Tag: wages

Damning Trade with Faint Praise

A Washington Post editorial today pushes back against the argument that a Trans-Pacific Partnership agreement would exacerbate income inequality. Amen, I suppose. But in making its case, the editorial burns the village to save it by conceding as fact certain destructive myths that undergird broad skepticism about trade and unify its opponents.

“All else being equal,” the editorial reads, “firms move where labor is cheapest.”  Presumably, by “all else being equal,” the editorial board means: if the quality of the factors of production were the same; if skill sets were identical; if workers were endowed with the same capital; if all production locations had equal access to ports and rail; if the proximity of large markets and other nodes in the supply chain were the same; if institutions supporting the rule of law were comparably rigorous or lax; if the risks of asset expropriation were the same; if regulations and taxes were identical; and so on, the final determinant in the production location decision would be the cost of labor. Fair enough. That untestable premise may be correct.

But back in reality, none of those conditions is equal. And what do we see? We see investment flowing (sometimes in the form of “firms mov[ing],” but more often in the form of firms supplementing domestic activities) to rich countries, not poor. In this recent study, I reported statistics from the Bureau of Economic Analysis revealing that:

Nearly three quarters of the $5.2 trillion stock of U.S.-owned direct investment abroad is concentrated in Europe, Canada, Japan, Australia, and Singapore. Contrary to persistent rumors, only 1.3 percent of the value of U.S.-outward FDI [foreign direct investment] was in China at the end of 2011.

The Rising Cost of Labor — a Triumph for Capitalism

Articles on page A7 and A8 of Saturday’s Wall Street Journal, about rising wages in China and France, confirm something that I learned from Julian Simon. As the Journal reported:

The 14% wage rise for private-sector workers in 2012, reported by China’s National Bureau of Statistics on Friday, represented an acceleration from 12.3% in 2011.


With high labor costs eating into his bottom line, Mr. Madec uses frozen ingredients—and even complete main courses—for the dishes served at Les Templiers…. a steady increase in labor costs and food prices has fueled an unexpected phenomenon: Many restaurants can no longer afford to prepare meals from fresh ingredients in their own kitchens.

And what’s the lesson I learned from Julian Simon? As I wrote in Libertarianism: A Primer,

Over the long run, in real terms, the only price that consistently seems to rise is the price of human labor.  Looking back a hundred years or so, we see that prices of goods–from wheat to oil to computers–have fallen, while the real wage rate has quintupled in 50 years.  The only thing getting more scarce in economic terms, that is, relative to all other factors, is people.


Labor Day and Labor Progress

David Henderson offers some excerpts from Stanley Lebergott’s article, “Wages and Working Conditions,” for The Fortune Encyclopedia of Economics, now the 1st edition ofThe Concise Encyclopedia of Economics. They seem especially relevant for Labor Day:

Surely the single most fundamental working condition is the chance of death on the job. In every society workers are killed or injured in the process of production. While occupational deaths are comparatively rare overall in the United States today, they still occur with some regularity in ocean fishing, the construction of giant bridges and skyscrapers, and a few other activities.

For all United States workers the number of fatalities per dollar of real (inflation-adjusted) GNP dropped by 96 percent between 1900 and 1979. Back in 1900 half of all worker deaths occurred in two industries–coal mining and railroading. But between 1900 and 1979 fatality rates per ton of coal mined and per ton-mile of freight carried fell by 97 percent.

This spectacular change in worker safety resulted from a combination of forces that include safer production technologies, union demands, improved medical procedures and antibiotics, workmen’s compensation laws, and litigation. Ranking the individual importance of these factors is difficult and probably would mean little. Together, they reflected a growing conviction on the part of the American people that the economy was productive enough to afford such change. What’s more, the United States made far more progress in the workplace than it did in the hospital. Even though inflation-adjusted medical expenditures tripled from 1950 to 1970 and increased by 74 percent from 1975 to 1988, the nation’s death rate declined in neither period. But industry succeeded in lowering its death rate, both by spending to improve health on the job and by discovering, developing, and adopting ways to save lives.

And how about women?

By 1981 (the latest date available), women’s kitchen work had been cut about twenty hours a week, according to national time-budget studies from Michigan’s Institute of Survey Research. That reduction came about because families bought more restaurant meals, more canned, frozen, and prepared foods, and acquired an arsenal of electric appliances. Women also spent fewer hours washing and ironing clothes and cleaning house. Fewer hours of work in the home had little impact on women’s labor force participation rate until the great increase after 1950.

And, on real wages:

By 1980 real earnings of American nonfarm workers were about four times as great as in 1900. Government taxes took away an increasing share of the worker’s paycheck. What remained, however, helped transform the American standard of living. In 1900 only a handful earned enough to enjoy such expensive luxuries as piped water, hot water, indoor toilets, electricity, and separate rooms for each child. But by 1990 workers’ earnings had made such items commonplace. Moreover, most Americans now have radios, TVs, automobiles, and medical care that no millionaire in 1900 could possibly have obtained.

And why was there so much progress in real wages and working conditions?

The fundamental cause of this increase in the standard of living was the increase in productivity. What caused that increase? The tremendous changes in Korea, Hong Kong, and Singapore since World War II demonstrate how tenuous is the connection between productivity and such factors as sitting in classrooms, natural resources, previous history, or racial origins. Increased productivity depends more on national attitudes and on free markets, in the United States as in Hong Kong and Singapore.

Output per hour worked in the United States, which already led the world in 1900, tripled from 1900 to 1990. Companies competed away much of that cost savings via lower prices, thus benefiting consumers. (Nearly all of these consumers, of course, were in workers’ families.) Workers also benefited directly from higher wages on the job.


Your Tax Dollars at Work

President Obama says that we are a  ”generous and compassionate” country and that “through government, we should do together what we cannot do as well for ourselves.” And to fulfill that “progressive vision,” he’s going to work on “making government smarter, and leaner and more effective. “

Today, under the rubric “Breakaway Wealth/Reaping Riches from Federal Spending,” the Washington Post gives us a front-page picture of where a lot of those generous and compassionate federal dollars actually go:

Millions of dollars worth of federal contracts transformed Anita Talwar from a government accounting clerk into a wealthy woman—one who can afford a $2.8 million home in the Washington suburbs with its own elevator, wine cellar and Swarovski crystal chandeliers.

Talwar, a 59-year-old immigrant from India, had no idea that she and her husband would amass a small fortune when she launched a company providing tech support to the federal government in 1987. But she shrewdly took advantage of programs for minority-owned small businesses and rode a boom in federal contracting.

By the time Talwar sold Advanced Management Technology in 2004, it had grown from a one-woman shop to a company with more than 350 employees and $100 million in annual revenue—all of it from government contracts.

Talwar’s success—and that of hundreds of other contractors like her—is a key factor driving the explosion of the region’s wealth over the last two decades. It also has exacerbated the gap between high- and low-wage workers, which is wider in the D.C. area than almost anywhere else in the United States.

Washingtonians now enjoy the highest median household income of any metropolitan area in the country

More than $80 billion in federal contracting dollars will flow to the region this year, up from $4.2 billion in 1980.

That’s my kind of smart, lean, and effective government!

Did They Learn Correlation and Causation in College?

It looks like Peter Thiel won’t be unopposed advising kids to stay out of college

Thanks to a new report from Georgetown University economist Anthony Carnevale, and a David Leonhardt column based on Carnevale’s study, over the last few days the college-for-all crowd has been striking back. But they seem to have missed something in their own college training: correlation does not equal causation.

Carnevale, Leonhardt, and others’ argument is basically that there are big, positive returns on a college degree. It’s something, frankly, that’s not generally in dispute. I say “generally,” because while on average college grads make a lot more than people without a degree, there’s a lot more to the story than averages. Indeed, there are at least three major problems with making averages the basis for a universal-college offensive, problems that Andrew Gillen recently laid out in a terrific blog post. I won’t reinvent the wheel by going into them all (read Andrew’s post) but I’ll summarize them: (1) There are huge throngs of people who attempt college and never finish, a giant population ignored when you just look at completers; (2) at least part of the college wage premium is simply a function of a degree signaling something about the intelligence, work habits, etc. that graduates already possessed; and (3) there are some majors and degrees that confer no great wage premium and are in about as much demand as Betamax or gangrene.

What is most concerning about the Carnevale report, however, is how the report and its fans make the very basic mistake of conflating correlation with causation in implying that the roughly one-third of bachelor’s holders in jobs not requiring degrees are much better workers thanks to their BAs. They base that conclusion on degree-holders in non-degree jobs earning appreciably more than workers with only high-school diplomas. Heck, a graphic to go with Leanohardt’s column trumpets that dishwashers with college degrees make a lot more than dishwashers without them, a data point seized on by the Fordham Institute’s Peter Meyer to attack anyone who dares say college isn’t the best option for everyone.

Once the dishwasher example comes up, is there any way to escape the causation/correlation problem? Any way to not at least seriously contemplate that it isn’t what someone learned in college that makes him or her a better dishwasher, but that someone able to graduate college will tend to be more punctual and reliable? Heck, even if you believed that the proverbial underwater basket weaving major existed, it would be very hard to conclude that the skills one would need to make the finest submerged wickerwork would be useful for getting dinner plates spotless, even though that often occurs underwater.

And many of the public service jobs cited in the graphic, such as firefighters? At least from what we know about teachers, government employee pay scales often give salary bumps for degrees, but degrees don’t necessarily have any bearing on job effectiveness.

People like Carnevale and Leonhardt are right to guard against efforts, especially by public-school employees, to actively push kids away from college, in particular if that’s driven by students’ class or race. But shoving everyone into ivy walls? Based on what we know, that’s equally unjustifiable.

Capitalist Acts between Consenting Adults

Even Robert Nozick gave up on libertarianism,” says Stephen Metcalf, more or less. “So what’s wrong with you?” (Aside, of course, from the fact that Nozick didn’t give up.)

I probably should hesitate before declaring my allegiance to the evil league of evil. But you’re reading this at the Cato Institute, so it may be too late for that. Metcalf’s piece falls into a large and (sadly) growing category for me, one labeled “People Condemning Libertarians for Strange Things That Never Occurred to Anyone, Let Alone to Us.”

It never occurred to me, for example, that by citing Wilt Chamberlain as someone who became wealthy in a morally blameless way, Robert Nozick was playing the race card. Metcalf writes:

“Wilt Chamberlain” is an African-American whose talents are unique, scarce, perspicuous (points, rebounds, assists), and in high demand. We feel powerfully the man should be paid, and not to do so—to expect a black athlete to perform for (largely) white audiences without adequate compensation—raises the specter of the plantation.

Raises the specter of the plantation? Does it now? Let’s generalize: Your forcing anyone to perform without what they consider adequate compensation should raise that same specter. If someone is going to perform for you, they must do it for a wage that they consider adequate, whether their “performance” is a show of basketball prowess or just working on an assembly line.

If they don’t like the wage, they should be free to seek a better one. If the employers pay a giant wage, and if they do so because they really, really like the work, then that’s also their right.

Those who want to interfere – to tax wages, to restrict entry or exit, or to prohibit whole lines of work – they are the ones who bear the burden of proof. Not the willing buyers and sellers of labor. That’s what Wilt Chamberlain’s example is supposed to show.

Maybe you’re not ready to go whole-hog and declare that taxation is theft. Eh, fine. Still, taxation should make all of us pretty uncomfortable, especially when we look at its philosophical implications. The arguments that justify taxation might actually be unavoidable—truthfully, I wouldn’t know how to run a government without them—but that doesn’t make them any less dangerous.

Of the many errors in a long and error-ridden article, I think the worst has to be the idea that libertarians hold all concentrations of wealth to be good. As long, I infer, as we gather it in sufficiently large heaps. Metcalf writes:

But being a star athlete isn’t the only way to make money. In addition to earning a wage, one can garnish a wage, collect a fee, levy a toll, cash in a dividend, take a kickback, collect a monopoly rent, hit the superfecta, inherit Tara, insider trade, or stumble on Texas tea. For each way of conceiving wealth, there is at least one way of moralizing its distribution. The Wilt Chamberlain example is designed to corner us—quite cynically, in my view—into moralizing all of them as if they were recompense for a unique talent that gives pleasure; and to tax each of them, and regulate each of them, according to the same principle of radical noninterference suggested by a black ballplayer finally getting his due.

This is simply wrong. For a libertarian, it’s only Wilt Chamberlain’s particular type of wealth that is morally blameless, not all the rest. Which kind is his? The kind acquired through voluntary transactions, without coercion or fraud. The kind that comes from Nozick called capitalist acts between consenting adults.

Some wealth is blameless. Some isn’t. And yes, some cases are truly hard to judge: Is Wal-Mart a free-market success story? Wellll…. kind of. But what about all those special tax privileges? What about that eminent domain abuse?

Wilt Chamberlain makes a good example not because he’s a black man struggling sympathetically in a white man’s world. His example is useful because it strips away every possibility of force, fraud, corporate welfare, and government favoritism. When we do that, we can see that it’s still possible to grow wealthy through honest, voluntary methods. That’s a valuable insight, even if you don’t necessarily agree with everything else Robert Nozick ever wrote. (Don’t sweat it; I don’t either.)

Finally, Metcalf strangely neglects Chamberlain’s fans. When we talk about Wilt Chamberlain’s right to collect a paycheck, it’s partly because he’s highly visible. But we should not forget that when we take away that paycheck, we also take away an entertainment choice for millions of ordinary people.

If we remove enough choices like these, we won’t merely have made life less cushy for the talented. We’ll also have made it a lot poorer for the rest of us. We could be taking away not just basketball, but breakthroughs in science, technology, and the arts. And why? Because someone found someone else’s voluntary transfer of wealth distasteful. That shouldn’t be much of a reason.

President Obama’s Dubious Claims about Incomes of the Top 1% vs. the Bottom 90%

“In the last decade, the average income of the bottom 90 percent of all working Americans actually declined,” Obama said on April 13. “The top 1 percent saw their income rise by an average of more than a quarter of a million dollars each.”

Politi-Fact, partly on the basis of my own research, generously rates the president’s claim as “Half True.”

The truth is that the President’s source, Thomas Piketty and Emmanuel Saez, refer only to pretax, pretransfer income reported on individual tax returns (as opposed to being sheltered inside a corporation or IRA or simply unreported), and they have no data on the bottom 90%. Worst of all, they leave out transfer payments, which amounted to $2.3 trillion last year — 44% as large as all private wages and salaries ($5.2 trillion). The data also excludes refundable tax credits, which added about $170 billion to low and middle incomes in 2009 according to the the Joint Committee on Taxation (the EITC, child credit and Obama’s “making work pay” credit). And the Bureau of Economic Analysis estimates that gross income reported on tax returns is about $1 trillion less than actual income.

As for the top 1%, my research shows that top investors report more capital gains and dividends when those tax rates go down, which is why they paid such a big share of income taxes (up to 40%) in 1997-2000 and 2003-2007.  Raise the tax on dividends and capital gains to 23.8%, as Obama hopes to do by 2014, and somebody else would have to pay the taxes now paid by the top 1%. Using income reported to the IRS to measure actual living standards is foolhardy at best.