Sunday, August 16, 2015

Market wages are fair wages

Pittsburgh Steeler's linebacker James Harrsion recently returned two participation trophies that his sons received. Below is why he did it:

"While I am very proud of my boys for everything they do and will encourage them till the day I die, these trophies will be given back until they EARN a real trophy. I'm sorry I'm not sorry for believing that everything in life should be earned and I'm not about to raise two boys to be men by making them believe that they are entitled to something just because they tried their best...cause sometimes your best is not enough, and that should drive you to want to do better."

I support Mr. Harrison's decision and I think that there is too much trophy inflation, grade inflation, etc., all designed to make everyone feel like they are better at something than they really are. I think this does children a disservice in the long run since it makes them more likely to pursue an activity that they are not relatively good at, which sets them up for a bigger disappointment once the world outside of their family and friends lets them know that they are not good at it (think of all those American Idol contestants from the audition episodes who are truly convinced they can sing...)

But that aside, the thing I want to talk about here was inspired by a comment on the article linked to above. One commenter wrote:

"And you get paid millions of dollars for doing what? Playing a game. How about returning the money because you didn't really do anything for it except play a game? Give it to the police or fire department that risks their lives everyday. When you do that, you can return your sons' trophies. Your sense of what is deserved is quite unbalanced."

The second to last sentence is a non sequitur, but the commenter hits on a point that I hear all the time -- that some professions are systematically "underpaid". "James Harrison makes millions to play football while the average policeman makes $47K per year and this is unjust", the thought goes. But this reasoning is flawed because it ignores how wages are determined in a market economy.

People value police work, i.e. there is some demand for police, and people are willing to be a police officer for the right price, i.e. there is some supply of potential police officers. The value that the residents of a town put on police work at the margin determines how much they are willing to pay for each officer and the people who are willing to accept that wage (or lower) and who qualify for the job become police officers.

There is nothing unfair about this process. No one is forced to be a police officer. Current police officers are free to quit their job at any time and pursue a different occupation that pays more if that is what they want. If a town is unable to hire the amount of police officers it wants at one wage the taxpayers have to raise the wage to induce more people to become police officers or be content with less officers patrolling their streets. All of these decisions are voluntary though, and no one is forced to do anything that they don't want to do. While there may be some individual police officers who are underpaid due to a variety of reasons, to say that police officers as an occupation are underpaid does not make any sense.

The market that determines the wages of workers does not make any judgement about the moral quality of the various occupations. Individuals have different preferences over police work and are willing to pay an amount that corresponds to their preferences. All the market does is provide a venue for aggregating these preferences into a wage.

If police officers are "underpaid" in some sense it is because society undervalues them. That is not Mr. Harrison's fault though. What is not fair is to imply that Mr. Harrison is somehow stealing from police officers because he makes millions and they don't. Again, Mr. Harrison does not force anyone to pay him money. Steelers fans could quit coming to games at anytime. We all could quit caring about the NFL and start caring more about police work and then relative wages between the two occupations would adjust appropriately. But we don't -- society loves the NFL. Mr. Harrison has made a voluntary choice to give Steelers fans what they want and they in turn have voluntarily chosen to compensate him for his services.

What is unfair is to blame Mr. Harrison for his wealth, as if he did something morally wrong to obtain it, and then imply that the "fair" thing to do is to take the fairly earned money from Mr. Harrison via force = taxation and give it to the police officers who have not earned it. As long as Mr. Harrison is paying his local taxes he has compensated the police officers for their services according to their mutually-agreed-to terms and he owes them nothing more. The same goes for the rest of us.

People who think like the commenter are mistaken and unfair, not Mr. Harrison.

Tuesday, July 14, 2015

Is your state in poor fiscal health?

Here is a link to my recent op-ed in US News and World Report about the fiscal health of the 50 states. Here is a snippet:

"States that mishandle their finances over a long period of time are often forced to make tough choices about their budget: Should they contribute to the state pension fund or spend more on infrastructure such as bridges and roads? Often these debates take place in local newspaper op-eds and news interviews, but without a frame of reference, the average taxpayers don't know if the problem is unique to their state or if it is something that all states are going through. The Mercatus Center's fiscal rankings allow taxpayers, business owners and local politicians to see how their state is doing relative to the other states along several different dimensions."

Tuesday, July 7, 2015

Obama's new overtime rule will hurt some workers but I don't think he cares

President Obama recently announced plants to issue an executive order that will require employers to pay salaried employees who earn up to $50K/year overtime pay. This rule encroaches on the fundamental right of a person to negotiate the terms of their labor with an employer. And just like the minimum wage and other restrictive labor laws, this new regulation will make it harder for relatively low-skill workers to climb up the income ladder.

As an example, when I worked at Chase Bank after college I earned a salary of $45K/year. I was not subject to overtime pay rules and this gave my boss and I the freedom to create a schedule that worked for the both of us. During the busy times, such as enterprise IT releases, I would work 50 hrs a week in order to make sure the job got done. When the work slowed down, I would leave early on a few days. Over the course of a year I am sure my work week averaged 40 hrs, but it would have been unnecessarily burdensome to both me and my boss to make sure that I only worked 40 hours exactly every week (or 80 hours every two weeks if that is how the rule is designed) or else be subjected to overtime rules. Why should the government intrude on a voluntarily reached agreement such as the one my boss and I made?

Also, the workers who are less productive and who make up for that by working harder and longer will be unable to differentiate themselves along this dimension. It is ironic that some of the same people who praise the "gym rat" - the less talented athlete that puts in the extra work in order to be better on game day - want to deny this same opportunity to people who earn less than 50K/year based on their elitist idea about what a "fair" salary is. If Obama's supporters think that overtime pay for work over 40 hours is such a good idea, I see no reason why it shouldn't apply to athletes, presidents, CEOs, etc. Why should people making less than $50K/year be the only ones who have to deal with this burdensome regulation?

It is important to remember that overtime pay only affects the cost of labor, not the output. What I mean is that a worker who produces $20/hr of output and earns $40K/year for that output does not suddenly start producing $30/hr of output when overtime kicks in. Companies will be reluctant to let workers work more than 40 hours per week even if the worker wants to, since the additional output of the worker will not be worth the additional cost. Thus workers who enjoy their job, such as myself at Chase, and who want to keep working on a day when they happen to be right in the middle of something will be forced to leave so that the firm does not have to pay them overtime. This also applies to the "gym rat". It does not appear to me that either the worker or the employer benefit in either case.

Obama is an interventionist; he thinks that his view of the world is the correct one and thus everyone should conform to that view. He doesn't appreciate the many differences that shape individual lives, nor does he appreciate the individual freedom that is required to deal with such differences. He hears one story about a hotel manager who worked 55 hours one week and only made their (voluntarily agreed to) salary and he immediately thinks that the situation calls for the heavy hand of government. I don't think he believes that people are capable of making their own decisions, or that people have different preferences about their work/life balance. In The Theory of Moral Sentiments, Adam Smith referred to someone who thinks this way as "the man of system":

     "The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder."

Obama is the man of system: To him we are all just chess pieces, to be moved around as he sees fit. Our own principle of motion is of little concern to him. This causes disorder but Obama does not see it because he is blinded by his own arrogance.

Monday, June 22, 2015

Labor force participation rate still down and that's bad for all of us

The U.S. unemployment rate is down to 5.5% but the labor force participation rate for prime age workers (age 25 - 54) is also still down: In 2002 it was 83.3% and in May, 2015 it was only 81%. But what does this mean in terms of actual workers?

A decline of 2.3 percentage points doesn't seem like a lot, but when the eligible working population is over 100 million people it makes a big difference as the chart below shows (click to enlarge). (2015 data here, other data here)

The first line in the chart is the age 25 - 54 labor force participation rate. The second line is the 25 -54 civilian non-institutionalized population. This population number excludes people who are incarcerated or on active duty in the armed forces and is the one used by the Bureau of Labor statistics to calculate the labor force participation rate. The third row is the population in the labor force in that year e.g. in the 1992 column row 3 is the population in the labor force in 1992. The 4th row is the population in the labor force for all years using the 1992 rate e.g. in the 2012 column, if the labor force participation rate had been 83.6% instead of 81.4%, 103,960,780 people would have been in the labor force instead of 101,224,970 (2012 column, row 3). The 5th row does the same thing as the fourth only it uses the 2002 rate for all years and the last row takes the difference between the potential amount of workers at the 2002 rate and the actual amount of workers (5th row minus 3rd row for all columns, which is why it is 0 in the 2002 column).

What this chart shows is that if the labor force participation rate had been 83.3% in May, 2015 instead of 81% there would have been an additional 2,875,345 people in the labor force. Now perhaps not all of these people would have been employed since the labor force includes both employed and unemployed people who are looking for work. But if even 75% of them had a job that would be an additional 2,156,508 workers!

Those additional workers would be making cars, making airplanes, making hamburgers, serving food, driving trucks, cleaning houses, teaching kids, working at a bank or any number of other things. They would be actively engaged in the economy, producing stuff for others and earning a paycheck. So where are they?

Hopefully they are working in the underground economy. Perhaps they are being paid under the table to do yard work, freelance construction work, business consulting, or some other job that allows them to earn a living but keeps them out of the official statistics. This is still not good for the rest of us, since in the underground economy workers don't pay taxes, which means they don't contribute to the goods and services provided by the government, which means a higher tax burden for the rest of us.

In an even worse scenario those workers are not working at all. Instead they are relying on family members or friends to support them or they are receiving government aid in the form of food-stamps and other benefits. Either way, they are not supporting themselves but instead relying on other productive people to support them.

This makes us all worse off. The people who aren't working don't get the satisfaction of feeling useful and contributing to society while the rest of us not only have to support them, but we also miss out on the opportunity to purchase the goods and services that they could have produced. It's a lose-lose situation.

Now if some of these people left the labor force for private reasons e.g. they won the lottery and simply retired there is nothing wrong with that. But remember that this is the prime working age labor force participation rate, people age 25 - 54, so widespread early retirement should not be a big factor. If instead there are too many regulations and taxes and just general economic uncertainty, hindering entrepreneurs ability to create and produce their products which drags down job growth, then that is a serious problem that is hidden by low unemployment numbers. I think that this latter explanation is what is happening and I think it is a problem for the economy and will continue to be going forward, despite what the unemployment figure suggests.

Wednesday, June 17, 2015

Eugenics and the minimum wage

One of the more tragic ideas to catch on during the progressive era (late 19th and early 20th century) was eugenics. According to Diane Paul (2001) “Eugenics” describes a movement to improve human heredity by the social control of human breeding, based on the assumption that differences in human intelligence, character and temperament are largely due to differences in heredity.

Many prominent economists were supporters of eugenics. Thomas C. Leonard wrote an article that was published in the Journal of Economic Perspectives in 2005 that re-introduced some of the most prominent economists who supported eugenics. For example:

     “If we could leave out of account the question of race and eugenics,” Irving Fisher (1921, pp. 226–227) said in his presidential address to the Eugenics Research Association, “I should, as an economist,be inclined to the view that unrestricted immigration . . . is economically advantageous to the country as a whole . . . .” But, cautioned Fisher, “the core of the problem of immigration is . . . one of race and eugenics,” the problem of the Anglo-Saxon racial stock being overwhelmed by racially inferior “defectives, delinquents and dependents.”


     “Social progress is a higher law than equality,” said Simon Patten, economist at the Wharton School and American Economics Association (AEA) president in 1908, and the only way to progress was the “eradication of the vicious and inefficient.” Frank Fetter (1899, p. 237), who was to serve as president of the AEA in 1912, also worried that “the benefits of social progress are being neutralized by race degeneration” owing to the “suspension of the selective process.”

And even though the moral character of these economists was dubious, their understanding of economic theory was sound. In fact, it was better than many of the progressive economists of today. For though their ends were detestable, they recognized the appropriate means for getting there; make the lower classes unemployable. After all, if a person can't work they can't afford to raise a family. What is a good way to ensure that the least productive, lowest class of people are unemployable and can thus be recognized by society as such? Increase the lowest wage at which people are allowed to be hired. From the article:

     Sidney and Beatrice Webb (1897 [1920], p. 785) put it plainly: “With regard to certain sections of the population [the “unemployable”], this unemployment is not a mark of social disease, but actually of social health.” “[O]f all ways of dealing with these unfortunate parasites,” Sidney Webb (1912, p. 992) opined in the Journal of Political Economy, “the most ruinous to the community is to allow them to unrestrainedly compete as wage earners.” A minimum wage was seen to operate eugenically through two channels: by deterring prospective immigrants (Henderson, 1900) and also by removing from employment the “unemployable,” who, thus identified, could be, for example, segregated in rural communities or sterilized.


     Columbia’s Henry Rogers Seager, a leading progressive economist who served as president of the AEA in 1922, provides an example. Worthy wage-earners, Seager (1913a, p. 12) argued, need protection from the “wearing competition of the casual worker and the drifter” and from the other “unemployable” who unfairly drag down the wages of more deserving workers (1913b, pp. 82–83).

I encourage you to read the whole article. It is an informative read.

It would be wise of the modern progressives to remember the roots of the minimum wage. It is not a tool to lift people out of poverty; rather it is a tool to keep people in it. The effects of a minimum wage are the same today as they were back then: It makes the least educated, lowest skilled people unemployable by raising the cost of their labor above the value it produces. If you want to ensure that those types of people remain in poverty, a high minimum wage is a good place to start.