Good Politicians Still Make for Bad Government

There is a relatively common refrain/sentiment, on both sides of the political aisle, that goes something like this: "If we could just get rid of this bad batch of politicians and get the right ones then everything will be great." Usually, the person expressing this concern cannot point to a specific time when the right people were in office and things were great. Or, if they do point to a specific time, they are blissfully ignorant about the facts of that time. This feeling, that the problem is the individuals we elect, ignores the institutions that shape how individuals act.

I think very highly of humankind. I think most people are generally kind. I think most people do things to help others and merely for the sake of helping others. I also think government is generally harmful. How can it be that I think most people are good, and politicians are people, yet I dislike government? The problem is that well-intentioned people can make mistakes. When this human fallibility combines with the power to force decisions on others it is a recipe for harmful outcomes.

It is no secret that legislators from certain areas tend to vote for certain measures. Washington's politicians favor aerospace. Virginia's favor the military. West Virginia's favor coal. This is perfectly understandable. My guess is that these legislators are good people, and they are truly trying to help others. Unfortunately, they don't understand that they are doing more harm than good. Voting for a piece of legislation that helps Boeing also hurts Boeing's competitors and consumers. For a more specific example, consider Russ Feingold. I don't personally know him, but there seems to be every reason to think he is a very good person who went into politics to help people. However, he has a strong record of opposing free trade. By opposing free trade he forcefully limits the range of choices open to individuals, not just in the United States, but foreigners as well. Individuals who would freely opt to engage in some form of trade or exchange are prevented from doing so by limits on free trade.

The same pattern can be applied to any area of policy. Individual politicians with very good intentions and the genuine desire to help, hindered by their incomplete knowledge or understanding, make choices that limit the opportunities of others.

The Prohibition on Working for Less Than a Specific Amount

In what is blatantly stealing from Prof. Don Boudreaux, I shall call the federal wage floors what they truly are: a prohibition on people charging less than a given amount for their labor. The Economist, much to my disappointment, wrote several articles this week defending such legislation.

In the article "Raising the Floor" from the week of December 13, The Economist claims that prohibitions on selling labor for less than a given amount "...reduce the amount companies must spend recruiting new people." Yes! Great! This implies that, before such a prohibition, workers choose to leave. A worker takes a job, gains skills and experience, gains access to new and better opportunities, and leaves their current job for the better opportunity. This should be celebrated. The Economist should be elated about this. I am as excited as I can be, considering it is happening to anonymous people that I do not personally know. The Economist advocates wage floors because it reduces employer recruitment costs.? How about concern for the prospects of unskilled laborers? I would much rather that employers bear the costs of employee turnover than unskilled laborers remain unemployed with no prospects.

"Solving" the Brain Drain: A New Opportunity for Central Planning to Fail

I spend a little time now and then surfing economics discussion forums. Yesterday I contributed to an interesting thread about the brain drain. The original post was lamenting the awful impact of the brain drain on developing countries. Normally I would have responded to point out the weaknesses in that argument, and to try and show why the movement of skilled labor does not have negative effects on developing countries. However, I was distracted. I was more intrigued by the set of policies proposed by the original poster. These policies were:
Grants to pay the cost of return for skilled workers.
Top-up pay to make salaries more attractive and draw skilled workers back.
Subsidized loans for returning workers to start a business or build a home.

I hope the original poster did not see these policies in any list of pending legislation somewhere. My guess is that such legislation would be ineffective at best and destructive at worst. A quick analysis of each exposes the shortcomings.

1-Grants to pay the cost of return for skilled workers.
This implies that the cost of moving is what stops skilled workers from returning. It ignores the factors that caused workers to leave in the first place. If someone chooses to emigrate, it is strange to think that they would opt to return merely because their moving expenses will be covered. It is a safe assumption that moving expenses are the least of the reasons a skilled emigre would not return to their country of origin.

2-Top-up pay to make salaries more attractive.
Where would the funds for this policy come from? What reason is there to think that returning workers would create enough value to justify such top-ups? The fact that they left in the first place is strong evidence that the ability to create value in their home country is limited. Also, this policy is ripe for abuse. Many a corrupt, authoritarian ruler would love to be able to hand out top-up pay to "skilled workers". A better sounding program for gaining political support could nary be found.

3-Subsidized loans for returning workers to start a business or build a home.
Again, this ignores a fairly obvious question. Why didn't these workers decide to emigrate instead of starting a business and building a home? What caused them to think a business in their country of origin was a bad idea, and how does this policy do anything to address those causes? A cheap loan is no good if infrastructure is lacking, red tape is stifling, corruption is rampant, or property rights are insecure. Additionally, much like the proposal above, this is a kleptocrats dream policy. What better way to increase personal power than to hand out cheap money? Prospective supporters would line up at the trough.

Another proposal I've seen is to limit migration from developed countries to developing countries. The argument for this is that citizens of wealthy countries should not take work away from locals in poorer countries. This is another example of the lump of labor fallacy. There is not a fixed number of jobs. A talented Canadian architect who moves to Laos creates opportunities for many Laotians. An expert electrical engineer from Belgium who moves to Congo creates benefits and opportunities for many Congolese. Finally, this policy assumes that it is morally acceptable to deny liberties to one person that are available to another. When put this way, it is predictably hard to find anyone who defends such a proposal.

What's the take-away? The brain drain isn't a problem. Even if it was, drawing people back is not the solution. Developing countries do not dysfunctional institutions because skilled workers leave. Skilled workers leave because there are dysfunctional institutions.

Immigration: Why I Love It

I recently relistened to the October 4, 2010 episode of Econtalk. Bryan Caplan is the guest, and the topic is immigration. Caplan makes, in my view, an rock solid case for immigration. I revisited this podcast because I've found that immigration is an issue I feel increasingly strongly about. It is also an issue that seems to elicit glaring, painful inconsistency from people of all ideological and political stripes. Many of these inconsistencies center around financial impacts of immigration: Do wages go down? How big an effect to remittances have? Do immigrants contribute more or less in taxes than they receive in benefits? While these are certainly important questions, and I do think that the answers to all of these questions support the case for immigration, they don't get at the reasons why I am a strong supporter of free immigration.

I'm a mongrel - roughly equal parts Norwegian, Welsh, English, and Polish. Though, as I understand it, the area my ancestors came from in Poland has gone back and forth between German and Polish control, so maybe with current boundaries I'm German. The English and Norwegians have always been in the in-crowd. They were the 'good ones' when referring to immigrants. The Welsh and Polish, not so much. If those opposed to immigration had been successful in limiting the movement of Welsh or Polish migrants the United States would be dramatically different. What would Chicago be without the Polish? What would the upper midwest be without the Polish cultural influence? I was a history major in college, and in my senior year wrote my research paper on the history of Colorado mining. Much of western Colorado was dominated by Welsh immigrants because they had skills and experiences that made them particularly well-equipped for the harsh weather, high altitude, and specific technical demands of the region. Think about all of the groups that have made their mark on the United States, and the things their contributions made possible. This extends beyond the USA. Every country is richer in countless ways because of immigrants.

On an individual level, my life would not exist as I know it if the Welsh or Polish had been shut out. Furthermore, my wife is from the Philippines. Her mother was an American citizen at the time of my wife's birth, but my mother-in-law chose to deliver in the Philippines, and my wife didn't move to the USA until she was 5. Much like southern and eastern Europeans, Asians of all nationalities were undesirable immigrants. If my wife's grandfather had not been allowed to migrate (note: he wound up serving in the American military), I wouldn't be able to share my life with my wife. It doesn't end there, though. I met my wife in Cambodia. I was there to teach social studies, and she was there to work as legal advisor for a group that defends property rights in a country where the government can take anything it pleases. If she and I weren't able to move to Cambodia to work we wouldn't have met. She wouldn't have helped Cambodians whose lives were being stolen. From there we moved to Thailand so she could work as counsel to refugees going through the UN process (I taught social studies). The Pakistani, Iranian, Congolese, and Syrian refugees she worked with would have continued to suffer through atrocities and persecution, and quite possibly would have died. This, to me, is a far more important part of the immigration question than any effect on wages or national accounts.

When I encounter someone who wants to limit immigration or deport immigrants I cannot help but think about how ridiculously arbitrary their position is. Why is it a good idea to stop immigration now, but not in the past when their ancestors would have been the targets of anti-immigrant legislation? Why should imaginary political lines drawn in the minds of humans limit the opportunities of individuals? Why are people on one side of the imaginary line more entitled to opportunities than anyone outside of the line? Why should the UN, or any other entity, get to decide who escapes unthinkable suffering and who must persevere? No one can offer anything resembling a reasonable answer to any of these questions.

Mutual exclusivity of smart growth policies

A friend recently posted a link to a blog post that had me shaking my head. It was written by an advocate for "smart growth" policies in urban areas along the west coast. Some of the policies advocated in the post were: height restrictions on buildings, mandatory provision of affordable housing in any new development, and funding for public transit. It seems to me that it would be difficult to imagine three policies that are more at odds with one another.

Start with public transit. In order for buses, metro lines, or commuter rail to be desirable, there must be a high enough population density. Automobiles offer greater independence, and a look around the world shows that urban residents favor this independence unless the cost of driving is sufficiently high. Such costs could come in the form of congestion, expensive parking, or shortage of parking spaces. When significant population density drives these costs up public transit becomes more attractive to residents. Shorter buildings mean lower population density. Lower population density makes public transit less desirable. It seems fairly clear, then, that limiting the height of buildings would encourage the use of automobiles and make public transit less attractive. (And I'm not even touching on the fact that even cities with very high population density often need to subsidize public transit.)

Inherent in the call for legislation that requires developers to supply "affordable" housing is the claim that housing is unaffordable. In order for prices to drop there must be an increase in supply or a decrease in demand. A limit on the height of buildings is an excellent way to limit supply. In order to increase supply, and therefore lead to lower prices, restrictions on new development should be eliminated. Capping the height of new buildings is directly contradictory to the goal of creating cheaper housing because it limits supply and does nothing to demand, therefore making the problem worse, not better.

My intent is merely to show that smart growth policies can be self-defeating, so I have not provided any data. In his books Applied Economics and Economic Facts and Fallacies Thomas Sowell goes into much greater detail with supporting evidence.

Austrian Theory explained - Part 2: Business Cycle

Disclaimer: This is bound to be a clumsy attempt at explaining the Austrian theory of business cycles. For a much better explanation please listen to the April 13, 2009 and January 5, 2009 episodes of Econtalk, or watch the famous Hayek vs. Keynes music video.

The Austrian theory of business cycles stresses the role of interest rates in valuing alternative investment options. As an example I'll use an investment option that many people consider at some point: going to college. Pursuing a degree, whether it be an associates, bachelors, masters, or any other, is an investment in one's own human capital. Like any investment one must consider the costs and the expected returns. A change in costs affects decision making. Lower costs mean future returns don't need to be as high, while higher costs mean future returns must increase to compensate.

Imagine that an election takes place and a new congress and president are elected. The newly elected politicians decide that more bridges are needed. In order to achieve this they create a new fund to provide scholarships, grants, and low interest loans to students pursuing a degree in structural engineering. This makes it less burdensome to pay tuition fees. Yay, interest rates have gone down! Education is more affordable! This leads more people to enroll in a structural engineering degree program than otherwise would have. These students eventually graduate and enter the job market. The aforementioned bridge loving politicians have decided to allocate more money to transport infrastructure, and recent graduates enter a favorable job market. As one might expect, this encourages even more people to pursue a structural engineering degree, adding the existing incentive created by lower interest rates. Many bridges are built, and many engineers are trained. Unfortunately, there comes a time when more bridges are unnecessary. We're all bridged out, one might say. What to do with all of those bridge-building structural engineers? They are no longer needed, and many lose their jobs. Furthermore, the tools and machinery they used to use are no longer utilized. Their staff is let go. There are surplus stocks of rebar and concrete laying around. This loss of jobs and misuse of resources happened because distorted interest rates caused too many people to pursue a degree in structural engineering. School was too cheap. The interest rate signal was wrong. If the interest rate had been higher, fewer people would have opted to enroll in structural engineering programs, and therefore fewer engineers would be produced.

Wait, many are quick to say, we need to put those bridge building engineers back to work! That's the solution! The problem is that we don't need more bridges. We've got plenty, thanks. Paying them to make more won't help, it just pushes more resources to an already unnecessary use. Austrian theory points out that a correction must be made. The engineers, their staff, the machinery, and the supplies need to be put to different uses. This transition will not be painless. Many bridge builders will face hard times. This is very sad. This highly regrettable situation does not mean, however, that pouring more money into bridges is a solution. The Austrian theory is that the structural engineers need to find another application for their skills, an entrepreneur must figure out a use for old rebar and concrete, and so on. This adjustment is the only real way to recover from malinvestment due to distorted interest rates.

Distorted interest rates lead to changes in investment decisions. Those investment decisions eventually prove to be poor choices. The resources allocated to those investments must be reallocated to other uses. This transition is the bad times in the business cycle. When interest rates have adjusted and resources are better allocated in response, we see the good times in the cycle. Refusing to accept the consequences of misallocation, either by further distorting interest rates or propping up wasteful uses, merely compounds the problem and delays the inevitable.

Austrian Theory explained - Part 1: Knowledge

I've been sitting in on Christopher Coyne's Micro Theory class. Tonight's lecture was particularly good. The topic was Hayek's theories on the market and the use of knowledge. At one point, Coyne referred to the old joke about the economist who sees a $20 bill on the sidewalk but his economist friend insists it couldn't actually be there. In my first of what will probably be a few posts attempting to explain Austrian theory, I'll use that joke to illustrate a bit about knowledge in the market.

The second economist in the joke is meant to be a subscriber to the perfect markets idea. The joke - playing a bit fast and loose with the word, if you ask me - highlights how ridiculous it is to assume perfect knowledge. I've encountered a few people who triumphantly confront me with the point that "economics is silly because it thinks people are perfect and know everything and markets are infallible." The beauty of Hayek's theory is that it recognizes humans are not perfect, do not know everything, and do make mistakes...and that free markets are necessary for this very reason. Perhaps it is petty of me, but I do love responding to the aforementioned straw man by calmly noting that sound economics makes no such assumption, but that this only strengthens the case for markets.

There are, obviously, $20 bills on the sidewalk. They are not strewn about on every corner of every block, but they do exist. This is, I believe, precisely what Hayek meant in saying that knowledge is acquired over time as individual preferences and circumstances change, and when someone acquires the right information at the right time AND recognizes the opportunity, they are able to offer something new in the market. When an entrepreneur recognizes the opportunity to use new knowledge to create wealth, a $20 has been found. Sometimes no one acquires sufficient knowledge to recognize an opportunity to create wealth, or the knowledge is there but the individual makes a mistake in valuing the opportunity and it is therefore unfulfilled. In this case, no $20. As one might guess, the number of times a proverbial 20 is found pales in comparison to the number of times it isn't. Humans aren't perfect, and there is a lot of information out there, so it shouldn't come as a surprise that $20's aren't carpeting the pavement.

Some find it difficult to swallow the fact that humans are imperfect, and like to think that intervention in the market can make things better. In my opinion, though, it is pretty wonderful, even awe inspiring, that markets emerge so that people can interact, exchange information, and help each other find as many 20's as possible.

Jo Koy's Insights on Labor Freedom

The issue of labor freedom keeps popping up for me. In the last few weeks I heard Christopher Coyne give a lecture on Mises' observations about socialist central planning, read Thomas Sowell's Applied Economics, re-listened to Milton Friedman on Econtalk, and just today heard comedian Jo Koy make a very relevant comment (as a guest on the Adam Carolla Podcast). Labor unions came up, and Koy noted that old labor union pictures are exclusively white.

Perhaps I'm reaching a bit, but it seems to me that the case for labor freedom can be summarized by the things mentioned above. Mises said that central planning eliminates ownership, therefore eliminating the ability to exchange and establish a price for resources, therefore eliminating the possibility of proper allocation. Sowell and Friedman, it seems to me, build on this by commenting on the consequences of limiting labor freedom through minimum wage, licensing, and other barriers. These barriers limit the real ownership of one's own labor, distort the price of labor and, perhaps most importantly, violate personal liberty. Sowell's discussion of slavery covers all of these evils and I doubt anyone would dispute his argument, yet many people seem to deny this same reality when it comes to labor unions and minimum wage laws. This is where Koy's aside comes in. Noting the racial homogeneity of labor unions was not intended as an insightful point about protectionist practices in the labor market, but it was nonetheless. Koy, a comedian not an economist, is obviously aware of the history of unions. In order to keep out competition in the labor market they advocated wage floors and barriers to entry, thereby greatly intruding on the labor freedom of non-union workers. While this process tends to be remembered as a valiant fight for the exploited working masses, Koy exposes it for the racist infringement of freedom that it actually was.

The case made by Mises, Sowell, Friedman, and Koy seems pretty strong, though if you'd like to hear it from a better and wiser blogger I'd recommend checking out Don Boudreaux over at Cafe Hayek. Limiting labor freedom eliminates proper market allocation (Mises), it tends to be used to keep out competition and enable discrimination (Sowell and Friedman), yet the prevailing historical view is an incorrect belief in egalitarian struggle for the proletariat.

Relearning an important non-economics lesson - again

Today I got stuck in what a former colleague called a YouTube vortex. That is what happens when you intend to watch a single video, then see an attractive link, and another, and another...

It all started because I was reading Cafe Hayek and followed a link to a Friedman clip. I decided to watch some more Friedman. That took me to Walter Williams. Then Thomas Sowell. Then Mike Munger. When I finally pulled out of the vortex, having been bombarded by a whole lot of highly thoughtful and intelligent ideas, the thing that struck me most had nothing to do with economics.

I have no idea why I scrolled down the page while watching any of those videos, but I did. Three times. The comments for each video were, without fail, quite depressing. As most consumers of online media are well aware, the comments section is not exactly the place one would go for a rational, civil, constructive discourse. The vitriol directed at Friedman, Sowell, and Munger was quite something, and I'm sure that, had I looked at the comments on the Williams clips, I would have found the same.

Today I relearned, again, that I need to be very vigilant in combating the human tendency to villainize people whose ideas do not agree with my own. Williams, Friedman, Sowell, and Munger are all brilliant men. They're also well-intentioned and, if the testimony of those who know them is accurate, quite caring, generous people. One would think, based on the YouTube comments I saw today, that these men are the best of the best when it comes to evil. It would be easy to tell myself that I'm better than the YouTube commenters, but I don't think that is true. I think I'm just as prone to this as anyone else is. I can think of several times when I was particularly guilty. My family, friends, and acquaintances have been guilty, too.

Economics, especially when it intersects with politics, as it often does, seems to elicit this kind of behavior. I hope that I have the presence of mind to remember the valuable lesson I've learned from great economists like Russ Roberts, Milton Friedman, Walter Williams, Thomas Sowell, and Mike Munger: sometimes wonderful, intelligent people have different views than I do, and I do a disservice to them and to myself to respond with anything other than openness and respect.








Wonder how long until I need to relearn that again?

Are CEO's taking all the money?

Over the last few days a number of my friends have posted the same video on Facebook. The video shows Elizabeth Warren 'correcting a CEO's math'. The commentary from my friends who posted this video tends to be executive bashing and calling for income redistribution. For the sake of argument I'm going to put aside all of the reasons I do not favor wage controls. Instead, I thought I'd do some very rough, back-of-the-envelope type calculations about what we could accomplish through income redistribution. Because the aforementioned video relates to fast food, I'll stick with fast food for my calculations.

McDonald's
According to McMichigan.com a  McDonald's location employs 61 people on average. Worldfranchising.com says each location employs about 50. That gives us a ballpark figure, I'll say 50. Reference.com and About.com both say there are about 13,000 McDonald's locations in the USA. Yes, I realize there could possibly be questions of reliability there, but I'll trust them for the purposes of this post. Multiplying these two gives a figure of 650,000 employees in the USA. Macroaxis.com says there are only 440,000 McDonald's employees in the United States. According to Bloomberg.com, the CEO makes $8.75 million. So, how about that greedy fat cat gives up some of that money that he doesn't really need. What if he gives up all of his salary? 8.75 million, divided amongst 440,000 employees, is $19.89. If the CEO's entire paycheck were redistributed each employee would get less than $20 per year, and that is taking the lower figure of 440,000 employees nationwide.

What about other businesses?

Wendy's
CEO salary: $4,200,000 (according to QSR Magazine)
Employees: 44,000 (Macroaxis.com)
Results of redistribution: $95.45 per employee per year


Starbucks
CEO salary: $10,700,000 (according to QSR Magazine)
Employees in the USA: 150,000 (Reuters and Jobs.com)
Results of redistribution: $71.33 per employee per year



Assuming that there would be no negative consequences of taking away the CEO's entire salary, that still seems like pretty meager gains to each individual employee. What's the take-away, in my opinion? The rich fat cat executives are not greedily hoarding money that could, if redistributed, make a difference to the lower level employees. They are paid quite handsomely because they create a great deal of value for consumers, investors, and employees. (Yes, there are exceptions, like on Wall Street and in Detroit, but that is a subject for another post.) 

Things in Blind Spot May be More Important Than They Appear

I love The Daily Show. I'm a regular watcher, and I think Jon Stewart is a more responsible and effective newsman than perhaps anyone else out there right now. Sometimes, though, even he can miss something.

On the September 24, 2013 episode of The Daily Show Stewart opens by skewering politicians who are opposed to the Affordable Care Act. In the next few segments he interviews Richard Dawkins. During the interview, Stewart says that he believes advances in technology can lead to horrible consequences. He also notes that people are flawed, and technology is used by people, so new technology will at times be put to flawed uses.

I wonder if Stewart makes the connection between the first and second segment. While I agree that many legislators who oppose the ACA seem to have flimsy reasoning, there are very valid concerns about the incentives that the ACA will create. The fact is we do not know what will result from these incentives. September 23rd's Washington Post had an article about some undesirable effects that already seem to be occurring. No doubt there will be more. If Stewart is correct that humans are flawed (he is), and if he is correct that new technology can be used in ways we might not like (again, he is), then why would he imagine that legislators are not flawed and that well-intentioned legislation cannot be turned to undesirable purposes?