A Pamphlet for Our Times

The minimum wage causes unemployment. This is a well-known fact amongst economists.

A little known fact is that the intended goal of the minimum wage when it was first debated and enacted was specifically to keep MINORITIES unemployed. Evil men believed that non-white races were inferior, and they recognized that a minimum wage would prevent these people from getting jobs. One minimum wage supporter felt it would:

"protect the white Australian’s standard of living from the invidious competition of the colored races, particularly of the Chinese.”

An American pro-minimum wage supporter approvingly recognizes that minorities will be unemployed:

“With regard to certain sections of the population [the “unemployable”], this unemployment is not a mark of social disease, but actually of social health.”

Keeping non-whites unemployed is NOT a mark of social health!

Another social activist "made clear what should happen to those who, even after remedial training, could not earn the legal minimum: “If we are to maintain a race that is to be made of up of capable, efficient and independent individuals and family groups we must courageously cut off lines of heredity that have been proved to be undesirable by isolation or sterilization . . . .”. He believed that economic isolation through the minimum wage would achieve this.

THE MINIMUM WAGE WAS CREATED BY EVIL RACISTS TO KEEP MINORITIES POOR AND, HOPEFULLY, DEAD. WHY THEN DO SO MANY GOOD, HONEST PEOPLE STILL SUPPORT THESE HEINOUS LAWS?

ABOLISH THE MINIMUM WAGE.

PASS THIS FORWARD AND MAKE A STAND FOR JUSTICE!



For a detailed and horrifying survey read:
"Eugenics and Economics in the Progressive Era"
Thomas C. Leonard
Journal of Economic Perspectives—Volume 19, Number 4—Fall 2005—Pages 207–224

Quote of the day: Poverty and the Yankees

I've been grading papers for a Fraser Institute essay contest, and I pass along this gem (from a high schooler, no less):

"Poverty is simply not solvable by throwing money at the issue, as the developing world is not a New York baseball team."

College rankings

In a movement that's been gaining support for a number of years, the members of the Annapolis Group have decided to try and stick it to the U.S. News & World Report college rankings by boycotting the process entirely. Well, they've only recommended boycotting it to the respective institutions-- their statement is here. They claim not to like the reputation part of the rankings in which college presidents are asked their opinion of the other schools in the survey, and this metric accounts for 25% of the final tally.

Personally, I think they don't like the rankings as a whole, and that's just a margin by which they can find a leg to stand on. College rankings are a zero-sum game. You go up when others go down, and your overall score doesn't matter one bit-- it only matters as compared to everyone else's. As such, self-interested college presidents should form opinions of these surveys based on how their institutions rank relative to where they feel they should rank. Those presidents most in favor of change should be those that feel most underrated-- and those at the summit of the list should never be against the rankings. It's interesting that the three presidents quoted in the article as being against the rankings-- or at least on record as against the reputation survey-- are from colleges ranked 41st, 45th and 65th, or those right in the range of feeling that a) they are underrated, and thus b) would likely stand to gain the most from an elimination of the U.S. News and World Report process.

(I could be mistaken, but I believe Reed College boycotted these rankings for a while in the late 90s and maybe into this century. Again, I could be wrong, but I think they were roughly around 10th when they decided to do this, and now I notice they are back in the rankings at around 50th, which is an interesting story in its own right.)

College presidents, as well as students, know exactly how important these rankings are. I was fortunate enough to attend one of the colleges nearer the top of the Liberal Arts list, and also served in student government there during the search and selection process of a new president. There was no larger factor in the decision than the candidates impact on the college's standing in the rankings. It wasn't something we were trying to conceal-- the student newspaper had the exact same debate we were having. Rankings are a massive recruiting tool, and colleges want the best students they can get.

I personally don't see the U.S. News and World Report rankings fading into the background any time soon. The market needs third party rankings, and all said they do a solid job-- independent of the rankings, there's a lot of data in one concise place. One solution put forth by the Annapolis Group is that there exist competing rankings that do a better job; they name National Association of Independent Colleges and Universities and the Council of Independent Colleges, among others. Of course, there's no reason to believe that these groups' rankings can insulate themselves from the discontent that U.S. News and World Report has fielded-- and once those new rankings come out, I can assure you that those nearer the bottom will be ready to cry foul.

Commandments for Driving

This one looks like a trick, but CNN.com is peddling it, so I'll take it as real. The Vatican has released the Ten Commandments of driving. It's in a document called "Guidelines for the Pastoral Care of the Road." My favorite new Commandment is "On the road, protect the more vulnerable party." Not sure about the incentive compatibility of that one.

One small issue: If the (original) Ten Commandments were given to Moses from God on Mount Sinai, how does the Church fit into the whole ordeal of being God? Isn't God the only one in a position to decree Commandments? I'm not even going to go down that path-- but I will say my co-blogger knows a lot more about that stuff than I claim to.

Dynamic Rent-Seeking

We're back! Comprehensive exams put a hiccup into the blog process, but now that I'm (hopefully) done with those things for the rest of my life, there shouldn't be any more 6 week gaps.

Here's an issue I've been wrestling with for the last couple of days. We know rent-seeking as the process of devoting resources to gaining political favors. People would be willing to spend up to the amount that they would gain from said favor to win the policy change. Nothing new here.

A discrepancy arises in the literature concerning the permanence of laws and how this may affect the amount of rent-seeking we observe. Landes and Posner show that a more independent judiciary creates a more stable policy environment in the sense that laws would persist longer. This would, in turn, create more valuable laws (via a longer horizon to glean rents from a policy change), and we would then observe more rent-seeking.

Randy Holcombe comes to a different conclusion. In his pursuit of creating a tax system that would minimize political costs (such as rent-seeking), he puts forth that tax codes should constitutional so they would be more difficult to change. This permanence, he says, would reduce the level of rent-seeking.

Something has to give, right?

A couple of thoughts:

- There is a flip side to this that's not being examined; namely, the cost of changing a tax code. If a more permanent law is more costly to change-- which may well be the case-- then there may be a reduction in the amount of rent-seeking. It's an elasticity issue.

The only problem I see with this is that rent-seeking literature almost exclusively ignores this half of the problem. Typically, you look at potential benefits, and groups will spend up to that amount. End of story. Maybe it's not a problem-- maybe it's something that needs to be looked at. But that doesn't seem to mesh well with what's already out there.

- Consider the following thought experiment: Let's say anyone could change the tax code with the flip of a switch. Anyone can change it; the person after you can do so just as easily as you did. How much rent-seeking would happen now? I don't think it's hard to see that there would be zero rent-seeking; it is the permanence of the law that gives it any value in the first place. After all, a zero time horizon doesn't lead to any present value calculations.

For this reason, I'm tending to think that the Landes/Posner position might be a bit more accurate, but I'm certainly not sold either way.

Economics, California-style

So this whole MacArthur Maze collapse has put a wrench into the commute plans of tens of thousands of Bay Area residents.

The curious step, though, was Governor Schwarzenegger authorizing free public transit the Monday after the collapse. First off-- if that's the solution, why only one day?

But more importantly-- is making it free the answer? Demand for public transit shot up; shouldn't the price rise? Then administrators shrug their shoulders when parking lots overflow, acting as if there was nothing they could do about it.

The same thing happens during natural disasters; price caps accompany any number of "essential" goods, and then policy-makers are left baffled as to why no one can get anything.

Should the governor even ask?

So the Bay Area is in it up to their waists for the next few months-- a tanker truck tipped over early Sunday morning, caught on fire and melted the two overpasses under which it rested. Which would be bad enough on its own, without even considering that a) one of those overpasses takes people from the Bay Bridge to Oakland and b) the other one connects the area around Berkeley (and everything north of there) to Oakland. Good times for the East Bay! By some miracle of God, no one was killed.

The story of it is here; the wording of it has changed a bit, but any full AP version of it should have a paragraph referring to the fact that Gov. Schwarzenegger plans on declaring an emergency and asking for federal funds.

Now, if only someone had studied the determinants of who gets federal emergency money...

The short of it: If you matter in the presidental election-- i.e. you're a battleground state-- then you're a lot more likely to get a sympathetic nod from Uncle Sam.

So how does California fit in? Well, it wasn't a battleground state, and on top of that, they didn't vote for Bush.

Professor Sobel puts the odds at "slim" that they get some federal money for this one. I think that's a bit generous.

The Jock Exchange

A group called the A.S.A. Sports Exchange has an application with the U.S. Patent and Trademark Office to create a market that deals in professional athletes. Basically, athletes sell a portion of their future earnings for a current sum-- an IPO of sorts, transferring the risk of a burgeoning superstar to the market. Fascinating concept. A few comments:

- In the short term, there is going to be (and the articles mentions this briefly) an adverse selection problem with regards to which athletes choose to sell themselves to the public. Tiger Woods has no need to give up any portion of his future earnings for current wealth-- he's already comfortable. Greg Oden and Kevin Durant might be beyond this point as well, but there are upcoming athletes in which there is a lot of speculation about their long-term potential and would be willing to take a more risk-averse position. These are the athletes that will be the superstars that everyone wants to buy and sell in fifteen or twenty years, and they will be available on the market. Incorporating the market at any time will lead to a short-term selection issue-- but if the market can survive it for the first years and not fold, there's no reason to necessarily believe it would persist.

- Drafting is a huge question mark for teams-- which players are going to pan out and which will become busts? Consulting the market would be another piece (and a significant one) of information that sports franchises could utilize.

- Will the SEC handle this? The Patent Office already has their hands on this, so it's not likely it will be able to wrest itself free of Uncle Sam. Also-- wouldn't it be interesting if this market operated free of any sort of insider trading regulation? Even if only for comparison to traditional stock markets...

Double-peaked preferences

So, among other things, Arrow's Impossibility Theorem shows that if you've got individuals with double-peaked preferences, then a simple majority voting procedure will not yield consistent outcomes. While it's easy to construct someone with double-peaked preferences on a non-linear spectrum-- ranking favorite sports teams or colors, for example-- it's generally the case that double-peaked preferences don't exist in voting for candidates. It's vastly oversimplifying the voting process, but if you cared only about one dimension of politics-- say, political leaning-- then you probably won't prefer a radical republican and a radical democrat to someone in the middle. People could then argue that the assumption of double-peaked preferences is unrealistic, and hence, Arrow's situation doesn't describe the vast majority of real life. (Though assuming that all political decisions are made on a one-dimensional margin might be just as unrealistic.) Fair enough. It's not like there's a shortage of ways to cut down majority-rules voting systems.

What's interesting is that I've seem to run across a couple of situations recently where I (and a professor of mine) have, quite clearly, double-peaked preferences. Maybe I'm missing something. I also don't think that it matters that there's no voting involved in these scenarios-- the issue above was with the accuracy of double-peaked preferences in representing real life.

They're both similar-- one involving my car, the other involving a house that a professor of mine recently bought. My car's warranty expires next month, so I took it down for a routine checkup last week. With regards to the viability of what parts were under warranty, I either want them to be functioning very well or very poorly-- either way, I end up with a car running well (on its own or immediately fixed) at no additional cost to me. What I want least is my car to be running just well enough that they choose not to fix anything. So I want it in great shape or poor shape most, but least favorable to me is a moderately well running car. That's a double-peaked preference. (Principal/agent problems of the mechanic are tangential to my ultimate preference for the condition of my car.)

The same idea holds for the recently purchased house. New houses get checked out by an independent third party that determines if everything is in working order. If everything is fine, so be it-- if not, then the seller is responsible for the repairs. This creates the same incentives to the buyer of the house as to the driver of the car-- either you want the house in tip-top shape, or in poor condition such that it will get fixed by the seller. The worst-case scenario is a house that comes in just above the fix-it line. Again, we've got double-peaked preferences.

Maybe double-peaked preferences are a bit more common than I had previously thought.

Global Warming Update

I believe we've posted here about global warming before, but a few things I'd like to pass along:

- I can try to be humorous about this subject, but nothing I write is going to be able to hold a candle to this. Here's the short of it: Global warming is the new terrorist.

- The Heartland Institute has been proactive on the topic in recent weeks; scroll down a little on the front page.

The Tennessee Center for Policy Research has been thrown into the global warming fray after they reported that Al Gore uses a good amount of electricity himself-- more than 20 times the national average, in fact. Evidently, Gore supporters weren't too pleased with press release. I guess they'd have to be-- admitting that it's alright someone (even Al Gore) to purchase however much electricity they want would undermine their position of believing they have the right to tell everyone else what and how much to consume. I've dined with TCPR's president, Drew Johnson, a couple of times and he's a great guy that does consistently great work. He even landed John Stossel!

Supply Curves are Upward Sloping

ABC News has a fascinating story about the President of the American Society of Transplant Surgeons promoting the right to sell kidneys. He argues that it will be cost-effective and very manageable from a bureaucratic point of view.

Science Blog reports that the monetary cost of donating a kidney can be substantial as well. They discuss a doctor's literature survey on the cost of donating a kidney.

Some of the results are as follows:

1. One US study finds that the average cost to a donor is $837, with values as low as zero and as high as $28,900.

2. Time lost from work is substantial -- average loss of $3,386 in the United Kingdom and $682 in the Netherlands.

3. Physical Limitations led to 3% of donors in one study either losing or resigning their job.

A common fear about a market for organs is that, at a positive dollar price, the rich will live and the poor die. Regardless of the merits of this argument, one must recognize that price also plays a role in increasing the supply of a good. Incentives matter.

This one's for Tom Johnson

We take requests here at TPS; as such, here are my thoughts on yesterday's WSJ piece against free trade:

The article focuses a lot (entirely?) on one side of the argument-- the costs to Americans. If the goal is to make "Americans" better, then you have to look at the costs and benefits to Americans and make a judgment. Americans losing jobs is a cost, but being able to produce goods and services cheaper is a benefit. It's an example of visible, condensed costs and very dispersed benefits-- and "300 million Americans paying $0.50 less for a t-shirt" isn't quite the newsworthy story that "5,000 Americans to lose their jobs" is.

It's not unlike the argument for the minimum wage. A family member plainly asked me over the weekend: Don't some people benefit from raising the minimum wage? Quite simply, the answer is probably yes. There are people that benefit from the minimum wage being increased. But that's not a reason to do it-- you need to look at both sides of the issue. If it's aimed at helping the working poor, are more of the working poor being hurt by the policy than helped on some margin? If it's aimed at income redistribution, are the working poor as a whole improving at the expense of the upper classes? It's a positive statement--not a normative one--on the means of formulating an actual argument and determining a policy's effect. Just because something has benefits is no reason to do it, and just because something has costs is no reason to refrain from doing it.

But back to the free trade issue-- it is also related to an issue first brought to my attention by Don Boudreaux in relation to international balance sheets and the irrelevance of trade deficits. Namely: Why look at the world in terms of countries? If we looked at the world in terms of a world economy, the idea of outsourcing immediately goes out the window. Instead, what we previously attributed to "outsourcing" is now the world becoming a richer place through a better allocation of productive resources. To adapt one of Boudreaux's analogies: If we divided the world into blondes, brunettes and redheads, would we have reason to fret if the blonde's jobs were being outsourced to the redheads?

"Retooling the American education system" is not the answer. Training Americans for jobs that are "likely" to remain in the United States is guesswork at best as to which jobs those will be-- not to mention the political processes involved in determining what those jobs would be. If "retooling" meant "eliminating the requirement of all American children to complete school through high school," I think that policy might have a bit more prospect for positive impact. After all, the U.S. could be completely eliminating a comparative advantage by requiring everyone to go to school through age 18...and if the goal is to get jobs within the U.S., then that would help achieve those ends.

"Retooling the tax code" involves all of the same guesswork and public choice issues as does the education issue.

"Free trade works" doesn't sell enough newspapers, I suppose.

Unleashing Capitalism

Russ Sobel, Josh Hall and I have recently edited a book concerning the institutional shortcomings of West Virginia, its role in our state's dismal economic performance, and what to do to make things better. It's called Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It. It is the first large-scale effort by the Public Policy Foundation of West Virginia, a group committed to "free enterprise, individual liberty, limited government and traditional American values." The book is entirely original research, with a number of contributions from current graduate students here at West Virginia University along with scholars outside of the state (William F. Shughart II, Edward J. Lopez, and Daniel S. Sutter, among others. The full list of authors is here.)

At its best, this book could lead not only to significant structural change in the Mountain State, but also provide a rubric by which other states could produce similar publications tailored to their particular circumstances.

To capitalism!

The Morgantown Heat!

I got pulled over yesterday on the way to school. Nothing major-- just a "friendly" 10-minute reminder that my front left headlight is out.

Fortunately, my roommate was with me at the time. While waiting for my license, registration and insurance to check out, I informed him of my theory that, ceteris paribus, drivers stand a much lesser chance of receiving a ticket when they have passengers in their car. The idea is that if it is one driver's word against one officer's word in a court of law, the State is likely to uphold the policeman's original claim. Should there be another passenger to vouch for the driver, the court now has two people claiming innocence. Knowing this, the officer doesn't waste his time writing a ticket and then having to go to court to potentially defend his actions. Again, ceteris paribus-- this isn't to say that no one ever gets tickets with other people in the car, nor that you can't get off with just a warning if you are by yourself. I just think you stand a better chance with some passengers in your car.

It's my personal experience that lead me to this idea-- I've got pulled over a handful of times over the years, and while the times that I've been pulled over are pretty evenly distributed between driving alone and driving with passengers, only once did I get a ticket while driving with a passenger (well-deserved, it should be noted), and only once did I not receive a ticket while driving by myself. A quick perusal of the Department of Economics here at WVU finds a roughly similar track record.

I'd love to see some data on this-- does anyone know what type of statistics police departments keep with regards to whom they pull over and the occupancy of the cars? Is any of this available?

Millionaires in your state

In need of a quick Econometrics paper? There's plenty to be done with this.

I think only Mississippi undercuts the Mountain State, but I only clicked on the light colored ones I could discern from the white background. (And why the avant-garde arrangement?) Also-- I wonder how much of an impact Wal-Mart has on Arkansas? Rate-wise, I think Hawaii is on top-- California, of course, dominates by sheer volume.

Edited: A classmate of mine from South Africa has informed me that The Perfect Substitute in Afrikaans is Die Perfekte Plaasvervanger. So, you know, TPS or DPP. Either way.

My Skarbek-esque post: Federalist 11

So I did last night what so many other Americans do every Friday night-- read the Federalist Papers. #11 caught my eye-- as did Hamilton's description of tariffs, trade and politics. He starts with the following hypothetical: "Suppose...we had a government in America capable of excluding Great Britain...from all of our ports; what would be the probable operation of this step upon her politics?" After stating that the arguments of the day posited little to no effect on Britain's policies, Hamilton lets fly this nugget:

"A mature consideration of the objects suggested by these questions will justify a belief that the real disadvantages to Great Britain from such a state of things, conspiring with the prepossessions of a great part of the nation in favor of the American trade and with the importunities of the West India islands, would produce a relaxation in her present system and would let us into the enjoyment of privileges in the markets of those islands and elsewhere, from which our trade would derive the most substantial benefits. Such a point gained from the British government, and which could not be expected without an equivalent in exemptions and immunities in our markets, would be likely to have a correspondent effect on the conduct of other nations, who would not be inclined to see themselves altogether supplanted in our trade."

Now, I'm not an expert on this period of history, but after reading over this I would presume that Britain had some sort of existing trade policy against the United States at the time; nonetheless, it's intriguing that the path to remedying the situation (in Hamilton's eyes) is to hammer Britain with our own trade-impeding policies. I'm reading this as saying that if we can hurt Britain bad enough, then we can convince them to reduce their trade policies and everything will end up peachy in the end.

It begs the question: Is Hamilton the first hippy? Is there any reason to believe, especially given the recent history at the time between Britain and the U.S., that an aggressive trade policy is going to lead to a greater degree of openness in the long run between the two nations? It's not to say that this situation couldn't happen-- but how could this be put forth as the deductive outcome?

Some other choice lines from Federalist 11...

Hamilton on his hopes for America in the world's economy:

"By a steady adherence to the Union, we may hope, erelong, to become the arbiter of Europe in America, and to be able to incline the balance of European competitions in this part of the world as our interest may dictate."

Hamilton on neutrality:

"The rights of neutrality will only be respected when they are defended by an adequate power. A nation, despicable by its weakness, forfeits even the privilege of being neutral."

(Wasn't Switzerland respected as neutral in World War II?)

Hamilton on the importance of military security:

"It would be in the power of the maritime nations, availing themselves of our universal impotence, to prescribe the conditions of our political existence; and as they have a common interest in being our carriers, and still more in preventing our being theirs, they would in all probability combine to embarrass our navigation in such a manner as would in effect destroy it and confine us to passive commerce."

Hamilton on the composition of foreign trade:

"The variety, not less than the value, of products for exportation contributes to the activity of foreign commerce. It can be conducted upon much better terms with a large number of materials of a given value than with a small number of materials of the same value, arising from the competitions of trade and from the fluctuations of markets."

An intriguing read.

Duel!

A classmate put forth this conundrum in my Public Choice class this morning:

Let's say you are in a three-way duel, and all three of you have a gun with an unlimited amount of bullets. Your two opponents hit with an accuracy of 90% and 80%, and you shoot with a success rate of 50%. Sequential shooting rules apply, and it's your turn. What do you do? He was convinced of a set course of action that would emerge in the short-run; I'm not entirely sold on the idea. I'm curious what everyone else thinks. I also think the far more interesting scenario is if everyone has to choose at once, instead of sequentially.

I then got to thinking about a more general scenario-- a three-way duel, and everyone in the group has one bullet. Accuracy rates would matter at the limit, but anything away from that and I think risk preference plays a bigger role. Even more so in a four-person duel with one bullet apiece-- accuracy matters at the limit, but now you've got risk preferences mixed in with group sanction effects, though group sanction exists only insofar as there is more than one period to make decisions (all-at-once decision making with the option of inaction).

The War on Drugs

Since every Wednesday is humor day at CNN.com, I figure to add in a thought or two concerning their chief comedian's column today concerning the War on Drugs. (It's capitalized now, because it's not a war unless you capitalize the name like you would for the title of an essay.)

One of my professors, Russell Sobel, has a great comment whenever this topic comes up: Couldn't you categorize a number of the "costs" of the War on Drugs (or any of a number of government social programs) as benefits? Dobbs notes that nearly 8,000 people are trying drugs every day-- that's a cost? Do you think the people trying them view it as a cost? It's like writing a piece on the tragedy of teenage driving deaths and saying that it's a cost that 5,000 new teenagers get a driver's license every day.

Dobbs also reports that illicit drug use costs the U.S. nearly $200 billion dollars per year. No word on the breakdown of that, but I'd bet a healthy share of it is due to the fact that the U.S. chooses to define certain drugs as illegal and needs to enforce that. Fair enough-- not that it's just, but it is a cost to the American taxpayer. But how come we never see estimates of the benefits of drugs? There is surplus in every black market deal, right? Despite the vast inefficiency and outright liberty-crushing War on Drugs, couldn't it be that drug use still generates a net gain to society? I know benefits estimates have been put forth, but I don't have links to any of them at the moment. Feel free to pass them along.

With regards to drugs and crime, yes, reducing drug use reduces crime because the government has defined drug use as a crime. If we defined wearing blue shirts as a crime, we'd have a lot of people committing that crime tomorrow. Once we started enforcing the law, people would substitute away from them. Yay-- we've reduced crime! People then point to crime indirectly related to drugs, such as assault, but there have been studies that have shown that the net impact of declaring drugs illegal has increased crime, not decreased it. After all, without a sound court system to enforce contract disputes in drug transactions, groups must provide their own enforcement.

And to give you a good sense of the excess burden of all of this: the War on Drugs Clock.

Your daily nonsense

From CNN:

"Even with exports growing, the deficit was a drag on the economy, as it meant that every man, woman and child spent an average of about $7,300 on imported goods and services during the year, turning to factories overseas rather than U.S. producers for the products they wanted."

Yeah.

Dictatorship rankings

It's time for Parade's dictatorship rankings again! The top two are the same from last year, though the third, Sayyid Ali Khamenei of Iran, jumped up to #3 from #9 only a year ago. New to the rankings: Choummaly Sayasone of Loas (at #16), Hosni Mubarak of Egypt (#18), Paul Biya of Cameroon (#19) and Vladimir Putin of Russia (at #20). The above link, if you scroll to the bottom of the page, has the previous rankings since they started them in 2003. There's certainly a paper to be had there.

As I pointed out last year, the U.S. has given money to nearly all of these rulers, which is interesting in that the U.S. likes to further the belief that they procure aid only in the support of democracy. Aid clearly doesn't work, but it's here to stay, so the question is how to improve upon the situation. Part of me thinks bribing dictators to incorporate good policies might work, but if the bribes get high enough, it could turn into a one-shot game that wouldn't lead to any sort of long-run well-being.