But… but… the roads!

It is curious that “the roads” falls among the top justifications for the existence of government. Setting aside the laughably false choice implicit in this sentiment (i.e. that roads could not exist absent government) we are left to ponder how one of the most poorly run government services is supposed to bolster, rather than weaken, the case for government. Poorly run? How so? Allow me to elaborate. Crumbling infrastructure. Traffic congestion. Traffic delays. Roads littered daily with accidents, injuries and deaths that on an annual scale reach into the millions of accidents and tens of thousands of deaths. What’s that? Unfair assessment you say? It’s the drivers causing the accidents and greedy selfish taxpayers not wanting to pay more in taxes to build more roads. Perhaps. But consider this: Imagine that a big evil corporation owned all the roads. Would there not be an outcry over these statistics? Would there not be an outcry over high prices for a poor product? Would people not say the company is more interested in profit than in making roadways safer? However, and here is the key difference in this counterfactual scenario, were a private company the owner of the roads the public would have at least one remedy not available today. The lawsuit. Private road owners, in contrast to “public” owners, are liable for events occurring on their private property. The injured could sue the road owners for providing an unsafe product. However, such suits would be few and far between. Road owners would see that problem a mile away. They would proactively invest in safety measures to ensure no one dies on their roads. There is a reason after all that air travel is statistically safer than road travel: an airline that had the same fatality rate per mile would have been sued out of existence long ago (or simply gone bankrupt as everyone stopped flying them in droves).

But such a recourse does not exist today. Those in government are immune from liability for their actions. When poor decisions are made, nobody is held accountable. Due to the revolving door structure of political office, decisions are made that maximize short-term benefits at the expense of long-term goals. This mode of operation tends to get one reelected. People naturally prefer those who promise stuff now vs later. The system can’t be “fixed” because the inherent feedback in the system drives it to always select for short-term minded stewards.

Would private roads operate any better? Given any particular owner there is no way to predict. Whether private or public, those in charge are just people. People are imperfect. However, in a private system there is a feedback mechanism that keeps the good and removes the bad. That mechanism is driven by competition and liability. An owner that keeps his roads safe, fast, and efficient is providing what the consumer wants. He stays in business. The owner that does the opposite goes out of business. Competition is the linchpin of free market regulation. It drives us to do better than the other guy. It drives us to provide a better and safer product in order to avoid the losses of liability. In short, competition is how we keep each other “in line” – no Big Brother needed.

Now armed with that knowledge, ask yourself, where is the competition in government? Voting? Please – that’s tantamount to rearranging the deck chairs on the Titanic. If AT&T were providing poor service, would you rather (a) vote concerning changing whatever policy displeases you but not be allowed to stop buying AT&T’s product if the vote does not go your way or (b) switch providers. Voting with your wallet is far more democratic than voting in the ballot box.

One might argue that roads are a natural monopoly, that there would be no competitor to switch to. This is superficially plausible, however it falls into the trap of assuming a private system must be exactly like the public system, just with a different owner. That would not be the case, the result of which would be opportunities for competition heretofore not yet envisioned (who knows, maybe we’d have our flying cars by now if the road system were private!). So, when you hear “but who will build the roads?” remember: a question is not an argument. One’s lack of imagination is not proof of anything.

What War Would Jesus Start?

For a supposedly Christian nation that was presumably founded upon Christian values, the United States has a rather bellicose history that is entirely incongruous with the Christian message of loving your enemy and turning the other cheek. As easy as it was for most of us to have been caught up in the patriotic fervor of striking back at the stronghold of the 9/11 hijackers, that response was fundamentally un-Christian. Not only does Jesus say that one must turn the other cheek but that one must likewise love those that are engaging in the cheek slapping. That’s a pretty difficult message for anyone to accept. But if you are a Christian it is pretty unambiguous. Even if the message is honored at the individual level it must likewise be honored at the collective level. It is a rather large feat of cognitive dissonance to believe one man may not kill another man but that 100 men acting in unison may justifiably kill another 100 men. War is simply the collective actions of individuals. If it is wrong for the individual to kill then it is wrong for the collective to kill. If it is commanded that the individual love his enemy then it is commanded that the collective love their enemy. If you are a Christian and believe the US is justified in going to war against Syria then you need to reexamine your beliefs. You cannot simultaneously believe in the divinity of Jesus and pick and choose which of his commandments you will adhere to.

Now that I’m done chastising the pro-war Christians don’t think the pro-war non-Christians are getting off so easy. Even if you do not accept the divinity of Jesus, this particular directive of his, of loving your enemy, contains within it an essential lesson that is theologically neutral. What is that message? That in order to break the cycle of violence someone must be the first to actually break that cycle. Someone must step forward and say, “I have been wronged, but I refuse to respond in kind.” The ability to make a conscious decision about our behavior that runs counter to every instinct built into our being is one of the defining characteristics of humanity. “Mind over matter” is what separates us from the instinctually driven animal world. A dog bitten will bite back; he knows no other response. Two dogs caught in this cycle will continue until both are nearly destroyed or one dies. Are we mindless animals unable to rise above our base instincts of an eye for an eye? Or are we intellectually superior to our enemies such that we alone are capable of recognizing the merry-go-round we are on and realize the only way to get off is to simply jump and say “no more.”

So, Jesus’ message of “love your enemies” and “turn the other cheek” is not so much a commandment as it is a key. With this key we have the means to unlock the cycle of violence and finally bring true peace to the world. A peace based on mutual respect and understanding. Such a peace is preferable to the global peace currently being proffered by those running the United American Empire, namely the “peace” that exists between well-armed prison guards and their prisoners.

No Country for Assad’s Men

On August 31 President Obama revealed to the world that when it comes to executive decision-making he has apparently taken a page from the book used by President Bush. Just as Bush justified interventionism in the economy by proclaiming that he must “abandon free market principles to save the free market” so too does Obama likewise make the oxymoronic case that in order to maintain peace we must go to war.

Our “leaders” are only as powerful as the support we give them; upon its withdrawal they are as but infants.

So, it is off to war in Syria then. The reasoning Mr. Obama laid out was one part demagoguery, two parts fear mongering. He opened with the age-old politician’s ploy of invoking “the children”. He thusly reminds us of the deaths of several hundred children in the recent Syrian gas attacks. However this example is somewhat hypocritical considering the US government has killed at least a hundred children with its overseas drone strikes alone, to say nothing of the children “gassed to death by their own government” at Waco Texas in 1993. Say what you will of the leaders at Waco, certainly their children did not deserve to be burned alive by their own government.

He then segues into the same tired justification trotted out for all preemptive wars: the risk of what “might” come to pass. If we do nothing, then: it might make a mockery of prohibitions on chemical weapons, it might endanger our allies, it might lead to more chemical weapons. Might, might, might. Here’s a “might” for you Mr. President. If we keep our nose out of other country’s business then they “might” just figure out how to solve their own problems, without our help. The losing side “might” not blame us for their loss, in which case the US “might” not once again become the target of homicidal rage.

Secure in his reasoning, he smugly asserts that he is confident the US can hold the Syrian government accountable for their actions. Since a necessary condition for being accountable to some other entity is being subservient to said entity, then clearly this President (and his predecessors) views all other countries as being subservient to US authority. The United States, in their minds, is not so much a country as it is a global empire. And an empire must keep its quarrelsome protectorates in line. In the American Empire all countries, companies and individuals are accountable to the King or his Court, err, I mean the President or Congress. Let us hope China never decides they need to hold the US government accountable for its actions by bombing US civilians into the Stone Age.

But then, there was a glimmer of hope. Mr. Obama graciously acknowledged that even though he’s sure he is King and can do whatever he desires, he’s a nice guy after all and does have that annoying Nobel Peace Prize to live up to. So, he’s going to make us a deal. He shall deign to permit Congress to debate and vote on whether we should bomb Syria. How quaint – he’s going to actually follow the Constitution for once (which clearly states war may only be authorized by Congress (Article 1, Section 8)). I wonder how he’ll proceed if the vote doesn’t go his way. If that comes to pass then we will once and for all discover whether we have elected a President or a Führer.

Ok, enough bellyaching about what we shouldn’t do. What should we do? A humanitarian evacuation. Send our naval fleet to retrieve every civilian in Syria who wishes to escape the crossfire of a civil war and immigrate to the US or any other country that will permit them entry. Without a population to support them both the rebels and the Assad government will crumble from within. Our “leaders” are only as powerful as the support we give them; upon its withdrawal they are as but infants.

Turn the world on with your smile…

Something on the lighter side. The legendary Bob Murphy, noted Austrian economist by day and karaoke singer by night, renders with aplomb the “Mary Tyler Moore” song on my behalf (or rather my wife, she is the big MTM fan and thought she’d enjoy it). I was the high bidder in a recent charity auction for the Brown Center for Autism and having Bob sing a song of your choice was one of the items he sweetened the bidding pot with. Enjoy

A Model for Freedom… in Detroit?

If you could distill the essence of the morning hangover and turn it into a city, that city would be Detroit. Everything seems “ok” during the party as both booze and money are consumed in excess. But as with all such excesses we are eventually (and often unceremoniously) awoken to the consequences of the cold hard reality we have wrought. Not quite the “morning in America” Ronald Reagan envisioned, but it is indeed now “morning” in Detroit.

Detroit is not alone in its profligate tax and spend policies that have slowly destroyed cities like a silent cancer. Stockton, California. Jefferson County, Alabama. Pontiac, Michigan. And the list goes on. Municipal debt has nearly doubled since 2000 from $1.5 trillion to $2.8 trillion as of 2011. Since municipalities can’t print their own money like Uncle Sam can there is a municipal debt bubble getting ready to burst that will make the housing bubble look like a hiccup. But there is a bright side to all of this, and Detroit is it. How so? For sure Detroit is in the condition it is in (abandoned homes, cars, factories, etc.) because of the actions of its overlords (city council). However, the response of its citizens to those actions has yielded the city we see today. Those citizens left. Those businesses left. And the fact that they were free to do so reveals the glimmer of hope for us all. We can at least (still) leave any relationship that is injurious. If the city had erected a wall and made it illegal to leave the city, illegal to close down a business, illegal to quit a job, it would no longer be a city but a prison (or any Ayn Rand novel, take your pick).

Where did those citizens go? To other cities. Detroit, just like any other city, county or state must compete for citizens on the open market. Create an environment that is conducive to freedom (low taxes, low regulations, civil liberties) and you will attract citizens. Create an environment opposed to those principals and the opposite occurs. Government decentralization is the reason we still enjoy some measure of freedom today. When government competes with government they all (mostly) behave. It is no accident that those states with the highest tax rates have been steadily losing citizens and those with the lowest gaining citizens.

However, there is a movement afoot from both the left and the right to set us on a path of complete nationalization. Each side falls sway to the delusion that they’ll be the ones “in control” and thus there is nothing to worry about. Under this “one nation” path the Federal government’s judgment will reign supreme in all areas, not just the annoying few outlined by the Constitution. But this reality is not new; we started down this path long ago. For those things controlled by the Feds there is no escape in moving. Don’t like paying into a bankrupt Social Security system? or Obamacare? Or funding endless wars (on terror and drugs)? Too bad, there is nowhere to go to opt out. Removing the Federal government would not necessarily mean an end to these programs however – it would simply mean that those programs could only exist in those areas where 100% of the citizens desired them. Anyone opposed would leave for cities with different policies.

But even such a geographically decentralized system of governance is but a mere compromise on the road toward true freedom. The dream is that someday humanity will evolve beyond our territorially driven reptilian brains to the point where geographical boundaries are irrelevant in defining political allegiances. Just as religious allegiances are blind to geographical boundaries so too should political allegiances be likewise blind to such boundaries. Although we can move to escape tyranny we shouldn’t have to.

Eliminate, Don’t Raise, the Minimum Wage

Argumentum ad populum

Of the various flavors of government interventionism in our lives, the minimum wage is perhaps the most welcomed. It appeals not only to our innate sense of “fairness” but also to our self-interest. It’s allure may erroneously lead us to the conclusion that because “it is popular” ergo “it is right”. Arguments for the minimum wage that are predicated on such popularity succumb to the logical fallacy known as argumentum ad populum (appeal to popularity). Mere popularity does not translate into legitimacy. The truth of this statement should be apparent to any citizen of a country that at one time exhibited popular support for prohibitions on biracial marriage and women’s voting, Jim Crow laws, and of course, slavery itself.

Even if we accept the assumption that an essential function of government is to make all human interactions “fair” and thereby enhance the outcomes of those interactions, it is still prudent to examine the principals and methods employed towards those ends to see if they are in fact achieving those goals.

 

A Priori Principals

Prior to examining the empirical evidence resulting from employing these methods we should first examine the principals behind them in order to determine if what we are trying to achieve is even theoretically possible. Although some principals must be verified by empirical evidence to confirm their validity, there are some that are immune to such testing. For example, the geometric axiom that the ratio of a circle’s circumference to its diameter equals “pi” is a priori true (meaning the truth of the statement does not depend on experience or examination). Measuring one circle or a million circles to test that principal cannot alter its universal validity. Likewise, there are economic principals that are also a priori true. One of these is that given two parties, the total wealth of both parties cannot be increased by transferring wealth between parties (this economic reality is a corollary to the Law of Conservation of Mass). To the extent one party gains, the other party loses, and the net remains zero. It is immaterial whether one believes this process is right or wrong, the simple fact is this process cannot increase total wealth. Owing to the subjective nature of value it is impossible to say that $1 in the hands of Person A has more value to him than it would in the hands of Person B. People’s value scales are different and can not be added or subtracted any more than one can add dollars and pesos.

 

Empiricism tested – The seen and the unseen

So, given the truth of this a priori economic principal, how is it that so many empirical studies show no deleterious effects or even positive effects of redistributive policies (e.g. minimum wage increases, redistributive taxation, fiat money inflation, etc)? Has an a priori principal been disproven? Not at all. Such programs appear to work for the same reason we are fooled by magic: misdirection. Economic misdirection illustrates the principal described by 19th century economist Fréderic Bastiat, namely that of the “seen and the unseen.” Magic appears to work because we “see” the surface illusion, but we do not see the action behind the surface, the gears, as it were, that are driving the illusion. Similarly, empirical studies of the effects of the minimum wage observe only the positive benefits while turning a blind eye to the unseen harms. As Henry Hazlitt wrote in “Economics in One Lesson”1.

 

“the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups”

 

Studies that show no effect from such redistributive policies such as a minimum wage are guilty of violating Hazlitt’s axiom: they examine the consequences only for one group, or only the immediate effects.

The more astute proponents of minimum wage laws often grab the metaphorical bull by the horns and address its most obvious conceptual flaw, namely that a $1,000/hour minimum wage would be unequivocally detrimental. However, the argument quickly turns to dismissing this fear by demonstrating that empirically no such job loss occurs when minimum wages are slowly raised. This is akin to saying that although fire can boil water, a small fire small won’t heat it up.  The support for this assertion is the oft-cited 1994 study of Card & Krueger2 showing a positive correlation between an increased minimum wage and employment in New Jersey. Many others have thoroughly debunked3,4 this study and it is not my intent to engage in a “weedy” deconstruction here, but suffice it to say even the original authors eventually retracted their claims.5

The problem with such “studies” that purport to demonstrate a neutral or positive effect from a rising minimum wage is that there necessarily must be a positive bias even from the most careful and fair-minded researcher. Why is that? The “seen and unseen” effect. It is quite easy to count individuals whose pay went up. What is more challenging, if not impossible, is to count the people that would have been hired but were not. This has the effect of masking increased unemployment: if the unemployment rate remains the same but would have dropped absent a minimum wage increase then this is a net increase in unemployment even though the absolute rate did not change. Likewise, offsetting reductions in non-monetary compensation will not show up in a monetarily focused analysis. Additionally, unemployment may also slowly rise without any direct job loss. How can this be? New positions will become constrained due to either stretched payroll budgets or a shift toward automation, which at a lower wage was not economically viable but is so at higher wages. Someone new to the employment market that cannot find work is seeking work and is thus counted as unemployed even though they have never been “fired”.

 

Empiricism supports prediction of youth unemployment

If we believe that those who will be most negatively impacted by a minimum wage should be those with the least amount of experience and skills then that that would lead us to predict higher unemployment among such a class of individual as compared to those with more experience and skills. To test this prediction we can then examine unemployment data for those aged 16-24 (less experience) as compared to those 25 and above (more experience). Indeed, if we look at the data6 from the Bureau of Labor Statistics (www.bls.gov) we find that the unemployment rate (June 2013) among 16-19 year olds is 24% and among 20-24 year olds is 14%. These values far exceed the unemployment rate (6%) of those workers with sufficient experience and skills to make them largely immune to minimum wage pay scales, namely 25-54 year olds. But it gets worse. Even when there are jobs to compete for, the young are at an experience disadvantage. Again the empirical evidence bears this out since were this not the case youth unemployment should slowly decline following minimum wage increases as the two groups equally compete for the same jobs. However we do not see this, youth unemployment is consistently higher across decades.7 The reasons for this are born out by the following analysis: At a given wage X (minimum wage) it is difficult for inexperienced worker A to compete with experienced worker B. However, Worker A could be competitive at wage X–Y. Think of it this way. If the government mandated a minimum haircut price of $200 per haircut whom would you hire for the task? The person who had been cutting hair for years or the person who had never done so? If you have to spend a $200 you might as well get the best you can get. However absent such a mandated wage you might be willing to try the neophyte for $5. You get a cheap, albeit imperfect haircut; the neophyte gains experience and improves his skillset.

 

Deleterious effects of youth unemployment

Although the redistributive effects of a minimum wage may be economically neutral in terms of wealth transfer between parties, it is definitely not neutral in terms of its non-economic effects, namely the prevention of free people doing as they please (i.e. gaining experience and contributing to society through work). People whose productive value is less than the minimum wage are de facto unemployable. They are denied the opportunity to gain experience and skills. Their exclusion from the job market is a net loss to society.

Minimum wage laws are a misguided attempt to help “the poor” by presuming all workers are similarly situated, i.e. that the vast majority of hourly employees earn minimum wage and that they are uniformly composed of heads of households. In fact the opposite is true. Only 2.1% of hourly employees earn minimum wage and of that 2.1% over half (55%) are 16-24 years old.8

If the intent were to help the poor, it would be better from a strict economic standpoint to simply eliminate the minimum wage and concomitantly expand social support for that tiny 1.2% of workers at the bottom if needed. The vast increase in youth employment resulting from a minimum wage repeal would expand the productivity of the economy thereby resulting in lower prices for goods and services, which would help “the poor” by giving them a stronger dollar.

 

There’s no free lunch – the many pay to support the few

If the wealth transfer effects of the minimum wage are economically neutral (in terms of strict monetary transfers) then who is gaining and who is losing? Obviously the people who get raises gain the most. Who loses? Everyone else. We lose in terms of higher prices resulting from cost increases being passed on. We also lose due to higher costs resulting from the withholding of labor of the unemployed, which reduces productivity relative to what it would have been. How much will prices go up? It depends. Do not be fooled by citations of a single study that demonstrates prices would not go up or if they did it would only be nominal. The truth is if you got twelve different studies you’d get twelve different answers. There are a multitude of variables because every company and industry is different. Some of those variables include: percentage of labor cost in the goods, percentage of workforce that will be affected, presence or absence of unionization, and elasticity of demand for the goods (i.e. will consumers pay more or not). Even if the effect is small, it still exists. Justifications based on the size of the cost are no different than justifying a new tax because it is proclaimed to be “nominal.” Whether the reason 100 million people pay an extra $1 so that 1 million people may be given $100 is the result of a tax or a law, the outcome is the same: redistributionary theft of the many to the few. It is wrong when corporations benefit from such practices and it is wrong when an individual benefits. Morality does not turn on the numbers engaging in the act. Just because the effect may be small at the individual level does not mean we just found our free lunch.

Even when costs are not passed on (due to inelastic demand) the owners of the company are “paying” in the form of decreased profits. Some may be inclined to argue that the workers “deserve” it more than the owners, however what one may not argue is that there has been a net benefit to the economy. It is often argued that if workers have more money they will spend it, all the while ignoring the fact that if the original owner of that money still had it they would have spent it as well. If one wishes to argue that some are more deserving, then simply be honest about that assertion and own up to the fact that one is advocating theft in order to rectify perceived social injustice. Do not attempt to shroud your motives behind a façade of economic utilitarianism (i.e. theft is ok because the economy benefits). These firms with inelastic demand for their product that are made to endure multiple bouts of minimum wage hikes will eventually go out of business as profit margins are squeezed down to 0%. Or if they are fortunate they will be in a position to automate most processes (think self-checkout lines). Automation or bankruptcy increases unemployment. Surely this is incontrovertible harm to those workers (the newly unemployed) that must be suffered in order that some workers at other firms may enjoy a small increase in pay.

 

No one earns minimum wage for life

Even those who start out making minimum wage do not continue to make minimum wage their whole life. They gain experience and skills and move up the pay scale in a company or they may move onto other employers who have a vested interest in acquiring such skilled labor. Just because you’re stuck at McDonalds making minimum wage does not mean you will be working there at minimum wage your entire life. You will at some point decide you want to make more and you will seek out a new job at a higher wage. And you will be able to do so precisely because of the skills and experience you acquired at your prior lower wage job. Low wage jobs serve a function in an economy. They should not be outlawed. They provide the opportunity for the inexperienced and unskilled to acquire both. They also offer those not looking for a career or who are not supporting themselves the means to engage in remunerative short-term work. Low wage jobs exist in those industries where job duties do not require any particular skill set and where consumers are sensitive to the price of goods in that industry. For example, McDonalds could pay all their employees $50,000 a year however the market for $50 Big Macs would necessarily be much smaller than it is today. At some point it is not the employer that sets the wage but rather it is the consumer. If the consumer will not spend more than X on a product then the wages to make such a product must necessarily be some fraction of the cumulative sales of X.

 

How did we get here? The subsidization of poverty.

Why are we even having this discussion? Do we really need the government to tell people to not work for less than they can survive on? Surely if people were working below a true “living wage” they would be dying in droves. Why is that not the case? Why are the streets not littered with the corpses of minimum wage workers? The key to this question is to understand that workers earn two wages: one from their employer and one from the state. Such workers are provided with the full panoply of government assistance. For example, someone making the current full time minimum wage earns $15,000/year, however they are also eligible for additional government benefits that bring their total remuneration to approximately $35,000/year if they are childless, or up to $52,000 year if they have children.9 In fact, earning more does not get one out of this situation as government assistance drops off slowly or precipitously depending on how much income has increased. These decreases in benefits actually incentivize the worker to not make more lest their higher income disqualify them for various aid programs. These benefits include the earned income tax credit, refundable tax credits, food stamps, housing, energy, and childcare assistance. These safety net systems, although started with the best of intentions, have resulted in the perverse incentive of encouraging the very thing we are trying to eliminate. Both the employer and the employee are aware of these safety nets, so each is willing to offer less and accept less given the assurance that society will pick up the tab. In other words, absent such subsidization, taxes supporting these programs would necessarily fall and wages would necessarily rise. Not out of generosity of an employer but as a result of the fact that absent any assistance no one could live on $15,000 a year, therefore no one would accept that wage any more than they would accept $100 a year. The young who make up about 20% of the labor pool8 would quickly fill in all the low wage job demands and once that pool was consumed employers who wanted more employees would have no choice but to pay the higher market wage.

 

Summary

Minimum wage laws should be understood for what they are: an unwarranted interference by Tom, Dick and Harry into the private trade negotiation of Dave and Fred. At its core, labor is just like any other good. The laborer would like to acquire money and is willing to sell his labor. Likewise the employer has money and would like to acquire labor. The two parties come together in order to reach a mutually agreed upon price. If that price is lower than you would like don’t blame the employer, blame competition. There are too many others willing to do the job for that price. Do stores blame their customers or the competition if they lose a sale? Blaming your employer for too low a wage is as silly as a store blaming its customers for not buying from them.

Minimum wage laws are simply price fixing by another name. They allow the public to intervene in employee/employer negotiation and tell the employer “It is illegal to pay less than X for this labor” and likewise tell the laborer “It is illegal for you to sell your labor for less than X”. When it comes to handling your own affairs, your neighbors do not know better than you. We should all be free to make such decisions for ourselves without outside interference.

Regardless of our current pay, everyone always wants more. There are two routes though to obtain more. There is the unethical route of using force (government) to extract what we want. This method is appealing in that it requires little effort, in the same way that picking up a gun and robbing someone requires little exertion. Theft is the time-honored tradition of obtaining goods with less effort than would have been expended in their honest production. But as with any theft, it is a zero sum game, there is always a winner and there is always a loser. The pie stays the same size because the thief has added nothing to it; pieces have merely been shuffled.

However, there is another method to achieve higher wages. Improve yourself so that you have a basis for negotiating. Differentiating yourself from the competition means you have less competition. You are capital that owns itself. You have it in your power to enhance the value of that capital. Wages correlate directly to the value society places on the tasks we perform. If we acquire those skills that society values more highly then we will necessarily produce greater value for society and this in turn will be reflected in the higher wage we are able to demand. These gains are not a zero sum game. The pie gets bigger because your enhanced productivity adds to the pie. Your employer pays you more not out of generosity but because you are able to give him more than you used to.

We each hold in ourselves the ability to improve our circumstances in a way that benefits us as well as society. Self-improvement through education and/or work experience is the answer to the question: how do I earn more? Elimination of the minimum wage is a necessary, although not sufficient, condition for improving the economic value of the inexperienced or unskilled.

A version of this article also appeared as a Mises Daily on January 16, 2014.

References

1. Hazlitt, Henry. “Economics in One Lesson”, (1946), p.5,

2. David Card and Alan B. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” American Economic Review 84, no. 4 (1994): 792. A later book expanded on these results, see David Card and Alan B. Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton: Princeton University Press, 1995). (this reference cited here)

3. David Neumark and William Wascher, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment,” American Economic Review 90, no. 5 (2000): 1390. Researchers from the Employment Policies Institute also reported finding data errors in the Card and Krueger sample. In one Wendy’s in New Jersey, for example, there were no full-time workers and thirty part-time workers in February 1992. By November 1992, the restaurant had added thirty-five full-time workers with no change in part-timers. See David R. Henderson, “The Squabble over the Minimum Wage,” Fortune, July 8, 1996, pp. 28ff. (this reference cited here)

4. Block, Walter. “The Minimum Wage Once Again”, Labor Economics from a Free Market Perspective, (2008), pp 147-154.

5. David Card and Alan B. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply.” American Economic Review 90, no. 5 (2000): 1419. (this reference cited here)

6 http://www.bls.gov/web/empsit/cpseea10.htm

7. http://www.americanprogress.org/issues/labor/report/2013/04/05/59428/the-high-cost-of-youth-unemployment/

8. http://www.bls.gov/cps/minwage2012tbls.htm#1

9. http://www.aei-ideas.org/2012/07/julias-mother-why-a-single-mom-is-better-off-on-welfare-than-taking-a-69000-a-year-job/

 

Changing the Rules of the Game

September 1 will mark the end of an era, at least in Georgia anyway. This is the date that Amazon.com must begin collecting sales tax in Georgia. Some day you will wax nostalgic and regale your grandchildren with stories of how there was once a place where people could escape the clutches of intrusive government: the Internet. This was a place where anarchism reigned and yet everything worked without any rules or leaders. But slowly government began to stamp out the embers of this freedom bit by bit. First it was taxes, then it was privacy, and next it will likely be access. Internet license, please. As Nature abhors a vacuum, so too does government abhor freedom. Big Brother the busybody knows no boundaries. Big Brother demands his “piece of the action” in every transaction, no matter how small. Just as the mafia feels they have a right to a slice of any economic activity that occurs within their self-proclaimed “territory” so too does government operate upon an identical principal.

So how is it that this has come to pass in Georgia? Has Congress managed to stealthily pass the “Tax Fairness Act”? Fortunately no. This current state of affairs is the result of Georgia House Bill 386 passed on March 20, 2012. This bill follows the Orwellian mantra that if conventional definitions of words aren’t working for you, then simply write new definitions. This bill redefines a term called “nexus” in order to dragoon Amazon and similar entities into becoming uncompensated tax collectors for the state of Georgia. Nexus is a tax term which means “a connection” i.e. if a company has a physical presence (office, warehouse, employees, equipment, etc) then they are said to have a connection to the state sufficiently similar to a resident so as to make them liable for the same taxes a resident would be liable for. But this bill has now turned that definition on its head by broadening the term to the point where merely having a business relationship with an entity in Georgia will confer “nexus” upon the foreign entity. It is hard to see how those who voted for this bill did not recognize the perverse incentive buried within it, namely that companies outside of Georgia will choose to NOT establish any business dealings with companies inside Georgia lest they become entangled with the Georgia Department of Revenue.

As if loss of business opportunities and higher taxes wasn’t bad enough, it gets even worse. Nexus and residency have always had a common shared characteristic: physical presence. Not anymore. Now that nexus is based on the most ephemeral of connections to the state how long is it until the residency definition undergoes a similar metamorphosis? If the two are indeed linked in their common purpose of establishing tax liability, then a change in one will invariably result in a change in the other. Therefore Georgia may one day establish that residents of other states are also in fact Georgia “residents” for purposes of income tax. Once that precedent comes to pass then what is to stop others states from likewise inflicting such taxes upon Georgians? Perhaps some day you’ll get an income tax notice from Florida because you vacationed there once. “You enjoyed the generous state benefits of roads and municipal services while here, so certainly you should be paying your fair share” will be the justification. Each blow of the precedential ax upon the tree of freedom accumulates damage until finally one day that tree is felled.

Naturally this new sales tax collection is being heralded by the economically illiterate as a boon for the “brick and mortar” stores. The initiation of sales tax collection will have ZERO effect on expanding local sales in Georgia. Why? People aren’t ordering on line to avoid a few bucks in taxes. They are ordering online because it is convenient. The lack of sales tax is just a perk. Removing that perk is not going to change people’s behavior. It is however going to reduce what people can spend to the tune of $16 million. This will only harm the individual as well as local businesses they are already shopping at. Increased taxes reduce the individual’s capacity to spend – everywhere. This is supposed to help the economy?

 

Calculating The Social Cost of Horse Manure

Imagine the following: It is the year 1700 and growth in the American colonies is threatening an economic and environmental catastrophe. Human and equine populations are expanding rapidly in tandem. The horse is integral to the economic engine that drives all economic output. But there is an unaccounted cost: manure. The horses are fed fuel (hay), do work, and out comes waste (manure). Harvard scientists have extrapolated that based on current trends there will be so many horses that manure will cover the colonies to a depth of three feet by the year 2000! Something must be done! There is clearly an unaccounted cost to all this manure lying about. The only solution to stem the tide: a manure tax.

Hopefully this seems a bit silly – it was meant to be. However our betters (those in government) are in engaging in similar sophistry. They make pie in the sky predictions cloaked in an aura of mathematical certainty concerning the “social costs of carbon” up through the year 2300. To wit: to little media fanfare the White House Working Group recently released an update to its estimates of the Social Cost of Carbon. Why is this notable?  The revised figures were up to two times larger than the previous “estimates” made by the same office only 3 years ago. Is the problem of climate changing getting worse? Hardly. The White House has merely “updated” its numbers in a climate cost-analysis model that has enough variables in it to send an algebra student screaming into the night.

These “equations” are nothing so scientifically resolute as E=mc2. No, rather they are a mathematical house of cards that can be manipulated to yield any desired value. For example, one of the key variables is something known as the “discount rate”, that is, the interest rate one would need to invest a dollar today in order to earn some amount in the future. So, if we invest $1 today that grows to $40 in one hundred years and we assume by then there will be $40 in economic losses due to one pound of carbon, then we say the cost of one pound of carbon today is $1. This is the “social cost of carbon”. The goal then is to spend $1 today to clean up one pound of carbon, thus averting $40 in damage in one hundred years. We would not spend $2 to clean it up because it would be more profitable to earn $80 and incur the $40 cost. If the social cost of carbon is low, then it is difficult to justify expensive remediation efforts, whereas if it is high then imposition of costs on the populace is that much easier to rationalize.

All we can do is pile assumptions on top of estimates of cherry picked data.

Of course the rub is how does one actually figure out the cost of environmental “damage” in 100, 200 or 300 years? All we can do is pile assumptions on top of estimates of cherry picked data. For example, loss of tourism dollars at ski slopes is counted as a cost, however the shifting of those dollars to newly more temperate regions is not counted as an offsetting benefit.

Even if we assume the science is ironclad and the calculations of the costs are solid, there is still the problem of the discount rate. It is the logarithmic volume control on the stereo of climate economics. Small changes have dramatic effects. For example, a discount rate of 2.5% yields a cost of $98/ton but 5% yields only $27/ton. Curiously the WHWG ignored the government’s own Office of Management and Budget (OMB) directive to also include a value of 7% in the analysis. It is estimated that at a 7% discount rate the Social Costs of Carbon would likely have been nearly $0 or even negative (meaning that CO2 actually confers a net benefit, not cost). It is also telling that the White House Working Group also ignored the OMB directive to only integrate domestic costs into their models, not global costs, an apparent “oversight” which further tends to push the Social Costs of Carbon estimates upward. This is what is known as “stacking the deck” in your favor.

So, back to our horse manure tale. What would the outcome have been had such a tax been implemented 300 years ago? Money would have drained from the economy, thereby lowering people’s standard of living while simultaneously retarding capital growth. This lack of capital would have had a deleterious effect on future generations’ economic output. Just as people in the year 1700 never could have conceived of the technological marvels that would make their hypothetical fear moot, so should we not be so conceited as to believe future humans will not make similar discoveries that will render our fears of climate catastrophe about as realistic as drowning in a sea of manure.

Time to Raise the Hood

A common business practice is to require that all employees take some vacation time each year. It not only improves morale but also ensures that potential problems attributable to that employee will be brought to light in their absence (as co-workers unwittingly uncover latent issues). In other words, although it can be disruptive to the status quo, sometimes it is a good idea to raise the hood every now and again and make sure all is working as it should. This is nowhere more true than in government. This country has been handing out billions of dollars in foreign aid for decades. For the most part this funding is on autopilot, it’s simply rubber stamped each year as the routine process of government functioning. But there’s been a recent snag in the status quo. Some in Congress are (finally) questioning the wisdom of sending billions of dollars overseas when we face such a tremendous deficit at home. That sentiment, coupled with the recent military coup in Egypt, has brought to the forefront the legitimacy of the US continuing to send foreign aid to a country in political turmoil. Discontinuing aid should be a no-brainer even for foreign aid proponents, just turn off the money spigot until we know who is actually in charge. But alas, it is apparently not so simple after all for some senators. It turns out much of this aid is funneled right back into the home districts of many in Congress. This long obscured truth is THE dirty little secret of foreign aid.

The public has been, as they say, “sold a bill of goods” when it comes to foreign aid. The propagandized message is that such “aid” is going to help poor people overseas. In fact, the money is funneled to rich people (the well connected in foreign governments) in poor countries and to even richer people in the US. How does this money end up back here? Almost all foreign aid comes with either implicit or explicit “strings” attached that stipulate that aid must be “directed” toward the purchase of goods or services from US based corporations. And which corporations might those be? Predominantly those that are part of the “military industrial complex” – the very same crony capitalist war machines that President Eisenhower presciently warned us about over 50 years ago.

So what’s the problem with foreign aid? Is it that it spreads state of the art weaponry across the globe (weaponry that could easily fall into the hands of terrorists) resulting in a planet armed to the teeth poised at the brink of war? Is it that we are borrowing money from China to subsidize foreign governments in an attempt to bribe them into submission? Is it that food aid actually harms more than it helps by destroying farming as an occupation in countries receiving aid (who could compete with free food)? No, for those in Congress none of these deleterious effects are a problem. Why? Because “foreign aid” gets many re-elected, particularly when such aid is directed at companies in their home district (e.g. Sen. Carl Levin (D-Michigan), is rather adamant that aid not be cut off to Egypt, and by bizarre coincidence it just so happens that a General Dynamics plant is located in Michigan.

At its core, foreign aid is no different than other government “stimulus” programs – it simply takes money from those not in favor with the political elite (that is, us) and hands it over to those who are in favor with the political elite (the true 1%). But there is one key cost incurred by foreign stimulus not typically seen in domestic stimulus: death and suffering. These are a direct result of the weapons produced and the tyrannical regimes supported. The political unrest in Egypt has finally forced us to raise the hood and take a closer look at the wisdom of foreign aid. To those in Congress who got caught with their hand in the foreign aid cookie jar, take note: your days are numbered.

Think Different, Think Free

It is a peculiar characteristic of US anti-trust law (Sherman Anti-Trust Act) that competition itself can be characterized as “anti-competitive”. The recent e-book price-fixing case against Apple (in which Apple was ruled against on July 10) is a prime example. The case is rather “weedy” so I will provide a pared down synopsis, however for those interested in the details please see this article for an excellent summary. Prior to Apple’s entry into the e-book market in 2010, Amazon was in a monopsony position in the wholesale e-book market and a monopoly position in the retail e-book market. No, I did not misspell “monopoly” – monopsony is a situation where a market has just one buyer (as opposed to just one seller with monopolies). In this case Amazon was the only (over 90% market share) buyer of e-books from the “Big 6” publishing houses. As such it was in a position where it could dictate the terms of sale to the publishers. Amazon sold every e-book for $9.99 and often lost money on these sales. The publishing houses were not happy with this situation as they felt Amazon’s low prices tended to devalue hardcopy books in the consumer’s mind and thereby potentially weaken their sales position further in retail book outlets (as people balked at paying high prices for print copies when e-books could be had for so much less).

In comes Apple to save the day. It’s a win-win situation for Apple and the publishing houses. Apple wants to chip away at Amazon’s dominance in the e-book market and the publishers want to have an alternate buyer for their e-book wares. So the upshot of all this? E-book prices went up, Amazon made more money (due to not losing money anymore), the publishers made less money (due to decreased sales resulting from higher prices) and Apple got a foothold into the e-book market. Unfortunately the judge ruled against Apple, citing that “depriv[ing] a monopolist of some of its market power is [not] pro-competitive” merely because some e-book prices rose after the fact. In other words, for competition to be permissible in this country it must fall into a narrow and arbitrarily subjective standard of behavior. If you enter a market and cause prices to rise too much then you are a monopolist. If you enter a market and causes prices to fall too much then you are a ‘predator’. And finally, if you enter a market and charge the same price as everyone else, then you are a cartelist.

The irony is that government should be the one prosecuting supposed anti-competitive behavior when it is government itself that is the sole source of monopolies and anti-competitive behavior. For example, this country still engages in New Deal era agricultural price controls intended to prop up prices by limiting production. Tariffs, subsidies, grants, regulations, certificates of need, insurance commissions, utility boards, public schools – all are either outright government granted monopolies or are examples of policies that have the direct effect of limiting market entrance or production and thus raising prices and stifling competition.

All “anti-trust” legislation should be abolished. Such legislation is akin to anti-witch legislation; a pointless attempt to prevent something that cannot nor did exist prior to enactment in 1890, myths of “Robber Baron” monopolies notwithstanding. Trusts, cartels, and monopolies – such things cannot exist in a free market for any appreciable length of time as long as competition is not short-circuited by arbitrary government edicts. To the extent a monopoly could exist in a free market it would be a testament to the degree to which such an entity is satisfying the preferences and demands of its consumers.

The government has spent millions of dollars prosecuting Apple over its behavior in a market for a luxury good that did not even exist 5 years ago. Perhaps it never occurred to anyone that if e-book prices were too high then people would simply stop buying them? Ultimately it is the consumer, exercising control over the purse, that dictates what will and will not succeed in the market. Government “anti-trust” witch hunts do nothing but harm the consumer by scaring off potential competitors who fear censure for not competing in precisely the manner prescribed by our wise overlords.