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Take a look at this article from the Wall Street Journal about empty seats in student sections at college football games.  What you will see is that the “law of demand” is still in effect.  Now, if you don’t know what the law of demand is, it is a simple and fundamental idea in economics, that the price of something and the number purchased are negatively related, if we hold everything but price and number purchased constant.  In other words, if the price of something goes up, other things being the same, people will buy less of that thing.  This is called a “law” because it is generally it is generally true, with so few exceptions we need not worry.

-MC

If you haven’t heard, Burger King is in the process of merging with a Canadian coffee and donut chain, Tim Hortons, so that they can move their corporate headquarters to Canada in what appears to be an effort to cut their tax burden.  You can read about it here in the L.A. Times.  But what you will read is that the reduction in taxes for Burger King would be very small, even though the Corporate tax rates are much lower in Canada, but that the combination of Hortons and Burger King makes some strategic sense above and beyond the tax advantage of a Canadian headquarters.

Whatever the reason for the move, many are decrying the move as “unpatriotic.”  Let’s think about this.  We know that people respond to incentives.  Rewarded behavior is increased and punished behavior is reduced.  In the Affordable Care Act (“AKA Obamacare”), subsidies are used to encourage people to sign up and taxes are used to penalize those who fail to get healthcare coverage.  If we tax behavior we want to reduce and we know that if we tax some behavior more than our neighbors do, people will run to our neighbors.  (I don’t know if people are starting to move to Washington and Colorado because they have decriminalized recreational pot consumption, but it would not be a surprise.)

We know that higher taxes on cigarettes will reduce smoking behavior some.  We know that we can cut greenhouse emissions by taxing them (or making people and companies buy carbon emission rights).  We should understand that if we tax an American based corporation, the owners can choose to put their company headquarters elsewhere. Taxes punish.  Should we expect someone to stand still and take the punishment we dish out and not try to run away?

We also know that taxes provide revenue to fund beneficial programs.  But if the taxes paid for the benefits received are worse in one place than another, we should not be surprised that it causes movement.  People and companies move to improve their situation.  Just as you would move to get a better job, a company will move to where it will keep more of its profits.  If it didn’t, the stockholders will get rid of managers who will not work in the interest of the owners.

The government does not own most of these companies, certainly not Burger King.  Burger King is beholding to the stockholders, not the government.  As a customer, you get what you want from Burger King when they give you food that you are willing to pay for.  If you want some say over where the company puts its headquarters, you should buy their stock.

Our economic system is not one where companies do what the government wants instead of what the stockholders want.  If it were, we would have a fascist system.  Perhaps, what is unpatriotic is to set taxes corporate taxes so high that those corporations find it in their stockholder’s interest to go elsewhere.

-MC

In 1973, David Friedman published an interesting book, The Machinery of Freedom, largely a compilation of essays concerning how anarcho-capitalism can work.  One of his essays is on how mass transit can be produced privately and that the infrastructure for it is largely in place.  Recently, two companies have started operating worldwide, Uber and Lyft, which turns Friedman’s vision into reality.  Here is Friedman’s entire book, The Machinery of Freedom, in a pdf on Dr. Friedman’s website.  His chapter, “99 and 44/100ths % Built,” describes his vision for mass transit free of government involvement and subsidies.

Here is a discussion of how these app-based ride sharing programs operate.

Uber and Lyft and other app-based ride services may not stay free of government involvement, not that they need that involvement to continue to operate, but that taxi companies don’t want the competition.  Here is a news video interviewing Matthew Mitchell of the Mercatus Center, and here is a Mercatus Expert Commentary piece from Mr. Mitchell on Virginia’s attempts to shut these ride sharing operations down.

Can you imagine a system like this to commute to Nicholls?  What do you think about the attempts to shut these companies out of markets, and who is harmed by this?

-MC

In previous posts, I have pointed out the consequences of price controls, especially in Venezuela. Venezuela has had food shortages, diaper shortages, medicine shortages,  and all of these shortages occur because the government there has sought to keep prices below equilibrium values.  Food, and medicine are both needed to keep their people from dying and these goods are in short supply in Venezuela.  In addition, murders are up and so is street violence.  This recent news story from the UK’s The Guardian shows that even the dead are having to wait in line as Venezuelans face shortages of coffins.

-MC

 

In a previous post, I suggested that what we call sweatshops are factories where workers are not treated well, but that these sweatshops offer workers a better life than they had, otherwise the workers would not agree to work there.  The pay in these factories, while quite low compared to U.S. and advanced economies’ pay rates, these factories pay well above other jobs available to these workers.  In other words,  “sweatshops” offer workers in these poor countries.  While working conditions seem harsh and pay seems low in these sweatshops, remember, they could not exist with voluntary employment if the conditions and pay were not better than other opportunities faced by these workers.  Be sure to read the Forbes and Huffington Post articles linked in that previous post.

In that post, I contrast sweatshop work with a foreign worker institution that exists in the Persian Gulf called kafala, where the governments of those nations actually support the real exploitation of foreign labor in those countries, exploitation that has led to the deaths of many workers just to erect a soccer stadium for a future world cup.

Far worse, than “sweatshop” labor and even worse than kafala it seems to me, is this disturbing report  from the U.K. The Guardian about out and out slavery on the high seas by Thai fishing enterprises that export shrimp.  According to this report, people are taken against their will, sold to these fishing enterprises, put on boats where they are kept at sea for years and worked long hours and often beaten and even killed.

These incidents and incidents of human trafficking (where people are held captive forced to do things against their will) are where we should focus our outrage, not the voluntary trade involved in what we call “sweatshops. When people are able to work at rates that are better than other positions they have available, above what we have called “opportunity costs,” then they are able to save, buy their own equipment and use their newly developed skills and knowledge to improve their lives.  Also, remember, that as more and more foreign investment flows into these poor countries, these competing employers push wages and conditions up, not down.

The real key to whether a relationship is exploitive or not is whether the worker has an option or not.  Think about how different the situation is between our former system of getting troops for our military forces under the draft, or conscription, and what we do today with our voluntary or paid military.  I should point out that free-market economists, such as Milton Friedman and Walter Oi, were at the forefront of the academic debate  against the draft, changing many important minds on the issue, contributing significantly to its demise.  See this tribute to Milton Friedman on the end of the draft written by David Henderson.

-MC

This guest post was written by my long-time friend, college classmate, and co-author, Gary Pecquet, an associate professor of economics at Central Michigan University.

Today, June 5th is celebrated as Adam Smith’s birthday.  In just nine years Adam Smith’s 300th will be celebrated. Not many thinkers have had the impact on the world as he over these previous three centuries.

Adam Smith’s brief biography:  http://www.biography.com/people/adam-smith-9486480#awesm=~oGjIQ8sfw9CIvA

They do not know his actual day of birth, but on June 5, 1723 his birth was actually recorded in Kirkaldy, Scotland. His father, a custom’s official, came from the lower middle class ranks of Britain died before Adam’s birth. Thanks to his mother’s meager savings and help from relatives Adam Smith received an education and became a professor of Moral Philosophy in Glasgow University. Glasgow was not a prestigious institution. It was like what is today what would be referred to as a teaching college. At Glasgow Professors were paid only a pittance from the University and were required to produce good lectures in order to receive most of their income from the contributions of their students at the end of the term, like tips. (These teaching evaluations were thus very effective.)

It was at Glasgow University where he wrote his first major work Theory of Moral Sentiments (1756). It was a product representative of the Scottish Enlightenment.   Smith embraced the classical virtues from Aristotle (prudence, temperance, fortitude and justice) and the three Christian virtues (faith hope and charity). What made Smith’s book so interesting was that he tried to explain the process that people learn and practice the virtues in society. According to Smith, people develop the moral sentiments through a process of at first evaluating the actions of others and then internalizing them by becoming conscious of how others may evaluate us. People seek the approval of others and both judge others and attempt to be seen as worthy by others by acting appropriately.  Thus, in contrast to Jean Jacques Rousseau, Adam Smith did not believe that modern society “corrupted”modern man. Thus, to Smith primitive man was a not so noble savage, who became corrupted by modern civilization. On the contrary, Smith believed that social interaction helps us to develop our moral sentiments and helps us to advance morally as the volume and quantity of our interpersonal exchanges increases.

The Theory of Moral Sentiments won Adam Smith success and fame so this helped him to gain connections from important British officials.  After travel and examination of many businesses, Adam Smith wrote and published his most famous work in 1776. Its complete title is An Inquiry into the Nature and Causes of the Wealth of Nations. This work is oft-considered to be the founding document of modern economics. The very name of this work indicates that Smith’s primary purpose was to study “growth theory.” Smith directly challenged the prevailing theories and practices of mercantilism. Mercantilism embraced three fallacies: bullionism, the false notion that national wealth consisted of gold and precious metals, protectionism and artificial trade barriers to save domestic industries and jobs and the zero-sum view of wealth.

Smith showed that a nation’s wealth consisted of its ability to produce goods and services and gold or money was only a unit of account.

Protecting domestic industries and jobs from foreign competition by high tariffs and other import restrictions was also a bad idea. Adam Smith argued that the Wealth of Nations could be enhanced by specialization and division of labor according to the most productive employments. Production should be based upon the most efficient mans to serve consumers. Smith correctly recognized that the goal of production is to deliver the goods to consumers. (Producers exist to satisfy consumers, not the other way around. “Jobs” (at least particular jobs) are not ends in themselves and should not be granted immunity from competition. Moreover, protectionist trade restrictions in Smith’s time lead the nations of Europe into many costly colonial wars against each other to secure monopoly profits at the expense of other nations and consumers in general.

This brings us to the third fallacy which still rears its ugly head today. The idea that wealth is a fixed sum or static quantity that cannot be increased but only fought over is perhaps the greatest fallacy made by non-economists. Specialization and division of labor result in increasing the economic pie. So do domestic policies that secure property rights and promote trade and technological innovation. Adam Smith wrote that “the division of labor is limited by the extent of the market.” As we reduce trade barriers, the market expands. In a small isolated village the same person may produce all furniture, but in a larger city separate businesses will likely produce tables, desks, beds, etc. And Smith also described the dynamic of learning by doing as we specialize we can become more productive over time.

We economists also assert that the test of a theoriy’s usefulness is in its ability to predict: Well Adam Smith made a number of remarkable predictions that have proven the test of time. Smith was a technological optimist. He believed that despite the many misdeeds of politicians to steer the economy into senseless protectionism and wars, the long term consequences was for the vast majority of people would realize the rise of opulence that would benefit even the lowest ranks of society. Today we can observe untold commodities that have become available to the poorest of Americans. Many of these modern goods and conveniences were not even conceived in Smith’s own time.

Smith believed in both the moral and material progress of the human race. Commerce increased the linkages between people and tended to raise the moral standards that we expect from each other as our connections increase and the gains of trade are increasingly realized we began to appreciate the value that other can bring to us. As we become more urbanized, we tend to adopt more urban values of tolerance and respect for diversity.

Human material and moral progress does not advance evenly or without interruptions and its does not proceed as rapidly as we may hope, but comparing data shows that historical decline in murder rates. (For example the number of homicides in Europe gradually fell from between 10 and 100 per 100,000 per year in 1400 AD to about 1 per 100,000 per year today.) Slavery was abolished throughout the western world during the 19th century and colonialism declined during the 20th century. People hold officials up to higher standards of human rights than a century ago. Scientific advances continue. Globalization in the 21st century has created networks of multinational firms reducing the tendency for nations to fight border wars.

Happy Birthday, Adam Smith

 

About three weeks ago, this story broke about rationing of appointments and treatment in a Phoenix VA hospital facility, rationing which has supposedly led to at least 40 deaths as these vets awaited treatment.  The rationing is due to two factors: 1) global budgeting of the VA hospital system capping total spending and 2) a lack of incentives for VA personnel to be as productive as private sector health professionals.  Both of these taken together  has led to rationing of health care to veterans–not diagnosing and treating veterans.  Two weeks ago, CNN reported in this story that many other VA hospitals were having rationing problems similar to the Phoenix facility.

Rationing at VA hospitals has long been a problem.  In fact, in 1992 a movie titled Article 99 was released detailing a VA hospital plagued with shortages of everything except very sick veterans.

Now, another VA scandal is emerging.  This one starts here in Louisiana.  As you can see in this story, back in February, President Obama, frustrated that congress would not pass his 39% increase in the federal minimum wage, issued an executive order requiring his $10.10 minimum wage for all federal contract workers.   There are many nursing homes across the country that care for vets and provide these services through contracts with the VA, meaning they are federal contractors.

Obama’s hike in the contractor minimum wage, without changing the reimbursement rate for veteran nursing home care, has led a nursing home in Louisiana to not renew its contract with the VA, as we read in this story.  This will cause their current veterans and their families to find other facilities and potentially other ways of paying for their long-term care.

Either President Obama did not think this federal contractor wage hike through very well, or he planned to use the veterans as political leverage to get unpopular tax hikes or equally unpopular spending cuts through Congress.

-MC

 

Here is a news story from a right wing media outlet, CNS, but they are just pointing out what the Bureau of Labor Statistics reports are showing, that young adults in the 25-29 age group are now at the lowest point in the labor force participation since the data was first collected in 1982.  Of course, it is not just in this age group where we have seen reduced rates of labor force participation, as labor force participation is down by a substantial amount all around.

This is not good news for the US economy.  Once a person has left the labor force, it is more difficult for them to come back, as their skills deteriorate more.  Smaller proportions of Americans working and producing means a lower average income and slower economic growth for us all.

-MC

Democracy is the theory that the common people know what they want and deserve to get it good and hard.

H. L. Mencken US editor (1880 – 1956).

I recently received the following comment from one of my better students in my Econ 211 class on my post last month, “Water Shortages.”  He writes about the protests against Bechtel and its water monopoly.  I usually reply to comments with the comment section, but, after reading a bit about what happened in Bolivia, I had much more than a comment to write.

Here is the comment from JW:

Whenever I hear of water shortages, I think of Bechtel, a company from here in the U.S. that tried to privatize one of Bolivia’s most precious natural resources – WATER! If Bechtel had won the fight, which they did at first, effectively taking control of Bolivia’s water supply, then it wouldn’t be the Bolivian government setting the water prices for that country, it would be the largest construction and engineering company in the United States with 37.9 billion dollars in revenue. It is also pertinent to note that Bechtel is he 5th largest privately owned company in the United States. And shortly after they took control of Bolivia’s water they raised they rates by 35%, which immediately sparked protests, and led by the Coalition in Defense of Water and Life and a machinist Oscar Olivera, Bechtel was dethroned, and the people one a major victory against multinational corporations trying to profit off of their water supply. Good for them. We have to fight against the parasitic economic principles of large corporations that claim allegiance only to their bottom line.

JW,

I can understand why a water shortage would remind you of that tragic situation in Bolivia.  Here are a couple of points, however.

First, when there is a shortage, the last folks you want to help you out of the situation are government officials.  Here is why: Government officials depend on their popularity to remain in power, and they do want to remain in power.  Raising prices that the common people pay is never popular.  Popular is not always right, however.  With a shortage there just is not as much as people want to buy at that price.  Shortages have their roots in scarcity, but are not the same, but since scarcity is a ubiquitous problem, there is nothing that can make it go away.  People never want to be told they can’t have all they want.  A shortage is what results when prices do not fully ration scarce resources, but require some additional rationing.

How are government officials going to ration anything, in particular, how will they ration water? They might use first-come, first-served, but then people will compete to get there first.  In Bolivia, the richer folks were connected to water systems with pipes, but the poor had to get water in jugs and transport it.  Guess who would have gotten their water first? The government may have had to turn water on and off to various parts of Cochabamba (the Bechtel water monopoly was only for one city, Cochabamba, the third largest city in Bolivia).   What is more likely is that the government would have played favorites, providing water to the parts of the city that supported the government more than the parts of the city where their opponents were more concentrated.

Also, in a shortage situation, it would be helpful if instead of just finding different ways of sharing the existing amount of water that could be provided; the rationing institution (practice) gave an incentive to folks to provide more water, to alleviate the shortage.

Government rationing does not do this.  However, raising prices does.  Governments have little incentive to raise prices, because it is so unpopular.  Private firms have a profit incentive and care little about popularity.

The second thing is that you should take a closer look at just what happened in Bolivia.  Here are two excellent sources:  2000 Cochabamba protests from Wikipedia and Timeline: Cochabamba Water Revolt from PBS.

The problems started back in the 1980s when an irresponsible government spending far exceed their taxing (spending: popular, taxing: unpopular), leading to hyperinflation of over 25,000% in 1985.  Bolivia only had the World Bank to turn to after that, because they no one else trusted investing in Bolivia, even their own citizens did not want to.  But having to turn to the World Bank meant having to comply with World Bank requirements for loans, which meant privatization for things such as water infrastructure.

Local water systems are, by their nature, monopolies, what we have called in class, “natural monopolies.”  One distribution company can provide water to an area more cheaply than two, as more distributors would require expensive duplication of infrastructure (water mains and such).  Water systems throughout the country were in trouble due to years of inadequate investment in maintenance.

The World Bank required the government(s) of Bolivia to get out of businesses from oil refineries to water distribution.  A Bechtel subsidiary somehow became the lone bidder for the SEMAPA water company in Cochabamba (can you say “rent seeking?”).

As part of the requirements for the contract to run the water system for Cochabamba, local politicians required Bechtel’s subsidiary, Aguas del Tunari and the other members of the consortium had to invest in a dam project that Cochabamba Mayor Reyes Villa wanted for them to get the $2.5 billion contract.   They also had to pay the debts of the old water agency, pay to expand the system and fix the existing and failing system.  The World Bank had warned that the Mayor’s dam project was not needed and that an existing dam could provide the needed water.  Opponents of the mayor claimed that the project was for the profit of the mayor’s major donors.

To do all that was required, particularly build the new dam, prices had to be raised by around 38%, or to nearly $20, but this was not affordable to poor Bolivians.  There were also rumors that the vague law that enabled this deal gave the company rights over all water, including rain water and water from wells and such.

It looks like the Bolivian officials dangled the potential for a monopoly in front of the noses of Aguas del Tunari and said you can have it if you build our dam, then charge what you want.

Of course, part of the problem is that the Bechtel and their subsidiary, Aguas del Tunari, ran the project just with their engineers, not economists or marketers who would have looked at what they would be able charge based on demand in the market.

Anyway, the rate hikes sparked protests and the protestors eventually won, as JW mentioned.  In the end, the control of the water system was restored to the local government.  The system continues to deteriorate.  The poor are still without safe water and pay far more than do the rich and businesses, as was the case before privatization.  Those with connections, pipes, only get water for about 4 hours a day, so the shortages persist.

The problem here was not as much the greedy capitalists, but the greedy politicians and their backers who forced requirements into the agreement that were helpful for them, but not for their customers and citizens.  Of course, both sides have a bit of blame to share.

As a side note, this story was the theme for the the Bond movie, Quantum of Solace.

Anyway, JW, thanks for pointing out this piece of recent international history.  This story has a lot of lessons for us, from rationing methods and dealing with shortages, to natural monopolies and the waste of rent seeking.

 

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