Thursday, January 24, 2008

Where do Wages and Prices Come From, Part 2

I've made some posts recently about where wages come from, and why we should expect employers to find it difficult to exploit workers in competitive labor markets. I see that Russell Roberts over at Cafe Hayek has made some similar points. Some highlights:
-only about 10% of the U.S. workforce is unionized.
-Somewhere between 0.5% and 2.2% of hourly workers earn minimum wage or less.

Why does this matter? If you believe that wages are the result of a capitalist conspiracy against workers, or that employers have the power to set wages at whatever level they wish, you are left with a theory that is unable to explain the real world. An overwhelming majority of the workforce works in jobs that pay more than minimum wage, and which are not unionized, yet they do not earn subsistence wages. In fact, many of them are paid quite well. The view that workers are persistently at the mercy of employers is inconsistent with a glance at the real world.

Once you can answer the question of why greedy employers persistently pay workers more than a subsistence wage, and why employees' incomes display such a huge variance, you have a theory of wages. The model we use in economics is Supply and Demand, and it is theoretically and empirically robust. Is there a competing model that can explain the data as well? If there is, I'm not aware of it.

Wednesday, January 23, 2008

More on the Election

One of my wife's friends asked her about my views on the economy and the election. I've already talked about the specific candidates, but I thought it might be worthwhile to give a general overview of the election from an economist's perspective.

I suspect that most economists find political campaigns frustrating. After all, a politician's goal is to get elected. Politicians that do things that don't get them elected disappear; it's like natural selection. The problem is the that the things that get them elected might not be honest or desirable. Politicians have an incentive to do and say whatever will get them into office--after all, voters are likely to forget most of what was said during the campaign anyway. Most economists that I know don't enjoy listening to political debates, because they tend to turn into a list of bad ideas.

Big Spending
For example, it always behooves a politician to promise large benefits while underplaying or ignoring costs. Remember Bush's Medicare Prescription Drug Benefit? It is outrageously expensive--an aspect that Bush did not play up while campaigning. Or consider all the candidates' promises to "invest in alternative energy". Given the government's disastrous corn ethanol policy, you can bet that additional government "investment" in alternative energy will be expensive and won't get us much, but there's very little cost in talking big. Consider, on the other hand, a candidate who said something like "I don't think government programs of this sort will tend to work out well, so I'd rather not spend the money and resources on it." Nobody wants to hear that, and such a candidate would lose out to a candidate who made big, expensive promises.

Ignorance of Economics
A related problem is that politicians and voters don't really know economics, so politicians propose policies that sound good to the untrained, but these policies are probably not actually good ideas. Most of the health reform proposals have this problem--they don't deal with the fact that people who get free health care will use it profligately, driving up costs (and if there is some form of rationing to keep costs under control, then health care isn't really free or unlimited). There is no free lunch in health care or any other area. There are certainly gains to be had from reforming health care sensibly (look at a previous post on Singapore's system), but we're not likely to get anything sensible out of our political process.

As another example, consider the proposals going around for fiscal stimulus packages. Many economists are rightfully skeptical of these, for three reasons. First, the Federal Reserve is probably better equipped to make timely and effective changes in monetary policy to direct the course of the economy. Congress, by comparison, takes months too get anything done, and doesn't really know enough about fiscal policy to get it right. Second, congressmen have strong incentives to create a bill that directs billions of dollars of pork to their home districts and campaign contributors, rather than a simple stimulus bill that gets money directly into the hands of people who will spend it. Third, it's not even clear that such a stimulus package would do anything, even if well-designed. People might simply put the money in savings, in anticipation of the future taxes that we will inevitably have to pay to finance our borrowing.

A third example: We often hear politicians propose stricter CAFE standards, rather than a higher gasoline tax, even though a higher gasoline tax makes a lot of sense, and CAFE standards make very little sense, economically speaking. Or consider the War on Drugs; economists tend to take a skeptical view of it, but politicians can't get enough of it. Is supply reduction--attacking sellers and distributors--really the best way to deal with drug addiction? There is pretty strong evidence that it is not.

A fourth example: People like agricultural subsidies. They tend to believe that without them, there would be no farmers, and no food. This is, of course, ridiculous--there are no chair subsidies, or computer subsidies, or towel subsidies, but we have plenty of chairs, computers, and towels. Since voters and farmers like agricultural subsidies, politicians provide them.

Meanwhile, many genuine problems--overfishing, for example--get ignored, because they're not sexy.

Federalism
Politicians at the national level quite naturally try to make everything a national issue. Have a problem with a local landfill? Federal regulation must be the answer. Want to have your local neighborhood signage replaced? Apply for a federal grant. Are your local schools of insufficient quality? A few hundred pages of federal regulation should fix that.

Rarely will a politician say "That sounds like something that should be dealt with by your local government, not the federal government." The problem with this is that, to some extent, local governments are competing with each other. Local governments that provide combinations laws and services that people like will attract voters (and tax revenue) to them. Local governments that are poorly run will lose residents. This provides a constraint on how badly a local government can be run. Moving policies from the local level to the federal level reduces this competition, and reduces diversity (in the sense that local differences in law and policy tend to disappear, replaced by federal law and policy). Instead we get "one-size-fits-all" policy as dictated by the federal government, and it's more difficult to "vote with our feet" at the national level than at the local level (changing countries is something most of us will not consider).

Foreign Trade and Immigration
Illegal immigrants and foreign competition are hot-button topics this year. Politicians are eager to sound tough on illegal immigration, when in fact the evidence suggests that, for the most part, illegal immigrants don't have much affect on us at all--their impact on wages is negligible, their impact on prices of good and services is beneficial to us, and the costs that they impose on us in the form of net government services consumed is very small. Combine this with the fact that, as a fraction of the population, immigration (legal and otherwise) is not even all that high, and it's a lot of fuss over nothing.

People are also upset about loss of jobs foreign workers. An in-depth discussion of this topic would take a while (you might listen to the recent Econtalk with Don Boudreaux if you're really curious; it is in part about trade and trade deficits, and it is aimed at a layman audience). I will, however, ask a few questions that you should ponder. Suppose that the source of job loss was not "China" but rather a new piece of technology. Would you be just as upset? Or would you recognize that the new technology frees workers up to do something more valuable? Suppose that jobs were lost not to China but rather to a neighboring state in the U.S. Would you be just as upset, and therefore propose that trade between your states be prohibited? Or would you recognize that if a good can be produced more efficiently in, say, Georgia, your state actually is actually better off as a result of being able to get these goods cheaply, and produce something else instead (for the exact same reason that you quite wisely do not try to produce all goods and services for yourself--you'd be poorer if you tried)?

Trade is an area in which people's natural xenophobia and paranoia seem to override their senses.

We Have Met the Enemy and He Is Us
I'm being too hard on politicians. They're being rationally self-interested, just as we are in so much of our lives. It's unfair to expect politicians to be selfless angels. They're just responding to the incentives that face them. In a sense, the voters are the real problem--the politicians are just telling us what we want to hear. The truth is, we want to be told that health care can be free and unlimited, that foreigners are to blame for our problems, that corporations can be forced to clean up with no cost or behavior change required from us, and that the federal government will solve all our problems. I've mentioned Bryan Caplan's Myth of the Rational Voter too many times in past blog entries, but it really has changed the way that I see politics. We're going to be stuck with bad politicians and bad policies so long as we've got biased, economically illiterate voters--that is, we're likely to be stuck with them forever.

Monday, January 14, 2008

More on Singapore's Healthcare

Check this out from Ghesquiere's Singapore's Success, via Bryan Caplan's blog. The system seems to work even better than I previously thought.

Monday, January 07, 2008

Some Thoughts on the Candidates

I haven't been following the 2008 presidential campaign too closely for two reasons:
1) Most of the coverage is empty horse-race stuff. Who's winning, who's losing--not discussion of issues.
2) The discussion of issues that does take place is mostly grandstanding empty statements, or statements of extreme stupidity.

I have nonetheless managed to form a few preferences. Here are my views so far in no particular order.

Republicans:
Giuliani: This man is crazy. I 'm not sure he's qualified to head the executive branch, and his inability to speak coherently about anything except 9/11 doesn't help. He sounds like a dangerous shoot-first-ask-questions-later sort.

McCain: I cannot forgive McCain's disregard for the First Amendment. His campaign finance reform trampled it, while accomplishing nothing. He is also far too willing to involve the government in foreign affairs. The government is simply too blunt an instrument to conduct the delicate surgery that would be necessary to improve the world by force and cajoling. I'm not saying that doing so is impossible, merely unlikely, and dangerous to try. It would also be possible for the government to make the country a better place by banning specific kinds of speech, but I don't think it's likely, and giving the government that kind of power would result in all sorts of unpleasant results.

Huckabee: Wants a national smoking ban. Wanted to lock up people with AIDS. His religious rhetoric worries me, too--social conservatism makes me nervous.

Mitt Romney: This guy is too slick. I just can't buy anything he says. It doesn't help that he and the Republicans listed above aren't really saying anything I like. I suppose personality shouldn't matter, but given that I'm not likely to agree on the issues with anyone who gets elected, I would at least prefer that I not think of the worst stereotype of a used car salesman every time I see the president on television.

Fred Thompson: Why is this guy in the race again? He doesn't seem to have anything unique to offer.

Ron Paul: Oh, Ron Paul. Why must you torture me? You say most of the right things about limited government and foreign policy, but then you rabildy rant against immigrants or obsess about monetary policy. Monetary policy is one of the least of our concerns; the post-depression era has seen the best economy in U.S. history, and the past twenty-five years have been remarkably stable (meaning that recessions have been relatively mild and short). I can live with this monetary policy. I could also live with Paul's monetary beliefs (after all, many brilliant economists have advocated commodity standard--not necessarily gold), but then he starts talking about this North American Union silliness (It's not going to happen; Americans are too xenophobic/nationalist/jingoistic). And now this. Paul is potentially a racist homophobe. Hopefully this story will turn out to be false. (As an aside, I'm not convinced the bit about secessionism is really a knock against Paul, nor is an association with Thomas DiLorenzo. Clearly there is no excusing genuine racism, however.) He also recently said that he does not believe in the theory of evolution. While this does not really disqualify him from being president (and to his credit, he said he didn't think the issue really had anything to do with being president), I must admit it does make me think slightly less of him--I can't help it, I'm a big fan of science and not a big fan of superstition. If only Ron Paul would stick to the basics of greatly reducing the role of government--legalize drugs, end foreign intervention, eliminate many government agencies, eliminate price controls and corporate subsidies--I would feel comfortable with him. Despite all this, Ron Paul still probably comes the closest to my own set of policy positions. I just don't know if I can vote for him.

Democrats:
Hillary Clinton:
She strikes me as an ordinary politician. I don't think I agree with her on many things, and I really don't enjoy listening to her speak. She gives me the same fakey vibe that Romney does.

Barack Obama:
Obama is interesting to me. Among all the candidates, he and Ron Paul are the only ones that I can listen to for more than thirty seconds at a time without getting irritated. He certainly has a gift for speaking without sounding like a politician. I'm not a big fan of his positions regarding free trade and making labor markets less competitive by giving labor unions more legal advantages. On the other hand, he did correctly point out a mistake made by Bill Richardson during a debate. Richardson said that he didn't support pollution taxes because they would be passed on to consumers, making goods and services more expensive, so he favored a tradeable pollution permit system instead ("cap and trade"). Obama made the exactly correct point that a tradeable pollution permit system also raises prices to consumers, for exactly the same reasons that pollution taxes do so. But he said that it's worth it. Now I don't agree with him that the money raised should be spent on government-funded research in alternative energies (simply raising the price of pollution to the right level will take care of that on its own), but he displayed a level of economic knowledge that was encouraging. Now if only he could read up on the economics of trade and competitive labor markets, he might be an attractive candidate to me.

John Edwards: I really don't like this guy. His entire campaign is based on the idea that corporations are greedy and bad. As I've said before, that view is far too simplistic, and it leads to bad policy. Corporations do bad things when the incentives encourage them to do so. They'll pollute, overfish, overgraze, and take your money in the form of subsidies. On the other hand, you likely do the same thing, by driving your car, buying fish that weren't sustainably harvested, eating beef that might be from South America, and collecting government benefits. I wouldn't call you evil for doing so, and I don't think it's fair to call corporations evil, either. After all, corporations produce the things we want, including the drugs that treat Edwards's wife for cancer. That doesn't make them good, either. It makes them a tool to be used. Policy has to be designed to make sure the tool gets used properly--to make sure the incentives are right. There are solutions to these problems: pollution taxes or tradeable permits, enforcing property rights in fisheries and rain forests, and eliminating agricultural subsidies (and other business subsidies). These solutions require careful thought, not outraged ranting.

Are the Libertarians running anyone this time? If the candidate isn't a nut, maybe I'll vote for him or her. Or maybe I'll just sit this one out.

UPDATE: The New Republic story on Ron Paul is out, and it doesn't look good for him.