People who really believe that trade restrictions prevent domestic unemployment or raise domestic wages – people who really believe that minimum wages raise the incomes of low-skilled workers without causing any loss of employment or worsening of other terms of these workers’ jobs – people who really believe that government-mandated family leave leaves workers better off – are like people who attend magic shows and really believe that the magician causes a rabbit to materialize out of the thin air within the magician’s hat.
“Wow!” exclaims an audience member. “I saw with my own eyes the magician pull a rabbit from a hat that only a moment earlier was empty! And also, the magician assures me that that’s what he did. He wouldn’t lie to me. So it must be true that the magician pulled a rabbit miraculously from his hat – that he bends reality to his will. I’m impressed!!”
These people believe their eyes. And why shouldn’t they? The empirical record, after all, is stuffed with rabbits being pulled from magicians’ hats – hats that audiences saw were empty just moments before live rabbits were pulled from them. What’s not to believe?
Don Boudreaux, “Do You Believe in Magic?”, Café Hayek, 2016-06-22.
February 16, 2018
QotD: It’s not economics, it’s magic!
February 15, 2018
The rise of the bourgeoisie
Ed West on the beginning of the end of military aristocracy in Europe and the rise of the merchant class:
The medieval system began with the Franks, whose mastery of cavalry made them the most powerful tribe in the former western empire. Later, the Normans used horses in far larger numbers and developed the cavalry charge, used to lethal effect at the Battle of Hastings. Cavalry underpinned the European social order because only those with a reasonable amount of land could afford the destrier warhorse, which cost 30 times as much as a regular farm animal and could carry up to 300lbs in weight, including 50lbs of iron armor — itself very costly.
The sons of the aristocracy were mostly schooled in warfare from a young age and despised learning and trade, which were viewed as dishonorable, leading to an excess of landless younger sons whose only skill was fighting, many of whom found their way to wars, or caused them, or made a living at absurdly dangerous tournaments. Cavalry developed certain rules — chivalry, which primarily concerned the treatment of aristocratic prisoners — as well as an idealization of the aristocratic warrior through the stories of Arthur, Lancelot, and Roland that singers recited at the courts of dukes and counts.
This order was first shaken in 1302 when France’s cavalry confidently marched north to suppress a revolt by the Flemish. Flanders is not naturally rich in resources — Vlaanderen means flooded — but its people had turned swamps into sheep pastures and towns, building a cloth industry that made it the wealthiest part of Europe, its GDP per capita 20 percent greater than France and 25 percent better than England. The wealth of Flanders’ merchants was such that when Queen Joan of France visited, she afterward wrote in horror that: “I thought I would be the only queen there, but I find myself surrounded by 600 other queens.”
The Flemish were traders, not knights, which is why the French were sure of victory. And yet, with enough money to pay for a large, well-drilled infantry, they were able, for the first time, to destroy the cavalry at the Battle of the Golden Spurs. It was the beginning of the end. No longer could the aristocracy simply push around the bourgeoisie, and as the latter grew in strength, it undermined the violence-obsessed culture of the nobility.
[…]
The aristocratic class that wished for glory in battle was in retreat, and yet, despite this, won the narrative. While in exile in Burgundy, King Edward had met a London merchant by the name of William Caxton who in his spare time transcribed books for aristocratic women. Exhausted at the toll of work, he learned through business contacts of a new technology in Germany, called movable type; when Caxton brought a printing press back home one of the most successful books he published was Thomas Malory’s The Death of Arthur.
It became the influential work in celebrating the Heroic Narrative of the Middle Ages, but the aristocratic ideals it harked back to were mostly a sham and ultimately rested on the rusty sword (and Malory was a convicted rapist). No account of any trader or banker could ever compete with these knights’ tales, of course, and yet you could argue that they were the real heroes who shaped our world.
QotD: Computer models
How can one be certain about outcomes in a complex system that we’re not really all that good at modeling? Anyone who’s familiar with the history of macroeconomic modeling in the 1960s and 1970s will be tempted to answer “Umm, we can’t.” Economists thought that the explosion of data and increasingly sophisticated theory was going to allow them to produce reasonably precise forecasts of what would happen in the economy. Enormous mental effort and not a few careers were invested in building out these models. And then the whole effort was basically abandoned, because the models failed to outperform mindless trend extrapolation — or as Kevin Hassett once put it, “a ruler and a pencil.”
Computers are better now, but the problem was not really the computers; it was that the variables were too many, and the underlying processes not understood nearly as well as economists had hoped. Economists can’t run experiments in which they change one variable at a time. Indeed, they don’t even know what all the variables are.
This meant that they were stuck guessing from observational data of a system that was constantly changing. They could make some pretty good guesses from that data, but when you built a model based on those guesses, it didn’t work. So economists tweaked the models, and they still didn’t work. More tweaking, more not working.
Eventually it became clear that there was no way to make them work given the current state of knowledge. In some sense the “data” being modeled was not pure economic data, but rather the opinions of the tweaking economists about what was going to happen in the future. It was more efficient just to ask them what they thought was going to happen. People still use models, of course, but only the unflappable true believers place great weight on their predictive ability.
Megan McArdle, “Global-Warming Alarmists, You’re Doing It Wrong”, Bloomberg View, 2016-06-01.
February 14, 2018
Repost: “I, Rose” and “A Price is Signal Wrapped Up in an Incentive”
Published on 8 Feb 2015
How is it that people in snowy, chilly cities have access to beautiful, fresh roses every February on Valentine’s Day? The answer lies in how the invisible hand helps coordinate economic activity, Using the example of the rose market, this video explains how dispersed knowledge and self-interested actors lead to a global market for affordable roses.
Published on 8 Feb 2015
Join Professor Tabarrok in exploring the mystery and marvel of prices. We take a look at how oil prices signal the scarcity of oil and the value of its alternative uses. Following up on our previous video, “I, Rose,” we show how the price system allows for people with dispersed knowledge and information about rose production to coordinate global economic activity. This global production of roses reveals how the price system is emergent, and not the product of human design.
February 13, 2018
Tulip mania … wasn’t
Tim Harford on bubbles in general and the great seventeenth-century Tulip mania in the Netherlands in particular:
It seems all so much easier with hindsight: looking back, we can all enjoy a laugh at the Extraordinary Popular Delusions and the Madness of Crowds, to borrow the title of Charles Mackay’s famous 1841 book, which chuckles at the South Sea bubble and tulip mania. Yet even with hindsight things are not always clear. For example, I first became aware of the incipient dotcom bubble in the late 1990s, when a senior colleague told me that the upstart online bookseller Amazon.com was valued at more than every bookseller on the planet. A clearer instance of mania could scarcely be imagined.
But Amazon is worth much more today than at the height of the bubble, and comparing it with any number of booksellers now seems quaint. The dotcom bubble was mad and my colleague correctly diagnosed the lunacy, but he should still have bought and held Amazon stock.
Tales of the great tulip mania in 17th-century Holland seem clearer — most notoriously, the Semper Augustus bulb that sold for the price of an Amsterdam mansion. “The population, even to its lowest dregs, embarked in the tulip trade,” sneered Mackay more than 200 years later.
But the tale grows murkier still. The economist Peter Garber, author of “Famous First Bubbles”, points out that a rare tulip bulb could serve as the breeding stock for generations of valuable flowers; as its descendants became numerous, one would expect the price of individual bulbs to fall.
Some of the most spectacular prices seem to have been empty tavern wagers by almost-penniless braggarts, ignored by serious traders but much noticed by moralists. The idea that Holland was economically convulsed is hard to support: the historian Anne Goldgar, author of Tulipmania (US) (UK), has been unable to find anyone who actually went bankrupt as a result.
It is easy to laugh at the follies of the past, especially if they have been exaggerated for the purposes of sermonising or for comic effect. Charles Mackay copied and exaggerated the juiciest reports he could find in order to get his point across.
Update, 15 February: For more detail on the lack-of-bubble in Tulip Mania, you might want to read Anne Goldgar’s post at The Conversation.
Update the second, 30 March: At the Foundation for Economic Education, Douglas French takes issue with Goldgar’s interpretation of Tulip Mania.
Sure, rare bulbs were hard to reproduce and in the greatest demand. However, this does not explain the price history of the common Witte Croonen bulb, which rose in price twenty-six times in January 1637, only to fall to one-twentieth of its peak price a week later.
Peter Garber, tulip mania historian, who, like Goldgar, doesn’t believe tulip mania was a bubble, admitted the “increase and collapse of the relative price of common bulbs is the remarkable feature of this phase of the speculation.” Garber wrote that he “would be hard-pressed to find a market fundamental explanation for these relative price movements.”
Goldgar claims in her latest article that she found no bankruptcies or suicides associated with the bust and that the Dutch economy was not affected by the crash. However, the data I discovered while writing my thesis for Murray Rothbard that is the book Early Speculative Bubbles and Increases in the Supply of Money, was that there was a doubling of bankruptcies in Amsterdam from 1635 to 1637.
Also, Ms. Goldgar must have forgotten the numerous lawsuits she mentioned in her book that were spawned by busted tulip deals. Some of the litigation lasted for years after the bulb price crash in February 1637.
[…]
Ms. Goldgar’s research indicates that only a few hundred people traded tulip bulbs. However, she writes that a few bulbs did sell for 5,000 guilders (the price of a house) and “only 37 people who spent more than 300 guilders on bulbs, around the yearly wage of a master craftsman,” as if this makes her case that this wasn’t a financial bubble.
Readers should note Ms. Goldgar is not interested in prices or market fundamentals. Her research interests are “17th- and 18th-century European social and cultural history; The Netherlands and Francophone culture; Print culture and the culture of collecting; The interaction of society, art, and science.”
In my review of Goldgar’s book in 2007 for History of Economic Ideas, I wrote,
By chronicling the extensive and intertwined network of the real buyers and sellers in the tulip trade, Goldgar puts a human face on tulipmania like no other author has done.”
However, the economics profession will always define tulip mania as Guillermo Calvo does in The New Palgrave: A Dictionary of Economics: “situations in which some prices behave in a way that appears not to be fully explainable by economic ‘fundamentals.'”
Maybe no chimney sweeps were trading in bulbs, but the massive price movements of simple tulip bulbs don’t lie.
February 8, 2018
The revenge of the return of the bride of rent control
Megan McArdle on the unexpected return of one of the very worst economic policies known to mankind, or as our beloved Prime Minister would insist “peoplekind”:
According to the Wall Street Journal, rent control seems to be making a retro comeback. Most forms of intelligent life could be forgiven for asking why.
Serial experimentation with this policy has repeatedly shown the same result. Initially, tenants rejoice, and rent control looks like a victory for the poor over the landlord class. But the stifling of price signals leads to problems. Rent control starts by producing some sort of redistribution, because the people with low rents at the time that controls are imposed tend to be relatively low-income.
But then incomes rise, and rents don’t. People with higher incomes have more resources to pursue access to artificially cheap real estate: friends who work for management companies, “key fees” or simply incomes that promise landlords they won’t have to worry about collecting the rent. (One of my favorite New York City stories involves an acquaintance who made $175,000 a year, and applied for a rent-controlled apartment. He asked the women taking the application if his income was going to be a problem; she looked at the application and said, “No, I think that ought to be high enough.”)
So the promise of economic justice erodes over time, as lucky insiders come to dominate rent-controlled apartments, especially because having gotten their hands on an absurdly cheap apartment, said elites are loathe to move and free up space for others.
The longer the rent-control policies remain, the more these imbalances grow. The gap between the rent that is charged, and the rent that could be charged in a competitive market, widens. Deprived of the ability to make a profit, landlords skimp on maintenance and refuse to build new housing. If you loosen the law to incentivize renovation, or new building, this only creates new forms of dysfunction: discrimination against tenants who might stay longer than a few years (limiting the ability to raise rents); a decontrolled market that has to absorb all of the excess demand created by locking up so much of the housing market in rent-controlled leases that rarely turn over; even landlords who renovate too often, the better to raise the rent. This arrangement is very good for the people who happen to have gotten their hands on a rent-controlled apartment, and very bad for everyone else, especially newcomers to the city.
QotD: Minimum prices for wine, a thought experiment
Consider this hypothetical (which, given the poor quality of today’s punditry and publicly discussed economics, is not as far-fetched as it might at first seem): Ostensibly to help raise the incomes of hard-working vintners of low-quality wines – vintners many of whom have children to feed and sick parents to care for, and many of whom also are stuck in their jobs as owners of low-quality vineyards – Congress passes minimum-wine-price legislation: no wine may sell for any price less than $1.00 per fluid ounce. Roughly, that means that the minimum price of a standard-sized – 750ml – bottle of wine becomes $25.00. Armed officers of the state will use deadly force against anyone and everyone who insists on disobeying this diktat.
If proponents of the minimum wage are correct in their economics, then the only effect of this minimum-wine-price diktat will be distributional. Consumers – including retailers and restaurants buying from wholesalers – will continue to buy as much wine, and the same qualities of wine, that they bought before the diktat took effect. The only difference is that, with the diktat in place, owners of low-quality vineyards earn higher incomes, all of which are paid for by consumers who dip further into their own incomes and wealth to fund this transfer. Easy-peasy! Problem solved!
But who in their right mind would suppose that a minimum-wine-price diktat would play out in the manner described above? Who would not see that a wine buyer, obliged to pay at least $25 for a standard-size bottle of wine, will buy only higher-quality wines – wines that before the diktat took effect were fetching at least $25 per bottle (or some price close to that)? Many wine buyers who before the diktat were confronted with the choice of paying either $8.99 for a bottle of indifferent but drinkable chardonnay and $25.00 for a bottle of much more elegant and enjoyable chardonnay opted for the less-pricey bottles. They did so not because they prefer to drink chardonnay that is indifferent to chardonnay that is elegant – they in fact do not have this preference. Rather, they did so because the greater elegance of the pricier chardonnay was not to them worth its higher price. So the low-quality chardonnay found many willing buyers.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2016-06-02.
February 6, 2018
QotD: The original goal of the minimum wage
For progressives, a legal minimum wage had the useful property of sorting the unfit, who would lose their jobs, from the deserving workers, who would retain their jobs. Royal Meeker, a Princeton economist who served as Woodrow Wilson’s U.S. Commissioner of Labor, opposed a proposal to subsidize the wages of poor workers for this reason. Meeker preferred a wage floor because it would disemploy unfit workers and thereby enable their culling from the work force.
Thomas Leonard, “Eugenics and Economics in the Progressive Era”, Journal of Economic Perspectives, 2005-09.
February 5, 2018
The Apple iPhone … productivity killer
Tim Harford explains why the first world’s productivity gains have stalled and even gone into reverse since the Apple iPhone was introduced:
A few weeks before Christmas, an impish chart appeared on the Bank of England’s unofficial blog. It compared plunging productivity with the soaring shipments of smartphones. Typical productivity growth in advanced economies had hovered steadily around 1 per cent a year for several decades, but has on average been negative since 2007. That was the year the iPhone started to ship.
Nobody really believes that the iPhone caused the productivity slowdown — a more obvious culprit would be the global financial crisis — but it is hard to find people who think that their phones are an unalloyed blessing. If in 1968 an economist or computer scientist had been told that 50 years later we would all be carrying wirelessly networked supercomputers in our pockets, he or she would have been staggered at the potential. I doubt they would have realised quite how much time we would spend liking Instagram posts, playing Pokémon Go and sending each other digital interruptions.
The costs of this distraction are starting to become apparent. I wrote recently about the research of Gloria Mark of the University of California, Irvine. Prof Mark argues that reorientating yourself after an interruption tends to take between 20 and 25 minutes. We all know how a moment’s inattention can turn into a clickhole of distractions. She also points out that once we get used to being interrupted by others, we start interrupting ourselves, twitchily checking email or social media in the hope something interesting might turn up.
February 4, 2018
BC versus Alberta – the existential threat of “dilbit”
Colby Cosh on the warlike preparations taking place in Alberta in advance of the interprovincial war over “dilbit”:
The special concern with dilbit [diluted bitumen — the form in which hydrocarbons from the Alberta oilsands are shipped to refineries as a liquid] is a pseudoscientific contrivance designed to allow Horgan to meet, or at least take a step toward, his loud campaign promises to thwart Trans Mountain. Now, even if you don’t believe that, you can understand that Horgan is threatening to conjure an all-new improvised layer of environmental regulation here. Even if you are convinced that it was spilled dilbit that killed Tasha Yar in “Skin of Evil,” you can see the unfairness of Horgan imagineering an infinite regress of scientific panels — each one surely more scientific than the last! — to injure a neighbour’s economy for his own electoral welfare.
The truth, however, is that B.C.’s New Democratic premier knows the hand-wringing about dilbit is B.S. And so does Alberta’s New Democratic premier. And so does just about everybody in Alberta. Yes, we Albertans have been busy this week preparing for border war: there is so much to do, what with the need to make propaganda posters, train commandos for mountain-pass warfare, dig victory gardens, and re-label all the Nanaimo bars “Liberty squares.”
Sadly, it probably won’t come down to a shooting war, but will remain in the crystal blue elysium of political manoeuvring. If it did come to a fight, Alberta would have a pretty big fifth column operating on its behalf across the legal border. I have a running joke with friends that I have occasionally referred to in print: it’s the idea that there exists a “Greater Alberta” that includes sizable parts of Saskatchewan and, in particular, B.C.
The so-called Peace River block that spans the border is one economic unit, and people at its western end, jealous of having ended up on the wrong side of a discontinuity in taxation, have actually agitated in the past for secession from British Columbia. And, as many have pointed out in the feverish climate of interprovincial hostility, the jagged southeast corner of B.C. has significant transmontane cultural and economic ties, too. It looks, on a flat map, like it ought to “belong” to Alberta. (In real-world topography, on the other hand, the Continental Divide is definitely a thing that it is hard not to notice.)
In short, almost everybody is now making my “Greater Alberta” semi-sorta-kinda-joke. But this is not really a Greater Alberta thing. At almost every point of the compass, that B.C. map is full of resource employees who are watching with distaste as their NDP government acts like an NDP government. This is surely a real moral advantage for Alberta in the grand struggle — but, remember, there are genuine practical gains for Horgan from his theatrical eco-rectitude: right now the motivating passion of his life, from dawn to dusk, is to persuade Green voters to turn orange.
January 31, 2018
Bitcoin – Ultra Spiritual Life episode 86
AwakenWithJP
Published on Dec 19, 2017Bitcoin – Ultra Spiritual Life episode 86
In this video, I tell you all about Bitcoin, how it works, and why it’s guaranteed to be the best investment of your life.
“Bitcoin is, of course, a mania – a delusion of the sort that human societies are prone to”
Tim Worstall looks at some historical manias and explains how even the maddest of them can yield long-term economic benefits (to society as a whole, if not to individual maniacs):
The UK’s railway mania, the tulip bubble, the dot com boom and other collective economic madness – such as bitcoin – might lose people a lot of money, but they often lay down important foundations
Bitcoin is, of course, a mania – a delusion of the sort that human societies are prone to. This is fighting talk from someone who declared in 2011 that bitcoin was all over. Being wrong is not interesting – it is rare things which are interesting, not common ones – but the psychology and economics here are important.
The classic text on this topic is Charles McKay’s Extraordinary popular delusions and the madness of crowds. Human societies are prone to manias which seem to defy any sense or reasonableness. Certainly markets can be so overcome, although the witch burnings show that it’s not purely an economic phenomenon.
The South Sea Bubble, Tulip mania, railway shares, the dotcom boom and now bitcoin are all part of that same psychological failing of not recognising that prices can and will fall as well as rise. That is the classical interpretation of the McKay book and observation, but modern studies take a more nuanced view.
South Sea and the Mississippi Company bubble were simply speculative frenzies, but the tulip story – while appearing very similar – can be read another way.
It is still true, for example, that a few sheds near Schipol, just outside Amsterdam, are the centre of the world’s trade in cut flowers – the result of that historical episode where a single tulip bulb became worth more than a year’s wages.
We can, and some do, take tourist trips to see the fields of those very tulips today. Modern researchers point out that the tulip was near unknown in Europe, the first examples only just having arrived from Turkey.
The art of cross-pollinating tulips to gain desirable characteristics was only just becoming generally known, and Europe was reaching a stage of wealth where the purely ornamental was becoming valuable.
Yes, the speculation in prices was ludicrous – although the weird stuff was in futures and options markets, not the physical trade, and the absurd prices never actually happened – but the end result of the frenzy was still that the tulip and flower market became and is centred in The Netherlands.
Tyler Cowen: The Economics of Choosing the Right Career
Marginal Revolution University
Published on 11 Oct 2016As many who entered the labor market following the Great Recession know all too well, graduating with a college degree does not mean you’ll easily fall into a good career. Four-year college graduates with entry-level jobs actually earned more in 2000 than they’re earning today and student loan debt burdens are higher than ever.
Does this mean you should skip college or drop-out? Not necessarily. Unemployment is still lower for those with undergraduate and higher degrees. However, understanding the economics behind the labor market will make finding a career a more manageable task.
The labor market in the United States has undergone many changes in the past few decades. Whereas we once had many manufacturing jobs that required little training or specialized skills, the labor market today demands more people who can work with computers and information technology.
Choosing a good career requires planning beyond getting a college education. You’ll want to carefully consider the career options available for your major, as well any specialized skills you’ll need to build outside of the classroom.
It’s also essential to understand how supply and demand affect your career options. How many people are also choosing that major vs. how many employers are looking for those skills? Is a particular career path susceptible to being replaced by a machine? What about outsourcing in the global labor market? What about laws and regulation – does it require an occupational license?
There’s a lot to think about! Choosing a career is a huge decision and understanding how supply and demand rule the labor market will help you better navigate your future.
How the Vikings plundered Minnesota
By all accounts, the Minnesota Vikings’ new stadium in Minneapolis is a wonderful structure and fans have been very happy with the amenities provided. However, as Steven Malanga explains, the non-fan taxpayers in the city and the state have a right to feel plundered by the Vikings:
Fans of the New England Patriots and Philadelphia Eagles will travel to the frigid northern city this week because the NFL granted a Super Bowl to Minnesota as a reward for stepping up with more than half a billion dollars in subsidies for the home-state Vikings’ U.S. Bank Stadium, which opened in 2016. For a city whose mayor recently described it as a “shining beacon of progressive light and accomplishment,” this is some feat, and a reminder that the NFL, whatever its troubles, maintains a firm hold on the taxpayer’s purse in many places.
Vikings owner Zygi Wilf, a New Jersey real estate developer, began pushing for a new stadium soon after purchasing the team in 2005. His supplications became more earnest after the roof of the Vikings’ old home, the Metrodome, collapsed in December 2010. Wilf originally proposed contributing just one quarter of the new stadium’s $1 billion cost, a spectacularly low-ball offer in an era when backlash against stadium subsidies for professional teams increasingly force owners to pony up a bigger share of construction costs. Wilf claimed that he couldn’t afford more, but he wouldn’t release the financial details of his real estate empire. A Minnesota state investigation, undertaken after a New Jersey judge ruled that the Wilf family had defrauded real estate partners in a local project and had to pay them $84.5 million, determined that the family could afford to pay up to $500 million for the stadium.
Even after Wilf upped his offer, the road to the stadium deal was paved with controversy. Minnesota financed a portion of its share of the costs by introducing a state-licensed electronic-gambling game to generate construction revenues, but the game proved a clunker with local residents; to fill the financing hole, Minnesota drew on revenues from its tobacco tax and increased corporate taxes. Then Wilf announced that he’d help finance his part of the deal by charging season ticketholders a seat license fee — prompting a threat from Minnesota governor Mark Dayton to pull government financing. Dayton soon changed his tune, explaining that sports financing has its own ineffable logic. “I’m not one to defend the economics of professional sports,” he said. “Any deal you make in that world doesn’t make sense from the way the rest of us look at it.”
Though it lent its balance sheet to the deal, the city of Minneapolis, according to critics — including one former city councilman — has been “hosed” by the Vikings. The city officially contributed $150 million to stadium construction, but these observers contend that that figure doesn’t include expensive infrastructure improvements that Minneapolis was forced to make. As part of the stadium package, Minneapolis also agreed to send $7.5 million a year in operating subsidies to the authority running the facility, which amounts to $225 million over the course of the deal. City taxpayers also apparently remain on the hook for any shortfalls in the revenues that back the bonds used to build the surrounding infrastructure. Residents understand little of this financing because, as the Minneapolis Star Tribune noted, the stadium deal “was as transparent as the Berlin wall.”
I’m a (very) long-term fan of the team, but that doesn’t mean I approve of the taxpayers being robbed blind so local fans of the team get to watch the game in a corporate welfare palace. Reason has posted several videos exposing the crony capitalist roots of stadium financing, including most recently this one. I first heard of “seat licenses” in 2014 and they sounded like a bad idea to me then. Back in 2012, when the public support was announced, I was not happy about it.
January 28, 2018
The origins of the minimum wage
In Ontario, many businesses are still struggling to cope with the provincial government’s mandated rise in the minimum wage (the Tim Horton’s franchisees being the current Emmanuel Goldsteins as far as organized labour is concerned). In this essay for the Foundation for Economic Education, Pierre-Guy Veer points out that most franchise businesses have very low profit margins (2.4% for McDonalds franchises, for example) meaning that they can’t just pay the higher wages without a problem, and that the original intent of minimum wage legislation in the US was actually to drive down employment for certain ethnic and racial groups:
Normally, wages are determined at the intersection of supply (employees offering their services, the blue line) and demand (employers wanting workers, the orange line), the letter E. Since working in retail or restaurants requires little more than a high school diploma, that equilibrium is much lower than, say, a heart surgeon, who must endure years of training and study.
But when governments come and impose a minimum wage (the dark line), wages do increase… at the expense of workers. With a base wage now at E’, more workers want to work but fewer employers want to hire because of the increased cost. The newly formed triangle is made of surplus workers, i.e. unemployed workers who can’t find a job. This unlucky Brian meme summarizes the situation of what minimum wage is: wage eugenics.
And don’t think it’s a vice; creating unemployment was the explicit goal of imposing a minimum wage. It was a Machiavellian scheme imagined during the so-called Progressive Era (late 19th Century to about the 1920s), where it was thought that governments could better humanity by “weeding out” undesirables – in other words, eugenics.
In the U.S., this eugenic attitude was explicitly aimed at African Americans, whose (generally) lower productivity gave them lower wages. To “fight” this problem nationwide, the Hoover administration passed, in 1931, the Davis-Bacon Act in order to impose “prevailing wage” (usually unionized) on all federal contracts. It was a thinly veiled attempt to “weed out” non-unionized workers, who were either African American or immigrant, in order to protect unionized, white jobs. Supporters of the bill, like Representative Clayton Algood, were very explicit in their racist intents:
That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.
But while the racist intent of the minimum wage has disappeared, its effect is always very real. It greatly affects the people it wants to help, i.e. low-skilled workers, and leaves them with fewer options. So don’t be fooled by unemployment statistics from the Bureau of Labor Statistics. Youth participation rates (ages 16-19) are still hovering around all-time lows (affected, among others, by minimum wage laws); this means that fewer of them are looking for jobs, decreasing unemployment figures.
It gets worse when breaking down races; only 28.8 percent of African American youth were working or looking for a job, compared to 31.6 for Hispanics and 36.7 percent for whites in December 2017.
