Good links

A short, but insightful graduation speech.

A longer and insightful discussion of wealth and how different views of where it comes from can affect the words we use.

From the first:

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

From the second:

Europeans and Americans “claimed” a higher portion of global output only because they produced a higher portion of global output!  What these Europeans and Americans “claimed” simply would not have existed had they not produced it.

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Good point on inequality and education

Here’s Mark Perry, of Carpe Diem, regarding John Goodman’s post: If you really care about income inequality, you need only focus on one thing: the inequality of educational opportunity.

As Goodman puts it:

Poor kids are almost always enrolled in bad schools. Rich kids are almost always in good schools.

As they point out, the left seems more concerned with protecting teachers unions than providing quality education.

But, I think it’s worth pointing out that the blame of bad schools doesn’t fall only on the administrators and teachers, though they are partly to blame.

As one commenter on Mark Perry’s blog post pointed out, what do you think would happen if you switched the kids in the good schools with the kids in the bad schools? Do you think the reputation of the schools would remain intact? No.

I think it’s worth considering why that is. It’s not because of inequality. It’s because different people value education differently, just like any other product or service.

Even in a country that provides publicly for education, people still get to make choices based on a number of factors. Those who value education more tend to choose to live in areas where their neighbors value it as well. Those who don’t value education as much are left in the bad schools.

Charters a good way to give more choice to the people who do value education, but happen to be stuck in the areas where their neighbors don’t value it as much.

But, charters won’t convince those who don’t value it, to value it more.

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Middle class is okay

One sign of lackluster American education is that politicians who use the shrinking middle class prop get votes instead of laughs.

Post title from Carpe Diem: “Today’s new homes are 1,000 square feet larger than in 1973, and the living space per person has doubled over last 40 years”

Weathermen are smart enough to look out the window to make sure that what they see with their own two eyes matches with their models and instrument.

If you believe the shrinking middle class myth, I suggest spending more time looking out your window and paying attention. Not only have house sizes grown, but middle class homes also include many more amenities than even 15 years ago such a bathroom (or at least bathroom sink) for everyone, walk-in closets, jetted tubs, three car garages, finished basements and the new trend, outdoor living spaces, to name a few.

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If you want to help the poor, you should read this

I agree with Mark Perry (an economist who has bought me a beer), of Carpe Diem, that the reduction in the world poverty rate is the most remarkable achievement in human history.

The percentage of the world population living on $1 per day or less has dropped since 1970 from around 26% to just over 5%.

It’s hard to argue with those results. They are inflation-adjusted.

I can think of a couple things that might be easier to argue about regarding those results.

1. I can imagine some folks would say that 5% isn’t good enough.

2. I can imagine that some folks would argue about the cause of those results. I agree with Perry’s explanation as provided by Arthur Brooks: “globalization, free trade and international entrepreneurship.”

I can imagine that some folks would say it was the growth in government and aid. But, for them, I’d ask, what if you’re wrong? As Brooks says:

…if you love the poor, if you are a good Samaritan, you must stand for the free enterprise system, and you must defend it, not just for ourselves but for people around the world. It is the best anti-poverty measure ever invented.

I agree. I could be wrong and I think — for the benefit of the poor — I should keep that in mind and stay open to evidence to the contrary, because whether I’m right or wrong doesn’t amount to a hill of beans.

What is important it what really helps them.

I also think us supporters of free markets often forget this. The opposition paints us as the defenders of the rich, the “1%” and king-like CEOs, while we’re really advocating for the benefit of everyone, including the poor. 

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.

 

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.

Walmart emerged from a willingness to try new things and learn

Thanks to Mark Perry at Carpe Diem for the link to this video illustrating Walmart and Sam’s Club growth.

We see the success stories after they’ve become successful and don’t often think how they got to that point.

I recommend reading Sam Walton’s book Made in America. It paints a good picture of how Walmart emerged from Walton’s constant experimentation and trial-and-error learning, in the store, store location and in the supply chain. It took him years to evolve the retailing model into something that would fund its own expansion by simply pleasing its customers.

It’s been awhile since I’ve read it (~15 years), but a few stories are stuck in mind.

Walton started his first store in a town on the eastern side of Arkansas. He grew it into a success and when it came time to renew his lease, the landlord kicked him out to take Walton’s store for himself. There Walton learned to build renewal options into his leases.

When Walton opened his store right across from a competitor in Bentonville, most people thought he was crazy, but Walton relished the competition and would try things to get people to try his store and keep them coming back, which was great for the customer. Walmart still gets a lot of resistance to this strategy — generally from people who care less about the customer.

He wasn’t too proud to borrow ideas from competitors. When he read an article about a store with a self-serve model in Minnesota or Wisconsin, he hopped on a bus (or train) and visited to see how it worked and then adopted the model in his stores and changed the retailing industry forever.

As he opened more locations, he tinkered with various ownership structures and incentives to drive the right behavior. He discovered joint ownership was the best incentive structure, which carried through all the way to employees of the eventual Walmart earning shares of stock. Early stores were partnerships between him and the store’s general manager.

Even after Walmart was getting larger, they tried new things. They took on a massive project in the warehouse in the 1980s to improve product distribution efficiency. It took years and a few costly mistakes, but it eventually paid off. I often think about that when I see companies ditch a project after the first failure. I wonder if it could be successful with some more learnings applied.

Businesses emerge from the interactions of customers and business owners. They aren’t designed by consultants in board rooms.