Governments Distort Incentives—It’s What They Do

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    Do not think about, write about or deal with  human behavior without determining the effects of incentives. It’s not their money, of course they’ll waste it.

    Wherein we see how theory can blind theorists to principles. One would think people of “high intelligence” would know these things, but one would be wrong. No one is more wrong about reality than statists, socialists and others of the “intelligentsia.” Another word should be minted for these incentive deniers.

$15 an Hour. Why Not $30? Why not $100?
John C. Goodman

There is a single thought that unites the political parties of the left all over the world (from welfare state liberals to socialists and communists) and it is this: incentives don’t matter. And since prices are the mechanism that coordinates incentives and clears markets, it follows that prices don’t matter either.

What other explanation can there be for something senseless that is about to happen in California: A $15 minimum wage, soon to be mandated for almost every employee in the state?

I suspect that most of the delegates to the Democratic National Convention this summer sincerely believe that if a price is judged too low (for example, a wage), the government should push it up – and nothing bad will happen. If a price is judged too high (for example, a rent), the government should push it down and nothing bad will happen.

If you don’t think that prices matter – that is, if you don’t think that prices through their incentive effects impact behavior – it inevitably follows that almost every economic event is a disconnected event. You won’t see any connection between minimum prices and surpluses or between maximum prices and shortages. That is, you won’t see any connection between rent controls and housing dilapidation. Or between minimum wage laws and the horrendous levels of black teenage unemployment.

Instead you will attempt to explain surpluses and shortages and other maladies as examples of personal failures (selfish hoarding, e.g.) on the part of the actors in the system.

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     It’s called blaming the actors for the actions rather than understanding the contingencies and circumstances.

You would expect unsophisticated people to think this way. But the editors of the New York Times? Here is the result of a quick Google search:

    1.     A series of articles about the spread of robots doing what humans used to do in just about every industry. (See for example, here.)
    2.     An unsigned editorial stressing the importance of work – even part time summer jobs supported by government and nonprofit subsidies – to keep black teenagers on the right track.
    3.     An unsigned editorial endorsing a $15 minimum wage.

At least at the Times, these three ideas are totally unrelated.

Take item 3. A minimum wage is often characterized as a restriction on employers. But the most important impact is on potential employees. A $15 minimum means that if you are unable to produce $15 of goods and services in an hour, you won’t have a job. Item 2 is a tacit admission by the editors that there are a great many black teenagers who are unable to produce even $7.25 in an hour — the current federal minimum wage. (Hence the need for subsidies).

So taken together, the two editorials are saying that the social impact of having a job is far more important than the wage anyone is paid, but the editors of the Times want to price these teenagers out of the labor market anyway. Does the make sense?

Do employers really have a choice?  Is there an alternative to hiring workers who are paid more than their marginal product? According to President Obama’s Council of Economic Advisors the answer is: robots. In fact, in their latest report, the CEA estimates that automation is going to have its greatest impact on those at the low end of the income scale. They estimate that those jobs paying less than $20 an hour have an 83 percent chance of being automated, while jobs paying more than $40 have only a 4 percent chance.

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   Increase the minimum wage and decrease the number of jobs and increase the number of robots.

Andy Puzder, the CEO of CKE restaurants (Carl’s Jr. and Hardee’s) says that in the restaurant business profits are pennies on the dollar and labor costs are one-third of expenses. Already we know how restaurants respond to minimum wages and other mandates: “fast food” means no waiters. Writing in the Wall Street Journal, Puzder says there is more to come. In 2013, Chili’s and Applebee’s began installing 100,000 table-side tablets so that customers can order, eat and pay their bill without ever talking to a waiter.

Given these developments, what could be more irrational or less humane than imposing a $15 minimum wage, effectively making low-skilled workers increasingly unattractive vis-a-vis their robot competitors?

In California, the mandate will be indiscriminate – ignoring differences in labor market conditions throughout the state. It will affect only one in five workers in San Francisco, but half of all workers in places like Fresno. That’s exactly the kind of law you would pass if you think wages can be high or low and nothing else will change.

So why $15? Why not $100? At $100, the price of a hamburger would triple, with no other changes. And one suspects the wage would have been set at $100 were it not for Jerry Brown and a few other people with some common sense.

Wage regulation isn’t only one way in which the left would like to intrude on otherwise freely negotiated contracts in the labor market. There is mandatory sick leave, the threat of longer paid maternity leave, expansion of the scope of overtime pay and other proposals.

In response, there is a growing group of workers for whom none of these restrictions apply: workers who aren’t employees. If you divide the income of Uber drivers by the number of hours they work, for example, the wage rate could be very high or very low – depending on time of day, day of the week and location. There is no legal restriction.

The “gig economy” is only a small part of a much larger development: alterative work arrangements, including independent contractors, on-call workers, temp workers and workers employed by contract firms. By one estimate, these workers are now 11 percent of the workforce in manufacturing and 16 percent in health care and education.

Amazingly, virtually all the job growth in the past 10 years is due to the growth of alternative labor!

So why is the loony left willing to leave all these people alone? In the world of “barnyard Marxism,” the economy consists of the oppressors (employers) and the oppressed (employees). If there are no oppressors, there is no oppression. If there is no oppression, there is nothing for government to do.

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   Entrepreneurs don’t want government help and, when they get it, it never turns out well. The whiners get government help and, in the end, it never turns out well. Government intervention in general never turns out well.  Rock on intervenors, a high standard of living is overrated.

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Power Teaching: How to Find Someone to Teach Your Child when the Education System has Failed.
Cui Bono–Cherchez les Contingencies

 

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