Bastiat's Bastions

A few days ago I posted this comment on how local governments protect existing businesses from competition by erecting barriers to entry through occupational licensing.  That story reminded me of  another story along similar lines, about a pair of Washington, D.C. entrepreneurs, Taalib-Din Uqdah and Pamela Ferrell who started their small business, Cornrows & Co. in 1980, specializing in African hair braiding.  The pair came under fire by the DC cosmetology board for having a cosmetoloty license, which would require going through a cosmetology school and passing a test on methods of cutting, dyeing, straightening, and perming, but would cover their braiding techniques.  Here is the Institute of Justice’s “Backgrounder” on the case.

Last year, I posted this on the exams required for new florists that the Louisiana board that licenses florists uses to keep its numbers down and their prices up, mentioning other cases of occupational licensing, like the ones for CPAs and massage therapists.

Back in June of this year, John Stossel penned this article on local regulation of both taxi operation and hair braiding, and how it hits the poor, the people that politicians often claim to be fighting for.  Stossel makes a great case here against this sort of occupational licensing.

When it becomes more difficult to become a competitor than to go along with the status quo, both consumers and these competitors lose, all in the name of consumer protection.  What irony!  Or is it just that we don’t realize that Orwellian “NewSpeak“ has been here  for some time.

-MC

In class today, I talked about the “Social Interest Theory” of Regulation.  Note in this article from the Freeman that it is government that is erecting huge barriers to entry and monopolizing something that seems simple, like street vending.  Now why would a government change an industry that is about as competitive as an industry can be into a monopoly?  Should we trust the institutions that do this to regulate other industries in the social interest, or do you think that they might easily be subject to capture?  Could rent seeking be at work here?  Read the article and share your thoughts.

-MC

A recent study   released by the Tax Foundation and reported by the Pelican Institute (here) states that extended unemployment benefits, which has been part of the stimulus programs passed by Congress, have increased the unemployment rate and slowed our recovery.

Under ordinary conditions, an unemployed individual is eligible for up to 26 weeks of unemployment benefits.  Through several federal extensions, supposedly for stimulus purposes, eligibility for unemployment benefits has been extended to 99 weeks.  President Obama’s “American Jobs Act of 2011” would extend the date for starting their 99 weeks of eligibility.  Notice that these extensions have lengthened eligibility for collecting assistance from half a year to slightly less than two years.  Under three recently passed free trade agreements with South Korea, Panama and Columbia, Democrats added extra weeks of eligibility for unemployment benefits under the guise of “trade adjustment assistance” for those losing jobs because imports from these countries.

What is pointed out in the Tax Foundation’s study, is that the supposed countercyclical nature of unemployment benefits, that benefits rise in bad times and fall during good times, is destroyed by the way that states have financed their portion of the funds to pay these benefits, raising unemployment insurance taxes when their unemployment funds get depleted during sharp recessions and lowering them in better times.

The Pelican Institute’s story includes discussion of what economists have long known, when you increase payment for certain behavior or reduce the costs to individuals for living in certain conditions, that behavior or condition increases.  Dr. Walter Block at Loyola University New Orleans is quoted in the Pelican Institute piece saying “The more you subsidize something, the more of it you get. If the government wanted the unemployment rate to fall, it would find a way to tax unemployment.”

Even Obama’s former economic advisor, Larry Summers, states in the Concise Encyclopedia of Economics:

Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways.

First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not…

The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment  insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.

Many people while unemployed get job offers or could get, but often at wage rates far less than what they have been accustomed to.  Their “reservation wage,” while falling over time, is sometimes not low enough to accept a low-paying job.

Another way to understand the point is to see these benefits as the opportunity costs of taking a job while still eligible for benefits.  Once one runs out of eligibility, the opportunity costs of taking a job fall considerably and job offers are more likely to be accepted.

The economics Nobel laureate and liberal columnist, Paul Krugman, in his college economics textbook co-authored with his wife, Robin Wells, states

[P]ublic policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. Most economically advanced countries provide benefits to laid-off workers as a way to tide them over until they find a new job. In the United States, these benefits typically replace only a small fraction of a worker’s income and expire after 26 weeks. In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.

Michael Elsby, Bart Hobijn and Aysegul Sahin report in the spring 2010 Brookings Papers on Economic Activity that the extensions in unemployment benefits we have seen from various stimulus programs that have increased the length of eligibility “correspond to between 0.7 and 1.8 percentage points of the 5.5 percentage point increase in the unemployment rate witnessed in the current recession.”  In other words, almost a fourth of the increase in the unemployment rate we have witnessed from the recession and lagging recovery is due to the extensions of unemployment benefits.

We need to be careful in how we structure these benefits and what we do to extend them.  While these benefits to ease the pain of unemployment, such pain killers lead to dependency and make it harder to get “afford” to take a job.

-MC

While you can never determine the cause of a factor, call it Y, merely by its correlation with another factor, X, you can sometimes rule out causes.  Even then, one must take a great deal of care in the analysis.  Remember that Y and X might be correlated because X causes Y, but Y could cause X.  Also Z might cause both X and Y.  To help in your thinking about all of this, consider an association that we find between charter schools and teacher burnout that I noticed on John Stossel’s Blog “John Stossel’s Take.”

While true enough, this is quite misleading.  Stossel points in his blog to a study, “Parallel Patterns: Teacher Attrition in Charter vs. District Schools,”  by the National Charter School Research Project (note that this could be a biased study).   While the study did find 52% higher attrition rates for teachers in charter schools, once one statistically controls for the sometimes conveniently neglected fact that charter schools are more likely to be in disadvantaged areas and that charter schools disproportionately hire teachers right out of college, teachers who are more likely to quit, the study finds:

“Teachers working in urban charter schools are 24% less likely to exit the system than similar teachers working in urban traditional schools.”

The use of appropriate control variables, our Ceteris Paribus  or “holding other things constant,” are vital to any serious study.

-MC

Economists recognize a limit on government spending due to the sources for the spending for those dollars to be spent.  Economists call this limitation the “government budget constraint.”  We recognize that there is a tax to be paid one way or the other, different ways of raising the funds implies different taxes.  Some of these are up front taxes, where we know we are being taxed, while others are hidden taxes that we pay, nonetheless.

Indulge me to some simple math.  Let’s use “G” for Government Spending, ”T” for Taxes, and “D” for Deficit.  The Deficit, D, is, of course, just G-T, so D = G-T.  That part is obvious:  the part of government spending that exceeds the taxes raised to pay for that spending is the deficit (government debt on the other hand, is the deficit accumulated over the years minus the few surpluses we have had).

So, the excess of government spending over above the taxes to pay for that spending is the deficit.  A hallmark of Keynesian economics has been the idea that deficits are ok, that they are even a good thing during recessionary periods.  This approval of deficit spending by the federal government removed the moral constraint to not run deficits that had been in play for years.

Borrowing to pay deficits and taxes on capital and labor

The next question is “how do we pay for this deficit?” Well, of course, we borrow the money–we choose to increase our debt by borrowing from anyone who thinks that we are credit worthy, better risks than others at the interest rate we are paying.   We simply put IOUs (or treasury bills) up for sale. Some of the creditors or buyers of these IOUs are our own citizens, and some are not.

If we only sell our IOUs only to our own citizens, we soon have to lower the price of our IOUs in order to sell more, as there will be a point where the our citizens will start to have to take their funds from investment projects in which they are willing to invest and keep those funds in treasuries, or government IOUs.  While I will not go into the explanation in this post, interest rates and the prices of IOUs go in opposite directions, but here is a sufficient explanation from About.com.

As we drop our price to sell more, our interest expense increases.   So, as we increase the size of our debt with deficits year after year, we also drive up interest expenses for most of the debt we owe, as much of it is in short-term securities.  Since interest payments amount to part of our G, government spending, the deficit goes up at an even faster rate.

Of course, we sell our IOUs not only to our own citizens, but to all those around the world.   By selling them to those outside our borders we are able to raise more funds at the same interest rate as compared to only selling them domestically.  Still, as our debt creeps upward, we have a larger proportion of our spending going to pay the interest on this debt.  Since so much of our current debt obligations are in short-term obligations, new debt from additional deficit spending raises our interest expense on most of our debt.   As more borrowing to finance new deficits begin to push interest rates up as the default risk on these funds increases (just like a lender runs a higher risk of not getting his funds back from someone who owes ten times what they make in a year compared to someone who is now debt free, but once had a mortgage), and so, lenders must get higher rates to take the risk of making the loan.

Interest rates start to edge upward as it becomes more difficult to sell our IOUs.  Higher interest rates mean fewer business investments in machinery, equipment, factories, etc. will be worth making and less of these tools will be available for workers to use.  Less capital per worker means lower productivity for workers and less pay, as workers are ultimately paid because they are productive.  If the worker does not produce as much, the worker cannot be paid as much.

So, increased borrowing is a tax on workers and owners alike, as lower wages for workers and less capital held by owners harms both of these producer groups.  This tax is hidden from immediate view, as it is not obvious that excessive government spending is immediately coming out of their pockets.  The tag line for our blog, “what is seen and what is unseen” becomes important here, as people usually perceive taxes that they get a bill for as a tax, but they don’t see deficits as taxing them.  As Louisiana Sen. Russell Long was noted for saying, voters really mean “Don’t tax me and don’t tax thee, tax the man behind the tree.”  We are the men behind the tree.  Or, when it comes to taxation, as Walt Kelly’s Pogo said “We have met the enemy and he is us.”

Printing money to pay the deficit and the inflation tax

Now one of the tricks that governments have used in the past is to have its central bank (our Federal Reserve) become one of the creditors and buy up these IOUs.  In an earlier day, we would simply have some institution print or coin money.  Increases in the supply of money in an economy usually or eventually results in raising prices, in inflation.  If the increased money supply causes people to reduce their acceptance of the money involve as they expect the money to have a declining value,

The unstable Weimar Republic, the post-WWI German government, did exactly that, resulting in inflation rates that boggle the mind, reaching a rate of 100% every 2 days.  In other words, prices were doubling every two days for a while.

Another way of thinking about that is that a person’s savings in money fell in half every two days.  There is an often-repeated story of someone choosing between a huge prize and a penny payment that doubled every day for a month (30 days—we won’t get greedy here).  Imagine getting a million dollars in 30 days or the penny payment doubling every 30 days.  Here is a little article on that choice.   The doubling penny ends up being $5,368,709.12 in just 30 days.

Now imagine the reverse, where you start off with cash holdings of $5,368,709.12, and you face inflation of 100% every two days.  In only 60 days the buying power of your cash holdings is reduced to a single penny.  In those short 60 days, the government’s inflation policy, turning its debt into money, has taxed away over $5 million of your savings.  “My father was a lawyer,” says Walter Levy, a German-born oil consultant in New York, “and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread.” (From the PBS series, Commanding Heights )

While everyone may try to rid their portfolios of money assets, it cannot be done for the whole economy, and so, wealth held in dollar assets falls, making us all poorer, but also making the inflation tax even higher.   As people try to protect their portfolios by buying real assets (not money or dollar denominated IOUs), we end up in a game of “who gets stuck with the worthless money.”  We spend that money at a faster and faster rate.  For instance, the German hyperinflation mentioned above led to retailers raising their prices several times a day.  Workers and their spouses soon started demanding to get paid several times a day so that the same marks were going around the economy at faster and faster rates.  A very old and well known relationship in economics is that the price level (think CPI) times the output of real goods and services produced (think real GDP) equals the Money in the system times the speed at which money circulates (something called Velocity).  Or, put another way, the growth rate in the Money Supply times the growth in Velocity divided by the growth in the economy is the growth in prices better known as inflation.  Either more money or faster circulating money will drive up prices if we don’t increase our output.

We see store owners and farmers raising prices and seldom think that it is really the government and the central bank behind these price increases, making inflation amount to an invisible tax eroding away at the cash savings we worked years to build up.

I should point out that economists recognition of a government budget constraint, that we are taxed one way or the other for all of our spending is noted in the acronym “TANSTAAFL,” standing for “There Ain’t No Such Thing as a Free Lunch,” coined by Robert Heinlein in his science fiction book, “The Moon is a Harsh Mistress.” Still earlier, David Ricardo noted the equivalence of taxing and borrowing in his 1820 “Essay on the Funding System.”

Why Do Deficits Matter?

If we are taxed one way or the other as has been shown, why do deficits matter, why should we care about deficits and running up big national debts?

Well, just as Ricardo noted the monetary equivalence between borrowing and taxing to pay for some large government expense, such as a war (Ricardo’s example), Ricardo also suggested ways that these were not the same, noting that people often fail to perceive the full costs of government spending when it is financed by borrowing, noting what has been called by one of my professors, James Buchanan, “Fiscal Illusion.”  The problem is that the taxpayer-voter seldom notices the perpetual interest payment the government must make as the same as the immediate tax increase to avoid a deficit.

Another way of putting this is that not all taxes are seen as such.  People seldom connect the inflation that they face because of government services that they receive while refusing to pay higher taxes.   People also do not notice that they have less equipment and tools at work and fewer sellers in each industry because investments were not made at some earlier time because interest rates were too high.

Taxes out of their own pockets are seen and kept to a minimum, while government benefits they get are seen and kept to a maximum.  On the other hand, stealth taxes on capital and on money holdings are not seen as payments for their government benefits or the reductions in taxes for which they themselves are liable.

So, voters ask for lower taxes and higher benefits, more spending, and their representatives oblige.  The cost of government is perceived as being very low.  When we do not see the full cost of something, we usually ask for more, just as the consumer who does not pay for the environmental costs of the products they consumer want more to be produced.

Deficits matter because they misrepresent the true costs of decisions to voters.  Voters who benefit from the spending vote for it, as it is clear that they benefit.  Voters who pay the inflation tax or the capital tax (higher interest rates) do not perceive their liabilities and do not try to block passage.  The most popular legislation, then, raises deficits.  Fiscal Illusion that plagues us, especially when we employ deficit financing of government spending, makes continued deficits more likely, as voters, more than Twist, find it easy to ask for “More, please.”

-MC

Ben Bernanke, the Chairman of the Board of Governors of Federal Reserve, states in this article that the   

“…stock market rally that began last summer was fueled by the Fed’s efforts which improved U.S. economic activity.”

The question is why has the stock market gone up in response to Fed monetary policies of increasing the money supply.  It might be that there has been increased “real activity,” increases in production that have encouraged stock market demand.   On the other hand, another very real possibility is that because of increases in the money supply base, through the Federal Reserve’s promised buying of over a half trillion dollars of U.S. Treasury Bills, that inflation is expected to increase. 

One thing that investors and others do to protect their wealth against inflation is to buy stocks because stocks tend to go up with the price level because businesses can raise the prices of their goods.   Gold is another hedge against inflation, and gold prices have shot up through the roof in response to Fed credit-easing policies.

While recent news of a substantial one-month decline in the unemployment rate from 9.4 to 9.0, but there were small gains in employment over that time, only 36,000 jobs added.  The answer to that puzzle is that the number of people who did not look for work in that time period went way up, suggesting that people had become too discouraged to continue to look for work. 

There seems to be too little of an increase in real activity, in actual production, to increase employment.  The Fed’s monetary policies seem to be having little effect, except on inflationary expectations.

-MC

Here is a “Special Report” from Reuters, titled “Special Report: Is America the sick man of the globe?”  Reuters, a respected news organization, right?  You would expect a little bit of fact checking, wouldn’t you?  The author states, in passing, ”As U.S. manufacturing declined, starting in the 1980s Congress and successive administrations focused instead on the financial sector and relied on debt — its own and that of the U.S. consumer — to foster economic growth.”

Everyone knows that U.S. Manufacturing has been declining since the 1980s.  The problem is, it just is not so.  The facts are easy enough to check out.  You can go to the Federal Reserve’s web page on Industrial Output.  Here is the combined data, from 1972 t0 2010, using the seasonally adjusted values for January of each year in a time-series graph.

While there are noticeable dips in 2001 and again starting in 2008, the long-term trend since the 1980s has clearly been an increase in manufacturing output. 

What has made manufacturing jobs so attractive, their high wages, is the high growth in output possible in manufacturing by the use of equipment to subsitute for people.  Growth in production means for the same amount of labor we can produce more, so manufacturers can cut costs per unit and pay more to their workers as well.   What has declined in the U.S. since the 1980s is the number of jobs in manufacturing, not the amount of manufacturing. 

Perhaps the author, while in Michigan, should have talked to one of the University of Michigan’s economic professors, Mark Perry, who notes here that the decline in manufacturing jobs is the result of the productivity of American workers, not the reduction of manufacturing in America. 

Daniel Ikenson wrote this article  in the Pittsburgh Business Times in November of 2007, reprinted here at the Cato Institute website. 

Output per worker has dramatically increased over the years.  Machines, while replacing some workers, have so increased the productivity of the remaining workers, that those highly productive workers are able to fetch higher pay.  The high pay has also contributed to the incentive for manufacturing innovation, as businesses seek to find ways to do without so many expensive workers.  Technology and the education and training that make that technology usable have increased the output per worker, raising manufacturing wages.

The lesson is that some things become part of general knowledge that may not be so–check out media claims–go to the data.   So much information is publicly available and easy to check out.  Be on the lookout for undocumented, “supposed” facts. 

-MC

To many people, requiring difficult licensing exams in order to protect public health and safety sounds like a great idea.  Who would object to requiring an exam to obtain a driver’s license?  We surely do not want those who don’t know the rules of the road or cannot make a proper left turn or have vision problems sharing the road with us and with our children.  We require licenses for so many things we seldom stop to ask why a license is needed.

Recently, Chad Turner penned a post that mentioned a Daily Comet editorial supporting a bill sponsored by Rep. Franklin Foil, R-Baton Rouge before the Louisiana legislature to do away with the testing requirements for the licensing of florists in Louisiana.   How does having one’s floral skills tested before a panel of judges really protect the public?  Professional florists are tested and judged by a far more sophisticated panel of experts, the buying public.  If a florist’s arrangements are not very tasteful or artistic, people stop buying from that florist and the florist turns to a new occupation.  Survival in a competitive market is a good indicator of quality.

Some years ago, a colleague of mine pointed out a “letter to the editor” sent to a New Orleans publication from someone who ran a massage therapy school.  This person was trying to get legislation passed to license massage therapists, requiring, of course, training from a massage therapy school.  That massage therapy school proprietor swore that he would try to make sure that all current massage therapists were grandfathered in and would not have to go back to school to continue in their profession.  If current massage therapists are all qualified to rub people, then why would we need licensing to protect the public?

The real question to ask is “who is such legislation protecting, the public or those in the occupation seeking licensure?”  There was never any evidence that anyone was being harmed by ill prepared masseuses.   It was only Louisiana politicians, not Louisiana masseuses, that rub people the wrong way.  Occupational licensure restricts the number of people entering a profession.  With fewer suppliers pay is pushed up—the laws of supply and demand do not sleep.   If someone is no good at a profession, they lose their job.  When customers can judge quality easily and cheaply either before or after purchase, why would we need someone else to protect us?

Similarly, some years ago, CPAs in Louisiana began to require 150 hours of college, or about 2 semesters of college beyond a bachelor’s degree to even sit for the CPA exam.  They do not even specify what those extra hours of coursework are.  Basket weaving would be fine.  What was the real reason for the stiffer requirements?  New CPAs coming out of college were depressing CPA pay.

With pass rates of about 75% of the examinees, the new supply of florists is currently being cut by about 25% of its potential, boosting the pay for florists, and so, the price of a floral order.   Rep. Foil’s bill encourages competition among florists and will help keep floral prices down, and so he deserves some thanks for his efforts.  Perhaps some flowers would be appropriate.

-MC

There are many words used to describe people who have some strong difficulty that might put them at a disadvantage to others. Yet, I am constantly reminded by a major finding in my discipline, economics, in one of its core concepts called “comparative advantage.” The idea is that any person who can interact with others has a place in the society where they can be productive and can engage in trade that is both beneficial to them and to other members of the society. Even someone who is especially good at everything is in need of trading with others: being able to do all things does not mean that a person can do all things, since we all face only 24 hours in a day and cannot possibly do all things.

Now, I should point out that having a place to produce goods or services that others will demand does not mean that all of us are especially good at any one thing, nor does it mean that all of us can provide others with goods or services of sufficient value that we can support ourselves without help of others. It does mean we all have a place and something we can do to help provide something to others of value. I often mention in classes that there are two paths to comparative advantage: one is to be relatively good at that one thing, and the other is to be relatively bad at everything else.

Still, there are some people who face certain substantial difficulties in life that it is amazing that they excel and even lead their fields in what they have chosen to do. Here are some personal recollections of three people I have come across at one time or another who were so astounding to me that the difficulty in their life was, for a time, invisible to me. Perhaps, I am just not that observant.

Walter Oi

Walter Oi is one of those economists whose articles were required readings in economic theory classes in graduate school. The most important of his theoretical works was an article titled “A Disneyland dilemma: Two-part pricing for a Mickey Mouse Monopoly.” The subject of that paper is something that I teach to my MBA students in managerial economics.
More socially importantly though, his paper in the American Economic Review in 1967, “The Economic Cost of the Draft,”  and his related book, The Costs and Implications of an All-Volunteer Force, were instrumental in bringing an end to the military draft in the nation, showing that the draft was a more costly way to raise a military force than was an all-volunteer force of the same size.

In graduate school at Virginia Tech (better known as VPI back then), on Wednesday evenings and Friday afternoons, we had seminars that all graduate students were expected to attend. These seminars almost always had guest lecturers. One Wednesday night I arrived right after Professor Oi had been introduced. I do not recall the subject of that evening’s lecture. Professor Oi, though of Japanese descent, spoke perfectly clear English, as he had grown up in California (and was one of those Japanese Americans sent to a concentration camp during WWII). While his English was perfectly clear, when he furiously wrote equation after equation on the blackboard I had trouble reading his handwriting on the board, even though my own handwriting is difficult to make out (one reason I am a fan of Powerpoint). I could make out a few lower-case deltas and alphas in the equations and could read some of it, but with great difficulty.

While after about 30 years I do not recall exactly what Professor Oi’s lecture was about, I do recall that it was brilliant, as his work usually was. At the end of his lecture, the moderator thanked him for coming and giving his talk, and Dr. Oi received the usual round of appreciative applause. As he was leaving, I discovered the reason for Dr. Oi’s illegible blackboard handwriting when a German Shepard came around from the other room to Dr. Oi’s side. It was his seeing-eye dog. As it turns out, Oi, who received his Ph.D. from the University of Chicago in 1961could not read ordinary text at all when he began college.

Incidentally, Oi also once served as the Vice-Chair of the President’s Commission on Employment of People with Disabilities. For more on Oi, this Wikipedia entry is rather accurate.

Vernon Smith

Several years after I finished my degree at Virginia Tech, I was at a meeting of the Public Choice Society (devoted to using economic methods and theories to study political, sociological and other non-market activities), which met jointly with the Economic Science Association (devoted to experimental methods) in Tucson. At that time, Vernon Smith, who is credited for beginning the study of experimental economics was at the University of Arizona in Tucson, as was Gordon Tullock, one of my Virginia Tech professors, who was one of the most influential originators of public choice economics. About 10 or so years later, Smith, along with the psychologist, Daniel Kahneman won the Nobel in economics in 1999. While there in Tucson, Vernon Smith, invited me and several other young professors out with him and his graduate students, to a Western bar, which had a country and western band.

Smith was friendly and courteous, but a barroom was obviously not home for him. Some years later, Smith began to talk about his Asberger’s Syndrome, which is a type of Autism. As a result, Smith, unlike many of us, seems to function just fine for long periods of time isolated from others. Actually, Smith’s autism may have worked well for him, allowing him to become a very prolific writer, even for someone who is such an original thinker. (For more on Smith, see
http://en.wikipedia.org/wiki/Vernon_Smith.)

Evelyn Glennie

Some years later, sometimes in the 1990s, I attended the meetings of the Atlantic Economic Society to present one of my papers. One of the more enjoyable aspects of the Atlantic meetings is that they often arrange for attendees to go to some very nice cultural event and at reduced rates. I went to hear the Philadelphia Symphony at one meeting, but I especially recall hearing the National Symphony at the Kennedy Center in Washington at another.

While I still recall the grandeur of the Kennedy Center, mostly I recall the performance. The audience was told that the performance was being recorded for later broadcast on National Public Radio or for Public Television. There were just two pieces on the program, with the second being a rare percussion concerto. The percussion concerto called for the soloist, Dame Evelyn Glennie, to play almost 30 different percussion instruments that were arranged around the stage. Dame Glennie must have been in her mid thirties at the time, and this very beautiful and talented woman came to the stage in a flowing, gauzy white dress that made her appear as a forest faery as she flitted about the stage from instrument to instrument the way a humming bird flies from blossom to blossom. What was out of place, though, in this most formal of musical performances for a soloist with the National Symphony at the Kennedy Center, was that she was barefooted. I thought perhaps this was to make as little noise as possible as she went from drum to marimba to water tympani across the stage. She finished the evening with a brilliant encore with just her and a snare drum on the stage.

The next morning, I had a 7:30 flight out of Reagan National Airport. This flight was one of the few I have been on where they showed an in-flight interview program. Imagine my surprise to see an interview with the very performer featured at the performance the evening before, Evelyn Glennie. I was even more surprised when the interviewer asked Dame Glennie how long she had been completely deaf. Yes, this Scottish musician, and the only solo symphonic percussionist in the world at the time (she still may be for all I know), was completely deaf. Anyone who has ever performed with a musical ensemble, a band, a choir, an orchestra, a trio or quartet, knows that being able to hear the others you are performing with is essential for proper balancing, blending and timing. Then I understood the reason for her bare feet at this performance. Bare feet enabled her to “listen” to the rest of the orchestra through her feet from the stage floor.

You can hear Dame Glennie talk about listening as a deaf person and, more importantly, as a deaf musician at the TED conference. Listening to her over and over (and “listening with my whole body”), I still cannot detect any signs of deafness.

Extraordinary people and the rest of us

Some people are just extraordinary and would be extraordinary almost no matter what difficulty faced them, making their adversities seemingly disappear before their brilliance. Most of us are not so gifted. Each of us does, however, have something to offer, something to make the world better for others, some comparative advantage, even if it is just that one thing we can do. We should all understand and appreciate others for what they do for us, from the musician that thrills us, to the shortstop who amazes us, to the doctor who saves the life of a child, and on to the person who takes away our garbage or cleans restrooms. Everyone has something of value to contribute, and they should be valued and appreciated for making our lives better.

The question posed at the beginning was “what was the right word for those with disabilities?” Under various circumstances, any of those words may be appropriate, but remember that most of us have some area where we fall short, for some of us it is noticeable and for others, our disabilities are as invisible as Professor Oi’s and Dame Glennie’s disabilities were to me. I am constantly reminded of the words of the great American humorist, Will Rogers, who noted “everybody’s ignorant, only on different subjects.” We all fall short somewhere, even the brilliant and the beautiful. The word I tend to prefer is “human.”

-MC

As I discuss in my Health Economics class, hospitals are, in most places, the largest employers of nurses.  With the nursing profession still dominated by women, often as second earners in their household, nurses tend to be less mobile than many other professionals.  In addition, in many communities there are few hospitals within commuting distance, giving those hospitals in commutable distance what economists term as a “monopsonistic” position in wage determination.

A monopoly is a market type characterized by having only one seller or by a very dominant seller. A market that is monopsonistic, or simply a “monopsony,” on the other hand, is a type with just one buyer.  The “mon” (from Ancient Greek “monos”) part of the word means “single,” while the “opsony”  (from Ancient Greek “opsnia”) part means “purchase,” so “monopsony” means a single-purchaser market.

When a market has a single buyer, that buyer has an extraordinary amount of bargaining power and can strongly influence the market price.  To get more nurses, better pay and/or better benefits must be promised or the hospital will be unable to attract more people to be nurses at their hospital.  That is, the supply curve of nurses is upward sloping, so if a hospital wants more nurses, they would have to increase nurses’ pay, new and incumbent nurses alike, or incumbent nurses may just quit to be rehired later at the higher pay.  Or they may just make things difficult for the hospital administration that pays new nurses more than loyal workers.

Let’s look at a simple numerical example.  Suppose that a hospital could attract and maintain a workforce of 500 nurses by paying them each $50,000 a year, for a labor cost of $25 million a year.  Now suppose in order to increase this workforce up to 600, pay would have to go up to $60,000 a year to attract the next 100 nurses, often from greater distances.  In this case, labor costs increase from $25 million to $36 million, or 44% more in labor costs for a 20% larger force.  This is because both the additional 100 nurses had to be paid more, but so did the 500 incumbent nurses.

How can the higher pay be limited to just those new nurses without paying more to the existing nurses?  This is where nursing contractors come in.  The contractors work for someone else and usually commute great distances.    The pay is higher for the contract nurses and the hospital’s nurses do not revolt.  In this case, the labor costs are the $25 million for the hospital’s 500 nurses and another $6 million for the contract nurses, pushing costs up to only $31 million instead of $36 million, or by 24%, not much more than the increase in nurses.

This past Saturday I, along with some colleagues and a student of mine from Nicholls, attended the Louisiana Political Science Association meeting at the Grambling State campus.  The meeting was helpful and very cordial, even though many of us strongly disagreed with one another.

There was a panel of undergraduate papers with two papers from Centenary students (my student and I presented a joint paper with Dr. Sanders in another session).  There was another panel of graduate student papers.  Both of these undergraduate papers were very interesting.  Allison Saylor an undergraduate student at Centenary had a nicely done paper titled ““The Bush Administration, Private Military Contractors, and the War on Terrorism,” in which she examined the substantial growth in the use of military contractors in the war in Iraq.  She posed a very useful question, “why would the war in Iraq require so many more contractors than we saw in previous wars?” (Quote marks are used here for my interpretation of her paper rather than a quote from her.)

During the discussion period after her presentation, I think the presenters, discussant, session chair and the audience arrived at a reason for this large expansion of contractors.  The last protracted war that the U.S. was involved in was Vietnam, and soldiers could be drafted then.  Any “desired” expansion (by the Administration) was met by increases in the number drafted. To expand under a voluntary force, we need to either attract more soldiers by increasing their benefits or by outsourcing non-combat roles to civilians.

The latter solution, outsourcing to private contractors, is likely to be less costly for two reasons.  Many of the non-combat requirements of a military force are things that many private sector companies are already doing and things where they have particular expertise, such as warehousing and goods distribution, food services, accounting services and construction.  Soldiers are no better at doing these activities and are probably worse than trained civilians at these sorts of  activities.  While this was also true during earlier wars, these activities in those days could be manned with soldiers who were drafted and forced to work below their opportunity cost or their voluntary wage rate.

The other reason for outsourcing certain tasks often performed by soldiers is exactly analogous to the nursing monopsony story told above.  The market for warriors is a monopsony market with the Department of Defense just about the only buyer in the market.

How can the higher pay be limited to just those new soldiers without paying more to the existing soldiers?  The contractors fill certain non-combat roles, while the military personnel perform the combat roles.    The pay is higher for the contractors, and the combat troops do not revolt.

While it might have been the case that certain contractors got sweetheart deals, no-bid contracts or cost-plus contracts, it is likely that troop increases with a voluntary force may have to increase pay to all rather substantially to get only a few more warriors.

I should point out that the return to the draft is not a solution to this high incremental cost of troop expansion, because the real opportunity cost of a draft is that some people are forced to do military jobs, often giving up positions where they are far more valuable to the country than what it pays its soldiers.  This social cost of the draft is hidden from presidents, congressmen, taxpayers and voters and they often do not consider such costs in their decisions.

Finally, it is almost ironic that those who kill (though often saving other lives and protecting freedoms) and those who heal face the same sort of labor market issues, and those who hire them face similar incentives to price or wage discriminate.

-MC