Russell Roberts's Blog, page 1417

GS invests in protection

When I think of Goldman Sachs, I think of its former chairman, Hank Paulson, calling its current chairman, Lloyd Blankfein a few dozen times the week before the AIG bailout, a bailout that helped GS collect billions of dollars it might have lost. GS would like you to think of something else.

Money isn't everything

I always like to tell my students not to take the job that pays the most money. Or at least don't take it for that reason. Most people don't take the job that pays the most money. We trade money for satisfaction, meaning, leisure, beauty, pride, and honor. Here is the story of a man who paid $72 million to have a meaningful life. It was a bargain.

Quotation of the Day…

… is, like yesterday's QoD, from Krugman's wonderful 1993 essay "What Do Undergrads Need to Know about Trade?"; the following quotation is found on page 123 of Krugman's indispensable book Pop Internationalism:

[T]he level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect.  Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.

Quotation of the Day…

… is from Paul Krugman's outstanding May 1993 American Economic Review essay "What Do Undergrads Need to Know about Trade?", reprinted in Krugman, Pop Internationalism, pp. 117-125; this quotation is on page 124 of the latter:

Now there are reasons, such as external economies, why a preference for some industries over others may be justified.  But this would be true in a closed economy, too.  Students need to understand that the growth of world trade provides no additonal support for the proposition that our government should become an active friend to domestic industry.

Litmus test

Watch this video. (HT: Drudge) It gives me the creeps. The desperation and viciousness is palpable. But there are surely millions of fine people, some of them my friends and neighbors who will find it inspiring. Such is the nature of politics. This is going to be the ugliest political campaign of my lifetime.

The Curious Task

Paul Osternman, who is in the Sloan School of Management at MIT writes in the New York Times (HT: Real Clear Politics):

On Thursday, President Obama will deliver a major speech on America's employment crisis. But too often, what is lost in the call for job creation is a clear idea of what jobs we want to create.

What jobs we want to create? Who is "we?" What does "create" mean? A clear idea? No one has a clear idea of how the government can create good jobs.

The next paragraph:

I recently led a research team to the Rio Grande Valley in Texas, where Gov. Rick Perry, a contender for the Republican presidential nomination, has advertised his track record of creating jobs. From January 2000 to January 2010, employment in the Valley grew by a remarkable 42 percent, compared with our nation's anemic 1 percent job growth.

But the median wage for adults in the Valley between 2005 and 2008 was a stunningly low $8.14 an hour (in 2008 dollars). One in four employed adults earned less than $6.19 an hour. The Federal Reserve Bank of Dallas reported that the per capita income in the two metropolitan statistical areas spanning the Valley ranked lowest and second lowest in the nation.

Leading a research team to the Rio Grande Valley strikes me a bit strange. But never mind. The implication is that sure Perry can create jobs. But he doesn't know how to create good ones.

Who does, Professor Osterman?

Do you really think Governor Perry just had his JobCreationMeter on the wrong setting, the crummy low-wage setting instead of the high-tech high-wage information economy setting and that's why the Rio Grande Valley isn't doing so well? And you're writing this piece to make sure the President gets the setting right?

The next six paragraphs are about the challenges of living on low wages in the Rio Grande Valley. I guess the goal of the research team was to discover how hard it is to be poor in Texas. I knew that already.

So what's the solution? Here is the rest of his piece:

Must we choose between job quality and quantity? We have solid evidence that when employees are paid better and given more opportunities within a company, the gains outweigh the costs. For example, after a living wage ordinance took effect for employees at the San Francisco International Airport, in 1999, turnover fell and productivity rose.

Contrary to the antigovernment rhetoric, there is much that the public sector can do to improve the quality of jobs.

A recent analysis by the Economic Policy Institute reported that 20 percent of federal contract employees earned less than the poverty level for a family of four, as opposed to 8 percent of traditional federal workers. Many low-wage jobs in the private sector (notably, the health care industry) are financed by taxpayers. The government can set an example by setting and enforcing wage standards for contractors.

When states and localities use their zoning powers to approve commercial projects, or offer tax incentives to attract new employers, they can require that workers be paid living wages; research shows this will not hurt job growth.

Labor standards have to be upgraded and enforced, particularly for those employers, typically in low-wage industries, who engage in "wage theft," by failing to pay required overtime wages or misclassifying workers as independent contractors so that they do not receive the benefits to which they are entitled.

Americans have long believed that there should be a floor below which job quality does not fall. Today, polls show widespread support for upgrading employment standards, including raising the minimum wage — which is lower, in inflation-adjusted terms, than it was in 1968. It's time for the federal government to take the lead in creating not just more jobs, but more good jobs. The job-growth mirage of the Rio Grande Valley cannot be our model.

So government just needs to pay more than the market will bear and force private employers to do the same. You might think this would reduce employment, but don't worry, "research shows this will not hurt job growth." I am comforted by this waving of hands.

Here is something else research shows–wages are determined by your productivity. Your productivity is a function of your skills, your investments in knowledge, your work ethic, and the capital that you have to work with. Laws that mandate higher wages don't affect any of these things. They just make low-skilled workers more expensive.

Remember your Hayek:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

Fighting that Well-Known Irrational Prejudice Against Drunkards

From this August 16, 2011, press release by the Equal Employment Opportunity Commission (HT Reuvain Borchardt):

Old Dominion Freight Line, Inc., a  trucking company with a service center in Fort Smith, Ark., violated federal  law by discriminating against at least one truck driver because of  self-reported alcohol abuse, the U.S. Equal Employment Opportunity Commission  (EEOC) charged in a lawsuit filed today. The company should have met its legal  obligation to comply with the Americans with Disabilities Act while assuring  safety, rather than permanently sidelining self-reporting drivers, the EEOC  contended.

An argument can be made that if a private trucking firm (or taxi firm, or tugboat firm, or airline, or any private firm that hires people to drive or pilot vehicles) fires drivers or pilots who self-report their alcohol problems, alcoholic drivers and pilots will have less incentive to self-report.  One consequence, then, might be that the roads, air, and waterways will be filled with more drunken drivers and pilots.

On the other hand, having self-confessed alcoholics driving or piloting vehicles creates obvious problems.

Are these problems appropriately minimized by not firing self-reporting alcoholics and, instead, putting them on leave or giving them a desk job?  Perhaps.  But perhaps not.  Perhaps knowledge that firing isn't in the cards – while making employees more likely than otherwise to report substance-abuse problems – makes employees less likely to avoid substance abuse in the first place.  The trade-offs here are numerous and nuanced.

Surely each firm has appropriate incentives to try to strike the right trade-offs.  If a private firm fires an alcoholic truck driver, and then government bureaucrats – some all aflame with self-appointed missions to inflict their own brand of "justice" on the world, and others tempted by the additional litigation experience that such actions add to their resumes – take legal action against the firm for doing so, the likely consequence is that more trucks, planes, and boats will, in the future, be driven and piloted by drunkards and other substance abusers.

Breaking windows

Alex Tabarrok suggests that Krugman has taken the broken window fallacy to a whole new level. Krugman argues that we want more regulations when we're in a liquidity trap–it forces firms to invest. Alex responds:

What is interesting about this argument is that Krugman has gone one derivative beyond the broken windows fallacy to create an argument requiring even stronger assumptions, let's call it the breaking windows fallacy.

Bastiat's assumption of a one-time, randomly broken window is more likely to be stimulative than an increase in the rate of window breaking. A one-time, window-breaking is a sunk cost that does not affect profit-maximization, at least not according to basic theory. (I say basic theory because once we introduce fixed costs, bankruptcy costs and liquidity constraints a one-time negative shock may cause a firm to shut down even when it would continue to produce without the shock, ala Krugman and Baldwin 1989). Thus a one-time window breaking may cause firms to increase spending. An increase in the rate of window-breaking, however, is a change in the marginal conditions for profit maximization that will cause some firms to exit the industry (reduce output) and thus the net effect on spending is more ambiguous.

My druthers

In this earlier post about the upcoming speech of President Obama, I wrote:

What I'd like him to say is the same thing I wanted him to say in January of 2009. My druthers haven't moved at all.

What I wrote in January of 2009 was this piece. The gist of the piece was: Don't increase federal spending, it'll be wasted on cronies, make our deficit worse and have little lasting effect on reaching recovery. Instead, better to make the tax system more transparent and fix the demographic train wreck of Social Security and Medicare now rather than later. Send a signal to the world that we can live within our means and act like adults rather than teenagers. I still believe that approach would have been the right one.

When I said "my druthers haven't moved at all" I didn't mean that it captured all my policy preferences. I meant that I still think fiscal stimulus is wasteful, that our deficit is a problem, that the current structure of the tax system has bad economic and political consequences, and that our demographic challenges would best be fixed sooner than later.

A number of commenters objected to my suggestion for the President to turn Social Security and Medicare into means-tested programs. That is not my preferred policy. My preferred policy is to eliminate both of them and treat adults like adults. Let us make our own choices and let private charity help those who are either unfortunate or irresponsible. Let charities compete in doing dealing with those challenges.

But if we end up keeping some form of Social Security and Medicare, means-testing is the right way to go. Making that transition would reduce the size of government enormously and make the real impact of each program more transparent. It is what I believe will happen. And if the President were to give the speech I suggested, I would be extremely pleased.

Open Letter to U.S. Assistant Attorney General Thomas Perez

Mr. Thomas E. Perez
Assistant Attorney General for the Civil Rights Division
U.S. Department of Justice
Washington, DC

Dear Mr. Perez:

In today's Wall Street Journal you justify the DOJ's crackdown on banks that, in your and your colleagues' opinion, allegedly resist extending mortgages at appropriate market rates to minority home buyers ("Government Is Right to Fight Discrimination in Lending").  And you protest that "The suggestion that the department, as part of its settlements, is forcing banks to lower their underwriting standards and make loans to unqualified borrowers is simply wrong."

Please forgive my skepticism.

Your premise is that profit-hungry banks – out of bigotry or incompetence or both – are leaving money on the table by discouraging credit-worthy homebuyers from borrowing.  If this dubious premise is valid, then a far better course of action for you and your colleagues is to quit your jobs as 'public servants,' start your own banks, and then lend to all of those many homebuyers whose profitable business is rejected by other banks.

By putting your own money where your mouths are, you'll not only give credible evidence that your premise is valid, you'll also – if you're correct – (1) solve through voluntary market actions the problem that you now attack with government force, and (2) make a mint.

It's a classic win-win.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

P.S. Yet another benefit of your putting your money where your mouths are is that, with government resources no longer spent solving a problem that the private sector cures, Uncle Sam's fiscal woes will be a tad bit eased.