation doesn’t line up with custom, we generally ignore them (like driving 5 miles over the speed limit).

One last tidbit. Here’s Reynolds’ idea to help slow the growth of government (emphasis added — incentives matter):

…create a third house of Congress, which I call a House of Repeal, in which people run for election in which their only power is to repeal laws. And if that one house repeals a law, that law is repealed. And when you go before the voters every two or four years or whatever term you choose for it, the only thing you’ve got to run on is which laws you struck down. Because right now, one reason why we’ve got growth of big government is there is literally nobody in the government with an institutional incentive to shrink government. Courts can strike down laws as unconstitutional, and they do sometimes, but it doesn’t do anything for them institutionally to do so. The other two branches are all about making government bigger. And everybody runs for election and tells voters what they are going to do for them; it would be nice if we could have somebody run for election and tell voters what they are going to undo for them.

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.

Oh yeah…liberty

Since President Obama mentioned hiking the minimum wage in his State of the Union address, it has been a hot topic on the econ blogs. Does it reduce jobs? Does it help the poor? Does it hurt them?

Credit to Grant Davies for kindly pointing out in the comments of my post about the minimum wage that the best argument against it is liberty

As I’ve read the plethora of blog posts about the minimum wage over the past few days from liberty-minded economists and bloggers, who have greatly influenced my thinking, Grant’s comment kept echoing in my mind.

The best (and only argument that should be required) against the minimum wage is liberty. Grant wrote:

As a human being, I have an absolute right to make arrangements between myself and another so long as it does not infringe on the rights of others.

Why should someone be able to prevent me from accepting a wage, if I so choose? If it is agreeable to me and agreeable to person willing to pay it, who cares?

Grant’s comment echoed in my mind as I read those blogs because so rarely was the case for liberty mentioned. They’ve taken the bait. Nearly all of the blog posts I read try to disprove the ‘greater good’ argument, rather than state the case for liberty.

Also, credit to The Pretense of Knowledge blog for including with other ‘minimum wage’ blog links, a link to a post about Dr. Higgs’ essay on the moral case for liberty. I commented on that essay here.

Besides there are also really good reasons to be skeptical about ‘greater-good’ arguments. They usually are wrong or, at best, inconclusive. Why violate liberty for that?

Even more on the minimum wage

When talk of minimum wage comes around, I think of a conversation I had with a friend once. I wrote about it in 2011 in a post titled “I support it, but it doesn’t apply to me.” My friend supported the minimum wage and used all the stock arguments for it. He also happened to own a small business and had found a way around paying minimum wage to his workers. Well, they weren’t workers. They were “independent contractors”.

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.

 

Should we have a minimum wage?

Here’s my attempt at the using the Costco Connections Yes/No format to answer this question. I’d like to mention, this post was in the works before President Obama’s State of the Union address this week.

Yes

Otherwise, employers would seek to exploit workers by paying them as little as possible.

Workers need to make enough to live on. Employers have more power than low-skilled workers in the market, so the minimum wage helps offset that power.

No

The minimum wage may set a price floor for wages above what some people are willing to work for and some people are willing to pay. If so, this reduces job opportunities and increases unemployment for low-skilled workers, depriving them of chances to gain work experience that would make them more productive and able to earn a higher income in the future.

If the minimum wage is successful at allowing some people to earn more than they otherwise would, it may also cause other negative trade-offs for these people. For example, their employers can treat their low-skill staff worse because there are folks lined up to take their job and they don’t have as many opportunities to find work elsewhere. This might mean that low-skilled workers have less flexibility in work schedules or have to put up with mean bosses.

Many workers do not need to make enough to live on. Many folks want to make some extra money and get job experience. Some of these folks include teenagers, college students, spouses of full-time workers, and sometimes folks with full-time jobs looking to make extra money for Christmas gifts and vacations. Not all jobs have to provide a living wage.

If an employee and employer come to a voluntary agreement on wages, why should ‘we’ care what the amount of the wage is? Everybody’s situation is different, so why should we impose our preferences on others?

The minimum wage is a largely a do-gooder’s ruse. It feels good to support it, but in reality many folks work for less than minimum wage. They just happen to be off-the-books in the gray and black markets.

My opinions:

When I was younger, I voluntarily took on jobs below the minimum wage. For example, I delivered papers and assembled bikes for a bike shop owner (I think some child labor laws were broken as well).

But, I was glad to have these opportunities (my parents were also more than happy to get me out from in front of TV to do something productive) and didn’t feel I was exploited. The reason these jobs didn’t pay much is because they weren’t worth much.

If my employers had stuck to the letter of the law, I may not have had those opportunities. By the way, the bike shop job was a pure black market job, to my last “No” point.

I should note, my ’employers’ in my paper-throwing job were my delivery customers. Judging how hard it was to collect $2 a month from them, they didn’t place much value on getting that paper twice a week.

I should also note, the biggest reason I gave it up was scheduling, not pay. I disliked waking up at 5 AM on Saturday to fold and deliver papers. I’ve never been a morning person.

I soon discovered that I could make well more than minimum wage and — more importantly at the time — could set my work schedule, by pushing a mower. I also learned some good sales techniques as I developed my customer base.

It turns out that the thing many homeowners dislike even more than paying their paperboy is mowing their lawns, which is why the very same people (employers) who had such a difficult time coughing up a quarter per paper were more than happy to pay me $80 a month to save them from lawn-mowing dread.

It’s easy for us to advocate the minimum wage when it applies to faceless people. But, so rarely do folks examine their own behavior and try to draw parallels.

We all value things a differently. Think of some of the things that you willingly pay for now. Do you pay someone to mow your lawn, clean your house, babysit, kennel your dogs when you’re on vacation, make coffee for you or coach your kids in soccer?

What if someone else came along and judged that you have been paying too little for these services, that you have been exploiting these powerless folks and you must now pay them 20% to 50% more for the same service?  You and your service providers would probably tell them to butt-out and mind their own business because you both are perfectly fine with your existing relationship. If you’re forced to pay more, you too may cut back.

When you advocate a minimum wage, you’re butting into to the business of others’. In my opinion, that’s the strongest argument against the minimum wage, because if we feel we have the right to butt into this voluntary arrangement between two people, then there is likely no end to what other meddling we’ll entitle ourselves to.