The Paradox of Centralized Regulatory Review
One counteractive observation made in the paper A Note on the centralized regulatory review (1984) is to centralize the review of regulation; to a single government bureau. Most libertarians would take issue with consolidating political power into one entity. However, as Miller, Shughart, and Tollison, explains centralization may benefit the private interests that oppose the implementation of the regulation. As befuddling as this suggestion may seem, this impacts the transaction costs of opposing government action.
“…In contrast, centralized oversight enables diffuse interests to focus their lobbying against rent-creating regulation on one location rather than splitting those efforts among a variety of regulatory agencies. In effect, centralization sums the individual welfare losses created by the regulatory bodies subject to its jurisdiction. When one considers the prevalence of regulatory intervention in the economy, the overall cost to diffuse is likely to be quite substantial. Summing the individual welfare losses from rulemaking activities that create rents raises the rate of return to lobbying against such regulation. Accordingly, more opposition will be forthcoming. (p.86-87)..”
While this may incur more costs for the lobbyist who pray upon the concept of “…concentrated benefits and dispersed costs..”, reciprocally, this would reduce the costs for private parties (grassroots coalitions of average citizens) looking to defeat the pending legislation.
“…In consequence, centralization will result in more speeches being made against rent- creating rulemaking, more articles written on the subject of regulatory reform, more letters and telephone calls to Congress from concerned consumers, more campaign contributions to politicians advocating deregulation in the economic area (and more and improved regulation in the social area), more consumer lobbying groups being formed, and so forth. The argument we have presented applies to any situation in which rent-seeking opportunities exist within a decentralized administrative framework. Centralization alters the relative rates of return to lobbying for various coalitions, generally in favor of groups having diffuse interests…” (p.87).
The “…diffused interests…” referred to by Miller, Shughart, and Tollison would be the coalitions of regular voters. Potentially, rallying against divisive “wedge issues” such as the Second Amendment or Abortion. Usually, grassroots political movements will not have the capital to petition multiple bureaus the way entrenched interest groups (lobbyists) influence government action. The centralization may seem like an institutional drive to expand the scope of government, but it may have the opposite effect on lobbying. Realigning the incentives of grassroots activities by reducing the costs of devoting resources towards political action.
Bootleggers & Baptists: LXIII- Walmart Raises Wages
Walmart has decided to raise its starting wage to $14 per hour. This seems contrary to conventional wisdom, as firms strive to minimize labor costs. Walmart may appear to be the proverbial white knight in this scenario. By the end of 2023, less than ten states will have minimum wage requirements that exceed Walmarts starting wage. In the context of a Bootleggers and Baptist (1983), is Walmart the Baptist? Is Walmart meeting Progressive politicians and the American public (51 % support a $15/hr. minimum wage) halfway? By offering slightly less than what the left-wing populists want, are they providing voluntary compromise?
Not so fast. On a superficial level, Progressive politicians would be the Baptists for championing the moral concern of the quality of life experienced by low-skill workers. It is important to note that their normative position does not account for the potential negative consequences of raising the minimum wage. Walmart is most likely not enacting this new corporate policy out of the kindness of its own heart. It is important to remember the insights made by Adam Smith (the butcher, the baker, and the brewer) in The Wealth of Nations (1776), business is not charity, Walmart executives need to act in the interests of the firm to survive in the marketplace. Walmart might be upping wages to retain employees, which would be the best-case scenario.
However, there may be a more oblique strategy the firm is circuitously implementing. This is purely speculative and not a conspiratorial claim. The following statements are merely conjecture. If a firm seeks to reduce labor costs; why would the company voluntarily increase wages? Indirectly, such a policy could assist in reducing labor costs. How? Through urging companies to automate operations. The St. Louis Federal Reserve even notes; when the minimum wage increases, the greater the potential for worker displacement.
Per the St. Louis Fed:
“… Increasing the minimum wage is a controversial issue. Although a higher minimum wage can provide higher income for low-wage workers, it can also reduce the number of job opportunities for those workers. Some of the reduction in jobs occurs because a higher minimum wage increases production costs, causing firms to shift away from, or stop, production of some goods…”
While the public would be disgusted by this realization, reviling such business tactics ignores the role of incentives in decision-making. If you were a Walmart executive, you would take the same measures to reduce operational costs.
Prisoner’s Dilemmas-XIX: Labor Negotiations & Strikes
For now, President Biden was able to pump the breaks on the railroad strikes. Biden appointed arbitrators to negotiate mutually agreeable recommended revisions to the current labor contracts. This action kept “..115,000 rail workers on the job..” and narrowly side-stepped work stoppages from occurring on Monday (July 18th). In a time of preexisting supply-chain constraints, labor disputes would only exacerbate matters (the best real example would be the situation in the UK).
The dynamics of organized labor have a long history of being contentious, and striking is their secret weapon in gaining leverage at the collective bargaining table. If a policy does not contour to union interests, the relationship between the government and the labor movement devolves into a standoff. Since both factions have competing goals, this negotiation process is a Prisoner’s Dilemma. Lawmakers tailored policies to the preferences of the majority (union members only make up 13% of the US labor force). Also, in the anti-union camp, management possesses a fiduciary responsibility to enforce policies that are advantageous for the firm.
These sets of incentives are opposed to the interests of the unions. Organized labor aims for higher wages, better benefits, more safety measures, and other generous forms of compensating differential. These new desired measures may be more costly for the firm or adversely impact consumers with higher prices or a lower grade of customer service (inefficiency). The demands of the labor unions tend to concentrate the benefits and impose costs on the rest of the economy. Even in sectors that are only tangentially connected to the industry where the workers are on the brink of striking. When their proposals are ignored or rules they dislike come into play, they defect by halting production and picketing.
How neither party can reach a consensus generates Pareto-inefficient outcomes; should be self-evident. Because employers and policymakers might not want to cooperate or even meet the unions in the middle, they are defecting. In turn, the unions initiate strikes which create product scarcity, production bottlenecks, and higher prices. The ripple effects of the lack of agreement will hurt every economic actor in the market.
Bootleggers & Baptists- LV-Gun Control
***Special thanks to Dylan, proprietor of the Onlookers blog! He pointed out a few typos and the necessary edits have been made.
Check out his blog (Click Here).
Few issues in the current political scene are as divisive as the Second Amendment; as articulated in the SCOTUS case District of Columbia v. Heller (2008), an individual right. Anytime a mass shooting occurs or restrictions are purposed, gun rights advocates tend to double down. After all, regulating firearms is a prisoner’s dilemma in which neither side of the aisle is interested in making any concessions. Prima facie, it does seem that guns have become increasingly regulated over the years. Potentially vindicating the slippery slope logic expressed by Second Amendment proponents. The fear of prohibitively strict gun regulations or outright bans weighs on the minds of gun owners. A point substantiated by the fact that 59 % of polled gun owners indicated that gun control advocates desire to outlaw private ownership of firearms. Many gun enthusiasts view this right as sacrosanct and a vital component of living in a free society.
How do the reactionary sentiments of slow and grinding decline to an outright gun grab correlate with patterns in gun sales? There does seem to be a connection between precipitating events and increases in transactions related to procuring firearms (including background checks). Analogous to how macroeconomic events impact trading on the stock market, the prospect of regulation after events such as mass shootings results in abnormally high gun sales. For example, gun sales in California soared by 168 % between 1996-2015. 50 % of all mass shootings within the past 50 years transpired after 2000. 20 % of the mass shootings in this timeframe occurred within the past five years.
Gun control proposals; are often formulated in the wake of a mass shooting; there does seem to be at least a superficial correlation between mass shootings, gun control proposals, and gun sales. But, are politicians and political activists concerned with decreasing the number of guns in the hands of the citizenry shooting themselves in the foot? It is inherently human for people to purchase large quantities of a commodity facing a ban. A clear example of this was before JFK enacted the Cuban Trade Embargo; he stocked up on his favorite brand of Cuban cigars. It isn’t outlandish to believe that gun owners would seek to stock up on accessories, ammunition, and firearms after a mass killing or the announcement of gun control legislation. In effect, this would encourage people to obtain more guns. Rendering the bluster of tough-on-guns rhetoric to being counterproductive. Unwittingly, when politicians like Beto O’Rourke are telling us that he is coming after our AR-15s he’s saying “.. Everyone run to the gun shop now!..”. O’Rourke is blinded by political gamesmanship; he overlooks that his firebrand comments have only created a cobra effect; people panic and buy more guns.
If progressive politicians are inadvertently increasing the number of guns owned by the American public, who benefits from gun-grab-mania? Gun store owners. In applying the logic of Bruce Yandle’s Bootleggers and Baptists (1983) model, it becomes clear that gun control advocates are indirectly helping the proprietors of gun stores. By sending all of their patrons into a frenzy, the moral arguments of the anti-gun crowd end up drumming up more business for gun vendors. While neither party is intentionally working together and does not even share the same goals, they have a synergistic relationship. Beto is waving the flag of the gun shops without even knowing it.
Bootleggers & Baptists: XLV- Baptists, Economists, Careers, & QE
What is Quantitative Easing?
Quantitative easing (QE) is the controversial and unconventional monetary policy tool first introduced in the United States in 2008 [1]; as a countermeasure to the Great Recession. The practice of Quantitative easing (QE) is where a central bank purchases long-term government securities, corporate bonds, mortgage-backed securities, and other assets from banking institutions with newly created money. The ultimate goal is to boost the money supply encouraging lending in a sluggish economy by lowering interest rates. The Federal Reserve’s strategies for managing interest rates are divided into pre and post-financial crisis eras. Before 2008 how the Federal Reserve maintained interest rates were different (operating under a corridor system). Per the New York Federal Reserve:
Before October 2008, the Federal Open Market Committee (FOMC) communicated the stance of monetary policy by announcing a target for the federal funds rate. The Fed would then use open market operations to make small adjustments to the supply of reserves so that the effective federal funds rate (EFFR) would print close to the target set by the FOMC. This type of implementation regime that relies on reserve scarcity is often referred to as a corridor system (as explained in this article). Under this framework, depository institutions, or banks, were incentivized to hold as few reserves as possible since they did not earn interest on their Fed account balances. Reserve balances that banks held in their Fed accounts added up to a very small amount, as can be seen in the next chart. The banking system operated with aggregate reserve scarcity and relied on the redistribution of reserves in an active interbank market.
Amid a phase of quantitative easing, the Federal Reserve injects massive quantities of money into the economy through large-scale asset purchases on the open market, increasing the risk of interest rates becoming too low. In the post-crisis, the Fed has opted to implement a Floor System, where the central bank pays interest on excess reserves (IOER) for funds held by member banks at the Feder Reserve beyond the mandate reserve requirements. Procedurally assists with stabilizing the interest rate (Fed funds rate) even when the Fed pumps vast amounts of liquidity into the economy. The excess money held by Fed-associated financial institutions acts like an interest rate floor; through paying on IOERs the opportunity cost of holding money is eliminated. Effectively, maintaining the target interest rate. The Fed’s convoluted attempt to skirt the Law of Supply and Demand, the Federal Reserve, nothing more than an attempt to have its cake-and-it-too (avoiding a liquidity trap and concurrently stimulating the loans market).
The Baptists and Economists of QE:
The monetary establishment expresses that QE is a necessary and effective policy instrument. The promoting of this interventionist policy has created fertile ground for Bootlegger and Baptists (1983) coalition dynamics. Much of this pro-QE sentiment is perpetuated by the research of Federal Reserve economists. It is hard to pinpoint clear Baptists in the pro-QE coalition, several parties that benefit from defending the practice.
In some instances, politicians who champion QE could be viewed as Baptists, arguing for it as means of stabilizing the economy. However, politicians stand to benefit from the unorthodox monetary policy in the form of Fiscal QE (coined by George Selgin), directing the money created through QE to non-macro-economic objectives (e.g. funding the Green New Deal through QE). There is the potential of politicians assuming the role of “pure” Bootleggers and Dual Role Actors. But while QE could be used to “achieve” macro stability (full employment, etc.) and other extraneous policy goals, it operates as a double-edged sword. It is important to note that the inflation rate is a metric that matters to the voting public. Inflation has become a focal point in political discourse and is politicized (p.129-163) [2]. The next logical possibility for Baptists would-be journalists. However, their position on QE is “mixed”. Some outlets like to diagram the pros and cons, others are outright hostile, and some echo the positive sentiments acting as a mouthpiece for the Fed.
There is one faction in the QE advocacy coalition that unquestionably fits the definition of Bootleggers, the economists employed by the Federal Reserve. In the book Money and the Rule of Law (2021) Boettke, Salter, and Smith detail the numerous incentive problems facing Federal Reserve officials armed with “constrained digression” (CH 3; p.58-94). Pollical pressures asides; there are other reasons why favoring QE would be appealing (p.67-70), but also substantial internal pressures as well. The authors expound upon the impact of “bureaucratic inertia” on the central banks; like any other center of governance, there is a bias towards maintaining the status quo (p.64). After approximately fourteen years and four rounds of QE, the policy has become normalized. Initially, QE was an aberration in American monetary policy [3]. Favoring QE in 2022 is an example of institutional inertia, but not during QE1 (2008).
However, the obtuse and obstinate inflexibility of the sluggish nature of the Fed is far from the most troubling rationale for unwaveringly defending QE. That would manifest itself in the form of promotion opportunities. We need to consider that the Federal Reserve is one of the largest employers of economists in the United States (p.64), urging researchers to conform to internal norms of the Fed. (p.65). One paper that beautifully describes the incentives of the career concerns of Federal Reserve economists was Fifty Shades of QE: Comparing Findings of Central Bankers and Academics (2020; revised 2021). In their NBER paper, Fabo, Oková, Kempf, & Pástor found that central bankers are more likely to describe QE in sanguine terms in their research when compared to unaffiliated academics (p.15). Fabo et al. found that there was some evidence that:
“…One possible mechanism is career concerns. In principle, bank management could make promotion decisions in a way that encourages bank employees to assess the bank’s policies favorably… (p.18).
“… We find that the interaction between the effect on output and Seniority is positive and significant. A one standard deviation increase in Seniority raises the sensitivity of career outcomes to the estimated effect on output by about 50%… (p.21).
“..These could involve concerns about the bank’s reputation and, for very senior researchers, concerns about their reputation. Like career concerns, reputation concerns reflect researchers’ incentives because in both cases, a researcher derives a private benefit from reaching a particular research outcome. We have no evidence on the potential contribution of reputation concerns to our results…” (p.25).
We must not interpret this correlation between the promotion of senior economists and research validating the “positive” effects of QE as these actors intentionally manipulate the results. In the absence of sufficient evidence; making such an assessment is made in bad faith, but there is most likely a third variable connecting these outcomes. For example, Fabo et al. describe the potential of economics who end up working for the Fed having priors that make them more apt to favor interventionist monetary policy (p.4 & 25). They even explore the possibility of researchers inadvertently selecting modeling techniques that would make QE appear to be more effective (p.2 & 17).
Footnotes:
- The initial introduction of quantitative easing in the US in 2008 was dubbed QE1. In March 2020, the US Federal Reserve initiated its fourth round of QE (QE4).
- In Boom-and-Bust Banking (2012) (ed. David Beckworth), Scott Sumner argues for adjusting monetary policy to NGDP targeting versus inflation targeting. A stance also advocated by David Beckworth. Sumner explains how inflation targeting is more politically appealing than a Nominal GDP target. After all, inflation is very salient, especially if you are old enough to remember stagflation. Side note, the author of this blog post was born in the late-1980s but is an avid fan of economic history.
- The policy of Quantitative easing developed in Japan in the early-2000’s and was subsequently implemented in the United States nearly a decade later.
The Folly of The Pilgrims
In commemoration of Thanksgiving, I am re-blogging my entry addressing my thoughts on the classic FEE essay Our First Thanksgiving (1959).
I sincerely encourage all of my regular visitors to read this classic essay published by the Foundation for Economic Education. It was originally published back in 1959, detailing the socialistic tendencies of the inhabitants of the Massachusetts Bay Colony. The essay explains how once the puritans did away with their collective system for allocating resources conditions began to improve.
The essay is entitled Our First Thanks Giving and it provides a unique history lesson regarding the holiday that has become in the modern-era a feast centered around football, food, beer and light conversation. However, it is important to never forget the struggles of the Pilgrims. The same system of resource distribution that failed the Pilgrims in the nascent years of the Massachusetts Colony is being proposed today. These policies are merely being presented in different packaging. Our puritan forefathers believed they could bring…
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The Biggest Blind Spot of Eliminating Qualified Immunity
The recent wave of states placing restrictions on the Qualified Immunity defense is a great triumph for civil liberties. Providing the average citizen with the ability to sue public “servants” is one measure that holds them accountable. It achieves this end by realigning the government employee’s incentives to avoid actions that violate the civil rights of ordinary citizens through the cost of personal financial loss. Placing stringent restrictions on and outright abolishing this legal doctrine is an effective tool in curtailing state power.
However, one consideration that few commentators have explored regarding ending qualified immunity is the source of funding for compensation. While various forms of indemnification may be effective in reforming government institutions (through decreasing the frequency of rights violations) the source of funding is still a point of concern. Why? Even if the sum paid out to the victim in damages is directly taken from the offending party’s salary (99.98% of the time it is paid through the general tax pool) is this truly compensation? This question is certainly an abstract one, however, It becomes quite necessary in terms of evaluating the restorative properties of indemnification. After all, even if damages are deducted from a public servant’s salary their income is funded by tax dollars. Depending on the extent of the damages the victim is merely receiving back the tax dollars they contributed to the tax pool. From a prima facie standpoint, most would perceive any compensation provided as having an equalizing effect. In a sense, all that is achieved is the victim is receiving the money they have paid to the government back, providing the cost of compensation is less than the individual’s net contributions in taxes. Since we need to consider other state-provided services utilized by the individual.
If the cost of the damages paid out to the victim were less than that of their overall contribution in taxes it could be viewed as being analogous to a refund. The product or service provided did not meet our expectations (because the public servant violated our rights), thus we are receiving a portion of our tax contributions back. Rebates, refunds, free products, and future discounts are all tactics utilized in the private sector to compensate for subpar customer service. However, many of the transgressions that bureaucrats, teachers, social workers, firemen, and police officers have perpetrated go far beyond poor customer service. Offenses have resulted in the loss of life, property, and freedom in some instances. Paralleling indemnification to a refund is rational, but morally inappropriate. Through making this comparison we are trivializing all of the deaths resulting from the misconduct and negligence of government employees.
It would be a mistake to ignore circumstances under which the victim receives compensation that far exceeds their contributions in taxes. Under such conditions, the refund argument for indemnification is completely invalid. In the scenario of a multi-million dollar settlement, clearly few citizens contribute such high amounts annually in taxes. In such a case, the victim’s compensation is subsidized by other taxpayers. Causing a lawsuit settlement directed towards a public sector employee to impose costs on innocent taxpayers. Whether the employee, the state, or local government pays the settlement it is still a burden to the taxpayer because they effectively fund all the mentioned sources of funding. Meaning that the compensation for the negligence of e.g.) a police officer, exerts external costs on innocent citizens. Effectively penalizing those with no responsibility for any of the abuses perpetrated by the offending police officer. Ultimately, the compensation is not equal to what the victim has contributed in taxes and the officer’s income is financed through tax dollars. A million-dollar lawsuit ends up not only be detrimental to the offending office and the police department, but also to the rest of the taxpayers within the community. These spillover effects are often dismissed due to the distributed nature of tax funding and various features of illusory fiscal policy.
Despite these issues, overall eliminating the defense of qualified immunity is a step in the right direction. Lacking this privilege may make employees of the public sector less cavalier in their conduct. Resulting in a lower frequency of actions that would constitute misconduct or negligence. However, depending on the magnitude of the damages experienced by the victim, the equalizing effect of indemnification is merely symbolic. It only nominally acts as a form of restitution, but it more accurately operates like a raincheck or refund provided by a restaurant manager than restorative justice. In the case of larger settlements, the refund analogy dissolves, but another problem creeps in. Now, innocent taxpayers are flipping the bill on the compensation, even though they are in no way responsible for inflicting damages on their fellow members of the community. Because of this spillover effect, no one can confidently say that even with qualified immunity off the table this will still result in optimal outcomes. One radical proposal to circumvent the pitfalls of publicly funded law enforcement services would be to privatize all policing, security, and contract enforcement services. In the event of a lawsuit, only the company and the offending agent are penalized. If other customers are disappointed because the lawsuit made their preferred service provider go bankrupt, there is always another option right around the corner.
Thier’s Law Applied to Human Capital
This blog entry was inspired by feedback from Enrique at the Prior Probability blog.
If Gresham’s Law applies to retain human capital in the job market, is it possible that Thier’s law (p.9) could also be applicable in certain contexts? On money, when legal tender laws forcing vendors to accept both forms of money at nominal value, economic agents will choose to transact with the higher valued currency. Presenting an axiom that is the opposite of Gresham’s Law, “ Good money drives out bad money”. Typically in the arena of monetary economics, the divide between advocates of Gresham’s Law and Thier’s Law is a sharply delineated dichotomy. Most proponents of one will not defend the possibility that the principle could apply to the circulation of money.
However, in terms of the circulation of human capital these concepts are not necessarily opposed. Employee retention is the byproduct of several highly qualitative attributes that are generally specific to a certain firm. In corporate vernacular, the term “culture” is thrown around so frequently that it has become a buzzword deeply embedded in the American psyche. Companies such as Google, go to great lengths to demonstrate that they have a flexible, open, and innovative corporate culture. The veracity of the claims is ultimately judged by the perceptions of the individual employees. One employee may adore working at Google, while their colleague completely despises the company’s ethos. Making the ebbs-and-flows of human capital even more complex. Employee retention at the individual level is based upon a multitude of various factors. The aggregated collection of the opinions of all the individual employees regarding their work-life satisfaction tends to paint a fuller picture. If while perusing Glassdoor, you happen to see a company with eighty-five two-star ratings, chances are this is not the petty slander of a few disgruntled employees. This is why oftentimes companies will periodically send out surveys to their employees in an attempt to measure overall morale throughout their organization.
Putting aside the highly individualized variable of career satisfaction metrics for an entire firm, if there is a pattern of talented employees leaving, there is a retention problem. Sometimes this may be isolated to a specific department even if the firm as a whole has no issues keeping competent and productive workers. Certain companies and even job roles select for specific attributes that may not be conducive to attracting skilled and reliable labor. Some industries are notorious for high turnover rates, one salient example being the hospitality industry. I remember a few years back, being in between jobs, so I briefly worked at a call-center. For me, this was an income stream until I found something else, for many of the people in my training class it was a lifelong career path. This path was a volatile one. Staying only a few months at one company and then abruptly quitting, generally with no notice. Upon receiving a new job offer, I gave my supervisor my two-week notice and he was astonished by the fact I even bothered to take this step. After only six months, only five people (including myself) out of the twenty-five in my training class remained. Industries and job roles with high turnover may be more willing to retain employees with fewer skills or with a poor performance history, due to the outflow of higher-skilled employees. Perfectly mirror the effect described in Thier’s law, instead of money, the commodity that is flowing out of the firms is quality human capital.
The question becomes how can these opposed ideas transpire concurrently in the same labor market or even the same company. The answer to this question is predicated upon a “rules of the game” type logic. Each company and each interior department within a firm operate as governing bodies directing the task of workers. Meaning both varying capacity function as “ruler-makers” within the company. Think of corporate policy as being analogous to the federal government, while the department formulated rules are similar to state law. Clearly, in most cases, corporate policy supersedes department policies. If these rules are too onerous or unjust there is little a qualified and skilled employee could other than leave. Either accept and abide by the rules set forth or resign. Resignation being a clear withdrawal of consent on the part of the employee. One relevant example of this is companies still drug testing for marijuana in states where it is legal. Granted, it is an organization’s prerogative to make employees refraining from drug use a contingency of employment. However, if enough high-caliber job candidates take to smoking cannabis they may be in a bit of a quandary. A few years back the FBI ran into this problem due to their “drug-free” employment policy.
If the rules governing the management of a firm are too oppressive, people with options are going to find another job opportunity. What the company is left with are those who lack the skills, ambition, and conscientiousness required for productivity. The employer is left with the staff that clings to their jobs for dear-life as odds are they do not carry too much value on the job market. Much how department policies such as catering to senior and skilled workers can impose an effect similar to Gresham’s Law the opposite is also true. If you create rules that disincentives tenure and self-development, odds are you will lose a lot of great workers. The kind of workers that can be a game-changer in managing strategic customers. As we have observed with the call-center example, frequently due to the oppressive rules, low pay, and dismal work environment people with potential tend to leave these positions. Leaving you with the unskilled and the desperate who are locked-in to the role due to their circumstances. Keeping this dynamic in mind, it is a wonder why people expect quality service whenever they call tech support.
The Fallacy of Raising the Minimum Wage
The renewed interest in raising the federal minimum wage is gaining steam as a hotly contested debate. Especially considering President Biden is inserting a $15 an hour minimum wage requirement in his latest Coronavirus relief bill. There are many proponents on both sides of the issue. Many advocates of a higher minimum wage claim the moral high ground on the issue, considering the rate has not kept up with inflation. Suggesting that raising it to $15 per hour would aid those working in low paid professions with being able to afford the bare necessities. Some even boldly advocating for a pricing floor of $24 per hour as being an adequate minimum wage.
However, is it economically sound to raise the minimum wage to even $15 per hour? Over the past couple of years, several papers have suggested so, but their interpretation of the data did suffer from some misconceptions. If we underwent an extremely rudimentary cost/benefit analysis of raising the pricing floor for labor we would see that it is a detrimental policy. A recent study found that raising it to $15 an hour would lift approximately 900,000 people out of poverty. As many advocates enthusiastically indicate as being evidence that this would be a good policy. Per the 2020 U.S. Census, it is estimated that 34 million people were living in poverty in 2019. Making 900,000 only a drop in the bucket in terms of battling the social issue of poverty. What the pro-raise the minimum wage camp neglects to inform us of that the same study they cite also estimates that 1.4 million people would also stand to lose their jobs! Making it reasonable to question whether raising the minimum wage would truly benefit the poor members of society.
The resurgence of the minimum wage debate mirrors the arguments for imposing pricing ceilings on in-demand goods during the beginning of the COVD-19 pandemic. Why? Because minimum wage laws and price gouging laws both operate as forms of price controls. Generally, these policies are implemented to insulate the consumer or work from “exploitation”. Either being paid inadequate wages or having to pay exorbitant prices for commodities during a time of crisis. However, prices are the key market signal that bridges the information asymmetries between consumer and supplier. Prices are contingent upon the supply of a product or service and the level of demand. Hinging on one of the most basic and universally known economic laws. Despite the good intentions of the activists pushing for an elevated minimum wage they are doing more harm than good. By mandating by law that the minimum wage needs to be at a certain dollar amount it immediately creates distortions in the labor market.
In an abstract sense, the worker is selling their time, services, and human capital when they agree to accept a job offer. In the job market, the corporations and small businesses looking for workers are the consumers. The job seekers are the ones supplying the labor. High wages alert prospective job seekers were the most lucrative job opportunities are which generally require less common skills. Directing the job seekers to make the appropriate investments in human capital. Implicitly detailing which degrees, certificate programs, and other forms of job training are required to stand out in the job market. Workers with little in the way of skills command a lower starting wage. Compensation is based on a worker’s productive output capacity. If a worker has few skills their productivity would be relatively lower from an economic standpoint. When the minimum wage is raised there is an imminent risk of displacing low-skill workers. If a fast-food worker is only producing $9 an hour worth of productive output and the minimum wage is raised to $15 an hour the business owner stands to take the loss. Then he may decide to cut corners and operate with fewer people, compromised product quality, or automatic the process. The threat of automation is real. Several studies have found that driving the price floor for labor up results in increased automation of operations. It is clear that the distortion of prices in the labor market could lead to displacing more low skill workers. The result being more low skill workers harmed than helped. Some income better than no income at all?
A Free-Market Approach to Wolf Restoration
Environmentalism and free-market economics have long been viewed as being adversarial. The very notion of combining these two ideas seem like nothing more than an oxymoron. This popularly perpetuated stereotype is echoed in the rhetoric of the Green New Deal. Why should conservation efforts not be guided by the signals of profit and loss mechanisms? Better yet, why should conservation efforts be insensitive to incentives and rely solely on legislative fiat and sanctions to enforce such initiatives? It is about time that environmentalism sheds its crunchy -granola image in exchange for more of a pragmatic approach. After all, conservation does entail conserving resources. Any economically conscious actor would consider the limitations on nonrenewable resources. Meaning that economic agents would strive for the more efficient use of resources of limited quantities. Efficient uses of resources tend to be rewarded in free-market economics. Ironically demonstrating how environmental conservation and free-market economics dovetails perfectly to one another.
One of the most notable leaders in market-based environmentalism has been PERC. Founded in Bozeman, Montana back in 1980 and has been committed to devising economically sound solutions to environmental issues. All the while, respecting private property rights. This research institute flips the conventional notion of environmentalism on its head. Seeking to pursue private solutions to environmental versus automatically resorting to legislation and regulation. One of Terry Anderson’s, a senior fellow at PERC, favorite examples of this was the story of Hank Fisher. A leader in the wolf restoration effort in the 1980s.
Fisher came to an epiphany in 1984, after meeting with a group of local ranchers in a schoolhouse in St, Anthony, Idaho. Fisher assembled the ranchers to hear their concerns regarding wolf reintroduction at the Yellowstone national park. The consensus was that the majority of the ranchers were concerned about the cost of losing livestock as a result of an increase in the wolf population. It was the response of one of the ranchers that solidified the foundation for Fisher’s market-based solution. One of the ranchers told Fisher: “It’s easy to be a wolf lover. It doesn’t cost anything. It’s the people who own livestock who end up paying for wolves.” Fisher then remembered a livestock compensation plan that was implemented previously in Minnesota. However, the ranchers were incredulous at the fact that they ever would be compensated for their losses.
In the summer of 1987, Fisher was able to test out the concept of a livestock compensation program in Montana. As wolves returned to northwestern Montana, local ranchers lost thousands of dollars’ worth of livestock. Killed by the wolves migrating back to their natural habitat. The indignation of the ranchers was reflected in the flurry of headlines in the local papers. Fisher quickly sent out a fundraising newsletter out to” ..Defenders of Wildlife members in Montana…”. He was able to raise the necessary funds to compensate the ranchers for their losses within 48 hours. After seeing the success of his first initiative, Fisher decided to continue to implement and maintain rancher compensation programs. He collaborated with local artist Monte Dolack creating posters depicting what Yellowstone would look like with a restored wolf population. Selling posters to the public for $30.00 apiece. Since 1987 (reference article was published in 2001), the program has raised $175,000.00 in rancher compensation. The scope of the program has been extended to ranchers in Idaho, Wyoming, Arizona, and New Mexico. Defenders of Wildlife also implemented a program in 1997, compensating for grizzly bear damages. Raising $60,000.00 by 2001.
The story of the environmental efforts of Hank Fisher is an illuminating one. Challenging the conventional wisdom that we need to dispense with free-market economics when pursuing environmental restoration efforts. Both are perfectly compatible with one another. With a little bit of ingenuity and understanding of market incentives, other aspiring pioneers could follow in his footsteps. By doing so create a win-win scenario versus the zero-sum policies that are favored in government-sanctioned penalties and inflexible regulations.
Privatization of Defense- Central Government. The Transaction Costs Reducer.
Hat Tip to the Marginal Revolution Blog and the Prior Probability blog for referring me to the referenced article.
The privatization of defense services could hypothetically reduce the occurrence of military conflicts. This is achieved by realigning the incentives to engage in warfare by making the costs more evident to the taxpayer. The direct costs of war are generally obscured due to a lack of clarity of how tax dollars are allocated. Operating as a form of indirect fiscal illusion. Either by design or by the context of the broad and imprecise nature of public expenditures. If a would-be taxpayer could not transfer or distribute the costs of war to the collective contributions of the tax base, frivolous objectives such as “spreading” democracy would be off the table. Military action would shift from being offensive or even preemptive to being purely defensive. Whether defense services should be provided by the local neighborhood watch or a private corporation is another matter.
There is some historical evidence suggesting that eliminating a mechanism for distributing the costs of violent conflicts makes them less apt to transpire. Per a recent paper written by Rosolino Candela, and Vincent Geloso the French settlers of the Bay of Fundy had virtually no violent conflicts with the Mi’kmaq tribe. Why? The European settlers of the 18th century known as, Acaridans, had to directly bare the costs of violent conflicts. Since they received little institutional or financial support from the mother country. Having adopted informal decision-making procedures, living along aside the Mi’kmaq, they lived in a state of near-anarchy (Candelaa & Geloso, 2020, p.3-4). Providing some credence to the inference that a strong central government operates as a mechanism for reducing the transaction costs of armed conflicts. Skewing the incentives of constituents to be more lackadaisical towards the costs of unnecessary military campaigns. Often reducing transaction costs is viewed as being a positive economic development in this case it is not. The evolution of the robust warfare state in the U.S. has amounted to profligate spending, a treacherously hazardous foreign policy, the growth of government, and ample opportunities for rent-seeking.
The Acadians received virtually no support from the homeland. Outside of a “symbolic” tax that was only sporadically collected by officials, they were primarily left to their own devices (Candelaa & Geloso, 2020, p.3). Leaving the settlers able to only rely on local militias to provide the defense of the colony. Leaving the “…costs of using violence would be concentrated on the beneficiaries themselves and could not be passed on to wider groups..” (Candelaa & Geloso, 2020, p.10). Through the colonists and the natives having to fully bare the costs of violent conflict, this was one of several factors that prevented the development of interest groups (Candelaa & Geloso, 2020, p.16). Stifling the potential for wartime profiteering by removing the incentives to fabricate needless conflicts for the sake of drumming up business.
While there may be contextual characteristics that do not apply to modern times. It should be noted that a highly centralized government does have an impact on the frequency of war. Through disbursing the costs across a large number of taxpayers, the true costs of military intervention are obscured. Hence why for the Acadians, the lack of financial and military support from the motherland shifted incentives away from violent forms of conflict resolution. Making it plausible to surmise that having a centralized government is what makes war so easy to initiate. It acts as the middle-man connecting constituents with service providers (the military). Alone, a centralized government reduces the costs of coordinating complex military campaigns. Never mind the fact that it collectively distributes the costs of the capital required for military conflicts. To truly demonstrate this point, consider the highly extravagant cost of a private citizen purchasing a tank or a submarine. Individually most people could not afford to purchase the instruments of sophisticated warfare. Combing the fact that a central government obscures the direct costs of war and provides the institutions that make the coordination efforts of armed conflict more efficient, it shouldn’t be a mystery why the size and scope of military conflicts have now become global. Providing some firm insights as to why the Acadians preferred the bargaining table to the sword in resolving conflicts with the Mi’kmaq.
Privatizing Defense- Reconnecting the Link Between War and War Time Spending
The costs and externalities of engaging in military intervention are high. These costs are not limited to merely monetary expenditures. The price is also borne in the loss of life, productivity, civil liberties, economic freedoms, and so on. Historically, countries have long justified war efforts through comprehensive political campaigns. Demonizing the opposing regime and stressing the moral imperative of defeating the adversary. Propaganda campaigns can work wonders, persuading the masses that the armed conflict is a “just” war, but it is not the only variable at play. If the costs of going to war were more direct and salient to the public, constituents would be less apt to approve of military intervention abroad. In the decades since World War II, most of these campaigns have been more about nation-building than actually defending the United States and its allies. If the connection between the cost of war was more linear it would be reasonable to surmise American citizens would be screaming with indignation about the prospect of their tax dollars being used to “spread” democracy.
The question is how do we make the connection between the cost of war and military efforts more conspicuous to the taxpayer? A radical suggestion would be to privatize defense. To some extent, there is a lot of merit to this argument. There are also a lot of well-formulated objections. Any conventional application of Coase’s Theorem would like to view defense as a public service that cannot be provided by private firms. Due to ambiguity regarding property rights and the high transaction costs of providing defense services. The issue of unclear property rights is by far one of the strongest arguments against privatizing the production of defense services. Even as economist Chris Coyne points out in a recent paper, those free-rider problems are inevitable. In Coyne’s example, if missile defense services are provided to a city, one house that has opted out cannot be excluded from protection (Coyne & Goodman, 2019, p. 6). It was maybe inordinate to organize defense efforts on a national scale versus a regional threat. Example being when Russia annexed the Crimean Peninsula. This threat was confined to a specific region of Ukraine versus Russia posing threat to the whole country (Coyne & Goodman, 2019, p.2).
Another flaw in the free-rider argument is even when defense is provided by the government there are still people who receive service without contributing. American citizens who evade taxes still receive the benefits of state-provided defense. The homeless and unemployed who also do not contribute to the tax pool also enjoy the benefits of defense provided by the United States. The problem becomes that free-riders exist regardless if defense is provided by the government or private firm.
All the counterarguments aside, if people could see on a monthly or quarterly basis how much they were spending on foreign wars, they would be less apt to be ambivalent about these military campaigns. This is a fact that is displayed in the ubiquitous Public Choice maxim of dispersed costs and concentrated benefits. No service provided by the government is “free”. This merely an illusion created by the distribution of the cost of government programs and services across many taxpayers. Typically, there is quite a bit of mystery surrounding how tax dollars are allocated. Unlike a private-sector invoice that is itemized, how much, and how it will be specifically used. Epitomizing the phenomenon of fiscal illusion. Severing the link between government spending and taxation creates confusion. By keeping the taxpayers’ ignorant, various government departments have more fungibility with how tax dollars can be used. Side-stepping any potential for accountability. This applies to all government spending, even defense and military expenditures. By reestablishing this link between war and taxation, every-day citizens would be more apt to question the efficacy of sending the military to a third-world dictatorship to reinvent them as a liberal democracy.
Government officials cannot be trusted to help facilitate the process of reconnecting direct costs of war with the corresponding military campaign. Few congressmen would go along with this policy. On the off-chance, taxpayers did start receiving itemized expenditure reports, who is to say that they will not be falsified. The only viable option would be allowing private firms to provide military-grade defense services to civilians. Effectively allowing for private competition in the provision of defense services. That could include private defense clubs, neighborhood militias, HOA funded auxiliary defense agents, or even larger corporate firms providing similar services. Whether you are picking up a rifle to participate in the neighborhood militia or you are paying a monthly bill for a corporate defense firm, you have skin in the game. Either you are paying with your safety and time or you are paying monetarily. Both contingencies align incentives towards avoiding frivolous conflicts. No one wants to pay exorbitant rates to receive defense services that do not even directly benefit their safety. Nor does anyone want to risk their life over minor conflicts. Objectives such as nation-building or ideological indoctrination would be off the table. Due to the high costs of such endeavors, most people would be much more cautious about engaging in such conflict. Confining most uses of military force for self-defense rather than offensive objectives.
Maximum Age to Vote
Last year, a debate formed around the issue of lowering the voting age to sixteen in the United States. While few have quibbled over the minimum age to be eligible to vote, even few people have ever considered creating an age ceiling for voter eligibility. Younger voters and older voters suffer from the same problems when voting for candidates and policies. They both have distorted incentives. Which have been warped by a lack of skin in the game. If you do not own property or own property but are not meaningfully contributing to the tax pool your you are effectively insulated from the consequences of taxation. This has the potential of voters electing candidates and policies that advocate for profligate spending.
Some may argue that seniors have a right to vote on policies that directly impact them such as social security. Especially considering they have rightfully paid into these entitlement programs their entire lives. However, this perspective does not consider the facts Baby Boomers are collecting far more than what they have paid into these programs. Due to the vast number of Baby Boomers collecting and their lengthier life expectancy when compared to previous generations. Two variables were not considered when Social Security was first established in the 1930s. Effectively creating an intergenerational transfer of debate and inflation to be borne by subsequent generations. In many ways, this distortion in incentives is more dangerous than that of younger voter blocs. At least they will someday have to contend with the consequences of such policies. The intergenerational transfer of entitlement programs and publicly funded pensions has to be one of the most salient examples of fiscal illusion. Shifting payment to the children and grandchildren of the beneficiaries effectively severs the connection between spending and taxation.
This is not to say that senior citizens do not possess the facilities for sound judgment. What incentive do they have to support fiscally responsible policies? Very little. Ultimately, they will not be the ones picking up the bill. This sheds light upon the land ownership requirement for voter eligibility implemented earlier on in American history. If you are not subjected to taxation you are going to be less mindful of economic matters afflicting the country. This criticism is notably aimed at college students who can vote but do not meaningfully contribute to the tax pool. Elderly citizens are in a similar situation. Most no longer work or only work part-time. Yet, they collect large sums of money collected in the form of government allocated benefits. Naturally, if you are making meager sums of money, you are going to be relatively insensitive to the levying higher taxes on the upper-income brackets. Even if such targeted taxation would result in less investment in the U.S. economy. Then again if you are already retired, why would this be alarming?
If an individual is receiving publicly funded benefits later in life they are shield from having to pay for these services. They are also disconnected from the adverse ramifications of this vast re-distribution of resources. Considering the lack of sensitivity to the consequences, this makes this voter demographic a prime candidate for manipulation by political pressure groups. Lobbying organizations that advocate on the behalf of seniors such as AARP understand that Social Security and Medicare are both powerful bargaining chips. The scintillating spark to ignite the indignation and ire of senior voters. Not to mention acknowledge that it is the secret weapon in mobilizing elderly voters to become devout participants in the political process. Few demographics are as steadfast regarding political participation than seniors. Groups such as AARP attempt to align the incentives of seniors towards voting for an elected official that is left-of-center. Due to their historical congeniality towards entitlement programs. Fostering a decades-long coalition between the left and seniors’ advocacy groups. Typically, promoting fear-mongering surrounding the potential of right-wing politicians eliminating treasured entitlement programs. Most of these claims are either highly speculative or hyperbolic. Due to the fact to alienating your most loyal demographic of voters would be political suicide. The threat of losing the senior vote will keep even the most vehement budget-hawk on their toes. The myth of Republicans being willing to commit political suicide remains strong. Leading these groups to skew the voting of incentives of seniors towards less fiscally responsible policies and candidates.
Individual votes are indeed inconsequential in elections. It’s more the overall aggregate voting pattern of a specific voter bloc that is significant. The key is to pander to the sensibilities of your targeted demographic. Either through factual discourse or the spread of misinformation. There are so many strategic groups gunning for the senior voting bloc, that unless one is well-versed in political science it would be difficult to distinguish these attempts at manipulating voting behavior from well-intentioned advocacy. Unfortunately, there is quite a bit of overlap between the two. Only confusing matters. It is important to remember that someone other than seniors stands to benefit from advocating for generous entitlement programs through increased job security. That is the administrators operating these departments that manage programs such as social security. Those employed by AARP benefit from having a cause to advocate. It is not pure beneficence these organized bodies push for increasing allocations for entitlement programs. I believe that most seniors still have the cognitive capacity to navigate these waters. Why should they have to? If you worked your entire life, raise kids, etc. why still grapple with constantly being manipulated by the invested interests in Washington? From the standpoint of mental health, it may also be advantageous to implement a voting age limit.
If those entering their golden years have an iron-clasp on their entitlement benefits at what age should they cease to be eligible to vote? This answer is quite simple. As soon as an individual is old enough to qualify for Social Security. Presumably once a person reaches retirement age they will opt to receive these benefits. Meaning they no longer have a stake in supporting fiscal responsible policies. To remedy the incentive problem, I would be willing to compromise with the following contingency. If a senior citizen would like to retain the right to vote they should forfeit the ability to collect Social Security. While they may not completely have skin in the game in they no longer generate taxable income, their incentives structure has been completely compromised by a boundless array of publicly funded entitlements. Once you start to accept these benefits and begin to expect them, you have already sold your vote to advocacy organizations, bureaucrats, and opportunistic politicians. Making relinquishment of voting rights a fair trade-off if one is looking to receive social security.
Inverted logic 