The Frying Pan Fable Follow-Up

Imagine you are in your house when suddenly you hear an intruder. Fearing for the safety of your family, you rush over to your closet and start loading your Tommy gun. As you are preparing your weapon, you have a random thought: “This Tommy gun is pretty effective for self-defense, but I think I might just use my trusty frying pan instead. Sure I’ll have to get closer to the intruder and put my life at considerable risk, but I just like my frying pan a whole lot.” Throwing your Tommy gun aside, you pick up your frying pan and go to defend your house.

Last week I made the point that created items generally work best when put to use according to their intended design. Additionally, this opening illustration highlights another key point about roles: when you utilize something beyond its intended role, you often usurp the designed function of something else. 

In terms of the role of government, this is an important concept to understand. When weighing benefits and costs, we must realize that as the role of government expands, the roles of other societal forces shrink. Just as the frying pan rendered the Tommy gun useless when its role expanded unnecessarily, so government enlargement can hinder the effective and intended functions of other societal institutions. This can be seen in two specific areas: social welfare and economic regulation. (I will merely touch on these issues as an illustration of the above point. A fuller discussion of either topic will have to be put off until a later date.)

Social Welfare

Most people would likely agree that it is important to help the poor and the less fortunate. And through welfare, the federal government is very involved in attempting to achieve this goal. However, as government gets involved in these poverty-reduction endeavors, it pushes out other more appropriate institutions, such as the church. Tony Evan notes, “The primary job of caring for those in need was never intended to be a function of government. Can you imagine Paul going to Caesar and asking for a federal grant to fix the problems of poverty within the church in Jerusalem?” (“Turn Neither to the Right Nor to the Left” page 241).

The Bible calls believers to look out for the interests of others (Phil. 2:4, 1 Cor. 10:24), and to materially give to those in need (Rom. 12:13, James 2:15-16). Thus, through the church, we have an institution that is designed for dealing with poverty.  Government welfare, on the other hand, is patently inefficient and unable to make noticeable improvements in terms of poverty reduction, because government was not designed to eliminate or alleviate poverty. Marvin Olasky describes our current welfare system as “the ultimate bureaucracy –an anonymous public supporting anonymous machinery supporting anonymous clients” (“Turn Neither to the Right Nor to the Left” page 208). As follows, the government suffers from a lack of knowledge about individuals and a (potential) lack of motivation to actually help the poor improve their productivity and get off of welfare.*

In summary, the government was never designed to financially provide for the poor. And by acting outside of its role, it inhibits the normal functioning of other effective private institutions, such as the church.

(There’s much more that could be said about the relative efficiencies of private versus public charity, improving private poverty relief, and the morality of government income redistribution. These topics are beyond the scope of this post, but if you’re interested in learning more, I would recommend two books: “Poor Policy: How Government Harms the Poor” by D. Eric Schansberg and “The Tragedy of American Compassion” by Marvin Olasky.)

Economic Regulation

While government economic interference is a very broad topic, the main point that I want to highlight is that government interference in the economy via interventions, such as price controls, usurps the effective and intended function of the price system.

What is the price system, you ask? Economist Robert Murphy explains the role of prices, “A market price is the balance between how eager you are to buy something and how reluctant the producer is to sell it. If something has a high price tag, it’s because it is scarce; if it has a low price tag, it’s because ‘they’re a dime a dozen.’ In short, market prices are not arbitrary” (“The Politically Incorrect Guide to Capitalism” page 9). Among other purposes, the price system has at least two important and related functions in the market: signaling and coordinating.

Prices act as signals to market participants, demonstrating the value that market participants place on the goods in question. Additionally, prices enable individuals to calculate profit and loss, which direct the actions of entrepreneurs. Economist Gene Callahan describes the market process as, “the ceaseless striving of entrepreneurs to locate price discrepancies and profit from them, thus adjusting production to the wishes of consumers” (“Economics For Real People” page 159). Thus, the price system signals to entrepreneurs areas of unsatisfied consumer wants and to intervene to provide the requested good or service. Without a price system, entrepreneurs would be unable to determine which new enterprises might be viable and profitable.

Prices also function to ration goods and services. Rather than allocating goods to consumers based on preference, nepotism, or some other form of discrimination, the price system allocates goods based on the consumer’s willingness to pay. Callahan again states, “the market guides scarce resources toward their most important uses through the voluntary rationing of the price system,” as “the new, higher price of the good motivates people to use less of it” (“Economics For Real People” page 199).

In summary, the price system is fluid and able to react to changes in supply and demand. Economist F.A. Hayek noted, “Fundamentally, in a system in which knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people” (“Economics For Real People” page 163). Prices serve to alleviate the problem of insufficient knowledge of market factors and to coordinate supply and demand.

Central planning supplants the role of the price system, but cannot allocate goods nearly as efficiently. After all, no individual or group of individuals could possibly track the changing preferences of millions of consumers and producers like the price system can. Furthermore, interferences like price controls distort the signaling function of the price system, disallowing consumers from “voting” for certain goods through their spending practices.  Murphy again notes, “When the government interferes with prices, it cripples the ability of free people to make intelligent economic decisions, just as surely as if politicians interfered with phone lines, e-mail, or other means of communication” (“The Politically Incorrect Guide to Capitalism” page 10). This behavior by the government has the negative effect of causing unnatural shortages and surpluses.

These shortages in particular lead to a rationing problem. If the government sets an artificially low price, the quantity demanded will increase, but the quantity supplied will decrease, leading to a shortage. In a free market setting the price would rise, rationing the good in question based on consumers’ willingness to pay. However, the price control disallows the price from rising, which forces the government to ration the good in question based upon some other criteria besides willingness to pay.

In conclusion, the government was never designed to direct the intricate adjustments of the market. And when it acts outside of its role, it inhibits the normal functioning of an effective societal force: the price system.

Conclusion

My intent was to briefly touch on two areas of public policy as a means of showing some of the unintended consequences of expanding the function of government. I didn’t want to go into considerable depth in terms of discussing the role of government, nor did I want to write extensively on these policy issues. Those will have to be topics for another day. However, hopefully this helped you think through the intended function of government and some of the unintended consequences of government expansion.

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If you have thoughts about how government expansion can detrimentally affect other societal institutions, feel free to leave a comment or send me an email. Additionally, if you want to specifically discuss the role of government or either of these policy issues, you’re welcome to leave a comment. Again, thank you so much for reading this blog!

 

*(You might ask why government and the church can’t work together to deal with the issue of poverty? Does government involvement in welfare necessarily supplant the role of the church? That’s a good question and I’ll try to touch on it briefly. I would say that government’s attempt to alleviate poverty through the welfare system not only have negligible positive effects, but often actually have considerable negative effects. Examples of these effects would be: incentivizing recipients to stay on welfare (a culture of dependency), incentivizing recipients to not establish marriages, and coercively taking money from individuals to fund the welfare system.  Hypothetically, if the government were able to alter this system entirely, it might be able to work with the church. But the bureaucratic, budget-maximizing nature of the government makes it difficult for me to envision an efficient government-operated welfare system. Further, the question of roles becomes important (as I’ve tried to stress throughout these posts). Is it within government’s intended function to deal with poverty?)

Buying Local, Trade, and Protectionism

I always buy locally-made products…unless I can find non-locally-made products of the same quality for a lower price.

“Buying local” is one of the current trends in our culture. Various companies and brands craft entire marketing campaigns around the fact that their products are produced locally, made out of local materials, and/or created with local labor. Now, why would the fact that a company is selling “local” products be persuasive and enticing to consumers?

One potential explanation would be that local consumers buy into a variation of “protectionism” on a smaller, local scale.* This explanation would argue that local consumers want to support their community and facilitate economic wellbeing within the local business environment by shopping primarily or exclusively at local dealers. This might be more of an emotional situation where consumers not only buy a product, but also purchase a good feeling of sorts.**

One of the problems with this line of thinking is the same problem that large-scale protectionism faces. When considering the economic well-being of a certain area, one must look at both the producer and consumer side of things. Buying local products at a higher price (and from my experience these locally made and marketed products tend to be more pricey) may benefit certain local producers but it also hurts local consumers (including you). If a whole bunch of consumers buys overpriced, locally-made coffee, the local coffee shop benefits at the expense of the five consumers.*** Therefore, it is difficult to argue that the local community is better off on net.

And why should local producers be my primary concern? Not to say that I should intend to hurt my community, but this sort of thinking can have the effect of hurting many foreign (or non-local) producers. Think of producers many states away who are efficiently producing cheaper, equal quality goods. Why should I turn away their products, which are of equal quality and a lower price?

Competition and trade forces producers to innovate and cater to consumers. Therefore, consumers should want as much trade as possible and as many product options as possible. This forces producers to use their time and resources in the most effective way possible. If local producers know that I will buy their goods because I am emotionally motivated to support them, then those producers will not be worried about their non-local competition and will be less likely to innovate, produce quality goods, and charge low prices. While this is a much smaller scale example, the “buy local” marketing scheme is similar to an import tariff in that it attempts to limit local consumption of non-local goods.

Now some might say that it saves resources to buy local. And this may or may not be the case. Dr. Arnold Kling in his recent book Specialization and Trade: A Re-Introduction to Economics argues that buying local can actually waste resources:

“Many people believe intuitively that it saves resources to “buy local.” Surely, we think, cheese or vegetables from a local farm must save on the energy required for transportation. However, if the grocery store sells cheaper products that comes from hundreds of miles away, some factor must offset the higher transportation costs. Chances are, the land elsewhere is more suited to growing crops, so that fewer acres are being used to produce a given amount of output. The local land might be better used for housing or as wilderness.
Water or other resources may be used more heavily locally than on distant farms. Whenever produce from distant farms is cheaper than locally grown produce, the price system is telling us that “buying local” wastes resources.”

So next time you are tempted to buy a product merely because it is locally-made, consider the bigger picture. Look into non-local options and try to use your purchasing power to support producers who make the highest quality product in the most efficient way possible. Don’t discriminate against high quality, cost-effective producers just because they live far away from you.

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If this post resonates with you or irritated you, leave a comment below and tell me what you think of it. You can always send me an email as well; I’d love to hear your thoughts. Thanks for reading!

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*Ironically, one of the most startling side effects of protectionism is that a significant portion of local producers is actually harmed by this type of behavior. Every dollar spent subsidizing the inefficiencies of one producer is a dollar that could have been spent supporting the innovative and efficient ones.

**The price that consumers pay for “local” goods could potentially involve a base price, which would be identical to the price of the product elsewhere, plus a premium to support the local market. This premium portion of the price would then be similar to a charitable contribution in the sense that the only benefit the consumer receives for this added cost is a good feeling for having “supported” the local community.

***How do producers benefit at the expense of consumers? After all, this is voluntary trade, which should be mutually beneficial. The key here is that consumers do benefit, but they could benefit even more by buying a less expensive product of equal quality elsewhere. Thus, this transaction is at least somewhat inefficient, because consumers bear an extra cost without a corresponding benefit.

The Parking Garage Dilemma

I’ve been studying a lot of economics lately and have been intrigued by a field known as “Behavioral Economics.” While I am far from an expert in this field, from my understanding this area of study seeks to explain why individuals make many of the decisions that they do, based on economic theory. This field is rooted in the concept of “rationality” which assumes that individuals weigh costs and benefits when making decisions.

Being a student of economics, and this area in particular, has lead me to try to apply what I’ve learned to some areas of my everyday life. (It is really interesting, as you get into this area of study, to look at and analyze the different decisions that you make on a daily basis. Oftentimes, you will begin to notice that you subconsciously weigh the costs and benefits of decisions without even explicitly thinking about it.)

One such area that I have been wrestling with is the concept of where one should park in a parking garage. I’ve been working in downtown Louisville for the past two years and utilize a parking garage on a weekly basis. Honestly, as I drove into work, I didn’t put too much thought into where to park. I generally would pick the first open spot I could find, so as to limit the amount of time I would spend driving out of the parking garage.

If everybody behaved this way, this topic would be quite uninteresting. After a couple months of parking in this manner, however, I started to notice that cars would drive past me and other open parking spots and head further up the garage in search of other open spots. To be honest, I could not make sense of this decision. Why would somebody pass up perfectly good spots on, say the fourth floor, in order to obtain open spots on the sixth floor? It made no rational sense to me.

Although I didn’t put too much effort into solving this puzzle, it did stick with me and annoy me on occasion. Finally, I obtained some clarity on a day when most of the lower level spots were filled. I drove up to the fifth level and noticed that all of the spots near the elevator were filled. I kept driving past many open spots until I got to the sixth level and also noticed that all of the spots near the elevator were filled. Suddenly, it occurred to me – these people were not trying to minimize the amount of time spent leaving the parking garage, but were trying to minimize the amount of time spent walking to and from the elevator! While I was willing to sacrifice a short walk to the elevator (cost) in exchange for a short drive out of the parking garage (benefit), these other people behaved the opposite way.

(Since writing this initial post in December, I’ve been able to take an “Urban Economics” class, which deals with city structure, transportation, and many other issues, and has given me a few tools to more eloquently explain this situation. Here is a more bit of a more technical explanation of the situation:)

When thinking about the “costs” of travel, economists consider both explicit monetary costs, as well as time costs. These time costs can be further broken down into “access time” costs and “in-vehicle time” costs. Access time cost is merely the disutility that an individual undergoes in order to enter a vehicle (i.e. waiting for a subway, walking to a bus stop, etc.), while in-vehicle cost is the disutility that an individual undergoes during an actual trip (i.e. sitting in traffic, sitting in a crowded bus, etc.).

Generally, to decrease access time, in-vehicle time would have to be increased. For example for a light rail system to decrease access time, the operators would have to add stops to the system. These more frequent stops would, however, increase in-vehicle time for those who were already on the light rail.

Empirical research shows that people actually dislike access time more than in-vehicle time. So, most individuals would rather get on a vehicle quickly, even if the trips itself were to take longer.

This actually lines up consistently with my observations in the parking garage. While I tried to minimize my in-vehicle time by parking in the first spot I saw, these people who kept driving to upper levels were trying to minimize their access time by parking close to the elevators. Apparently, my “ground-breaking” observations can be very easily explained by existing economic theory. Nevertheless, I thought these ideas were worth sharing.

To wrap this up, economics is a fascinating topic and can be used to explain many seemingly confusing aspects of human behavior. I hope this post was interesting and/or beneficial to you.

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If this post piqued your interest or if you believe that this is really too petty of a subject to be discussed, please leave a comment or send me an email. Thanks for reading!

Public Radio and Public Goods

I listen to a decent amount of public radio on my various commutes to school and work. Inevitably, there comes a time every couple months where the station that I listen to tries to coerce its listeners into donating money to support the station. “Coerce” might be a strong word, but I do want to emphasize that these reporters really lay it on thick.

And they use a number of tactics. First, they try to emphasize that the dollar amount they’re asking for is really small. Who can’t part with a mere $5 a month? Second, they inform their listeners about some great deal where, if the listeners donate a certain amount, a charitably-minded company will match that amount. Of course this amazing opportunity only lasts for a short period of time, so listeners had better jump on it. Third, they share testimonials of individuals who have donated to the station and whose lives have consequently been changed for the better. Finally, and most interestingly, they appeal to the listener’s sense of morality. Is it really fair to be listening to the station without paying for it? Listeners who are basically stealing from the station in this way must feel so guilty. (Though, it should be noted that the station is offering their programming for free, so its hard to blame listeners for doing what the station is encouraging them to do. But more on this later.)

This entire process takes a good chunk of time. By the end of it I generally wonder why I didn’t just switch to a different station, but then I wouldn’t be able to write this post.

So what leads radio stations to behave in this way? Well, they are offering a good at no price and have to find some way to make money. The world is full of similar goods that consumers have the opportunity to benefit from without paying for directly. (Think of national defense, clean air, Thunder Over Louisville, etc.) In the world of Economics these are called “Public Goods” and have two distinctive characteristics: a) they are non-excludable, meaning it is difficult/impossible to prevent people from consuming them; b) they are non-rival, meaning that two individuals can consume the same good without limiting each other’s consumption.

Based on their characteristics, Public Goods suffer from a specific problem known as the “Free Rider” dilemma. If consumers know that a good will be available to them regardless of whether or not they pay for it, they will not be motivated to pay for it. The proper way to handle this issue would be to have each person pay what the good is worth to them. However, if you try to figure out how much said good is worth to them, they will likely understate its value.

There are a number of ways to handle this problem. From a government perspective, funding for Public Goods often comes from taxes. In the private arena businesses use advertisements, sponsorships, and other similar strategies to obtain funding.

Public radio is an interesting version of a public good, because they can use advertising to obtain funding but also often try (really hard) to get donations from their listeners. While these donations do provide the stations with money, they still fail to be completely efficient. Some people who pay a significant amount per month are still paying less than the station is worth to them, while others who were guilted into paying a small amount might be paying more than the station is worth to them.

I actually haven’t donated to this station and I probably will not, because it just is not that valuable to me. (Side note: I also disagree with many of this station’s positions, so I would have a hard time justifying supporting this station from that perspective. But that is really a separate issue.) Or to say that differently, to me the most valuable feature of public radio is the fact that it is free. If a price were imposed on my listening of a certain station, I would, without any remorse, merely switch to a different station or listen to music on my iPod. I admit that I am a “Free Rider” in this situation and I am okay with that.

If radio stations were really serious about obtaining funding from their listeners, they would try to restrict their product from being consumed freely. They could create some sort of subscription and only allow paid listeners to benefit from their programming. They haven’t done this yet, and I imagine that it is because there are significant amounts of listeners like me who would not continue to consume their products if they were no longer free. There are so many free substitutes available to consumers that, unless all radio stations imposed a price, the non-free stations would likely suffer significantly in this situation.

Public radio stations are in a unique and challenging situation. And until a workable solution comes forward, they will likely continue to try to obtain funding by begging their listeners for money. Maybe the true cost of listening to public radio is being tormented by twenty straight minutes of donation requests?

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I hope you found this post to be interesting and/or informative. If you agree or disagree with the view expressed in this post, please leave a comment or shoot me an email. Thanks for reading!

Why the Minimum Wage is Ineffective and Costly

[Note: I was going to post about this topic later in time but given the fact that 19 states just increased their respective minimum wage amounts, I thought it would be especially relevant and interesting today.]

I don’t know about you, but every time I hear somebody praise the minimum wage or recommend that it should be increased, I inwardly (or sometimes outwardly) roll my eyes. That’s not to say I don’t understand this policy’s appeal to many individuals. However, once you look beneath the surface and see how this policy really works and some of its real but hidden consequences, it clearly possesses a host of problems. Based on this policy’s appeal to a wide variety of individuals, I want to offer a non-comprehensive summary of this policy and some of its inefficiencies and costs. I’m going to start this post with an outline of some ways that people might view and justify a minimum wage.

An Unrealistic (But Maybe Common) View of the Minimum Wage

I can’t say the ideas expressed in this section are based off of a single person’s opinion or the opinion of the majority of the minimum wage’s supporters. I do imagine, however, that these are some (potentially common) ways that people might think about and justify this policy.

  1. An increased minimum wage means that all (or most) low wage workers will benefit from a higher income.
  2. An increased minimum wage means that unemployed individuals will be more motivated to enter the job market, will obtain good jobs, and will be better off.*
  3. Companies are greedy and have reserves of money that they can and will open (if legally forced) to pay higher wages to their employees.

While there may be some degree of truth to each of these claims, these views have significant flaws, which will be expounded upon in the rest of this post.

The Reality of the Minimum Wage

What exactly is the minimum wage? The minimum wage is a wage floor or a legal minimum price for many types of labor.** It was designed to help the working poor by enforcing that companies pay a “living wage” (in other words, enough money to live on). In terms of market operations, a minimum wage increases the price of labor without any corresponding increase in the value of labor. (This is a significant disconnect which I’ll talk about more later.)

The fact is that companies (for the most part) seek to make profits and operate in a very competitive environment. Thus, it is hard to justify paying the same people a higher wage in order to do the same task. You might think that for the most part companies can and will just swallow the extra cost, but think about it from your perspective. If the price of a good that you consume increases significantly, do you continue to consume the same amount of that good as before? Unless you absolutely need that good, you likely try to cut back on your consumption and/or find alternatives. Like you, companies tend to be rational, think at the margin, and behave according to universal economic principles. So when price increases (imposition of a minimum wage), quantity demanded (desired number of employees) decreases.

Ways That Companies Respond to a Minimum Wage

Assuming that firms will not just accept these increased labor costs, how exactly do they attempt to cut costs in the face of a minimum wage?

  1. Hire less people. Whenever possible firms will try to replace workers with machines, kiosks, or just try to get more work out of a fewer number of laborers.
  2. Decrease fringe benefits for employees. Just because a company has to pay a certain hourly wage does not mean that they must continue to offer benefits such as employee discounts, paid time off, etc.
  3. Black market activity. Really desperate firms can break the law and try to hire workers at an illegally low wage rate.***
  4. Increased prices for consumers. In the face of higher operating costs companies will seek to share the burden with consumers in the form of higher prices. This will have varied results depending on particular products, markets, etc., but it leads to the potential for making a whole lot of people significantly worse off.

Some Additional Costs of the Minimum Wage

I’ve been quite negative regarding the minimum wage up to this point. I do want to be clear that this policy has at least one benefit: those low income workers who retain their jobs do indeed get to enjoy a higher wage rate. But what are some of the costs that society incurs in order to obtain this single benefit?

  1. Increased prices for consumers. As noted earlier, firms will not bear the burden of higher costs alone, and will share these costs with consumers in the form of higher product prices. Especially for those with smaller incomes (i.e. the poor), this increase in prices has the potential to cause significant harm.
  2. Disemployment of the poorest, most unskilled laborers. When firms are determining who to layoff they will likely get rid of the least skilled, most unproductive workers. Sadly, these are the exact individuals that the minimum wage seeks to help. This policy suffers from a significant disconnect between policy goals and actual outcomes.
  3. Fewer training opportunities. As noted earlier, the minimum wage creates an increase in price without a corresponding increase in value of labor. It makes sense to think that a worker earns low wages or remains unemployed because he/she is unproductive, untrained, or of little value to potential employers. Thus, the more education and training that low income workers can get, the higher wage they can demand. (It’s amazing that all of this can occur without the government intervening to adjust and distort the market… but I digress.) However, if the cost of labor is higher, and firms choose to hire less workers, then opportunities to gain work experience and training decrease significantly.
  4. Potentially fewer incentives to work. Those who remain employed at a higher wage rate might actually be incentivized to work less or not at all. Higher income leads to more taxes and less welfare, so there is a real possibility that the costs of working at a higher wage rate will outweigh the benefits to many individuals.
  5. Increased personal discrimination by employers. Whenever there is a surplus of a good, some sort of rationing mechanism must be in place in order to determine who can obtain the limited supply of said good. Without price to ration goods, employers are free to hire or not hire individuals based on personal characteristics, rather than productivity or other legitimate reasons. For a policy that seems to bear merit based on arguments of equity, this is a disturbing side effect.

Some Policy Alternatives to the Minimum Wage

At the end of the day, this policy intends to improve the lives of heads of households among the working poor.**** Having noted many of this policy’s problems, what are some better, alternative policies? After all, it would be less than productive to point out all of the problems with this policy without listing at least some potential alternatives.

  1. Lower or eliminate payroll taxes for unskilled, low income workers. FICA and state income tax withholdings can significantly decrease the incomes of the working poor. Why not give this concentrated group of hurting individuals a tax break?
  2. Expand or create policies similar to the Earned Income Tax Credit. The EIC is a remarkably effective form of welfare that provides low income, working individuals with a direct reduction in tax liability. It is a concentrated benefit (goes to individuals with an income below a certain amount) but also provides labor incentives (since you must be employed to get it).
  3. Enact contingent welfare policies. These types of programs would provide welfare to workers based on completion of training or some other achievement.
  4. Utilize wage subsidies. Government would, through these types of programs, provide employers with money to give directly to low income workers.

While it is unlikely that any of these policies would perfectly solve social employment problems in our country, they are worth at least considering. Each suggestion has its flaws, but succeeds at least in providing the target group of workers with benefits tied to labor incentives.

Conclusion

I hope you found this post to be informative and helpful. It ended up being pretty long so I hope I didn’t bore you too significantly. This post was HEAVILY influenced by my Intermediate Microeconomic Theory course taught by Dr. D. Eric Schansberg. So for further (and more eloquent) thoughts on these issues, I would point you towards his book Poor Policy: How Government Harms the Poor. Another useful reference book might be our class’ textbook: Microeconomics: Theory and Application by Browning and Zupan.

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Like always, if you have thoughts of consensus or disagreement, please leave a comment or send me an email. I’d love to hear how you’ve thought about or been impacted by these policies. Thanks for reading!

 

Additional Notes:

*This effect likely occurs to some degree but is not really beneficial for two reasons: a) Research shows that generally labor supply is quite inelastic (meaning that increased wages do not lead to significant increased amounts of willing workers). b) And just because individuals and willing and able to work does not ensure that employers will hire them. Without a simultaneous increase in demand for labor, an increase in willing workers, according to this line of thinking, would actually lead to higher unemployment.

**It’s important to note that not all jobs are even covered in minimum wage legislation. 75% of unskilled workers have jobs that are not covered by the minimum wage, such as tipped workers, seasonal workers, farm workers, etc. Clearly this policy fails to impact the lives of many individuals in the specific category (unskilled, low income) that it attempts to better.

***Economic theory would suggest that a minimum wage would create a surplus of available workers, so there would likely be individuals who would be willing to work at lower wages and would be motivated to not turn these firms in to the government.

****It’s also worth noting that the minimum wage impacts not just heads of households. Individuals like high school student seeking to make some extra gas money are impacted in the exact same way as low income, unskilled heads of households. This policy is too broad and impacts a number of individuals who are not the primary target.

Best Economics/Business/Public Policy Books of 2016

In this spirit of “end of the year lists,” here is a list of the best Economics/Business/Public Policy related books that I read this past year:

 

Turn Neither to the Right Nor to the Left: A Thinking Christian’s Guide to Politics and Public Policy by D. Eric Schansberg

Having studied under Dr. Schansberg this past semester I was especially eager to read this book. And after reading it I can honestly say that I don’t know of another book that attempts and succeeds at describing how Christians ought to think about Public Policy from a Biblical perspective. Schansberg maintains a unique level of consistency and subordination to the doctrines of scripture. While you may or may not agree with every single argument, I believe this book brings up issues that are very necessary for believers to consider.

 

Specialization and Trade: A Re-Introduction to Economics by Arnold S. Kling

Dr. Kling uniquely describes Economics as a focus on how specialization and trade impact decisions and outcomes. This book is refreshing in how it states that Economics is not a magic formula that can give correct results based on proper data. Rather, it is a process of looking at historical outcomes and realizing patterns and similarities that might continue into the future. Overall, a unique and interesting take on the study of Economics as a whole.

 

The Law by Frederic Bastiat

This book does a fantastic job of diving into the issue of the purpose of law and how law is often perverted from its proper goal. While dealing with philosophical issues at times, it also looks at a handful of real life examples of government successes and failures. I highly recommend this book for anybody interested in the issue of liberty and the role of government.

 

Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports by Howard Schilit

While the study of Accounting can be quite dull at times, this book is probably the most interesting and non-boring Accounting-related text that I’ve come across. It deal with common fraud schemes that individuals have used over the years and gives its readers advice on how to detect businesses that are being deceitful. This book is definitely geared towards those who are interested in Accounting or investing and it does a phenomenal job of pointing out which areas of the financial statements individuals should pay attention to.

 

The Goal: A Process of Ongoing Improvement by Eliyahu M. Goldratt

Written in the form of a novel, this book describes Goldratt’s well-known concept of the Theory of Constraints. For those interested in Operations Management or just Business in general, this book presents the Theory of Constraints in a very interesting manner, which is informative but also easy and exciting to read.

 

All Marketers are Liars: The Underground Classic That Explains How Marketing Really Works–and Why Authenticity Is the Best Marketing of All by Seth Godin

Marketing is a fascinating topic to me and this book does a good job of outlining Marketing principles in the context of story-telling. It describes marketing as telling stories that people want to hear and believe, but that do not take advantage of people. There is still a lot that I’d love to learn in this field of study, but this book was a really good start.

 

The Armchair Economist: Economics and Everyday Life by Steven E. Landsberg

This is certainly a good book to read whether or not one has formally studied Economics at all. Each chapter deals with a different real-world issue and shows how the issue at hand relates to the study of Economics. Definitely a riveting read but also very informative and beneficial.

 

Business for the Glory of God: The Bible’s Teaching on the Moral Goodness of Business by Wayne Grudem

While not really ground-breaking in the ideas it presents, this book deals with common myths and misconceptions about Business as it relates to Christianity. Using Biblical evidence it shows that Business goals can often be in accord with the goal of glorifying God. This is a helpful book if you are struggle with reconciling Scriptural evidence with the way businesses operate or if you are engaging with someone who is wrestling with these issues.

 

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As always I’d love to hear what you think about this post and/or these books. If you read other books this year, I’d love to hear about those as well. Feel free to leave a comment or send me an email. Thanks for reading!

 

The Economic/Behavioral Effects of Bridge Tolls

Those of you who live in Louisville are likely very aware of the upcoming tolls on a few of our local bridges. Given the high amount of use that these bridges face in the Kentuckiana area, it will be interesting to see how traffic behavior changes with the introduction of these tolls. What exactly might be some of the changes instigated by these new tolls?

In essence these tolls will behave as a tax on the use of three of the five Ohio River bridges, raising the cost of travel via these bridges. (As a sidenote, a toll seems to be a more equitable way to pay for the costs of the bridge than increasing everybody’s state/local taxes, regardless of their use of the bridge.) All else equal, economists generally believe that an increase in price leads to a decrease in quantity demanded. Thus, it would make sense that traffic on these tolled bridges would decrease, as people try to effectively plan and limit their trips across the river.

Now the exact size of this decrease is a little bit harder to predict. One factor that effects the size of a decrease in quantity demanded, relative to an increase in price is the availability of close substitutes. The bridges not being tolled would seem like legitimate substitutes, meaning it would seem reasonable to expect traffic on non-tolled bridges to increase.

However, it will be interesting to see whether drivers traveling from (for example) downtown Louisville to Clarksville or Charlestown view the Sherman Minton Bridge as a legitimate substitute or if cost of the extra travel time would outweigh the benefit of avoiding the toll. If time is money, as the saying goes, than it seems reasonable to expect some people (especially high earners) to choose to pay the tolls and save time. People making less money, whose time is presumably less valuable (from a strict wage perspective) would likely be willing to endure longer travels for the sake of saving some money.

All that said, this is merely theory and there are most likely other factors that will effect commuting behavior beyond what I highlighted here. Hopefully, this post was helpful and thought provoking. It will be interesting to see how this change effects the city of Louisville and the surrounding area.

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If you agree or disagree with the thoughts posted here or have additional thoughts on this issue, please feel free to post a comment or send me an email. I’d love to hear what you have to say. Thanks for reading!