Monday, November 20, 2006

Gentleman-Rankers On A Spree, Damned From Here To Eternity

Our Daily Ioz, favorite rabble-rouser of the first water, points us to this gem uttered by Congressman Charlie Rangel (D, NY):
Rep. Charles B. Rangel (D-N.Y.) has long advocated returning to the draft, but his efforts drew little attention during the 12 years that House Democrats were in the minority. Starting in January, however, he will chair the tax-writing Ways and Means Committee. Yesterday he said "you bet your life" he will renew his drive for a draft.

"I will be introducing that bill as soon as we start the new session," Rangel said on CBS's "Face the Nation." He portrayed the draft, suspended since 1973, as a means of spreading military obligations more equitably and prompting political leaders to think twice before starting wars.

"There's no question in my mind that this president and this administration would never have invaded Iraq, especially on the flimsy evidence that was presented to the Congress, if indeed we had a draft and members of Congress and the administration thought that their kids from their communities would be placed in harm's way," said Rangel, a Korean War veteran. "If we're going to challenge Iran and challenge North Korea and then, as some people have asked, to send more troops to Iraq, we can't do that without a draft."
First (and we echo the sentiments of Ioz here), given that the President to whom he refers avoided going to Vietnam, in spite of conscription at that time, what makes Congressman Rangel think Congress will treat future wars with any more reluctance? We assure you no child, nephew, cousin or neighbor of a member of the United States Congress will serve as a conscripted GI unless something goes terribly wrong. What is the point of getting all that power, after all, unless you get to use it?

Second ... well, here we must confess a weakness. We were tempted to throw this triumphantly in the face of any Democrat or liberal who claimed that the November election was a repudiation of the Commander-in-Chief's cowboy diplomacy. "So much for that," we would cry, "Rangel's a Democrat and he's as imperialist as the next Republican." However, given that Rangel has proposed this bill twice before in the last four years (once to be voted down near unanimously, once to die without even being introduced), it seems clear that this is not an act of political opportunism. Else why advance the bill before, when he lacked the votes to support it? This is clearly a pet crusade of the Congressman's, no more attributable to the Democrats as a whole than to New Yorkers as a rule.

Third, history soundly rejects Rangel's reasoning. If the Gulf of Tonkin Resolution and the police action that followed cannot be taken as a war entered on "flimsy evidence," then no war of the last century can.

Friday, November 17, 2006

Milton Friedman, RIP

Most popular libertarian-ish economist of the 20th century dies at age 94

Many of us first became aware of the virtues of free markets through his Free To Choose. We at The Last Argument have also read much of his son David's work and correspond with his grandson Patri. The world is darkened by his loss but brightened by his memory.

Thursday, November 16, 2006

Truth, Justice and David Ricardo

We love Cafe Hayek, really we do, but sometimes Russ Roberts needs to reign it in.

We first discovered Russ through his novel, The Invisible Heart. It's one of those delightful gems where characters deliver dialogue not to advance their motivations but to prop up arguments. The protagonist, a passionate defender of free markets, entertains stock objections to capitalism from his students with good cheer and aplomb. As a passionate defender of free markets myself, we found the rhetoric unremarkable; as a passionate defender of the good novel, we found the story equally dull. It's books like this (seconded only to L. Neil Smith's The Probability Broach) that make us cringe before announcing our libertarian sympathies.

But we love Cafe Hayek, and Roberts' ability to disperse economic ignorance - like a drop of soap in a dishpan of dirty water - more than makes up for his literary failings. So it is with gentle good humor (a polite roll of the eyes, a patronizing nod) that we find Professor Roberts fabulizing again.

He declares his intention, in a recent post at Cafe Hayek, to be to "teach and understand a concept that many would label the single most important insight of the discipline," namely, the Ricardian principle of comparative advantage. We agree with Professor Roberts that the importance of comparative advantage cannot be overstated. We agree also that the short shrift this idea gets in most economics classes verges on the criminal. Literally criminal, since ignoring the benefits of trade has led to thousands of worthless regulations (i.e., theft) for centuries.

What we cannot agree with is his hackneyed prose:
"Funny, you mentioned 'plunder.' " Pam said. "It's such an old-fashioned word. I had an economics professor who actually talked a lot about plunder. He said until the birth of capitalism, plunder was the main way you got ahead. You knocked your neighbor over the head and took his stuff. Here's the interesting thing about plunder. Plunder looks like it merely rearranges the economic pie."

"That's right," Pete said, happy to forget their troubles for a moment and think about the impact of plunder. "Theft means more for me and less for my neighbor. The total amount doesn't change."

"That seems right but my teacher pointed out that theft actually makes the size of the pie, properly measured, smaller."

"What's 'properly measured' mean?" Pete asked.
Camus would snicker behind his beret. Descartes would roll his eyes. Ayn Rand would probably take him to task for not pressing the point hard enough, but you see where we're going.

If Professor Roberts is so hard up for an illustrative analogy to teach the importance of comparative advantage, let him take this one for free: the Justice League.

The Justice League is a team of the most powerful superheroes on the planet: Superman, Batman, Wonder Woman, Aquaman, The Flash, The Martian Manhunter, Green Lantern and others ad hoc. Each of them has a specialty: Batman is the world's greatest detective, Aquaman has undisputed rule over the oceans, the Flash can run at the speed of light, etc.

But Superman is better than all of them.

Pre-Crisis, Superman could fly around the planet Earth fast enough to go back in time. He could hear sounds from practically anywhere, see through anything with his X-ray vision, and juggle suns. He could be a better detective than Batman, a better warrior than Wonder Woman and a faster mover than the Flash. If the chief export of a superhero is Justice, then Superman could produce more Justice than any other member of the League.

So why does Superman hang out with those guys? Because the Justice League produces more Justice than Superman acting alone. Batman may not be able to see through walls, but he can uncover clues while Superman is off pounding asteroids. Superman can fight more effectively than Wonder Woman, but he'd be better served by flying to Alpha Centauri and back to get this week's MacGuffin while Wonder Woman deals with those robot zombies. By sharing his time with these people, Superman produces more Justice than he would alone.

And since Justice is what Superman wants most in the world, he benefits by sharing time with people who are worse than him at everything.

That last sentence bears repeating, because that's the truly remarkable conclusion of Ricardo's theory: you can benefit by trading with people who are worse than you at everything. The very act of trade enriches all parties. Commerce benefits everyone who participates, even if you think the other party has nothing to offer. The world doesn't need a Superman - Superman needs the rest of the world.

We always prefer to check for existing analogies before constructing torturous bridges of our own: the audience is more likely to recognize a common reference than follow our lengthy explanations. We do dearly wish that Professor Roberts would take the same tack. He is, at times, like the Fisher family in his own example - trying to do everything by himself (produce brilliant economic theory and write novels) rather than trading with those who could do the latter better.

Monday, November 06, 2006

Minimum Wage

Brad Hicks of Livejournal has a post today regarding a minimum wage initiative in Missouri. He defends it with the usual rhetoric we'd expect from someone who writes glowing paeans to FDR:
The statement, which you have already heard and will hear again, that "raising the minimum wage raises the unemployment rate, by making businesses lay off those who aren't worth the extra money" is not a proven fact. It is, at best, a hypothesis. During the stagflation of the 1970s, back when Republicans were arguing that the US economy was in the toilet, not because of Vietnam-era runaway deficits and the OPEC oil embargo but because, thanks to the unions, the middle and working classes had it too good, it even became a popular theory. But until you test a theory, it remains only a theory. And the theory that raising the minimum wage causes increased unemployment has been tested. Repeatedly. The minimum wage has risen 26 times since it was first introduced back in 1938. And none of those times did it result in increased unemployment. Not one. On the contrary, we have seen substantial periods of rising unemployment twice in the last several decades. Both of them coincided with long gaps between raises in the minimum wage, from 1981 to 1990 and from 1997 to the present.

The minimum wage is one of those examples that pains honest economists, because the evidence against its benefits is so simple and the statistics marshalled in its defense so complex. We labor on regardless.

When Brad says that the correlation between minimum wages and unemployment is "at best" a hypothesis, he is wrong. Consider a supply and demand graph, familiar to any student of economics. Label the vertical graph "Price of Labor" and the horizontal "Supply of Labor." Find the point where the two curves intersect.

Now draw a horizontal line above the equilibrium. That is the effect of a minimum wage - an artificial "price floor," forbidding any business to charge a price for labor beneath it. If we raise the price from $2.30 (the equilibrium) to $3.00, then the supply of labor now outstrips the demand for labor. This results in labor shortages or, as the papers call it, unemployment.

To say that a minimum wage will not cause unemployment, one or more of the following must be true:

  1. The price is already well below its equilibrium, and this price floor will raise the price of labor to that level. This would mean that the demand for labor is outstripping the supply - that there are more open jobs then there are job seekers. In this thought experiment, the unemployed are idle dreamers who must be coaxed out of unemployment by the tempting offer of a higher wage. This strikes us as patently false; we list it simply for the sake of completeness.

  2. The demand curve for labor is so inelastic that a change in price will not significantly affect the quantity of labor demanded. Elasticity is the extent to which a change in price results in a change in demand. A sharper change means a greater elasticity.

    Below is an example of a perfectly inelastic demand curve.

    Examples of goods with inelastic demands include cigarettes and gasoline - it takes a great change in price to produce a small change in demand. State governments have taken advantage of this datum to level significant taxes on both products, claiming an inexhaustible source of revenue.

    Obviously, the demand curve for labor cannot be perfectly inelastic, or none of us could ever be fired. However, we'd be willing to entertain the argument that headcount is fairly static for large businesses. The investment of capital and machinery requires some minimum number of persons x to operate it and a cost-efficient business would be operating as close to that minimum as possible already. If the jobs need to be filled, would this business fire a handful of people should the minimum wage rise?

    A possible argument, though we've never heard anyone other than ourselves make it.

  3. The few people that the minimum wage fires are masked by an increase in spending from the bottom tier's now-higher wages, which leads to an increase in business revenues, which leads to expanded investment, growth and the hiring of more workers. This is the Keynesian money multiplier. While we could devote a week's worth of webjournal posts to debunking Keynes, we'll simply say for now that we don't find the idea that one dollar can be counted as ten if spent by the Department of Labor to be compelling.

  4. The theory of supply and demand is a lie.

In short, if the minimum wage does not cause unemployment, it falls to those who argue for the minimum wage to explain why. The idea that a price floor does not result in a shortage contradicts the foundation of modern economics. Progressives will cite statistics, as Brad does, but a statistic is not an argument. It is at best support for an argument - an argument we have yet to hear.

Can we think of reasons why the minimum wage might cause people to lose their jobs, yet this change is not reflected in the statistics? Yes.

Here's one hypothesis: The businesses hit hardest by minimum wage increases are the smallest of small businesses. Larger businesses, like Target, Sears or WalMart (which actually pays significantly more than the national minimum wage on average), can defray the added costs more easily. So a raise in the minimum wage transfers workers from mom-and-pop stores to Big Box corporate warehouses. Huzzah for big business! If progressives are sabotaging one of their cherished goals in service of another, that's their kitty to mind, of course.

But above all else, the argument for the minimum wage fails on one simple, praxeological level. It presumes that a government agency - any agency - knows the cost of running a business better than the business itself. The most casual audit of Department of Defense expenditures, or the cost of rebuilding your county courthouse, should lay that myth to rest.