Voice For Liberty

Tag: Economics

  • 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.

  • Problem of low wages not easily solved

    It seems like an easy fix for social injustice: pass a law requiring employers to pay workers more than they would otherwise. Magically, everyone has more wealth.

    It would be nice if it were so easy and simple. Looking at only the immediate effects and listening to the rhetoric of some politicians and editorial writers, it would seem that a higher minimum wage is good. But considering all effects of a higher minimum wage reveals a different situation.

    As Milton Friedman writes in Capitalism and Freedom:

    Minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it. Many proponents of minimum wage laws quite properly deplore extremely low rates; they regard them as a sign of poverty; and they hope, by outlawing wage rates below some specified level, to reduce poverty. In fact, insofar as minimum wage laws have any effect at all, their effect is clearly to increase poverty. The state can legislate a minimum wage rate. It can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum. … The effect of the minimum wage is therefore to make unemployment higher than it otherwise would be.

    There are those who say that increasing the minimum wage won’t have any impact on the demand for labor, and therefore people won’t lose jobs. But that is false. If it weren’t false, why not raise the minimum wage to, say, $25? Most people would say that at that level, employers wouldn’t hire low-skill workers because they aren’t “worth” that much. But some workers aren’t “worth” even the present minimum wage, or they could find jobs at this wage.

    (When we say workers aren’t “worth” a certain wage, we are really saying that the marketplace — that’s you and me — places a certain value on the output the worker is able to produce. It has nothing to do with their worth as a person. It has everything to do with their ability to produce goods and services that people are willing to pay for.)

    Furthermore, if we are willing to agree that raising the price of employing certain workers won’t decrease the demand for their labor, we also have to be willing to ignore the law of supply and demand, which states that as the price if something increases, less will be demanded. I am confident that this law applies.

    The problem is that an increase in the minimum wage does nothing to increase the productivity of workers, and increasing productivity is the only way that workers can make real progress.

    How do we increase worker productivity? One way is through education. Sadly, as documented in many articles on this website, our public education system is failing children badly.

    Capital — another way to increase wages — may be a dirty word to some. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man with the backhoe is more productive. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption) and invested in a piece of equipment that helped workers to increase their output. Those who call for higher taxes — often the same people calling for a higher minimum wage — make it more difficult to accumulate capital.

    These are the things we must do to increase productivity, and with it, real wealth. If the solution was really as simple as some claim, that in order to increase the wellbeing of low-wage workers we could merely pass a law, shouldn’t we be outraged that this law wasn’t passed a long time ago?

    Then, if a law is passed to raise the minimum wage to x, shouldn’t we insist that it have been increased to x + $1, or x + $2, or x + …?

    No, the solution to low wages is much more difficult than that.

  • Remarks to Wichita City Council Regarding the AirTran Subsidy on July 11, 2006

    Mr. Mayor, Members of the City Council:

    You may recall that I have spoken to this body in years past expressing my opposition to the AirTran subsidy. At that time we were told that the subsidy was intended to be a short-tem measure. Today, four years after the start of the subsidy, with state funding planned for the next five years, it looks as though it is a permanent fixture.

    Supporters of the subsidy have made a variety of claims in its support: that the subsidy and the accompanying Fair Fares program are responsible for $4.8 billion in economic impact, that being a pioneer in subsidizing airlines is equivalent to the role that Kansas played in the years immediately prior to the Civil War, and that we would have a mass exodus of companies leaving Wichita if the subsidy were to end.

    I believe there is no doubt that fares are lower than what they would be if not for the subsidy. That points to the subsidy’s true achievement: government-imposed price controls. Its effect is to force many airlines to price their Wichita fares lower than they would otherwise. If it didn’t do that, there would be no reason to continue the subsidy.

    Economists tell us — and human behavior confirms — that when the price of any good is held lower than it would be in a free market, the result is a reduction in the quantity supplied.

    We see this happening. Earlier this year the Wichita Eagle reported that there are fewer daily flights supplied to and from Wichita, from 56 last year to 42 at the time of the article. It has been explained that the financial woes of Delta and NWA are to blame for this reduction. This is demonstrably false, as NWA recently added a daily flight to Wichita, and both airlines have added (and dropped) flights on many routes while in bankruptcy. Furthermore, even though in bankruptcy, theses airlines still desire to operate as profitably as possible.

    Now we learn that the legacy airlines — those established, older airlines that take pride in their comprehensive nationwide networks of routes — are revising their strategies. A Wall Street Journal article from earlier this year (“Major Airlines Fuel a Recovery By Grounding Unprofitable Flights” published on June 5, 2006) tells us that the legacy airlines are beginning to look at the profitability of each route and flight. They are not as interested as they have been in providing flights just for the sake of having a complete nationwide network.

    When we couple this change in airline strategy with our local price controls, I believe that we in Wichita are in danger of losing more service from the legacy airlines. If AirTran — a new-generation airline with low labor costs — can’t earn a profit on its Wichita route at the fares it charges, how can the legacy airlines be expected to do so? And if they can’t earn a profit on a flight to or from Wichita, and if they are beginning to scrutinize the profitability of each flight, can we expect them to continue providing service in Wichita?

    No government has ever been able to successfully impose price controls without the people suffering harmful consequences. As economist Thomas Sowell wrote in a 2005 column:

    Prices are perhaps the most misunderstood thing in economics. Whenever prices are “too high” — whether these are prices of medicines or of gasoline or all sorts of other things — many people think the answer is for the government to force those prices down.

    It so happens there is a history of price controls and their consequences in countries around the world, going back literally thousands of years. But most people who advocate price controls are as unaware of, and uninterested in, that history as I was in the law of gravity.

    Prices are not just arbitrary numbers plucked out of the air or numbers dependent on whether sellers are “greedy” or not. In the competition of the marketplace, prices are signals that convey underlying realities about relative scarcities and relative costs of production.

    Those underlying realities are not changed in the slightest by price controls. You might as well try to deal with someone’s fever by putting the thermometer in cold water to lower the reading.

    This is my fear, that someday I will open the newspaper and learn that American, United, Delta, Northwest, or Continental has reduced or even ceased service to and from Wichita. That day, when it becomes difficult to travel to or from Wichita at any price, that is the day we will feel the harm the subsidy causes.

    On a personal level, my job as software engineer requires me to make from ten to twenty airline trips each year. Some of the places I travel to — Jackson, Mississippi and Lexington, Kentucky, for example — are not served by AirTran. If I am not able to travel there, no matter what the price, I will either have to find a different job or move from Wichita.

    Mr. Mayor and Council Members, I urge you to reconsider your support of the AirTran subsidy. Even though the legislature and governor have agreed to pay for most of the subsidy, I believe the subsidy is not in our long-term interest. We need to let the price system, operating in a free market, do its job in guiding the allocation of scarce resources for both producers and consumers. The result may be more expensive fares. The alternative, which is the very real possibility of greatly reduced service to and from Wichita, is much more harmful.

    Other Voice For Liberty in Wichita articles on this topic:

    The AirTran Subsidy and its Unseen Effects
    As Expected, Price Controls Harm Wichita Travelers
    AirTran Subsidy Is Harmful
    Wichita City Council Meeting, April 19, 2005
    Wichita Eagle Says “AirTran Subsidies Foster Competition”
    AirTran Subsidy Remarks
    The Downside of Being the Air Cap by Harry R. Clements. This article makes a striking conclusion as to why airfares in Wichita were so high.
    Letter to County Commissioners Regarding AirTran Subsidy
    Open Letter to Wichita City Council Regarding AirTran Subsidy
    Stretching Figures Strains Credibility