Voice For Liberty

Tag: Economics

  • Williams’ law: the vital role of profits

    This is an excerpt of a speech given by Walter E. Williams on February 6, 2005 at Hillsdale College. The complete speech, titled “The Entrepreneur As American Hero,” can be read here: http://www.hillsdale.edu/imprimis/2005/03/.

    At this juncture let me say a few words about the modern push for corporate social responsibility. Do corporations have a social responsibility? Yes, and Nobel Laureate Professor Milton Friedman put it best in 1970 when he said that in a free society “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

    It is only people, not businesses, who have responsibilities. A CEO is an employee, an employee of shareholders and customers. The failure of the corporate executive community to recognize this, and its willingness to engage in activities unrelated to the pursuit of profits, means national wealth will be lower, product prices will be higher and the return on investment lower.

    If we care about people’s wants, rather than beating up on profit-making enterprises, we should pay more attention to government-owned non-profit organizations. A good example are government schools. Many squander resources and produce a shoddy product while administrators, teachers and staff earn higher pay and perks, and customers (taxpayers) are increasingly burdened. Unlike other producers, educationists don’t face the rigors of the profit discipline, and hence they’re not as accountable. Ditto the U.S. Postal Service. It often provides shoddy and surly services, but its managers and workers receive increasingly higher wages while customers pay higher and higher prices. Again, wishes of customers can be safely ignored because there’s no bottom line discipline of profits.

    Here’s Williams’ law: Whenever the profit incentive is missing, the probability that people’s wants can be safely ignored is the greatest. If a poll were taken asking people which services they are most satisfied with and which they are most dissatisfied with, for-profit organizations (supermarkets, computer companies and video stores) would dominate the first list while non-profit organizations (schools, offices of motor vehicle registration) would dominate the latter. In a free economy, the pursuit of profits and serving people are one and the same. No one argues that the free enterprise system is perfect, but it’s the closest we’ll come here on Earth.

  • Gambling study flawed. Ask casino workers.

    Did you know that a study used to promote the economic development benefits of gambling in Wichita has casino workers paying for a large part of the social costs of gambling?

    There is a document titled “Economic & Social Impact Anlaysis [sic] For A Proposed Casino & Hotel” created by GVA Marquette Advisors for the Wichita Downtown Development Corporation and the Greater Wichita Convention and Visitors Bureau, dated April 2004. One presentation concludes that the average cost per pathological gambler is $13,586 per year. Quoting from the study in the section titled Social Impact VII-9:

    Most studies conclude that nationally between 1.0 and 1.5 percent of adults are susceptible to becoming a pathological gambler. Applying this statistic to the 521,000 adults projected to live within 50 miles of Wichita in 2008, the community could eventually have between 5,200 and 7,800 pathological gamblers. At a cost of $13,586 in social costs for each, the annual burden on the community could range between $71 and $106 million.

    If all we had to do was to pay that amount each year in money that would be one thing. But the components of the cost of pathological gamblers include, according to the same study, increased crime and family costs. That is, people are hurt, physically and emotionally, by pathological gamblers. Often the people harmed are those such as children who have no option to leave the gambler.

    But this study makes the argument that the economic benefits of gambling will more than pay for this social misery: “While this community social burden could be significant, its quantified estimate is still surpassed by the positive economic impacts measured in this study.”

    How does the report make this conclusion? The largest components of the positive economic impacts are employee wages ($37 million), additional earnings in the county, and state casino revenue share, along with some minor elements. Together these total $142 million, which is, as the authors point out, larger than the projected costs shown above.

    But this analysis is flawed. Casino employee wages can’t be used to offset the social costs of pathological gamblers, as these employees probably want to spend their wages on other things!

    Economic impact studies like this often assume that any economic activity the proposed development might create is due solely to its existence, and that these monies can be used to pay for whatever problems or costs the development causes.

    Just ask the prospective casino employees where they want their wages to go: into their own pockets, or be used, as this study uses them, to pay for the social costs of gambling.

  • Economic fallacy alive in Kansas at Docking Institute

    As reported in the Wichita Business Journal at wichita.bizjournals.com/wichita/stories/2007/03/19/daily26.html, the Docking Institute of Public Affairs at Fort Hays State University has produced a report that seems to say that the $727 million deferred-maintenance backlog at Kansas universities is, well, really a good thing.

    (The report is available to read at www.kansasregents.org/maintenance.html)

    Why? Quoting from the press release that accompanies the report: “This report displays the substantial and positive economic impact that a comprehensive state university building maintenance funding solution would have on the state’s economy,” said Reginald L. Robinson, President and CEO of the Kansas Board of Regents. “University maintenance funding would produce a dramatic ripple effect through the state’s economy creating thousands of new jobs, millions of dollars in increased earnings, and billions of dollars in increased state economic output. As state policymakers continue to focus on ways to improve the state’s economy, they need not look any farther than our crumbling state universities.”

    After reading this, it is tempting to wish that our universities were in even worse condition. By fixing them, we could really ramp up our state’s economy!

    But I am saddened to conclude that the authors of this report see only the immediate effects of the spending they promote. They fail to see the secondary effects. As Henry Hazlitt wrote in his classic work Economics in One Lesson:

    This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences. (emphasis added)

    It’s easy to fall victim to this type of thinking. The economist Walter E. Williams summarizes the broken window fallacy that Frederic Bastiat recognized long ago:

    Bastiat wrote a parable about this that has become known as the “Broken Window Fallacy.” A shopkeeper’s window is broken by a vandal. A crowd forms, sympathizing with the man, but pretty soon, the people start to suggest the boy wasn’t guilty of vandalism; instead, he was a public benefactor, creating economic benefits for everyone in town. After all, fixing the broken window creates employment for the glazier, who will then buy bread and benefit the baker, who will then buy shoes and benefit the cobbler, and so forth.

    Those are the seen effects of the broken window. What’s unseen is what the shopkeeper would have done with the money had the vandal not broken his window. He might have employed the tailor by purchasing a suit. The broken window produced at least two unseen effects. First, it shifted unemployment from the glazier, who now has a job, to the tailor, who doesn’t. Second, it reduced the shopkeeper’s wealth. Explicitly, had it not been for the vandalism, the shopkeeper would have had a window and a suit; now, he has just a window.

    As Professor Williams also brought to our attention, even educated people such as Princeton economist Paul Krugman failed to take into account all factors — the broken window fallacy that Bastiat recognized — when he wrote in The New York Times that the destruction of the World Trade Center “could do some economic good.”

    In general, public works — like fixing the universities — are promoted as job-generators. It is as though the jobs generated come at no cost. But that’s just not true. Here’s Hazlitt discussing the building of a bridge:

    … The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence.

    This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridge workers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000,000. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

    Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, radio technicians, clothing workers, farmers.

    There really is no free lunch. What Kansans spend on university repairs can’t be spent on something else.

    Should Kansas spend the money that the Regents are asking for to repair the universities? Because it fails to recognize the secondary effects of the proposed spending, the analysis put forth by the Docking Institute doesn’t answer that question.

  • The Williams rules

    Here’s why we should listen to the economist Walter E. Williams. From a column of January, 2007.

    The kind of rules we should have are the kind that we’d make if our worst enemy were in charge. My mother created a mini-version of such a rule. Sometimes she would ask either me or my sister to evenly divide the last piece of cake or pie to share between us. More times than not, an argument ensued about the fairness of the division. Those arguments ended with Mom’s rule: Whoever cuts the cake lets the other take the first piece. As if by magic or divine intervention, fairness emerged and arguments ended. No matter who did the cutting, there was an even division.

    …

    We have a set of rules that are known, neutral and intended to be durable. Those rules were created by our founders and embodied in the U.S. Constitution. Those rules have been weakened by a Congress of both parties that picks winners and losers in the game of life. The U.S. Supreme Court, which was intended to be a neutral referee, has forsaken that role and become a participant. All of this means we can expect a future of bitterly fought elections and enhanced conflict.”

  • How To Judge the Worth of Ethanol

    From The Wall Street Journal, January 27, 2007: “Ethanol gets a 51-cent a gallon domestic subsidy, and there’s another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it — despite recent high oil prices.”

    Remove this subsidy and the tariff. Remove the subsidy paid to farmers who grow the corn that is used to make ethanol. Then, the free market will rapidly tell us the true value of ethanol.

  • Denouncing “Greed”

    Today there are adults — including educated adults — who explain multimillion-dollar corporate executives’ salaries as being due to “greed.” Think about it: I could become so greedy that I wanted a fortune twice the size of Bill Gates’ — but this greed would not increase my income by one cent. …One of the reasons why central planning sounds so good, but has failed so badly that even socialist and communist governments finally abandoned the idea by the end of the 20th century, is that nobody knows enough to second guess everybody else. Every time oil prices shoot up, there are cries of “greed” and demands by politicians for an investigation of collusion by Big Oil. There have been more than a dozen investigations of oil companies over the years, and none of them has turned up the collusion that is supposed to be responsible for high gas prices. Now that oil prices have dropped big time, does that mean that oil companies have lost their “greed”? Or could it all be supply and demand — a cause and effect explanation that seems to be harder for some people to understand than emotions like “greed”?

    — Thomas Sowell

  • Preserve farmland at what cost?

    A writer in the January 2, 2007 Wichita Eagle laments the loss of farmland to development, particularly residential homebuilding. The writer states that if farmland were preserved, Kansas could become more prosperous.

    There are two areas in which I believe this writer is mistaken. First, if the transaction between developer and farmer was voluntary, each is better off than they were before. The developer (and by extension the people he hopes to sell houses to) valued the land more than the farmer did. Otherwise, why would the transaction take place? These voluntary transactions that make both parties better off than before are the basis for the creation of wealth and prosperity.

    Second, farmers in Kansas produce so much output that they continually complain of the low prices they receive. Farmers tell us and Congress that if they don’t receive huge subsidies, they will go out of business. In 2005, farmers in Kansas received $1,056,866,760 in subsidy payments. This involuntary transaction reduces the wealth and prosperity of Kansas and the United States.

  • Minimum wage price controls hurt Kansas

    This article presents compelling evidence that raising the minimum wage is not in the best interests of low-wage workers.

    An issue that the very existence of a minimum wage reveals, one that no one seems to talk about is this: Why are so many workers capable only of doing work valued so low? We should be asking why we spend so much on public schools and education, only to have groups of workers with so little skill that their work output is valued so little.

    Minimum Wage Price Controls Hurts Kansas
    By Karl Peterjohn

    The minimum wage is going to rise. That is the consensus from both political parties out of Washington. Raising the minimum wage is at the top of the rather thin 2007 public policy agenda for the new Democratic majority in Congress. The new GOP senate minority leader Mitch McConnell has indicated that senate Republicans will not stop this price control expansion from being enacted.

    The federal minimum wage is $5.15 per hour and has been for the last nine years. The new increase is likely to be $7.25 an hour and this could be very bad news in Kansas. Federal labor data indicates that Kansas is one of four states with the highest percentage of the workforce getting paid between $5.15 and $7.25 per hour. Over 10 percent of working Kansans are getting paid $7.25 or less. The other three states over 10 percent are South Carolina, Mississippi, and Louisiana.

    Raising the minimum wage to $7.25 won’t have much of an impact in the coastal areas of the U.S. where hour wages already easily exceed these levels. In low income Kansas, the impact is likely to be substantial and highly negative. One senior Kansas legislator discussed this new price control expansion with this pithy comment: “Look for a lot of small town restaurants to close.”

    The recent death of Nobel Laureate and free market economist Milton Friedman ties into this return to government expansion of price controls, in this case over labor. “Economists may not know much. But we know one thing very well: how to produce surpluses and shortages. Do you want a surplus? Have the government legislate a minimum price that is above the price that would otherwise prevail,” Friedman said. Numerous examples of the negative results of price controls are cited in his classic “Free To Choose.”

    Friedman warned against the negative impact of price controls hurting job hunters. People looking for work will be banned from working at less than the new legally mandated minimum. A surplus of labor in the form of increased unemployment will appear next year.

    Since these minimum wage workers are at the lower end of the job scales, they will be disproportionately the under-educated, low-skilled, and least employable workers losing their jobs. This will create a demand for more government spending to aid the newly unemployed.

    If raising wages was as simple as having the government wave a wand and pass a law, why stop at $7.25 per hour? How about $1,000 an hour? If government price controls on labor are a good thing, why not? There would be lots of folks willing to work at that wage. However, there would not be many willing employers. Government created labor surpluses in the form or massive unemployment would soar. The economy would collapse.

    Everyone knows that setting this type of extreme price control is bad. Why are folks so willing to make this mistake to a smaller degree? Unions benefit since the minimum helps to serve as a floor underneath their contractual efforts. This union tie explains the Democratic Party’s adamant support for expanding this price control. This still harms low income people by destroying their jobs and, with it, opportunity for something better.

    Government price controls also weaken the economy by sending incorrect signals, mis-allocating both capital and labor. This hurts the economy by misallocating resources. Price controls remove necessary incentives for efficiency. Economic misallocation occurs when signals from market pricing are replaced with government edicts.

    The most pernicious impact of this price control is removing the first step for people entering the labor market. While most folks make a lot more than the minimum wage, these entry level jobs are important to first time workers, low skill level workers, and poorly educated workers. Price controls that destroy the jobs these folks perform are pernicious to society and destructive to individuals striving to get their first step into the job market. A large number of Kansas jobs will be destroyed by a $7.25 minimum wage. Look for more unemployment ahead in 2007.

    Why won’t Republican senators filibuster against government mandated job destruction? The only accomplishment for the Democrats during the last two years in the U.S. Senate has been their filibusters. The Democrats won their majority with their filibusters.

  • Unintended but foreseeable harms of the minimum wage

    Understanding the minimum wage, and why an increase will be harmful to those it is meant to help, requires thinking beyond stage one.

    Commentary by David R. Henderson in the August 1, 2006 Wall Street Journal shows how the unintended effects may harm those who are still working after an increase in the minimum wage:

    … because the minimum wage does not make employees automatically more productive, employers who must pay higher wages will look for other ways to compensate: by cutting non-wage benefits, by working the labor force harder, or by cutting training. Interestingly, the Economic Policy Institute (EPI), a union-funded organization in Washington that pushes for higher minimum wages, implicitly admits the last two of these three. On its Web site, EPI states, “employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.” How would an employer get higher productivity and decreased absenteeism? By working the employers harder and firing those who miss work. Lower training costs? By training less.

    Other things employers might to do compensate for higher labor costs include these:

    • Reduce non-wage benefits such as health insurance.
    • Eliminate overtime hours that many employees rely on.
    • Substitute machines for labor. We might see more self-service checkout lanes at supermarkets, for example.
    • Use illegal labor. Examples include paying employees under the table, or requiring work off-the-clock.
    • Some employers may be more willing to bear the risks of using undocumented workers who can’t complain that they aren’t being paid the minimum wage.
    • Some employers may decide that the risks and hassles of being in business aren’t worth it anymore, and will close shop.

    Increasing the wellbeing of low-wage workers requires more work than passing a mere law.