Category Archives: Economic Fallacies

Crackle, SNAP, Pop(ular) goes the entitlements!

Do “food stamps” mitigate hunger among the American poor? No. Although with a name like “food stamps” one can be forgiven for falling into the trap of believing so. Following the current cutesy trend that apparently requires government programs have clever acronyms that describe their purpose (PATRIOT Act, HIRE Act, etc.) it has been renamed SNAP (get it, “snap” your fingers and food appears courtesy of the US taxpayer!) But I digress. Why do they not help? Three reasons: (a) fungibility & marginal utility, (b) socialized costs and (c) dehumanization through dependency.

Fungibility means that any given unit of something is indistinguishable from any other unit of the same material. For example, grain, silver or dollars are fungible, however diamonds or tires are not (as they vary in quality). Marginal utility is the concept that given some good, as one procures more of said good one values each subsequent unit less. So if you have a small amount of water, you value it highly as you must satisfy your most urgent needs first (thirst). But, as you gain access to more water you may then opt to “waste” it on less urgent needs, e.g. washing your car. Ok, so with that little economics lesson out of the way, how does this relate to food stamps? The food stamp money is fungible with regular money. In other words food stamps are no different than cash. Why? Absent food stamps the marginal value of the money recipients possess is very high and they will spend it on the most urgent needs (food) first. People in poverty aren’t going to NOT buy food and instead buy sneakers, movie tickets and haircuts. That would just be stupid. If we then give them money earmarked for food, they will still buy food (with food stamp money) AND NOW other (less urgent) goods with the money they used to spend on food. We are just playing a shell game, pretending this money is for this and that money is for that. It’s all just mixed together. Fungibilty is the reason some recipients can afford fancy nails and cell phones.

A secondary issue is that of socialized costs. Because the program exists people are willing to work for less than they would absent the program because they know they can count on it. If I know I need $15k/year to survive but I know the government will give me $5k/year in food stamps, then I’m going to be a lot more willing to work for $10k/year. So the employer pays less because the employee is willing to accept the lower wage BECAUSE OF the program. Then the government taxes the employer and hands the money over to the employee as food stamps. So in the end both end up with the same amount of money. So what did we accomplish here? Why not just cut out the middleman (the government) and pass the savings onto everyone? Once again we are just playing a shell game where the only beneficiary is the government.

The state is our shepherd, we (the sheeple) shall not want.

The final issue is the social harm the program engenders through the promotion of an entitlement mentality (literally – the government is running ads trying to get people to join the SNAP rolls). This mentality dehumanizes the recipient by promoting the idea they are merely wards of the state who cannot survive without suckling at the state’s communal teat. The state is our shepherd, we (the sheeple) shall not want. Inherent to the structure of any entitlement program is an economic feedback incentive that promotes attachment. The more money you make the less benefits you qualify for. I think U2 captured the idea well, “running to stand still.” Why expend great effort to obtain that which you can obtain from no effort at all?

I know politicians mean well, but their complete ignorance of basic economics and incentives creates problems bigger than the ones they were trying to solve. Just because something seems intuitively obvious (state sponsored welfare helps people) doesn’t mean it is correct. The notion that the sun revolved around the earth was intuitively obvious for centuries until someone took the time to apply some thought to the question. Big problems require deliberate, contemplative analysis, not thoughtless, knee-jerk, feel-good solutions.

Where are the jobs?

Following up to last week’s post (read here). Although the constant cycle of supply and demand tends to make it unclear which process came first, in the end we can trace the inception point to supply. Supply that can be used to satisfy demand comes about through savings and so it is savings that ultimately is the source of jobs (employees are paid prior to sales). So, since the popular media tells us that corporate profits and cash on hand have never been higher, why is job growth so anemic?

There is actually a great deal of job creation (see chart), even at the height of the recession there were millions of jobs being created. Unfortunately, more were being destroyed. However, it is misleading to suggest there are few jobs being created. Further investigation of the chart reveals that  job growth rates have been trending downward for the last 12 years (no BLS data for this statistic exists prior to 1992). Why would this be?

Quarterly Job Creation & Loss as % of Workforce

 

1) Regulation: regulation hinders jobs in three ways: (a) it acts as a stealth tax by increasing dead-weight costs (for example, a report last year by the House Government Oversight and Reform Committee stated the Obama administration has established nearly 300 new regulations that will cost businesses an additional $60 billion each year), (b) it acts as a barrier to new firms that would otherwise compete with established firms either by criminalizing innovative ideas or imposing paperwork compliance costs that are disproportionately burdensome to smaller business and (c) in some cases it simply outlaws entirely certain types of business (see the Lacey Act as one example). To illustrate point B consider the following: where would Apple be today if Microsoft had encouraged regulations that required competitors to conform to their standards. It would be illegal for Apple to innovate and thus deviate from those “standards”… and we’d all be running Windows 95 while listening to our Zunes and the iPad would be mere fanciful sci-fi fodder. Because the computer industry is relatively unregulated, there has been tremendous innovation and growth. But in other heavily regulated sectors (health insurance, agriculture, automotive, etc.) there is little to no innovation because bureaucratic micromanagement simply does not allow it. Without innovation there is no growth and without growth there is no reason to have a new job.

2) Risk: Many of those in government condescendingly dismiss the idea that risk arising from unknown tax costs contributes to slow job growth. Their condescension is rooted in ignorance of the real world, a world where risk is a constant companion. But in the government’s ivory tower that companion is nowhere to be found. Their obliviousness to risk is apparent in the squandering of other people’s money on “good ideas” that ultimately fail and for which they have zero accountability. Although taxes were higher in the 1990’s, at least they were stable. Tax rates that vary year to year on the whim of Congress are more destructive than high taxes as people focus their energy on gaming the tax system rather than in pursuing productive goals.  Think of it like this: what if the final price for a car you bought today would not be revealed to you until 5 years from now. You would start your monthly payments now and at the end of 5 years you’ll either have it paid off or owe a whole lot more. How likely are you going to buy a car with that level of cost risk? Likewise, those with money to invest in new jobs also will wait until they can be certain of the final costs. Risk makes people cautious… unstable tax policies that increase financial risk will increase cautiousness.

Risk makes people cautious… unstable tax policies that increase financial risk will increase cautiousness.

3) Training: the stock bubble destroyed financial capital, however the housing bubble destroyed financial & human capital. Financial capital destruction can be swept under the inflationary rug through Federal Reserve printing press slight of hand, however there is no keystroke subterfuge that can wipe away the years people spent training and gaining experience in construction and related industries. In short, human capital was misallocated into the wrong sectors of the economy. The government operated a national multi-year housing circus financed with artificially suppressed interest rates and the implied moral hazard of “too big to fail”. People were attracted to that monetary opportunity like flies to honey. But then overnight the government flipped the switch and the circus went dark. Now the circus participants must spend years retraining. Training takes time.

Ultimately the market can heal itself if the price mechanism is left to operate free of government manipulation or interference (the mechanism whereby wages for high demand jobs will rise and thus attract people to train for those sectors). Propping up burst economic sectors or inflating new ones will only postpone the fever that ultimately is needed to cure the economy and restore healthy job growth.

Chicken or the egg?

Which came first, supply or demand? At first blush this question appears to be of the intractable “chicken and egg” variety, however upon closer inspection we find the correct answer: Supply. How so? Surely no one will supply something if there is no demand. In order to solve this riddle we must first understand what is meant by “demand.” In the vernacular it means mere want or desire, however in economic parlance the meaning has a subtle and important difference. Demand is both the desire AND the means to fulfill that desire. In other words, it’s not enough just to want something; you must have something to offer in exchange.

No one can demand something until AFTER they themselves have produced something.

 

Why are demand and desire not economically equivalent? Consider the following: how relevant are people with no money at an auction? If we define demand as mere desire then as human desires are unbounded so too must be demand. Since we know there is not universal infinite demand for every good (i.e. infinite prices), we then know that demand and desire cannot be equivalent for economic purposes. However, desire does play a role. It is the spark that determines what should be produced. Entrepreneurs gauge market desires in order to determine the things that are a safe bet to produce while accounting for people’s ability to pay for such new goods (e.g. high desire/low affordability: people desire flying cars, but few could afford them, low desire/high affordability: nobody desires mud pies even though they could be affordably made, and high desire/high affordability: smartphones are desirable and since they could be affordably produced, they were).

So, if I want what Joe has, I have to two choices: (a) I can take it from Joe by force (the warrior path) or (b) I can produce something Joe wants and trade with him (the market path). In order for me to “demand” something I must first produce (supply) something. No one can demand something until AFTER they themselves have produced something. If Joe and Greg exist alone in the universe we can demand things all we want, but none of those demands will be met until we first produce something. Therefore supply must come first.

So if supply comes first, then where does job creation start, from those that spend money (demanders) or those that save it (suppliers)? Popular opinion and a Keynesian worldview err in the belief that demand drives job creation, but that is mere superstition. Logic clearly demonstrates it is savings that are the source of new jobs. It might seem intuitive that spending would create new jobs, after all, that money eventually goes to pay workers, right? True, but applauding the result of production (demand) while ignoring the source of such demand (supply) is a disingenuous attempt to ignore reality: that jobs are produced from saved funds. Policies that ignore reality and promote spending at the expense of saving can do nothing but harm job growth.

To understand why savings are critical to new jobs we must spiral all the way back to a business’s inception. What was the source of funds to pay those first workers before anything they had produced was sold? It came from the invested capital of the owners of the business, i.e. their savings (profit from prior ventures). To make this point a bit clearer imagine the following: all businesses decide to disburse all profit as bonuses to their employees, so all business net income is $0. Should be great for the economy right, all that extra cash floating around? Not really, the increased demand cannot be met because businesses have no unused funds (i.e. saved profit) from which to hire any new employees or purchase equipment. If they hired any now it would have to be on the condition that they could not be paid until the things they produced actually sold. Of course they can lower the pay of the other workers, but that’s my point, the funds withheld to lower the pay represents what was previously characterized as profit/savings: only profit/savings can create new jobs. Every attempt to redistribute it or tax it only undermines the job creation process.

So this begs the question, since companies have a lot of saved funds and profit why isn’t there more job creation going on now? The answer to that question will have to wait until next week…

Prosperity through tools

What is wealth, or rather, what is the point of wealth? Wealth is the promise of the ability to obtain our wants and desires with minimal effort. In general those that produce much with little effort are wealthier than those that produce little with great effort. And how does one go about producing much with little effort? With tools. Tools make the difficult easy and the impossible possible. Tools are the reason we don’t spend most of our lives simply trying to obtain our next meal. Tools are the reason we have at the beginning of the 21st century a higher standard of living than we did at the beginning of the 20th century or any period prior to that. Increasing wages and increasing standard of living are a direct result of improvements in the efficiency of our tools. Wages did not rise because of unions or the minimum wage, they rose because our tools became more productive.

To those that believe unions or government can force higher wages absent improvements in productivity, please consider this scenario: A bakery employees two people and they make by hand 20 loaves in 12 hours. They are paid $1/hour, or $24 for the pair per day in wages. The bakery sells the loaves for $2 each so it can make up to $40/day, or a net $16 in profit. Now suppose the two employees join a union that demands they be paid $1.50/hour and the bakery has no choice but to agree. Wage costs have now gone to $36/day and to maintain the 40% margin it must now charge $3/loaf. There are three possible outcomes: (1) the public can no longer afford to buy the loaves and the bakery goes out of business (involuntary closure), (2) the bakery tries to operate with a lower margin but quickly finds there are more profitable ventures than baking and since all other bakeries have the same new cost structure all bakeries close (voluntary closure) and an entire industry ceases to exist in the market or (3) the customers accept a higher cost…which then compels them to join unions to demand higher wages from their employers, who in turn raise their prices until all prices spiral upward until a new equilibrium is reached of higher wages AND higher prices.* So ask yourself, what was the point? Either businesses are driven to close their doors (leading to unemployment) or the end result is entirely neutral (wages go up 3 fold and costs go up 3 fold).

Here is how better tools make everyone wealthier. The bakery purchases a new fangled gadget that allows the two employees to make 200 loaves a day. It can now afford to charge only 28¢/loaf while still doubling profit. The employees continue making $12/day but because they are so much more productive the bakery offers them the option of only working 8 hours for the same $12 ($1.50/hour). Because bread costs have gone down everyone in society has more disposable income. The employees are working fewer hours and earning more per hour and the bakery is earning more as well. Everyone wins (society, employees and employer) and no coercion from the state was necessary. Now repeat that in multiple other industries over many years and what you see is an increasing standard of living and wealth. Everyone’s condition is improved over what it otherwise would have been. Some believe that it is mere “high paying” jobs that make society wealthy, but unproductive high wage jobs can do nothing to raise society’s standard of living. I will close with a quote  (attribution varies but the sentiment is valid nevertheless) that crystallizes this sentiment: “While touring China, a businessman came upon a team of nearly 100 workers building an earthen dam with shovels. The businessman commented to a local official that, with an earth-moving machine, a single worker could create the dam in an afternoon. The official’s curious response was, “Yes, but think of all the unemployment that would create.” “Oh,” said the businessman, “I thought you were building a dam. If it’s jobs you want to create, then take away their shovels and give them spoons!”

* For my Austrian economics friends I am glossing over the “supply of money” point so as not to overly detract from my main argument, but for those uninitiated in the core logic of Austrian economics here are more details on the various paths Scenario 3 can take: Of course with point (3) all prices can only rise if the government prints more dollars… in a hard money economy where the supply of money remains constant some prices would go up and others must necessarily go down thus potentially driving those businesses to close shop and their employees to become unemployed. To simplify the supply of money argument imagine the following: You have $10 and there are 4 vendors each selling their wares for $2.50. You are able to buy from all 4. But if they all demanded $5 for their wares then you would only be able to buy from two of them… you would choose the ones you find most valuable and the other two would simply not receive the sale. Repeating that multiple times means those businesses must close as they have no sales. But some could stay open if for example two raise their price to $4, then the other two could obtain sales if they dropped their price to $1 ($4x 2 + $1 x 2 = $10). If they can stay in business on $1 they will survive but if not then they will go out of business. A real world example wherein prices were driven up but vendors were not permitted to drop their prices was with minimum wage laws, these include such services such as milkmen, full-service gas, door men, they simply cease to exist because no one is willing to pay an amount for that service that will cover the government mandated minimum wage that must be incurred to provide that service. Now although these out of work employees would increase the labor supply and drive labor costs down somewhat (to the extent there was still non-union labor in existence, if all were unionized then they would simply remain unemployed and would have to start their own businesses to fend for themselves in a new “underground” union-free economy). To the extent there was not 100% union coverage of the workforce non-union wages would be driven down, i.e. the gains of the union are offset by the losses of everyone else. But even with this net 0 in wages for society there would still be a net loss to society in that the goods and services supplied by those businesses that closed are removed from society and thus it is a net loss to society… the value they formerly produced simply no longer exists.

 


A reply to objections raised against Educational Responsibility

My “Education” editorial prompted a rational and cogent response from David Land in the Morgan County Citizen. This is one of the reasons I began writing this column, to engage those with differing views in polite discourse free of the usual “Left-Right” rhetoric. Thank you David. I would like to respond to the issues raised.

should anything benefiting the individual be subsidized by the state?

First point: Education is a public good because it tends to benefit society; therefore society should subsidize it. Anything that benefits the individual can benefit society (because society is composed of individuals). This begs the question: should anything benefiting the individual be subsidized by the state? For example, automobiles permit a broader range of employment options and access to goods, so one could argue businesses should subsidize (through taxes) automobile purchases, as that would ultimately benefit those businesses that will have access to more employees and customers. But we don’t do that. Why? Because the free market responded to the demand for this valuable good, thus transforming the car from a luxury available exclusively to the wealthy into a luxury available to every sector of society.  The point is that while a K-12 education is now extremely costly (+$100,000) this would not be the case had there been a free market in education all along, the cost would be closer to an affordable $30,000 over 13 years and thus the argument over “who should pay for it” would vanish. Companies need educated workers, but workers need an education to get jobs. It’s a two way street in which two parties engage in a mutually beneficial exchange (labor <–> money) and there is no a priori reason to assert that party A must provide resources to party B in order that party B may meet the requirements of said exchange and thereby benefit both parties. If you want to buy my house should I be forced to lend you money because said purchase ultimately benefits me?

If shifting costs from an employee to their employer tends to drive wages down, why is it hard to accept that shifting costs from an employer back to the employee would not drive wages up?

Second point: In a free market business owners would never pass on the tax savings derived from elimination of subsidized public education. I do understand the basis for this objection: normally if a business has a good year or receives a tax cut there is no incentive to simply divide the surplus among all employees. However the situation I was describing is unique because it is a specific trade of funds, namely, the tax being cut is used for a known (earmarked as it were) cost of living for the majority of employees. So the incentives are different from that of a “normal” tax cut. If we understand the incentives then we can understand why most would raise wages and/or lower prices. Let us suppose we could wave a magic wand and eliminate all property tax and most state income tax overnight. Employees would now find themselves in the position of having to pay for their children’s education directly. Those formerly subsidized employees would jointly demand higher wages to approximate their net increase in costs. The incentive to comply for the employer is two fold: 1) maintenance of employee morale through a raise that employers can easily afford (for example, we could easily afford this as we pay over $60k/year into the school system) and 2) lack of rehiring options if a trained employee quits over wages…most potential replacements would be demanding the same higher wage. But let us assume for the sake of argument that no employers would give raises. What would be the result? Because most (99%+) employees with children would value their children more than anything else in their lives they would pay for their education first, thus decreasing their demand for discretionary goods and services. The decline in that demand would result in lowered revenue for those businesses, who would then in turn lower their prices (which they could afford to do out of the tax savings) in an attempt to attract back customers…this would thus make goods and services more affordable for everyone. Even if nominal wages ($) are static, real wages (purchasing power) increase as prices decline (price deflation). Because education costs could drop by as much as 2/3rds the overall effect is a net gain to the aggregate productive capacity of the economy. If you’re still skeptical, ask yourself this: Imagine the reverse, imagine that the government instituted a new “food tax” that supported a program that provided all food for all citizens, would we not expect wages to decline over time (e.g. if you spend $12,000/year less on food it makes it easier to accept a lower wage)? So if shifting costs from an employee to their employer tends to drive wages down, why is it hard to accept that shifting costs from an employer back to the employee would not drive wages up?

Wouldn’t we expect automobile ownership (that is, any luxury item) to be lower in Haiti?

Third point: Haiti as a real world example where a mostly private education system has failed. This is an interesting example, however it is an apples to oranges comparison that only underscores the expected market penetration of a luxury item in an impoverished country.  Education, while desirable and beneficial, is not essential to life and so it is economically classified as a luxury good. So are automobiles. If we were comparing automobile ownership between the US and Haiti wouldn’t we expect automobile ownership (that is, any luxury item) to be lower in Haiti? In fact they are: 12 vs. 808 per 1000 people. So if one luxury good has a low market penetration in a poor country wouldn’t we expect all other luxury goods to as well, including education? Using an impoverished country such as Haiti as an example of how the free market cannot provide education to all citizens is as fallacious as arguing that the private market in Haiti has been a failure in making automobiles available to all citizens and thus the only answer is a publicly subsidized automobile ownership program.

Fourth point: Children of the poor would suffer due to lack of educational opportunity. Poor children would not experience a lack of educational opportunities as schools would offer needs based scholarships (as private schools do today) and charitable organizations focused on education would quickly sprout up (funded by those who honorably believe it is their obligation). But let us assume again a worst-case scenario and that those in poverty could not go to school. Will they just lay down in the street and die? Of course not. If there is a demand, the market will respond. Perhaps home schooling co-ops might form. Perhaps businesses would charter trade-focused schools. One example of how the market can quickly and effectively provide a superior education to those in the low income spectrum was the destruction of the public school system in New Orleans by Hurricane Katrina. Charter schools were quickly legalized and the market responded with schools that have by every measure outperformed the old system (see video at 30:00 mark). The point is that the creative brain power of millions of people will find solutions to even the most challenging issues.

I could just as easily argue that public education was the cause of those countries’ poor GDP as I could argue that private education was the cause in Haiti.

Fifth point: Education drives productivity and since private education would result in fewer people being educated this would result in lowered US productivity. Again, private education would not result in fewer people being educated, but even if we assume for the sake of argument it is true it would not change the productivity of the US. Enhanced educational opportunities are not what drove the tremendous growth in the US, but rather are a result of it. It’s like saying “look at that wealthy guy with the fancy car… if I buy a fancy car then I can become wealthy too!” If we accept this assertion then we would expect in every country where there is public education we would find a GDP comparable to the US. But that is not what we see. There are numerous countries that have public education and a GDP near that of Haiti’s . Why would education be a determinant in GDP outcome in Haiti but not in these other countries? I could just as easily argue that public education was the cause of those countries’ poor GDP as I could argue that private education was the cause in Haiti. In point of fact, Cuba ranks above the US in the United Nations Education Index, so that alone should dispel any notion of education driving economic prosperity.

Sixth point: Uneducated masses being unable to secure jobs would turn to crime. The correlation between crime and education is real, but the assumed causal relationship is backwards: lack of education doesn’t make criminals, rather most of those with criminal proclivities are afflicted with a pre-existing condition: contempt for education (by either themselves, their families or culturally). Every criminal in our jails went through our public school system. Clearly a lack of educational opportunity played no roll in their current status.

If we had a non-monopolized private system of K-12 education then education would be one of those “luxuries” that all could enjoy, just as things that were once considered luxuries only for the wealthy are now commonplace (e.g. cars, cell-phones, ball point pens, air travel, air conditioning, etc). That’s what a free market does over time, it becomes more efficient at producing those goods and services in high demand until they become affordable for all. Affordability eliminates subsidization.

What does that “L” stand for again?

On July 31, 2012 there will be a statewide vote on whether to adopt yet another 1¢ sales tax (bringing us to 8%! ) This new tax is known as the “TSPLOST” (Transportation Special Purpose Local Option Sales Tax – authorized by the 2010 “Transportation Investment Act”). This SPLOST tax is unique from all prior SPLOST initiatives in that it represents the first step toward loss of local sovereignty. The TSPLOST breaks Georgia up into 12 “economic development” regions. It is the aggregate vote within each region that determines whether the tax is implemented. This multi-county vote aggregation is unique in the history of Georgia as it violates the central tenant of “home rule” written into the Georgia constitution. This means simply that even if one county is 100% opposed, if all the other counties in a region (see map of region here) are for it, then the tax will be imposed in all counties for the next 10 years (even in the ones that did not approve it). This is a disturbing precedent toward slowly shifting political power away from the local level and towards a more centralized authority. We see the same trend today with the states versus the central authority of the federal government. The parallels are uncanny. Just as the states send money for education or highways to the federal government only to have it redistributed back to the states in a non-proportionate manner we will see counties sending TSPLOT money to the state only to have the state send back less to some counties and more to others (see this file for details). Now some might argue that unequal distribution of tax receipts is endemic to any taxing scheme in a region, whether it be city, county, or state. That is quite true. However using the fact that our current tax system is unfair is a poor justification to continue using that same system at a new level.

Those in favor of this new tax rely on the same old hackneyed Keynesian fallacy that somehow public works projects magically pump up an economy… by forcing the taxpayer to spend money on roads and bridges and bike paths (dubiously justified) when they would have otherwise spent it on other goods or services. Road construction companies will be doing quite well (an additional $19 billion over the next 10 years) to the detriment of all other businesses that will see a decline in sales of $19 billion. At best it is a zero sum game, the only difference being that with the tax we are saying we think the government is more properly suited to know how to spend our money and without the tax we are saying we should decide how to spend our money.

Ok, so by now you’re asking, “Ok, Mr. Smarty pants, how should we fund transportation infrastructure?” – Well, I’m glad you asked! Transportation more than any other government monopolized “service” is a user based service for which assessing a service use fee is easily implemented and justifiable (if you use it, then pay for it). There are a number of ways to do this and I’ll list them in increasing order of their effectiveness in terms of fairly assigning cost to usage: gasoline tax, annual odometer tax, general highway tolls, “tiered” highway tolls (i.e. pay more to drive in less congested lanes), fully private roads (where the desire for profit drives new PRIVATELY FINANCED road construction). Any of these options would be better than a general sales tax because those who are on limited or fixed incomes and who do not drive much are being forced to subsidize large businesses and freight carriers who disproportionately utilize the “public” roadways. Taxing activity directly related to road usage at least makes an attempt to fairly assign cost to those that are using them. It is a step in the right direction and it is the step we must take lest we continue sliding down the slippery slope of nebulous centralized taxation for anything that seems like it might be “good.” Vote for local control and fiscal responsibility and vote NO on TSPLOST.

Playing the “roads” card

Tax discussions invariably devolve to a point where one side finds it necessary to resort to the “roads” card. The assumption with this rejoinder is that “roads” are a major and necessary function of government. Setting aside the “necessary” aspect for now, let’s address the “major” assumption. At first glance it would seem something as ubiquitous as roads must carry a heavy cost burden: they are everywhere after all. But first glances are seldom correct. Let’s look at the numbers. In the state of Georgia the FY2012 budget allocates a mere 0.03% of the budget to transportation. The proposed Federal FY2012 budget allocates only 2.8% to transportation. Hmmmm… how can this major function of government be such a minor expense? The US contains approximately 4 million total miles of all road types. We could repave all of it EVERY YEAR and it would only cost roughly $400 billion (1/10th of the budget).

Tax discussions invariably devolve to a point where one side finds it necessary to resort to the “roads” card.

As I’m sure most are aware, the GA Department of Transportation has been busy around town the past few weeks, most notably with the repaving of the Hwy. 441 Bypass. This is a prime example of resource misallocation. This repaving was not necessary. I drive this stretch everyday. There was not a thing wrong with it and believe me I know bad roads! I lived in Indiana for several years where the roads were subjected to snow, ice and salt. They were rough, pot-holed and frost-heaved. They were only repaved when the cost of annual maintenance exceeded the cost of repaving. Our “old” Georgia roads would be the envy of any Hoosier! Why are we doing this? Jobs. The seen. We see the workers working; certainly this is good for the economy? What we don’t see are the jobs not created, the goods not purchased, all because present (taxes) or future (progeny taxation) funds have been redirected towards work that wasn’t even necessary.

Yes, roads need to be maintained, but absent any economic incentives (prices) bureaucrats have no way to efficiently allocate resources. Resources (money) get allocated based on personal whims and connections. I have no doubt somewhere in Georgia there are some beat up old roads that do need work (Fieldcrest Lane in east Morgan comes to mind!) but they are not political priorities.  Politicians waste money on pet projects and then have the audacity to put their hat in hand the following year asking for even more so they can accomplish what they failed to do the first time. And we give it to them, because we’re too busy with our own lives to care. We hear the President pontificate on our crumbling infrastructure. Nobody bothers to as ask why governments, the supposed stewards of our roads and bridges, were not setting aside funds all these years to properly maintain these depreciating assets. That’s what any good business does (good meaning one that does not go bankrupt due to mismanagement). With our revolving door governmental representation there is no accountability; 236 years of “the next guys problem” is the legacy we are left with. Concentrated benefits and diffuse costs perpetuate the problem.

So yes, we all love a nice new smooth road, but let’s consider the cost, in the end someone must pay. Let’s not spend money we don’t have.

The Minimum Wage fallacy

One of the more pervasive economic myths is the need for a mandated minimum wage. This belief is the manifestation of an irrational fear. The fear is predicated on the notion that absent a minimum wage employers would pay the absolute lowest subsistence wage. For the sake of argument let us assume this is true. Were this true we would predict the following: (Given) employers strive to pay the least amount possible (Given) the minimum wage is the lowest legal wage, (Conclusion) employers would pay only minimum wage to the majority of the workforce. What do we find if we would look at actual wage data? As of 2006 a mere 2.2% of US workers actually make minimum wage. Therefore we can conclude this argument is irrational and without merit.

 

Would you buy a Kia or a BMW if the government mandated the Kia could not be sold for less than a BMW?

 

Now the argument switches from an “evil employer” focus to a “safety net” focus. The safety net argument presumes ALL workers require sufficient pay to independently support themselves. Not all workers are the same however, nor do they all have the same goals. Many workers (e.g. teenagers) are inexperienced and do not need to work for self-sufficiency. Such workers would be happy to receive a starting wage in exchange for the opportunity to gain work experience while earning some spending money. By “happy” I mean they would prefer that versus no job at all. However “no job at all” is what most of them (and other low-skill workers) encounter because the minimum wage is higher than their productive capacity. With the recent increase in the minimum wage this is exactly what we got. As of 2011 unemployment for those 16-24 was over 50%. It doesn’t make sense to pay someone $7.25/hour for $4/hour work. The net result is that the unskilled and inexperienced never get the opportunity to get their foot in the door to gain the experience they need so they can demand a higher wage. Low starting wages are a stepping-stone to higher wages. Outlawing low wages is like outlawing the 1st grade in an attempt to eliminate illiteracy among 1st graders. Kids don’t stay in the 1st grade their whole life just as the same people aren’t making low wages their whole life.

The minimum wage overprices the unskilled out of the labor market (would you buy a Kia or a BMW if the government mandated the Kia could not be sold for less than a BMW?) thus it reduces the supply of available workers which then drives up wages for the skilled laborers as they are now not having to compete with low priced labor. This is why unions are ardent proponents of the minimum wage. It is not for altruistic “help the worker” sentiments, but rather because it benefits unions by restricting the pool of cheap labor that might otherwise compete with union labor. The best example of this union-government cronyism is the Davis-Bacon Act of 1931.

Perhaps the best argument against the minimum wage though is to accept the assumption that the minimum wage is a good idea. Let us imagine we raise the minimum wage to $40/hour. Surely that would eliminate poverty once and for all! But here’s what would happen – all industries employing workers making less than $40/hour would see their employment costs skyrocket. Those industries that have elastic pricing (e.g. fuel, food, utilities) would be able to pass the higher costs on thus decreasing the gains from the increased wage. Those industries that have inelastic pricing (e.g. discretionary leisure goods) would not be able to increase prices. They would go out of business. This would create unemployment due to the destruction of entire industries.

When the minimum wage is high these problems become apparent, but these same problems nevertheless exist at smaller scales. The irony is that the minimum wage is putatively sold as helping those most in need of government assistance, the unskilled worker, when in fact it actually harms those workers by preventing them from gaining employment. But I guess that’s why they invented welfare. Better to pay someone to do nothing than work for “too little.”

Price Gouging

Economic freedom is a willing buyer purchasing from a willing seller at a mutually agreed upon price without state interference. Curtailment of this freedom occurs if one party feels the terms of the prospective sale are unsatisfactory and so utilizes coercive state force against the other party. When the seller does it we call this “minimum price fixing” (e.g. minimum wage laws, crop price controls, etc.), which makes it a CRIME to sell below a government-mandated price. Likewise a buyer desirous of similar protection will petition the government to invoke anti-gouging laws or “maximum price fixing” which makes it a CRIME to sell above a certain price.

Price gouging is nearly universally reviled. Surely this is one place where we can agree that the government needs to step in, right? Wrong. There is nothing wrong with price “gouging” or “scalping”. These actions are merely manifestations of the law of supply and demand. Supply goes down, price goes up. This attracts other sellers, which thus opens the floodgates of competition, which increases supply and ultimately drives down price. “Gouging” is beneficial for two reasons: (a) it promotes a needs based market driven rationing of a scarce resource and (b) it ensures a consistent supply of a scarce resource.

A rising price ensures supply never goes to zero by incentivizing reduced consumption. No matter how scarce a good becomes there will always be some of it available to those who truly require that resource because they are willing to pay. If price is artificially suppressed when supply is short this invites those with early information to consume as they normally would, leaving none for those truly in need. Raising prices gives everyone an equal opportunity to partake in the resource even if they are last in the information chain. Some might say the rich have an unfair advantage, that they could buy everything up if we don’t force arbitrary rationing. But this is illogical. The argument is basically that the wealthy are compelled to buy up all expensive goods in short supply. Funny, there doesn’t seem to be a shortage of diamonds or gold watches. Some might then say the “poor” are excluded when price goes up. Perhaps if the price of gas went to $10,000/gallon, but in practice that can’t happen. Prices can’t exceed the level at which the population can pay. If they did the seller makes no money, so he must lower price until people are willing to pay. It will be less burdensome for the wealthy to pay higher prices, but that’s no different than during “normal” times. So if we don’t need government price controls during “normal” times then we don’t need them during “shortage” times.

High prices also afford the seller the ability to ensure continuing access to a scarce resource. For example, when Hurricane Katrina destroyed refining capacity it affected gas prices in Georgia. Gas prices went way up the next day. Surely this is unfair, right, the cost of the gas in the tanks didn’t suddenly go up overnight? No, this means the owner is exercising good business sense. Just think about it. If the station did not raise prices the amount of money they would get at the old price would not be enough to buy an equal quantity of “new” gas. This would only exacerbate the shortage. Raising price on current inventory ensures that the seller can completely replace it with more expensive inventory and outbid other stations if necessary. Sellers can’t provide their customers with a service if they have nothing to sell due to artificial price restrictions. Who do price restrictions help? No one. Or rather it helps the lucky few that buy early but only to the detriment of everyone else.

Even though at face value government control of economic relationships might seem beneficial (“stop those evil gougers”), ultimately unintended consequences end up harming the very people it was purported to help. If anyone has an area that they believe government should exercise economic controls please send me a note at morin.greg@gmail.com and I will gladly do my best to debunk it in an upcoming column.

The “Buy Local” Canard

One of the most compelling economic myths is that of “buy local.” On its face it seems a rather compelling argument: spending money locally keeps local businesses going and keeps that money in the community. Such a policy is easy to praise because we see the positive effects, but what we don’t see (the “unseen” harm referred to by Bastiat) is the sales that did not go somewhere else… and those sales result in less income for “non-locals” by which they can come and buy “local” from us. So, there might be a small temporary uptick in the local economy, but eventually equilibrium is restored. The root of this myth is predicated on a jingoistic guilt trip. The “localness” of a business is elevated to being the sole consideration in one’s buying decisions (e.g. “buy “American” not because it’s the best, but because, well,it’s your patriotic duty!”).

The jingoism argument is that people should buy only goods and services sold within that community. The problem is that “community” is a completely arbitrary distinction. For example, we are told we should “buy American” because it’s good for America. But then we’re told we should buy“Georgian” because it’s good for the state. Then we’re told we should strive to buy “Morgan” because it’s good for the county. Then we’re told we should buy“Madison” because it’s good for the city. So, if we follow this argument to its logical conclusion, then we should then further strive to only buy goods from people that live in our neighborhood, right? And one step further would mean we should only buy goods made by our family members. And finally, finally, the best would naturally be if we only did everything for ourselves. Crazy result,right? This is why it is important that if you are going to make an argument,you understand the logic of the argument and test all scenarios using that logic. If the outcome is deleterious at the end of the logic chain then it must be deleterious along the chain.
You can’t be “buy American” and “buy Georgian” at the same time. Buying from Idaho would be buying American but not buying Georgian, so clearly you can’t buy from Idaho. Oh, right it’s ok to buy “non-locally” if whatever you want isn’t made “locally”. So, if it is sold in Alabama and Georgia, then the more desirable path is to buy from Georgia? Unfortunately this argument presupposes an impossible world. It assumes a world where Business A in Alabama and Business G in Georgia make absolutely identical products, provide an identical level of service and provide identical pricing(free shipping). If every metric of the two businesses were absolutely identical then there’s no upside or downside to buying local. The outcome is neutral because in this hypothetical Utopian scenario it also means an Alabama resident has no more impetus to buy local or from Georgia than does the Georgia resident. But, since there has never been and will never be identical businesses competing, we should make our buying decisions not on an arbitrary metric like geographical coordinates, but rather on differences in what or how something is being sold. Choose based on quality, service, or price, not on arbitrary characteristics.
Exhortations to purchase based solely on arbitrary traits of the business (location, gender, race, religion, etc.) are actually discrimination. It is just as discriminating to choose to only associate with others because of an arbitrary trait as it is to choose to not associate because of that trait. And while I will defend one’s right to associate as they see fit, I also have an obligation to point out the flaws in the arguments made to support those decisions. If a “local” business is so uncompetitive that the only way it can gain sales is to participate in jingoistic appeals, then perhaps it should go out of business to make room for the next guy who can sell a product so good nobody cares about where it’s located.
FOLLOWUP – I received a Letter to the Editor on this column in the Morgan County Citizen which you can see here. Here is my response:
In response to Joe Houston:  I am puzzled. You claim to disagree with my editorial and yet offer no argument (other than dismissive phrases) to specific points raised. Your attempt at refutation is to merely cite positive economic effects as though they are the direct result of “buy local” when in fact they are the result of increased sales. “Buy local” followed to its logical conclusion in all communities cannot increase sales. If you gain $100 in new local sales but lose $100 in non-local sales (because the non-locals are now buying in their local community) what have you gained? The laudable effects outlined in your letter can be achieved through growth based on competition and not on illusory gains dependent on appeals to loyalty. Don’t misunderstand: I’m not saying to NOT buy local, but rather that buying decisions should be based on price, service or convenience and not SOLELY on arbitrary distinctions like geographical coordinates.