Are Costs Benefits? Looking and Medical and Education

A little while ago, I noted a strangeness in Sen Bernie Sander’s bill to make colleges free taxpayer-funded.  I noted a similar strangeness the other day talking about medical care.

The question is: why is higher spending per capita on education a good thing while higher spending per capita on health care a bad thing?  Many on both sides of the aisle bemoan America’s educational system, and say the solution is to spend more on education (while simultaneously complain the cost of college is too high, which is a head-scratcher, but we’ll talk about that at some other time).  Many on both sides of the aisle bemoan America’s health care system, and say the solution is to spend less.  But both views are wrong.

Costs are not benefits.  Costs are what one has to give up in order to achieve benefits.  You cannot judge the value of a thing based upon its costs, but rather by its benefits.  America may have the highest health care spending per capita in the developed world, but does that mean our health care system is worse?  Not necessarily.  One would have to look at the benefits thereof to make a proper call.  And same thing with education: the fact that a country spends more/less per student on education doesn’t matter if there benefits aren’t there.  By focusing entirely on costs (and either not recognizing they are costs, as in the case of education, or not looking at the benefits, as in the case with health care), it can lead to wrong-headed policy recommendations (for example, price controls.  Sure, they’ll lead to lower spending, but also create shortages).

The Simpsons and Living Standards

The following is a letter I sent to Don Boudreaux:

Hi Don,

FXX has been doing a marathon of every Simpsons episode ever (a 12 day affair).  I’ve been watching it off and on and just thought I’d share with you an observation:

According to the Simpsons, there sure isn’t any stagnation.  The Simpsons, as you know, are a lower middle-class family (they often describe how much they are paycheck to paycheck, sometimes avoiding foods like steak because they can’t afford it).  So, much of what the family owns would be placed in that category.  As I am watching, it is amazing how much the family’s standard of living rises.  In the early 90’s, for example, there is just one car, a big ol’ TV set, etc.  By 2000, the family has 2 cars, and a “regular” TV.  By 2013, they now have a big-screen flat panel TV.  Homer still has the same job (mostly).  Marge is a housewife.  Bart and Lisa and Maggie are still kids, but the Simpsons’ lives are so much better.

But that’s not the only observation:

In one episode that takes place in the late 1990’s (or perhaps early 2000’s.  Not totally sure), Bart gets a girlfriend who is the daughter of a movie star.  She invites him over to watch TV because “You have never seen Itchy and Scratchy until you’ve seen it on DVD!”  Not 14 years ago, DVDs were the exclusive domain of the rich, and yet now they are ubiquitous!

Of course, this is hardly scientific and all kinds of legitimate arguments can be made against these observations, but I just thought I’d share that a family that represents “the average American” sure as shoot aren’t stagnating.

Best,
Jon

Why Do We Do It?

One of the questions I get asked a lot (and I know other free-marketers do, too) is “why do you focus so much on minimum wage, especially when its effects are so small?”  It’s a good question, especially considering time is a scarce resource.  The reason is simple: somebody needs to stand up for liberty and to hinder the proliferation of these bad ideas.

What attracted me to economics in general, and free markets in particular, is its ability to do good in the world.  I fight for free markets and liberty in general not for their own sake (“liberty for liberty’s sake” is an empty phrase), but because no system in the history of mankind has delivered more people out of poverty, ended/prevented more wars, reduced violence, bigotry, hatred, and sexism more than free markets and trade.  The record of history is crystal clear on this matter. In market-based economies, people of all income levels live better and more peacefully than those of the supposedly “peace and love” socialist economies like Venezuela, Argentina, and the old USSR. In the past 30 years, as markets globally have become more liberalized, hundreds of millions of people have been lifted out of poverty.  It is truly amazing.

But it is a long and ongoing struggle.  When Adam Smith first wrote Wealth of Nations back in 1776, even he doubted his ideas of free markets would ever become popular.  Slowly but surely they did, and in 1846, Britain took its first steps toward this by repealing the Corn Laws.  His ideas then dominated much of the economic world for a century, until John Maynard Keynes came into the picture.  Keynes ideas took a while to get off the ground, too.

The point of all this is I spend my time fighting these battles so these poor ideas, such as minimum wage, do not become entrenched again.  It is an uphill fight.  I may not see it come to fruition, but if I, and others like me who fight this good fight, who seek to make the world a better place through human cooperation and mutual trust, then the light of hope remains.  There have been times when the light of freedom has been dim and times when it has been bright, but no matter what, its keepers have kept the flame alit.  The torch has been handed down from generation to generation, and soon it’ll be my turn to bear it.  It won’t be easy, but nothing worth doing ever is.

Keep up the good fight, friends.

Freedom for Me, Not For Thee

L.A. recently passed a minimum wage increase to $15/hr.  One of the biggest supporters of this legislation was organized labor.  Now that it’s passed, they seek to repeal it (but just for them).

Before I get into the meat of this post, let me first say I have no philosophical problems with labor.  It’s blatant hypocrisy I despise.

Anyhoo, back on track.  Now that the wage hike is increased, labor leaders are asking that unionized firms be exempt from it.  Here’s why:

But Rusty Hicks, who heads the county Federation of Labor and helps lead the Raise the Wage coalition, said Tuesday night that companies with workers represented by unions should have leeway to negotiate a wage below that mandated by the law.

“With a collective bargaining agreement, a business owner and the employees negotiate an agreement that works for them both. The agreement allows each party to prioritize what is important to them,” Hicks said in a statement. “This provision gives the parties the option, the freedom, to negotiate that agreement. And that is a good thing.”

Source: LA Times

I agree with Hicks position 100%, but his logic applies not just to labor unions, but to all laborers, union or otherwise.  As he rightly notes, minimum wage prevents parties from negotiating an agreement that works for both parties and allows each to prioritize what is important to them.  The individual, just like the union, may face a situation where working for a wage below the minimum is preferable to other options (say, for example, s/he cannot jet a job for the minimum).  Minimum wage, as Hicks rightly notes, eliminates that freedom.  There is nothing special about labor unions that mean they deserve more freedoms than the individual.

I am glad Hicks is doing the right thing for his membership to get them exempt from minimum wage legislation, but I just wish he wasn’t doing it at the expense of non-unionized workers.

The Good Side of Recessions

Recessions get a bad rep.  It’s perfectly understandably why: recessions suck.  No one likes to lose their job, or have to budget.  Recessions are messy, ugly, and frightening.  But they can also be good.  To understand why, it is important to understand what a recession is.

A recession is more than just a country-wide thing.  Firms and individuals undergo recessions fairly frequently.  All a recession is is when economic activity (production and/or consumption) drops.  This could be due to the loss of a job, or the ending of a product line, or even a career choice.  What is typically known as a recession is when these individualized instances aggregate.

Recessions are typically an indication of misapplied resources.  Remember that the goal of all economic activity is to produce value.  Without value, there can be no exchange, and no wealth is generated.  Therefore, any activity that doesn’t generate wealth contains therein misapplied resources.  Recessions will occur to encourage the owners of the resources to stop applying them to the non-valued ventures.  Take, for example, the fairly recent bankruptcy of Kodak, a film and imaging company.  In a time of nearly ubiquitous digital cameras and digital photo storage, the concept of film became obsolete and Kodak stopped offering value.  As such, it went into a recession.  The resources at Kodak’s command are now freed up to pursue other more valuable ventures.  In other words, Kodak’s recession actually stands to benefit the economy.

This is the big lesson here: recessions drive out unproductive and non-valued products and free up resources for more productive uses.  They do suck, but it’s the way the economy heals.  Political policies designed to hinder recessions actually hinder economic growth by preventing the reallocation of unproductive resources. For example, if a (politically connected) industry is facing recession, a typical response is to bail them out.  This just encourages the bailed out firms to keep doing what they were doing; they felt no costs and thus had no incentive to reallocate their resources (it also sets up a dangerous precedence, but that’s for another post).  When we get sick, we run a fever and may vomit.  It sucks, but it’s how the body heals.  Recessions are the same way.

Economic actors should always strive to produce value, but if they are faced with a recession, the best thing to do is to recognize it and reallocate.

Disagree at Your Own Peril

Writing in the Washington Post, Sen. Whitehouse (D-RI), advocates for using RICO statutes to shut down disagreements on global warming consensus.

I think this is a great idea.  If it applies to science, let’s apply it to economics, too!  That means people who think the trade deficit is bad, free trade harms Americans, returns on capital are driving inequality, or that minimum wage doesn’t make it harder for workers to find jobs could be prosecuted!  I mean, on the one hand, I’d be out of a job, as much of this blog is about debunking these myths, but if I can just press federal charges against people who disagree with economic theory, it’d be an easy life.  I wonder if I could get some whistle blower rewards…

All sarcasm aside, I wonder how fast these politicians would change their tune once they started facing RICO statutes.

Finite Resources vs. Scarce Resources

Over at Cafe Hayek, Don Boudreaux reports on some great news: the amount of arable land in the wold has grown considerably since the 1960’s!  This is why I love economics: making the world a better place.

But there is another lesson to take away here other than that the world is getting better.  That lesson is the difference between what we mean when we say a resource is scarce vs. being finite.

Arable land is both scarce and finite.  There is only so much arable land in the world.  However, thanks to technological advances, arable land has become less scarce; it’s supply has increased. It is still finite, to be sure, but “more” land has been “created” making it less scarce.

And this is the sort of thing we’re talking about when saying oil (or other resources) are finite but can become more or less scarce.

There is Such a Thing as a Just Price

Tim Worstall, over at Forbes, is one of my favorite writers.  I generally find myself in agreement with him, and when I don’t it causes me to reevaluate my thoughts.  However, there is one item I wish to disagree with him on.  The other day, he wrote:

Also perhaps, to wonder at how various left liberals are still making the mistake that a medieval saint was making near a millennium ago, that a Greek philosopher was making near three millennia ago. For the truth is that there just isn’t any such thing as a “just price.” There’s only one that clears that market and any number that don’t.

I agree that there is no one just price, but I disagree that there is no such thing as a just price.  The just price is whatever price is agreed upon by the parties involved.  If a man agrees to sell his labor for $7/hr, and another decides to buy it for that price, then $7/hr is just.  Neither’s rights were violated, no injustice has been visited upon them, so the price is just.  But, if one man held a gun (either literal or proverbial) to another’s and said “you will work for $7/hr,” then that price now becomes unjust, since the laborer’s rights were violated; an injustice has been visited upon him.

Market Failure is Profit Opportunity

Markets are not perfect.  They do fail.  Every worker isn’t paid exactly what his marginal labor is.  Goods and services do carry with them externalities.  I’ve never met an economist, regardless of his school of thought, who argues otherwise.  But the failure isn’t necessarily a bad thing.  In fact, it offers an opportunity for advancement.

All advancement is based off of challenge.  To quote Dr. Mordin Solus:

Can’t carry a load, so invent wheel. Can’t catch food, so invent spear. Limitations! No limitations, no advancement.

These limitations, these challenges, are exploited by clever people to make a profit:  Man invents spear, trades it to his neighbor, for fresh meat.  Or, to bring this into a modern time frame: man noticed workers underpaid.  Starts business, offers higher wages.  Lures employees from competitors.  Makes profit.  Or, man notices vehicle emissions harmful.  Invents more efficient engine.  Sells to companies for royalties.  Makes profit.

Any market failure can be (and often is) exploited to make a profit.  Their new inventions (which don’t need to be physical, by the way.  A process improvement can be an invention, too) help humanity advance.

The ability to make a profit off a market failure is also a barometer of how effective the applied remedy is (and whether or not there is an actual market failure).  If an entrepreneur is unable to earn a profit, it’s possible his solution won’t solve the market failure (for example, trying to solve auto emission by selling new steering wheels) or that his perception of the marketplace was wrong (hiring workers at a higher wage but unable to earn profits suggests the workers are paid above their productivity).

When markets are allowed to compete, when this profit motive is allowed to thrive, then market failures, when they do arise, can be corrected.  When competition is not allowed, when profit is treated as a curse word, then these failures can become systemic.

One final thought: there are certain types of goods, specifically public goods, where conditions and characteristics are such that it would be extraordinarily difficult for an entrepreneur to correct a market failure.  In this case, it may be (and sometimes is) appropriate for government to supply the good/service.  But these goods are few in number and the Public Choice Problem remains.  One must be very careful when calling for government to fix a market failure.