What I Love about Economics

I’m not an expert in economics, but the subject comes up here at the Spherical Model pretty regularly, since the Economic Sphere is one of the three overlaying spheres. I did take basic econ in college, and I read a fair amount. That seems to have done me more good that Alexandria Ocasio-Cortez’s degree in the field. One thing I know is that economics is inextricably connected to politics and culture.

As economist Ludwig von Mises said,

One of the indispensable prerequisites of a master of economics is a perfect knowledge of history, the history of ideas and of civilization, and of social, economic, and political history. To know one field well, one must also know other fields.—Ludwig von Mises, in Shawn Ritenour, ed. The Mises Reader, p. 22 , quoted from John Chamberlain, “My Years with Ludwig von Mises,” The Freeman 27, no. 2 (February 1977): 126–27.

Looks like we even agree on the three spheres: political, economic, and social.

I’ve been a follower of Mises economics, usually called Austrian economics, for a while. [Mises.org is a good source.] I’m also a follower of the Chicago school, of Milton Friedman—and eventually bringing around Thomas Sowell. To an expert there’s probably a lot of difference, but to me they’re both about free-market economic principles. I think Mises is possibly more theoretical—the philosophy behind the policy—while Friedman is more about implementation: based on these free-market principles, what policy will work best in this situation?

The Mises Reader cover

Anyway, I’ve just started reading The Mises Reader, a collection of Mises’s shorter and more accessible works, as well as excerpts from his major works, edited by Shawn Ritenour. Even the introduction has been rich with quotes. I thought I’d share a few, to offer a taste of how Mises thought—making us wish there were more thinkers like him today. The first several are quotes about him, by Ritenour. Then there are some of Mises’s own words.

This may not seem like much of a Valentine’s Day post, but, being who I am, a truth seeker, I love words like these. Enjoy.

The work of Ludwig von Mises is an important guide for thoughtful citizens because he strongly, yet matter-of-factly sets forth economics as the pursuit of truth. Not the truth of the passing fancy, nor the so-called “small t-truth” that is always in danger of being refuted by the latest bit of empirical data; but economic truth that will stand for all ages.—Shawn Ritenour, ed., The Mises Reader, Introduction, p. 15.

This is what happens when intellectuals, teachers, and college professors see themselves as destroyers instead of cultivators. If we want to preserve our noble cultural inheritance, we cannot think that it will happen automatically. It is always easier to destroy than to maintain and build up. If civilization is not to descend into barbarism, we must teach each generation the importance of truth, liberty, and private property. It is not called culture for nothing. We must cultivate civilization.—Shawn Ritenour, ed. The Mises Reader,  p. 12-13, Introduction

Today people are increasingly urged to support this or that political program advertised as solving a vexing social problem with no understanding of economics and hence no frame of reference from which to evaluate different policies. All that is mustered in justification for interventionism are feelings that make people want to “do something.” The economics of Mises is the crucial antidote for the current interventionist ideology supporting the progressive march to economic fascism. Citizens acquainted with Mises quickly understand that any sort of middle-of-the-road economic policy does indeed lead to socialism.—Shawn Ritenour, ed., The Mises Reader, Introduction, p. 21.

An economy that has taken advantage of an extensive division of labor is very complex and yet, decentralized. Such an economy features a multitude of different markets in which the participants must coordinate their activities if we want to avoid recessions and depressions. The biggest problem for this decentralized economy to work is that all of the various producers have to know what to produce, how much to produce, and how to produce it. This can only be done if some method of calculation exists. No other economist of his day stressed this point more than Mises. Indeed in the 1920s Mises demonstrated that the lack of economic calculation is the Achilles heel of socialism.—Shawn Ritenour, ed., The Mises Reader, p. 18.

Mises recognizes that what makes such comparisons even harder is that we all value goods subjectively, according to our personal preferences. We cannot, therefore, measure value because there are no objective units of value measurement. Again it was Mises who demonstrated that voluntary exchange in a monetary economy opens the door to a solution. In a monetary economy, every good is exchanged against money, so every price is expressed in terms of the monetary unit—in our case dollars and cents. Even though value is subjective, in a free market, people manifest their values by voluntarily deciding what they will pay for particular products and services. These objective prices, therefore, are reflections of subjective values. Entrepreneurs are able to use these objective prices to calculate expected profit and loss and act accordingly. In a free market, Mises shows, entrepreneurs are able to plan for the future and consumers will receive what they most want.

Socialism, on the other hand, is doomed because there is no way for the central planner to efficiently allocate factors of production because there is no way to calculate profit and loss. In a completely socialistic economy all of the means of production are owned by the state. There is, therefore, no actual exchange of goods, and hence no actual prices that reflect the actual subjective values of human beings. Producers, then, have no way to calculate whether their actions are productive or wasteful from the point of view of society. What is called a planned economy is, instead, as Mises so eloquently put it, “groping about in the dark.”—Shawn Ritenour, ed., The Mises Reader, pp. 18-19.

 

Ludwig von Mises
image from Wikipedia

A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings. To stress this point is the task of economics as it is the task of biology and chemistry to teach that potassium cyanide is not a nutriment but a deadly poison.—Ludwig von Mises, in Shawn Ritenour, ed., The Mises Reader, p. 20, quoted from Mises, Human Action, p. 676.

One may try to justify [social security] by declaring that the wage earners lack the insight and the moral strength to provide spontaneously for their own future. But then it is not easy to silence the voices of those who ask whether it is not paradoxical to entrust the nation’s welfare to the decisions of voters whom the law itself considers incapable of managing their own affairs.—Ludwig von Mises, in Shawn Ritenour, ed., The Mises Reader, p. 21, quoted from Mises, Human Action, p. 613.

I was sometimes accused of representing my viewpoint in a manner too abrupt and intransigent. It was also claimed that I could have accomplished more had I displayed a greater willingness to compromise.... When I look back at my work… my only regret is my willingness to compromise, and not my intransigence.—Ludwig von Mises, in Shawn Ritenour, ed., The Mises Reader, pp. 22-23, quoted from Mises, Memoirs, p. 60.

Economics Schools of Thought

We had family filling the house for Thanksgiving, and that meant time for some conversation about economics with son Economic Sphere. I was wondering about the economics degree of the new, apparently clueless, socialist congresswoman from New York, Alexandria Ocasio-Cortez. Her degree is in economics, and it was my understanding that most notable economics departments had changed in the past few of decades toward free market, and away from Keynesianism. But she seems economically unaware (if I am being kind).

I got this explanation—not recorded, so any errors are mine and not my son’s. Anyway, Economic Sphere said that there are two types of economics programs: those focused on macroeconomics, and those focused on microeconomics. The macroeconomics ones use Keynesian models—despite their being wrong nigh unto 100% of the time. If the model says there will be a particular outcome, they act as though that is the outcome, even after it isn’t, even though sensible people can show why it would never be the outcome.

The ones focused on microeconomics go with free market economic principles. For some reason, they’re more aligned with what actually happens. They’re less willing to interfere, to try to wield power over the economy to get a particular outcome, such as by enforcing pricing, but will instead let the market set prices.

I asked another question, about the difference between the Chicago school (way of thinking) and the Austrian school, since both are free market.

What I got was some basic review. So I thought it might be useful to define a few terms today, and the reasons we prefer what we do--i.e., freedom instead of government interference. While Economic Sphere tends to be a walking encyclopedia, and his answers filter through my explanations below, I've also turned to Wikipedia fairly liberally.

Keynesian Economics

Keynesians, according to my old Webster, “hold that full employment and a stable economy depend on the continued governmental stimulation of spending and investment through adjustment of interest rates and tax rates, deficit financing, etc.” In other words, a healthy economy requires government intervention.

According to Wikipedia,

Keynesian economists generally argue that, as aggregate demand is volatile and unstable, a market economy will often experience inefficient macroeconomic outcomes in the form of economic recessions (when demand is low) and inflation (when demand is high). These can be mitigated by economic policy responses, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, which can help stabilize output over the business cycle. Keynesian economists generally advocate a managed market economy – predominantly private sector, but with an active role for government intervention during recessions and depressions.

One of the first lesson I was taught in a basic econ class, by a free-market economist, was that intervention lags. Legislators—or other officials—look at the current situation, decide it isn’t what they’d like it to be, so they set in motion a policy to change it, that takes about six months, by which time the original situation has changed, and most likely the intervention causes new problems.

Supposedly, the Federal Reserve is there to mitigate and smooth out the damage of cyclical market recessions. What we had before that was occasional volatility. What we’ve had since is occasional volatility plus more regular cyclical recessions. Are the problems all caused by the interventions? We don’t know. And you can’t prove a negative; we don’t have a parallel universe to compare to. But we do know it didn’t do what it set out to do.

Macroeconomics

Macroeconomics is described here by Wikipedia:

Macroeconomics (from the Greek prefix makro- meaning "large" + economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies.

Macroeconomists study aggregated indicators such as GDP, unemployment rates, national income, price indices, and the interrelations among the different sectors of the economy to better understand how the whole economy functions. They also develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade, and international finance.

While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income).

So, macroeconomic models—such as those developed by Keynes—are used by governments to develop policies. But, like I said, interference doesn’t work the way their models say they will. Our Spherical Model saying fits here again: 

Whenever government attempts something beyond the proper role of government (protection of life, liberty, and property), it causes unintended consequences—usually exactly opposite to the stated goals of the interference.

Microeconomics

By comparison, here’s the smaller story of microeconomics, also according to Wikipedia:

Microeconomics (from Greek prefix mikro- meaning "small" + economics) is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.

One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations. It also analyzes market failure, where markets fail to produce efficient results.

Microeconomics stands in contrast to macroeconomics, which involves "the sum total of economic activity, dealing with the issues of growth, inflation, and unemployment and with national policies relating to these issues". Microeconomics also deals with the effects of economic policies (such as changing taxation levels) on the aforementioned aspects of the economy.

In short, microeconomics is what a business would do to figure out how to price a product, and whether to produce the product, based on the price. How well businesses do in predicting price, and allocating limited resources, determines the health of the overall economy. Government interference makes that decision-making process more challenging, adding in tax burdens and other punishments or incentives that distort the actual value of a product.

Free-Market Economics

I looked up both free enterprise and free market in the dictionary.

Free enterprise is “the economic doctrine or practice of permitting private industry to operate under freely competitive conditions with a minimum of governmental control.”

Free market is “any market where buying and selling can be carried on without restrictions as to price, etc.”

So these terms relate mainly to microeconomics. But they are affected by macroeconomic policies, which alter money supply, pricing, taxes, and allocation of resources, distorting information that normally leads to sound pricing and/or production decisions.

I also asked Economic Sphere what is the difference between the Chicago school of economics (i.e., a school of thought, or a set of ideas adhered to by various people—not a physical school) and Austrian, or Mises economics, because they’re both free market. Economic Sphere said the Austrian school of economics is theoretical. It’s about principles and ideas related to the free market. The Chicago school of economics is about policy: how to implement policies as close to the free market as we can get in an imperfect political world.

So, the Austrians tend to be libertarians? I guessed. And he said that was right. Here’s a bit more on those terms.

Austrian School of Economics

I usually hear about the Austrians through the Ludwig von Mises Institute. The originals showed up in Vienna in the late 1800s to early 1900s, although they are all over the world today.

According to Wikipedia,

Among the theoretical contributions of the early years of the Austrian School are the subjective theory of value, marginalism in price theory and the formulation of the economic calculation problem, each of which has become an accepted part of mainstream economics.

Since the mid-20th century, mainstream economists have been critical of the modern day Austrian School and consider its rejection of mathematical modelling, econometrics and macroeconomic analysis to be outside mainstream economics, or "heterodox." Although the Austrian School has been considered heterodox since the late 1930s, it attracted renewed interest in the 1970s after Friedrich Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences and following the 2008 global financial crisis.

I’m assuming that “mainstream economists” from mid-century on refers to Keynesians in this context. Interference was all the rage from about 1910 onward. Keynes and Friedrich Hayek were contemporaries, and Hayek does a good job of refuting the pro-controlled economists with real life. The controllers love their models, and they can’t be bothered with things like real-life evidence and facts.

If Hayek hasn’t been on your reading list, his Road to Serfdom is a must read. Hayek qualifies as an Austrian, but he is also of the Chicago school, because of his influence there. Here’s how Wikipedia describes his contribution:

Friedrich Hayek
image from Wikipedia

Friedrich Hayek (1899–1992) Hayek made contact with many at the University of Chicago in the 1940s, with Hayek's The Road to Serfdom playing a seminal role in transforming how Milton Friedman and others understood how society works. Hayek conducted a number of influential faculty seminars while at the U. of Chicago, and a number of academics worked on research projects sympathetic to some of Hayek's own, such as Aaron Director, who was active in the Chicago School in helping to fund and establish what became the "Law and Society" program in the University of Chicago Law School. Hayek, Frank Knight, Friedman and George Stigler worked together in forming the Mont Pèlerin Society, an international forum for libertarian economists. Hayek and Friedman cooperated in support of the Intercollegiate Society of Individualists, later renamed the Intercollegiate Studies Institute, an American student organisation devoted to libertarian ideas.

Chicago School of Economics

This school of thought got its name because of the work of a number of neoclassical economists on the faculty at the University of Chicago, producing twelve Nobel laureates in economics.

They rejected Keynesianism, and looked at a variety of other ideas for macroeconomics—that is, policy ideas. They’re a little harder to pin down, but in general are trying to apply free market principles to national policy. Bruce Kaufman, in The Elgar Companion to the Chicago School of Economics (2010) says they are characterized by:

A deep commitment to rigorous scholarship and open academic debate, an uncompromising belief in the usefulness and insight of neoclassical price theory, and a normative position that favors and promotes economic liberalism and free markets (p. 133).

The great economist Thomas Sowell studied at the University of Chicago for his PhD—and remained a Marxist throughout. It was later, when real life woke him, that he transformed into a free-market economist.

Milton Friedman
image from Wikipedia

The Chicago name I know best is Milton Friedman, who was at the University of Chicago for some thirty years. According to Wikipedia, again:

Milton Friedman (1912–2006) stands as one of the most influential economists of the late twentieth century. A student of Frank Knight, he was awarded the Nobel Prize in Economics in 1976 for, among other things, A Monetary History of the United States (1963). Friedman argued that the Great Depression had been caused by the Federal Reserve's policies through the 1920s, and worsened in the 1930s. Friedman argued that laissez-faire government policy is more desirable than government intervention in the economy.

One of the critics of the Chicago school, economist and three-term Democrat senator Paul Douglas, complained that, “The opinions of my colleagues would have confined government to the eighteenth-century functions of justice, police, and arms.”

That doesn’t seem like a valid criticism to me; it seems like something to appreciate—limiting government to its proper role. What a concept!

We could summarize today’s economics lesson with this Friedman quote:

One of the great mistakes is to judge policies and programs by their intentions rather than their results.— Milton Friedman Interview with Richard Heffner on The Open Mind (7 December 1975)

Security Limits Opportunity

Real life is an untidy, somewhat chaotic thing. And economics is part of real life.

For example, we’re a couple of weeks since the passage of the Tax Cuts and Jobs Act. In the wake of that, many companies have offered bonuses to the employees and other investments in the business. Among them, Walmart this week announced raising their starting wage to $11 an hour, which is more than $3 above the national minimum wage.

No law was required to force them to do this. The free market did it. Entry workers are in short supply, so much so that they need to offer more money to entice the workers of the level they want. That’s a good thing for every entry-level worker willing to do the work Walmart wants done.

One of the Sam's Club locations closed in Houston
image from KHOU

But then, this morning, without prior warning, the Walmart corporation closed about 100 Sam’s Club 

locations across the country. Sam’s Club, if you’re not familiar, is the big box store branch of Walmart. It requires a membership fee, and quantities and sizes of products tend to be large. But prices are typically better than you can get elsewhere. Three of these closed stores were in and near Houston.

When I heard the news, I immediately went to the internet to find out if our nearby store was among them, and breathed a sigh of relief. The closed ones are far away enough that I’ve never been to them.

But employees weren’t even given a heads up. The announcement apparently went out overnight. The company explains,

After a thorough review of our existing portfolio, we’ve decided to close a series of clubs and better align our locations with our strategy. Closing clubs is never easy and we’re committed to working with impacted members and associates through this transition.

The suddenness seems harsh. But employees will get pay for next 60 days and are eligible to apply for transfers to other Sam’s Club locations or Walmart stores.

If you see the sudden upheaval that these employees face —the untidy chaos—as a problem that needs to be solved, you might forget that the free market solves this “problem” better than government or any other way.

In France there are guarantees that you can’t lose your job for life. That’s security. But there are steep costs for that, in money and freedom. I met an exchange student during recent travels. She was studying here to avoid, or postpone, some requirements from her high school in France. She was expected, by age 16, to have decided on her life’s work. From that point on, all education and opportunities would be limited to that decision—assuming she qualified for her choice. She would have a job waiting for her after graduation, but no opportunity to change her career once she realized, at age 19 or 23, that what she loved at 16 didn’t still interest her or fit who she grew up to be.

That kind of limitation might work for people who are raised from birth to believe job security is everything, and choice and flexibility are overrated. But here in America, that kind of control over life choices bristles with tyranny. And we won’t stand for it.

Does that mean we don’t care about workers at Sam’s Club who just lost their jobs? Of course we care. But the solution is in the market. We know—and it’s also evidenced by Walmart’s raise in wages—that there’s something of a shortage of workers right now (at last). So those workers will be in demand elsewhere.

It’s a general rule of thumb that, the lower the pay rate, the quicker a worker can find a job. Over a certain level, you add a month of searching for every $10,000 in annual pay. Except for management, most of the laid off workers are in the under $20,000 a year range; that means they’re very likely to find new work within the two months of their severance pay. If they get work very quickly with a different company, that severance is actually a bonus.

Lack of control, and that sense of insecurity, may feel uncomfortable while you’re in a moment of upheaval. But this is America, where opportunities abound when government gets out of the way. There’s always a good chance that change will lead to something better. There’s a reason we still talk about the American Dream.

Economic Principles for Volatile Times

Monday we woke up to a sharp 1000-point decline in the stock market, which recovered to down only 500 by the end of the day. But still startling. What caused it? And what does it mean for the future?

Monday's stock market drop, chart from here.

It has something to do with China’s economy, but also a lot to do with American economic policy.

China’s growth has concerned world markets over the past quarter century. But growth—real growth—has to be related to actual creation of wealth. Wealth represents the accumulation of the results of labor. If it doesn’t represent real wealth, but is an illusion caused by printing money, manipulating money supply, then it’s bound to lead to an eventual comeuppance. That has been coming for a while.

Here’s a summary, by Greg Lewis at American Thinker, of what’s been going on there:

The Chinese economy, fueled by state-funded credit and money-printing, has enabled the size of the Chinese stock market to rise to dangerously overblown levels more than 50 times higher than they were only two decades ago….

China’s extraordinary stock bubble has been enabled by some of the most perverse practices ever perpetrated on this planet. Among other things, in order to prevent shareholders from selling their stocks to avoid the losses that it’s clear are inevitable, Chinese authorities have threatened to send police and paddy wagons around to arrest citizens who dare to sell off their investments.

Since the turn of the century, China has been on a state-credit-funded manufacturing spree that has caused the demand for commodities to spike to levels never before seen….

What does China have to show for it? Hundreds of ghost cities, filled with enormous skyscrapers, housing projects, and sports stadiums, along with superhighways to nowhere. They now stand virtually unoccupied and unused…. The problem is that what China has built will produce no lasting return to sustain its economy, and the resulting bust will also cause severe contractions in commodity prices and U.S. and global suppliers’ earnings.

China’s 10 percent annual growth rate over the past three decades is turning out to be nothing less than one of the great frauds in global economic history. …

China is an example on a large scale of the failure of central planning, the failure of tyranny to lead to prosperity.

What is worrisome is how closely our formerly free economy has been following the Chinese model. Lewis adds this:

When you couple China’s unimaginably large and corrupt fiat economy with the fact that the United States has been following the Chinese model on a smaller scale since the crash of 2008, you have the makings of financial disaster. Indeed, in the name of bailing out the big banks involved in the 2008 financial meltdown, our own ignorant Keynesian economics poobahs have engaged in the same fiat currency printing as the Chinese. In addition, in maintaining interest rates at or near zero percent for the past half decade plus, the Fed has stolen upwards of $1 trillion in interest people should have collected on their savings over that time. In the wake of the current turmoil, the Fed is once again backing off raising interest rates.

I don’t know if the blip that happened this week portends huge disaster in the near term or not. But we do know that economic principles are about as inexorable as gravity. Anything government does that interferes with a free economy will increase the pain to come.

Back in 1988, Murray Rothbard wrote a piece refuting the contemporary economists about the causes and cures of the 1987 stock market crash. The Mises Institute shared that piece again this week. Rothbard lists nine myths about that crash and what should have been done—and shows why they’re myths, and what is the truth. The assumptions of the mostly Keynesian (liberal, progressive, central planning) economists was that fine tuning control over money supply, inflation, trade, taxes, and government spending would make things right. They just had to stumble upon the right mix of policy. But here’s the summary point:

The important point about a recession is for the government not to interfere, not to inflate, not to regulate, and to allow the recession to work its curative way as quickly as possible. Interfering with the recession, either by inflating or regulating, can only prolong the recession and make it worse, as in the 1930s. And yet the pundits, the economists of all schools, the politicians of both parties, rush heedless into the agreed-upon policies of: Inflate, and Regulate.

That is the main point of books like Meltdown, by Thomas Woods, which examines the 2008 crash, and The Forgotten Man, by Amity Shlaes, which examines the Great Depression of the 1930s. In addition, the “forgotten depression” of 1921 shows us by contrast what happens when government refrains from interfering. In that stock market crash, President Warren G. Harding refrained from interfering, and let the market correct itself, which happened within a few months. Calvin Coolidge continued the non-interference policies through the 1920s. And it wasn’t that naturally growing successful market that led to the 1929 crash: that was government interference. That crash was actually caused by federal easy money policy (exaggeratedly low interest rates). And the crash didn’t cause the Great Depression. The stock market was well on its way to correcting itself in a quarter year—until the Fed interfered with suddenly tight money. And then Hoover, followed by Roosevelt, tinkered with the market one way after another, keeping the market from returning to prosperity for more than a decade.

In 2012, economist John B. Taylor gave the Manhattan Institute’s Eighth Annual Hayek lecture, “The Policy Is the Problem.” In that lecture he does two things: he defines economic freedom, and then lists the known principles.

What I mean [by economic freedom] is the situation where individuals, families decide what to buy, what to produce—they decide where they will work, they decide how they're going to help other people. But they do this within a framework. It's kind of the American vision, if you like. And that framework involves five things: 1) predictable policy, 2) rule of law, 3) a reliance on markets, which generates 4) good incentives, and 5) a limited role of government.

What we’re looking at this week, and forward, is the result of the Obama experiment in interference. Policy has been unpredictable—changing, added regulations, applied according to crony capitalism rather than predictable law. Markets have been viewed as a measure of unfairness—success means some unfairness to the bottom, rather than entrepreneurial energy. Regulations have been discouraging and the opposite of good incentives. And monetary policy has continued extraordinarily ow interest rates, leaving nowhere to go when a correction is needed.

Capital—literal as well as social respect from other countries—built up over the first couple of centuries has been spent in this socialist experiment under Obama. The market has no chance of returning to growth and prosperity until the interference stops.

As for Monday’s stock market drop, correction depends on whether this government tries to do something about it. They’re already doing enough harm. Could they do more? There seems to be no limit to the bad policies they will try.

The 2008 drop could have corrected quickly with restraint from government. The current Great Recession (sometimes referred to as the historically slowest recovery) is lasting because of government policy. So we’re already down. But I’m sure they could manage to cause us to drop from the current plateau to an even lower one.

Drops naturally correct; it’s a parabola. They naturally bounce back up if allowed to correct. But then there's the trampoline effect—if they interfere, they keep the bounce back up from happening.

Outlawing Entry Level Jobs

Socialists love minimum wage laws. It will lift millions of Americans out of poverty, off welfare, and into the buying public, they say.

protests for $15 minimum in Seattle

But they are starting with several false assumptions:

·         Employers are greedy, and that is the only reason they don’t pay workers more out of their evil profits.

·         People earning minimum wage can expect to remain on minimum wage indefinitely.

·         People earning minimum wage are heads of households, finding it impossible to pay for their family’s rent, food, and everything from that wage.

·         Raising the minimum wage can lift people out of poverty.

Except, all of the assumptions are wrong.

Employers set wages based on the market value of the work—how much the worker brings in to the company, and how easy it is for the employer to find workers willing to do the work. When work is worth more, the employer either pays more, or finds it difficult to get and keep decent employees.

Minimum wage workers can almost always expect a raise within six month, or at most a year, based on their being a good employee and gaining experience. It’s hard to imagine anyone expecting to work hard, either part or full time, for minimum wage year after year, expecting never to get a raise. You’d leave, with the experience under your belt, and go get a better job.

People earning minimum wage are generally getting their first job, or their first job in a long time (such as mothers re-entering the work force after being a stay-at-home mom). They likely prefer part-time work. They are likely to be teenagers getting their first job, at a time when they have little experience to offer an employer, and still live with their parents, or possibly with roommates. They likely don’t have a high school diploma, although they may be a high school or college student.

A full 81% of minimum wage workers are not heads of households. If someone is earning minimum wage and trying to support a family, they have bigger problems than any minimum wage job can solve. And they probably already get aid for housing and food. Forcing employers to pay them—and all other unqualified workers—more than they are worth doesn’t solve their lack of earning capacity.

There’s an easy logic problem you can go through with pro-minimum wage people—if you could get them to participate in logic. When they were asking for $8 (which wasn’t that long ago, and still the case in most parts of the country), you would say, “Why not $10?” And they’d probably say, “Great idea.” And then you say, “Why not $15?” which is what they’re saying now, so presumably they’d say that was only fair. So then you say, “Why not $20?” Good chance they’ll say, “Even better.” And then you raise the stakes “Why not $50, or $100?” Then they get irritated and condescending, because everybody knows that’s too high. So you ask why it’s too high, and you probably get, “Because those jobs aren’t worth it,” compared to more skilled workers that don’t even make that much. Or, “No one’s going to pay that much for a burger server,” or floor sweeper, or busboy, or dishwasher—whatever the low-skilled job may be.

There’s a point at which pretty much anyone knows, intuitively, that the low-skilled work isn’t worth the high wage. The problem is that they don’t recognize any current entry-level wage as fair and adequate—because they don’t like to think about the value of the work being offered.

What is the best way to earn above minimum wage? Get experience and skills that make you worth more to your employer than minimum wage. How do you get experience and skills? Training and education, for a start, but also work experience. Even with training, an employer is likely to want an experienced worker if he has to pay a higher wage.

Without government interference, wages could be a matter of the free market. We think “full employment” now is 4-5%, but that is because the minimum wage prevents hiring workers at lower rates, so those worth less than minimum remain unemployed. If lowering unemployment were the goal, it could be lowered under 2%—and consist pretty much of those temporarily between jobs—if the market were actually free.

But wouldn’t it be wrong to pay someone even less than minimum? Wouldn’t that be practically indentured servitude? That’s the argument. But, say you’re a 15-year-old trying to get a little spending money, to maybe save up for college, or an eventual car or other purchases? Is it better to get paid $5 an hour while gaining experience, which might lead to higher wages later—or to make nothing and gain no experience?

Minimum wages—ruled unconstitutional until the late 1930s under FDR—are literally outlawing any jobs worth less to an employer than the government-set minimum.

It is a maxim here at the Spherical Model, that any time government tries to do something beyond the limited powers granted in the Constitution, there will be negative unintended consequences, and they will usually be exactly opposite of the intended purpose of the government interference.

So how is this playing out?

Seattle, which is in process of implementing a $15/hour minimum wage, is finding there are unintended consequences (which of course they were warned about by free-market economists).

Head-of-household minimum wage workers didn’t find that $15 was enough to actually pull them out of poverty. While they were making less, they received government subsidized housing and food aid. Higher wages put them at risk of no longer qualifying for help. So they started asking their bosses for fewer hours, to avoid a drop in living standard.

So it hasn’t been good for those actually receiving the increased wage. And it hasn’t been an improvement for employers or customers either. Restaurants have closed at higher than normal rates. Some employers have claimed that wages made up more than 50% of operating costs; the higher required minimum meant no profit, no reason to stay in business.

Some restaurants have increased prices by 15%, trying to pass along the minimum wage increase to customers. But there’s a natural effect to higher prices: fewer customers. They’ve also found that customers pass along the higher costs by paying lower tips. It has turned out that dishwashers have come out better than table servers.

Self-serve kiosk at Jack-in-the-Box

There are more restaurants using automated ordering, so they can get by with fewer employees. That might be a reasonable response—but it means fewer jobs. Government can’t just impose a price find that the law of supply and demand won’t be in play.

One thing is certain: if you don’t get your first job, and the experience that comes with it, you don’t get your second job. If you haven’t magically built up your skill and experience to be worth $15 the first time you get hired, the government is saying it is against the law for you to work.

Employment is an agreement between two people: employer and worker. If the arrangement is agreeable to both, what business does government have inserting itself between them? While we watch Seattle, and LA, and other places, experiment with the higher minimum wage, how about we have another area where minimum wages are eliminated? Let’s see, over a decade or two, which place is better at lifting millions out of poverty.

Meeting a Freedom Fighter

This past Saturday we had a special speaker at our local tea party meeting. It was Rev. Rafael Cruz, father of Senator Ted Cruz. It’s the second time I’ve heard him in person, but this time was a smaller group, with more time. He’s a confident speaker, able to go on for an hour or two without notes. And he does probably a hundred or so such speeches a year.

Rev. Rafael Cruz
photo from Cypress Texas Tea Party

Rev. Cruz loves freedom. He was born in Cuba, but he makes sure you know he’s not a Cuban-American; he’s an American born in Cuba. As I recall his story, he escaped from Cuba during the early Castro regime, with $100 sewn into his clothes, and nothing else. But America is the land of the free, and he was able to prosper here, and set up circumstances for his son to get even more education and success.

He tells his son (I’ve heard Ted Cruz repeat this) that he had America to flee to; if we lose our freedoms here, where would we have to go?

He’s a strong defender of the Constitution, and structured his talk on the part of the Declaration of Independence about protecting life, liberty, and the pursuit of happiness—pointing out that the order of those three things is the priority. Life has to come first—and he points out the most vulnerable are at the beginning and ending of life. Liberty is necessary, or else you’re a slave. There’s no guarantee of happiness, only a guarantee of the freedom to work for it, to pursue it in the way we choose.

As a pastor, it’s not surprising that he recognizes we live in a unique place—founded on the word of God, founded by religious people, seeking to live the word of God.

He’s a huge supporter of his son, which is understandable. He started with an anecdote following Senator Cruz’s election. Chris Wallace had asked him something like, “Are you going to Washington to join the club?” And Cruz answered, “No. I’m going to kick down the door, tear down the curtains, and auction off the silverware.”

He told some interesting background about his son’s growing up that I hadn’t heard. As Ted was entering high school, he was introduced to a leader of the American Enterprise Institute who got him reading classics. From there, Ted, in a group of five, formed what was called the Constitution Club. They memorized the Constitution. They toured the state, doing Rotary Club lunches and other forums. They would write the Constitution on several blackboards while people were eating. Then they would give speeches on free market economics.

A young Ted Cruz gave some 80 such speeches during his high school years. That had to be excellent preparation for later speaking before the US Supreme Court on behalf of the state of Texas while he was solicitor general.

I can’t think of a better high school preparation for someone serving this country. By raise of hand, how many of our elected officials have ever memorized the Constitution? Even the Preamble (we had our homeschoolers memorize it). Can they explain free market economics at least as well as Ted Cruz could in high school? That ought to be a requirement—if we could quantify it somehow as a standard.

During the Q&A I got to ask about the senator’s possible presidential ambitions. Just the night before I’d read something about the formation of a SuperPAC, which is often viewed as an exploratory preparation for running. Rev. Cruz said that the SuperPAC was formed in order to help a number of people in last November’s election, so that was its purpose and timing. However, he did acknowledge that many people have asked Senator Cruz about his willingness to run, and he says the Senator is spending some time seriously considering, and praying and discussing with family, whether he should run. And we can expect a decision one way or another in the next 30-60 days.

I got this button at the Texas GOP Convention last June,
just in case I need it someday

Over the weekend possible candidate Governor Rick Perry impolitely pointed out that we’ve tried a first-term senator without executive experience, and that hasn’t worked out so well. Ouch! Personally, I normally prefer governors, who have executive experience. I’m interested in learning more about Gov. Bobby Jindal of Louisiana, and Gov. Scott Walker of Michigan. There may be others. Gov. Perry isn’t my favorite, but he’s light years ahead of what we’ve been experiencing. Gov. Jeb Bush has disqualified himself by supporting Common Core and amnesty; that makes him a “progressive,” which would appeal to Democrats, except for the Bush name. So he’s pretty much unsupportable for either party. That’s of course why the media claims he leads the polls.

I’ve liked a lot of Gov. Christie’s better moments, but I’m concerned that at heart he’s not fully conservative, but so far I haven’t written him off; I’m just not rooting for him. I have similar feelings about Senator Marco Rubio—who lacks the executive experience as well, and has some explaining to do about his immigration reform ideas (which have sounded like amnesty), but I’m willing to give him a listen, since he’s been good on many other issues. Senator Rand Paul has a lot to recommend him, especially on economics. But, while he’s not his father, his foreign policy is too isolationist for a world this dangerous, so I’m concerned but haven’t written him off.

But Ted Cruz—he lives and breathes the principles of the Constitution. The Constitution leads to freedom, prosperity, and civilization—every time it’s tried. We need someone willing to try it. We can’t afford any “compromise” that just sinks us slowly into tyranny. We need restoration of the brilliant American experiment in limited government.

While I’m satisfied with Senator Cruz as my Senator, I also recognize he has a backbone and ability to articulate truth in ways we are much in need of. As for previous experience, he has served in significant positions and done them well. No floating along voting “present” and agitating community organizations. Perry’s implied comparison of Cruz and Obama is pretty ridiculous. They are polar opposites.

I’m in favor of as strong a contrast as we can get with Clinton (or the Clinton-like alternative, if such a thing should materialize), who misspent her youth immersing herself with Marx and Alinsky.

But, speculation about presidential candidates is more of a sport than a solution. Rev. Cruz pointed out that what really matters is what happens when we leave that room. Do we share our ideas with others? Do we become precinct chairs (yes—as a matter of fact, our little tea party group has worked toward that goal pretty successfully the past couple of years; I am one)? Do we run for city council and school board? We need conservative Constitutionalists at every position from the bottom to the top. And every one of us needs to speak louder and let our representatives know what we expect of them as our employees.

So much to do! It’s a blessing we have a clear voice like Rev. Cruz inspiring and encouraging us.

Predictions

It’s the time of year for making predictions. I don’t happen to be good at that sort of thing. I don’t know who will be running for president. I don’t know what edict the president is going to make next, claiming such executive orders are within his constitutional authority. I don’t know how various judges are going to vote on redefining marriage.

So I’m going to do something easier: an if/then exercise. We know, based on principle, that anything the government takes on, for whatever “good intentions,” will cause harm—and most likely will create the exact opposite of the stated goal. I can safely predict that, if an idea is actually a good one but is outside the proper role of government, then government will make things worse rather than better. If an idea is worth doing, then the free market is much more likely to bring about the desired ends.

So here’s the list.

 

Families would benefit from giving dads (in addition to moms) parental leave upon the birth of a new baby.

Government Way: Makes a law requiring all employers to provide paid parental leave for at least one month for any dad whose wife/partner has just given birth.

Result: Businesses hesitate to hire married men whose wives are in child-bearing years. Businesses remove other benefits from employees, in order to pay for this new requirement without going in the red. Businesses will hesitate to promote or increase pay for any man who is likely to (or has taken) paid family leave. Businesses will reflect failure to reach goals during time off in performance reviews.

Many European countries do offer lengthy paid parental leave to fathers and mothers. It looks so civilized. But several things play out in those countries: high unemployment, lack of advancement for employees, and shockingly low birth rates.

Free Market Way: Businesses who want to attract and maintain the best employees consider whether offering parental leave would help. They will consider what works best for the employer and the employee. They may come up with a variety of alternatives, which might include varying lengths of parental leave, or combining work at home with work at the office during new baby times.

Result: The employer can actually offer caring for the individual employee, instead of simply being coerced to follow a one-size-fits-all government plan. The employer feels supported by the employer and is more likely to respond with hard effort to meet the employer’s goals. The employer and employee agree on the importance of family, and families are likely to be stronger—and larger. 

Employees Should Be Paid a Living Wage

Government Way: Makes a law requiring businesses to pay at least a minimum wage—for example, $10 an hour—for every employee, regardless of the value the worker brings to the business.

Result: Businesses will only hire employees who can and do contribute the minimum wage cost (which is actually high for the employer, with taxes, benefits such as health care, and management costs). Anyone who has too little experience or ability will remain unemployed. Young people who do not need a living wage, but need some income and experience, will lack previously available opportunities. Young, inexperienced, and part-time workers will be most hurt. Businesses will be less likely to risk starting businesses in areas where low-experience workers are plentiful—so unemployment will be particularly high in places where the most vulnerable live. The costs to produce goods are higher, so the cost to purchase is higher, nullifying the higher minimum wage being earned by the lowest skilled employees. So, if they have income, it doesn’t go as far.

Free Market Way: Businesses make individual agreements with individual workers, based on the work the employer wants done and the worker’s abilities. No employer is forced to pay more than the work is worth. No employee is forced to do work for less than he agrees to be paid.

Result: Businesses attract the best workers by willingly paying them what they’re worth. Less experienced workers start out working at a lower wage, but as they gain experience, their pay increases. Employers are willing to take a chance on less experienced workers, because the cost of employment is lower. Unemployment decreases—possibly down to near zero, which is prevented by current minimum wage laws. Inexperienced workers have a starting place from which they can move up. There is more flexibility for employers and employees. Costs to produce goods are more in line with what the market will bear, without artificially high costs, so money earned goes further. 

Everyone Ought to Receive Affordable Health Care

Government Way: Implements a complex and unworkable scheme to force all people to buy health insurance prescribed by government, regardless of what individuals want and need and can afford. Many unwanted details are hidden within the law—i.e., higher taxes on home sales, health clinics in schools that work against parental desires or permission, pressure to force states to set up exchanges to enable the boondoggle. It is insisted this is not a tax when being forced through Congress; it is held up as a tax, in order to pretend it is constitutional, when brought before the Supreme Court.

Result: While this is ineptly named the Affordable Care Act, it is more expensive for almost all Americans, essentially just as many remain uninsured as previously, and many who previously had health insurance and doctors they liked are deprived of those options. Health insurance is mistaken for care, and both health insurance and health care are made less affordable.

Free Market Way: It is recognized that separation from free market has led to higher prices. So free market alternatives begin to appear: health care savings accounts, health care cooperatives, lower prices for direct cash payments, major medical-only insurance, insurance across state lines and portable when changing employers. Low interest payment plans might be allowed, depending on credit histories and other factors. Hospitals coordinate with charities to help those with overwhelming costs.

Result: Individual needs are met with individual options. Competition and connection between patient and payment increase attention to cost, keeping costs naturally lower, and—as happens in free markets—innovation leads to greater services at lower costs

The list could go on. If you want a clean environment, keep government out of it, or you’ll get a dirtier environment. If you want a colorblind society, stop letting government favor certain races. If you want a good education for every child, get government out of the business of controlling education from afar.

There are specific roles for government, always related to protecting life, liberty, and property. Government has been so inept in so many things, we may not trust them even with the essentials, but there is a proper role for government. However, anything beyond that proper role and government will create negative consequences, regardless of possibly positive intentions.

So I predict greater freedom, prosperity, and civilization wherever government is limited to its proper role. I predict movement toward tyranny, poverty, and savagery whenever government steps in to “fix” some perceived problem. Every time.

Playing Monopoly

As a game, Monopoly can be a good (or long) several hours of family fun. We have fond memories of playing it when son Political Sphere was close to age five, still most of a year before kindergarten, and he had figured out how to make change and volunteered to be the banker. I know; I’m sort of bragging. But, really, there was a lot of entertainment value in having smart kids.

In that game the goal is to get more and more property, so you can command the highest prices possible and eventually force everyone else to go bankrupt. It has a 1930s Depression feel about it.

So, I’m looking at a similar goal this week, watching one of the largest three oil drilling equipment companies buy out another of the top three.

Negotiations have apparently been going on for a while, but news leaked last Thursday about the possible buyout of Baker-Hughes by Halliburton. Halliburton was already very big at number 2 worldwide. Baker-Hughes was probably third largest, but combined with Halliburton, they eclipse the size of number 1 Schlumberger (a French company, pronounced here in Texas something like Shlum-ber-zhay).

This morning the news came out that the deal was going through. Halliburton is paying around $34.6 billion for their fellow American company, along with some stock payments for employees. Last Friday stock prices were up a bit for both companies. Today, Halliburton is down 10 points and Baker-Hughes is up 10 points. I don’t know what that means, other than stock watchers think the price was good for Baker-Hughes and probably higher than Halliburton had wanted to pay. As far as I can tell, nothing illegal has taken place. Anti-trust examinations are still to come.

So that’s the free market at work, right? Only partly. Free enterprise is not actually a game of monopoly, in which the players have a goal or getting all the market share and putting all their competitors out of business. After all, competition keeps prices down for consumers and encourages innovation.

But competitors are kind of pesky for big businesses. And that’s why there have always been efforts to get governments to regulate in ways that give an advantage to the bigger, more established businesses, making market entry more difficult—thus limiting competition.

It was just a few days ago that I quoted economist Milton Friedman saying:

[Businesses] aren’t promoting free enterprise when they ask for handouts and regulations and controls to avoid competition.

The two greatest enemies of free society are intellectuals and businessmen—for opposite reasons. Intellectuals want freedom for themselves but no one else. Businessmen want free enterprise for everyone else, but special consideration for themselves.

I don’t have any data showing particular favors either Halliburton or Baker-Hughes has been involved in. I’m not a hater of either company just because of size. But I am puzzled—as a lover of free enterprise and civilization—with the monopoly game playing of big business in general. Why would it be a goal to grow endlessly? Why isn’t there a perfect size for any particular organization? Is bigger necessarily better?

The companies seem to see benefits from the merger. But there are concerns. One of the things that tend to happen following mergers is that shifting and settling occurs. Where there are redundancies, the acquired company employers are the ones likely to be let go. So it’s hard for regular people to understand what the CEO means when he announces that they always put the employer and shareholder interests first.

Baker-Hughes had been having a good year. Halliburton has as well. Both were facing an industry with lower oil prices right now, because OPEC saw the need to flood the market, in the face of growing supply out of North Dakota and Texas, to discourage further drilling. But OPEC can only drop prices for so long without harming themselves. As long as drilling is happening anywhere in the world, both of these big companies were there making money. So, it wasn’t any great need on the part of Baker-Hughes that led them to enter into the negotiations in the first place.

In general, in a free market, businesses ought to be free to hire and let go employees as they see fit. But, because success of free market is intertwined with living the laws of civilization, there should be some concern for the individual employees as well. If that perspective is lost because a company gets too big, loses sight of people and culture, and focuses only on bottom line growth, then that company might be too big.

Should government have a role in making things safer/better for employees in such a merger? It’s tempting to say yes. The employees have been hard working and loyal, and the company is failing to be loyal in return. Shouldn’t we, the people, see to it that employees aren’t taken care of as we think would be fair?

Yes and no. This situation isn’t very different from people who think we, the people, ought to force companies to pay a minimum wage. The outcome of forcing a particular contract between employer and employee is the failure to enter into a contract that doesn’t benefit both parties. So what happens is that unemployment goes up, and those who could be getting experience while earning low hourly wages are left unemployed. Our interference harms rather than helps, despite our good intentions.

So, what would be nice is that these big corporations, when they face redundancies, they think less about numbers and more about people. They could consider a longer severance package, for example.

The experienced cynics among us might ask, What if we know those companies just won’t do it; shouldn’t they be forced to give a longer severance package? Wouldn’t that at least make them think differently about the balance between keeping and laying off any particular employee?

I don’t know. It looks good, to voice the intentions this way. But what we need is a world in which the company leaders actually think about culture, loyalty, and human factors as a higher priority to short-term numbers. We need them to be more civilized. Without the heartfelt movement toward civilization, there will always be unintended consequences, probably opposite of what we want to have happen.

Freedom, prosperity, and civilization are tied together. You don’t get actual long-term prosperity without laws that allow as much freedom as possible, and without people who choose to live civilized lives. So the best outcome to pray for, after a big upheaval for thousands of people, such as this merger is about to cause—is for the hearts of more and more people, preferably those in leadership positions where policy decisions are made, to be turned toward accomplishing human good, and trusting that will lead to greater prosperity.