Bastiat’s Bastions

Immigration is a contentious topic. Rather than add to the contention, I wish to clarify a poor economic argument that is frequently used in immigration policy debate. Many people support immigration because, “Americans aren’t willing to do the jobs that immigrants are willing to do.” This statement is potentially erroneous in that it confuses the notion of quantity of labor supplied with that of labor supply. Whereas quantity of labor supplied is the amount of labor a person or group provides at a given wage, labor supply is a schedule specifying a person or group’s quantity of labor provided at each possible wage level.

The statement quoted above stems from an observation—that some U.S. jobs are held almost exclusively by immigrant workers. From this observation, a fallacious conclusion—that domestic workers would not work in such jobs at any wage level—is drawn. To say that a group’s quantity of labor supplied is zero for a given job and wage is to say nothing about the group’s behavior at other wage levels. The graph below represents a possible depiction of a labor market with and without immigrant labor.

The graph features two supply curves, one showing quantity of labor supplied by citizens at each possible wage and another showing quantity of labor supplied by the combination of citizens and immigrants at each possible wage. In the absence of immigration, citizens would earn a wage of w_zero an hour and work q_zero hours in the featured labor market. However, if immigrants enter the country and work in the same market, the supply of labor shifts right (quantity of labor supplied increases at any given wage). In equilibrium, workers in this market now earn w_one per hour and work q_one hours. However, by looking along the labor supply curve of citizens, we find that citizens supply zero hours of labor to this market at a wage of w_one . Given their work and non-work alternatives, citizens opt out of the type of labor depicted in the presence of immigration (and its wage-depressing effect). However, citizens will rejoin this workforce if the wage rises above w_one .  Economist Chad Turner points out that this inducement of domestic labor at the higher wage will not obtain if the domestic labor supply curve is sufficiently leftward-shifted.   

Though immigrant laborers do benefit other members of our economy (e.g., consumers and producers), jobs would not go undone without them. Rather, in the absence of immigrant laborers, relevant market wages would move upward and induce the participation of citizens.

-SS

A few weeks ago, PricewaterhouseCoopers (PWC) released its study, “Healthcare policy in an Obama administration: Delivering on the promise of universal coverage.” (You can read about PricewaterhouseCoopers here).

 

Obama’s plan is modeled after the Massachusetts healthcare system. His (near) universal coverage plan comes, not from a public takeover of the healthcare industry public ownership of the means of production in that industry-socialized medicine, but from subsidizing small firms’ healthcare coverage expenses and requiring businesses of all sizes to provide healthcare coverage for workers or face a hefty fine. What is substantially different about Obama’s plan from the Massachusetts system is Obama’s plan does not force individuals to purchase healthcare coverage. What we do have to keep in mind, however, is that it is unlikely that the healthcare reform that goes through Congress and is signed by Obama is the exact one that Obama recommended.

 

PWC estimates that the federal government’s cost for this expanded coverage, mostly from subsidizing small businesses, would amount to $75 billion a year, at least initially. As with all entitlement programs, initial estimates of future costs are underestimated and often overlooked. Real costs for Medicare and Medicaid were about 10 times what was originally estimated. Let’s hope that the estimates for Obama’s plan come closer to the mark. Here is what happens: as more people are covered, demand for health care expands greatly, pushing healthcare costs up dramatically. This results in calls for price controls, which create shortages, along with political civil wars to drop coverage for certain procedures and certain medications.

 

Healthcare coverage for more people, while laudable, drives healthcare prices up for everyone and ignores consideration for how these more highly demanded services are to be delivered. Giving more people the ability to pay without increasing the number of healthcare providers merely puts more people into waiting rooms, without doing anything about actually getting people diagnosed and treated. We end up worse than the Canadians, with not only month-long waiting lists for specialties, but with month-long waiting lists to see primary care physicians. Massachusetts was able to handle this by getting more doctors and nurses from other states. This cannot be done so easily for the nation as a whole.

 

We often fail to see things from both sides. It is easy for us to put ourselves in the place of healthcare buyers, because most of us are. We have a difficult time seeing the big picture of both healthcare buyers and healthcare suppliers, but if we succeed in putting more people into waiting rooms without getting more doctors and nurses to into examining rooms and treatment rooms, we will see prices for healthcare take the express elevator through the roof. Then, political demands arise for a government takeover of the healthcare industry. As Steve Lieber, CEO of the health trade association Health Information and Management Systems Society (HIMSS), is quoted as saying: “Apply traditional economic principles. If you have an increase in demand, there should be some type of effort to address the supply side. It takes time to increase the number of physicians. As demand increases in that sense, it can be an economic incentive on the provider to become more efficient.” (p. 18)

 

However, the AMA and ANA control the accreditation of medical and nursing schools, and the licensing of doctors and nurses. There are several ways of increasing the supply of providers. Massachusetts, for instance, allows patients to designate a nurse practitioner or physician’s assistant as their primary care provider. They also required their medical schools to graduate a minimum number of primary care physicians. Of course, this does not keep these graduates from going out of state and obtaining more lucrative specialties.

 

Two things beyond the Massachusetts reforms are needed to really increase healthcare supply. First, is to require the medical schools and nursing schools to increase their graduation numbers. Second, with the political support from the AMA and the ANA and the current political frenzy over immigration, it is far too difficult for qualified doctors and nurses from overseas to come into the US and practice their professions—this needs to be reversed.

All-in-all, Obama’s plan is not the takeover of the healthcare industry that Hillary Clinton’s almost became. Still, without some rollback of the governmental regulations that provide unnecessary barriers to entry into the healthcare industry, his plan will cause prices to rise so substantially that the voters will demand a government takeover of the industry.

 

-MC

 

From the time we were young, we were told that the key to a good job is to get a good education. Is this right? I am sure we all know people who dropped out of school and were quite successful, and others who have Ph.D.s and cannot hold a job. Both of these types of exceptions to the general rule of better jobs with better education occur time and again. But these are exceptions. Getting a good job without finishing high school is betting against the odds. And that is a sucker bet.

 

The U.S. Current Population Report for 2002 found that on average, high school graduates made 50% higher incomes than did high school dropouts, and those with 4-year college degrees made almost twice what those who finished high school without additional education. The average doctoral earner made more than 3 times what the average high school only worker made. Also, high school dropouts make only about half of the average income for all those over 18.

 

More education is clearly related to higher incomes. Higher education gives people more options. If age or experience is taken into account, education becomes even more important.

 

In my home state of Louisiana, we have natural resource wealth in many forms and in great quantities. Oil, natural gas, farmland, water, timber, fish and wildlife are abundant in this state. A few years ago, I discovered that my own lot was above 3 of 4 natural gas formations below my subdivision. But in Louisiana, amid great natural resource wealth, our rates of poverty are among the highest in the country. Why is this? It is because Louisiana has among the lowest rates of high school completion in the country, with less that 75% of our above 25 population having completed high school, compared to high school completion rates in the upper 80s in states such as Iowa, Vermont, and Minnesota.

 

The wealth that states such as Louisiana and Mississippi lack is something economists call “human capital.” Human capital is the knowledge, education, skills, training, and experience that a person has that enables them to be more productive. Good health is also a form of human capital, as healthier people have more work days. What economists find time and time again is that more productive people earn more. And people who are able to produce things that people will pay a lot for get paid more. Along these same lines, education that is easy to come by, such as a degree purchased that requires little or no study is of very little value.

 

Adam Smith, the father of modern economics, noted over two hundred years ago that areas where education was highly subsidized, such as theology, had far greater supplies and far lower pay than areas where there were few scholarships.

 

In a study I did with Gohkan Karahan for Applied Research in Economic Development, we found that states with more high school completers and college completers had substantially higher levels of income, even when controlling for factors such as the percent of those under 18 (kids who don’t work much) and those over 65 (seniors who don’t work much) and for those in the latter years of their work lives.

 

Another factor to consider that makes it less likely that high school dropouts will make dropping out even more costly: high school dropouts are much more likely than high school completers to land in jail with more than 50% of African-American male dropouts and more than 10% of white male dropouts getting prison records before they turned 30.

 

Does more education guarantee someone a better job? No, but it sure makes better jobs easier to get and unemployment much less likely. Is all poverty due to a lack of education? Certainly not, poverty has many causes. But people who are not able to complete high school for some reason or other start off with two strikes against them and must face the next pitch with a blindfold on.

 

Want to fight poverty? Help a child stay in school.

 

-MC

Perhaps, by now, you should have heard of the proposal by economist Roland Fryer that poor children  in New York City and their parents be given financial rewards, money, for good grades in school, for good attendance, making it to parent/teacher conferences and so forth.  I am worried that payment for certain behaviors will create expectations for payment for others.  Behavior not rewarded may be the same as behavior that is punished, and less of these other behaviors would be expected to occur.  While I am not a fan of Fryer’s proposal, middle-class families, parents, or more usually grandparents, often give kids a few bucks for good grades.  Parents and grandparents giving money to kids for good grades certainly seems to encourage school performance, not diminish it. Poor children, however, seldom have such generous grandparents, so Fryer’s proposal, if enacted, does seem as if it would encourage good school performance. Barry Schwartz, a Swarthmore psychologist, penned this editorial for the New York Times, suggesting that Fryer’s proposal will backfire.  Schwartz’s argument is “filled with holes.” (That is a great phrase, isn’t it? Filling something up with holes–the Louisiana Department of Transportation’s method of road repair.)   For instance, his Swiss Canton example is about hypothetical choices.  What peoples say they will do or accept, and how they act are often at odds. 

A similar argument was made in 1970 by a British social scientist, Richard Titmuss, wrote a book, The Gift Relationship: From Human Blood to Social Policy (see this book review of a 1999 reprint of Titmuss’ book).   In his book, he argued that the British system, where blood given out of altruistic motivation (love) was superior to the

U.S. blood supply system, where we paid for whole blood in many areas.  Red Cross, of course, loved Titmuss.  Economists, such as Kenneth Arrow, took issue. 

There are, admittedly, safety reasons to be concerned with paid blood.  Many blood banks located near skid row and paid homeless men (we called them bums back then) for their blood, who sometimes gave blood tainted with hepatitis.  The problem, though, with the safety of the U.S. blood system, however, was that the medical associations in every state of the union had lobbied their state legislatures to make blood supply a “service instead of a good.”  This enabled them to skate product liability laws that would have made the doctors liable for giving tainted blood.  Doctors, however, are the ones administering the blood and are in the best position to pick blood banks.  If doctors had be liable, they would not have used blood banks that used the homeless.  In fact, in those days, the safest blood in the country was “paid’ blood in Minnesota used by the Mayo Clinic.

Titmuss was exactly wrong about blood and so is Schwartz about the rewards of learning.    Different people see different things as rewarding.  Some see learning as its own reward, but many of the students that Fryer is dealing with, from poor, disadvantaged families in New York City, do not.  The thing about money is that it is a generalizable reward, and can increase selected behaviors with just about anyone–if the monetary reward is salient.  The larger the monetary reward, the more people who will engage in the monetarily rewarded behavior. So, while one person out of a thousand may have their warm fuzzy rewards of learning “crowded out” by financial rewards, so many more will perform according to Fryer’s expectation. 

The idea that one reward crowds out others, seems mostly mistaken.  Suppose in my earlier years, I had been a roady for my favorite rock band.  I might have done it for free, to get to go to all their concerts, hang out with them.  Oh, but they want to pay me, too?  Can life get any sweeter?

Not everyone gets warm fuzzies from giving blood.  Not everyone gets warm fuzzies from learning Shakespeare, or high school chemistry.  The ones that do say “wow, I get to do what I like and someone pays me for it, too.” 

Do scholarships reduce the learning by students?  If we gave everyone A’s (or C’s) would they start learning more because now there is no kick to learning?  Does the performance of TOPS scholars fall because of the financial aid?  I doubt it.

While there may be one or two twisted souls who respond as Schwartz suggests, far more people respond to monetary incentives, especially people who are on the financial edge.  Monetary rewards are likely to be more important for the very poor than for the well-to-do for the same behavior.

There are very few things that people do that they take offense to getting paid for.  There are, admittedly a few.  Dating and sex seem to lose a bit of excitement when they involve financial exchanges.  On the other hand, very few people who love to play sports would say “gee, now that someone wants to pay me for doing something I love, it loses all its spark–find someone else to return kickoffs–I’m outta here.”

While there may be cases where students who see learning as its own reward, with the financial worries of poor families, and the extent that educational success is often looked down upon by peers in poor communities, it is doubtful that the net result of Fryer’s suggestion of paying for grades will be reduced performance.  The Church relies on higher callings to fill the ranks of the Priesthood, and few, at least few Americans, get called.  We rely on Titmuss and Schwartz reasoning and forbid payment for blood and for organs–and we see bad shortages of each with thousands dying each year waiting for organs to be donated, while viable organs get buried.  What if we relied on altruism to fill the ranks of the military, the police force and the medical profession.  We would be very sick victims of crime, living in a country over-run by some foreign demagogue, such as Venezuela’s Chavez.

–MC

I got an email over yesterday that said:  Block this site!  Don’t let your students see this!  This is humor only economists should hear…and no one else!

Well, here is the site:

Oh, and my students, no points for commenting on this one, you still might want to check out the link at http://www.youtube.com/watch?v=VVp8UGjECt4

MC 

Shameless, I know, but I thought that would get some of our readers’ attention. However, this post is about an “un-initiation”. Read the NY Times article here.

The basic story, allegedly, is that the national offices of Delta Zeta sorority (more or less) kicked out nearly 2/3 of the members of their chapter on DePauw University’s campus.

The national offices say they were concerned with the declining membership of the DePauw chapter. The officials came to campus to conduct interviews, ostensibly concerned with the members “commitment to recruiting new members”. Members were told to look their best. After the interviews were conducted, 23 of the members were essentially asked to leave the sorority, leaving only 12 members. Those asked to leave were deemed to be deficient in their “commitment to recruiting new members.”

However, some former members allege this stated reason is a red herring, and the officials’ determination seemed to be unrelated to the members’ actual willingness to recruit. These former members suggested that national officials were worried that the reputation of the sorority, as measured by student stereotypes, was negatively affecting recruitment. (The word “socially awkward” was used by students when stereotyping members of the sorority.) These same former members claim the “commitment to recruitment” was the excuse used to purge the sorority of “undesirable” members.

As it turned out, every one of the overweight members of the chapter was deemed deficient in their commitment to recruiting, as were several minority members. Lending credibility to the former members’ allegations, half of the remaining 12 members quit the sorority voluntarily after the actions of the national office.

So why discuss this in an economics blog?

This is interesting to me for two reasons. First, it gives me a chance to discuss two economic theories – club goods and franchises, both of which you folks wouldn’t likely catch in an introductory class. Second, it gives me an opportunity to introduce you how economists think about discrimination. I’ll focus here on the clubs and discrimination, and get to the franchises another day.

As mentioned, the first of the theories is the economic theory of clubs, which applies to all clubs, not just sororities and fraternities. Believe or not, some economists sit around and try to think about what it is that a club “does”, and even what is the optimal size of a club. In a nutshell, the economic function of a club is to provide a shared economic good (or experience) to its members, while often excluding those goods (experiences) from non-members.

Examples of clubs include chess clubs, sororities, Sam’s Club, writers of this blog, and season ticket holders of LSU football. The fact that people have been joining sororities for years seems to suggest there is some benefit of this club. People would not incur the costs (both monetary and time) of joining clubs if there was no benefit.

Though some groups will accept all members that are willing to pay the “dues” (do sororities?), the exclusivity is often very important. Each of my examples above has a differing requirement on membership or dues, and each provides a different experience. As an aside, I should note the initiation for new members of this blog is quite secretive, but does not involve hazing of any kind, but does include some razzing.

No discussion of clubs and exclusivity would be complete without a classic from Groucho Marx, who said, “I don’t want to belong to any club that will accept me as a member.” Think about this statement – it is a pointed commentary on exclusivity.

Before we condone or decry the actions of DZ’s national office, a bit more thinking is in order.

1. Is it fair to allow limiting membership of groups? That is, is it reasonable that clubs should be able to decide who is a member of their club?

2. If a sorority restricts its membership to people with the characteristic of being thin, is this acceptable?

3. What if “thin” is replaced with “studious”? Or “socially at ease”? Or “nice”? Or “white” Or “female students at DePauw”? Or “female students”?

4. Does it make a difference if we change the word “club” or “sorority” to “krewe”, “country club”, “professional baseball team”, “college”, or “circle of friends”?

5. Where is line drawn?

When it comes down to it, the formation of clubs (at least one that does not accept all comers), leads to some form of discrimination occurring. Even if one favors one group, one is discriminating against another. Isn’t purchasing a Beyonce album discriminating against Johnny Cash albums? Surely this is not immoral, nor illegal.

Is it wrong for Harvard to discriminate against people with low ACT scores? Is it wrong for the New Orleans Hornets to discriminate against slow white guys named Chad Turner (even though he has a deceptively quick first step a solid 3-point stroke) because his vertical leap is only 19 inches?

Now re-read questions 1 through 5 above? Do you pause a second longer?

The point I am trying to make is this: some of that discrimination is illegal (a positive statement), some of it is morally wrong (a normative statement), but it is all discrimination.

Where should the lines be drawn?

–CT

Some disclaimers:

I was (still am?) aptly characterized by the term “socially awkward” during my college years.

In the interest of disclosure, I was not a member of a fraternity (or a sorority), though have several friends and family members that were. I’m not anti-DZ, anti-sorority, anti-fraternity, or anti-Greek system. I realize that each chapter of a sorority (fraternity) is different.

And while I don’t personally condone the activities of DZ’s national offices, this post it is intended to be less about a particular situation, and more about the economics of clubs and the difficulty we have in delineating what type of discrimination is legal/illegal and moral/immoral.

And to head off (or at least delay) a few comments/complaints, I do realize there is a huge difference between the real world situation in the article and the scenarios I outlined above. I asked above if the members of the group have the right to choose its members in a fashion they wanted, while in the article the national organization is making the membership decisions. I’ll attempt to address this difference in part II.

F. A. Hayek, in his influential article, “The Use of Knowledge in Society,” discussed the problem of planned economies, like Soviet Russia.  He claimed that not only was there a serious incentive problem, but more importantly, there was a knowledge problem.  The problem is that no single person can know all the information required to produce even simple products, yet alone everything that a society needs in order to prosper.  This formed the basis of Leanord Read’s famous essay, “I, Pencil,” (which some students may recall Milton Friedman used in his film, “Free to Choose”), which tells how no single person knows all of what it takes to make a simple wooden lead pencil. 

Market economies solve this problem through prices that convey useful information about the relative availabilities of productive resources (answering the question of how to produce) and relative wants of people (answering what to produce).  Here is a very insightful article that appeared in the Washington Post on Hayek, the Wikipedia project, open-source software projects, and prediction markets.  It is well worth reading and thinking about.

 MC

Take a look at this CNN article on trouble that New Orleans public schools are having in attracting teachers.

The idea of a compensating wage differential as at least as old as The Wealth of Nations, which Adam Smith (the father of modern economics) wrote in 1776.

Workers who work in jobs with more desirable conditions will accept lower wages than people who work in jobs with less desirable conditions. The gap between the wages of workers at different locations is though of a as a “compensating wage differential”. The additional wages are required to compensate the worker for working in less desirable conditions.

Why? The dynamics are simple. Suppose there are a number of identical workers, and two otherwise identical jobs. One job (think school) has a desirable characteristic, while another does not. If the wage started out the same in both schools, obviously people would be flocking to work at the school with the desirable characteristic rather than the school with the less desirable conditions. Principals would have many candidates to choose from at good condition schools, while principals at bad condition schools would have a difficult time attracting workers. In fact, there would be a shortage at bad condition schools and a surplus at good condition schools.

Now, some folks hoping to get a job at the good condition schools might offer to work at a slightly lower wage, or accept a lower wage, to avoid the bad condition school. So would others. We’d expect wages to fall at good schools. By the same token, some people would accept a job at the bad condition school if they were offered a higher wage. So would others. We’d expect wages to rise at bad schools.

Eventually, the size of the wage gap would change until there was no incentive to try to move from one type of school to the other. The “last” teacher would be indifferent between working at the good school or the bad school. The extra wages at the bad condition school would be just enough to compensate for the disutility associated with working under these bad conditions.

Now, back to the article…it points to a number of conditions in the public schools – all of which could be a source of a compensating wage differential: expensive housing prices, large class sizes, and violence in the area (and perhaps the school). The article points out public school district faces a shortage of workers, and further points out that “charter schools” don’t seem to be having a problem.

Some school officials even attempt appeal to potential teachers’ feelings of good will – hoping to get them to work in the public schools. Do you think their appeal to people’s good nature (”to their sense of adventure and desire to make a difference”) will be effective? I don’t think that will work. If you do, may I appeal to your sense of adventure to mow my grass? There must be a better way…

What does this information in the article tell you about the wage structure in the teaching market in New Orleans? How can the public schools solve the teaching “shortage? In fact, what is the only way they can solve the problem?

–CT

My brother just sent me this news story from Reuters:

http://today.reuters.com/news/articlenews.aspx?type=businessNews&storyid=2006-11-16T185745Z_01_WBT006219_RTRUKOC_0_US-FRIEDMAN.xml&src=rss&rpc=23

The story is about the death of Milton Friedman at the age of 94. Professor Friedman was probably one of the 20th century’s most important social thinkers. His theories, and those of his followers, helped convince policy makers about the importance of bringing down inflation, and why inflation is such a poor tool to fight unemployment. In the 70s when I was in college, inflation spiralled from about 4% per year to about 13% and really got out of hand. Since then, the Fed has been more careful about the growth of the money supply and our inflation rate has gone to about 2-3% per year, as measured by the CPI, which usually overstates the inflation rate by at least 1 percentage point.

In addition, Milton Friedman has been a tireless freedom fighter, fighting for everyday freedoms. He also was the person who invented education vouchers and started the whole education choice discussion.

Professor Friedman will be missed, but he certainly will not be forgotten.

Morris Coats

One of New Orleans’ original “Catholic League” schools, Holy Cross, recently announced its intention to move its campus out of the lower 9^th Ward. The area had been in decline for years and hurricane Katrina heavily damaged the century (plus) old campus. There was somewhat of a battle over the new site – some wanted the school to relocate to Jefferson Parish, others wanted Holy Cross to stay in New Orleans. New Orleans won, so to speak, as the school announced it will move into a recently vacated Archdiocese of New Orleans school district.

What I found interesting was the logic that some opponents used to fight against Holy Cross moving into Jefferson. A recent article in the Times Picayune stated:

Ray Ferrand, principal of Bonnabel High School in Kenner, said Holy Cross would increase its enrollment at the expense of Jefferson Parish’s public elementary, middle and high schools.

Joe Potts, head of the Jefferson Federation of Teachers, urged the board to reject the sale, saying it does nothing to help public school children.

Holy Cross charges a tuition of about $6,000 per year. If parents would opt to take their children out of Bonnabel, where they do not directly pay any tuition, to spend $6,000 per year, could this possibly be indicative of a problem with Jefferson’s public schools? And is it is even plausible that increased competition for Jefferson’s public schools could lead to improvements? If Holy Cross had paid Jefferson Parish more than $2 million for land, couldn’t that money have been put to use to aid the public schools?

NM