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  • Comrade Kamala? Assessing Three of Harris’s New Economic Proposals

    Posted on by Azrael Comment

    The Kamala Harris campaign is still relatively young. The current Vice President and previous US Senator from California has barely been in the race for a month. Her first concrete economic plans are being announced and, for the most part, panned by economists. Let’s examine some of these proposals, their effects, and why economists oppose them.

    1. Price Caps on Groceries

    Let’s begin with the most shocking Harris proposal—a federal ban on “price gouging” for groceries. Let’s start with the rhetoric and then get down to brass tacks. What is price gouging? It’s a term without any clear tie to economic facts.

    Historically, “price gouging” referred to price increases caused by disasters (e.g., bottled water being more expensive during hurricanes). But of course, when demand increases or supply decreases, prices do naturally rise to prevent shortages. Labeling this as “gouging” in certain circumstances is arbitrary at best.

    Furthermore, what sort of crisis are we appealing to in order to say there is price gouging? Covid still? Since the Covid pandemic ended over two years ago (even according to Fauci), that really doesn’t make sense. Is the crisis that inflation is making things unaffordable? Well, if the disaster behind this gouging is price increases, then all price increases are defined as gouging. That doesn’t make any sense either.

    To be blunt, gouging is just a word used for emotional effect. We can always pick some arbitrary benchmark of “fair” or “unfair” price increases, but that benchmark will remain arbitrary.

    Now let’s move to the brass tacks. What would this mean? The way the language is couched, this policy would amount to nothing more than a form of price control. Regardless of the particular form this ban takes, any law which penalizes a store for having prices above some point is a price control. Insofar as this policy affects prices at all, it is a price control. Insofar as it doesn’t affect prices, the policy is spurious.

    What’s the problem here? Well, when either demand increases or supply decreases (or both), the competition to buy a good increases relative to the available supply. This means that more people will be bidding for the same number of products. If prices do not rise, the products will run out, and some people who are willing to pay the current price cannot purchase the good in question because it has run out. Economists call this a shortage.

    If, instead, prices are allowed to rise, two things happen. First, higher prices cause buyers to decrease their consumption relative to lower prices. Second, higher prices incentivize producers to supply more of a product, since a higher price commands a higher revenue. These two forces work together to make sure that all potential buyers can purchase the number of goods they are willing to pay for.

    Harris’s team claims that the pandemic was used by businesses as a pretext to trick people, to increase prices more than rising costs called for, and that this is a corrective measure. So are grocery stores pulling one over on people? Not so.

    Grocery stores have tiny margins compared to other industries. Look at the data.

    If you’re unfamiliar with the term, a 1.2 percent profit margin means that for every 1 dollar of sales a grocery store makes, it keeps 1.2 cents in profit. The rest goes to pay costs. If costs were just a couple of cents per dollar higher in the grocery industry, grocery stores would take losses and start to go out of business.

    The Harris team may try to walk this back and propose a policy to help grocery stores with their costs so that they can “pass on” the savings (though that’s not exactly how it works), but as of now the wording threatens at least de facto punishment for increasing prices. Low grocery prices sound nice, but food shortages don’t.

    The bottom line is that grocery stores aren’t responsible for increasing the money supply by 40 percent over two years during the Covid policy era, which is the real driver of the price inflation we’ve experienced.

    2. A Subsidy for New Homebuyers

    Next, Harris is considering offering a $25,000 subsidy for new homebuyers. The policy has a similar ring to it. Housing is a significant part of the average American’s budget, and Harris will play well with getting young voters to turn out if she promises them $25,000 off their housing bill.

    So what’s wrong with this? Do myself and other economists hate affordable housing? Quite the contrary. Harris’s policy will hurt housing affordability for many. If someone is considering whether to rent or buy for housing, promising him $25,000 to buy is going to convince many people on the fence to buy. This wave of new buyers will increase the demand for housing, and, as a result, prices will rise.

    Not only this, but as prices rise, many landlords may decide that the new higher price tags on their rental units are worth selling for. The supply of houses for rent would tend to decrease, resulting in higher rental prices.

    So while new homebuyers might experience a slightly lower cost (net of the new price increases), everyone trying to move and buy a new home is going to face higher prices.

    The problem doesn’t end there. The government isn’t sitting on any piles of cash to hand out $25,000 subsidies. The policy will ultimately be financed by debt, and debt must be repaid (plus interest!) with future taxes. So even the first-time homebuyer may be worse off in dollar terms over the course of his life, as he pays higher future taxes for others.

    Put simply, subsidizing demand means higher prices and higher taxes. This is no gateway to affordability.

    3. Increasing the Child Tax Credit

    The last of Harris’s policies on the docket is the only one that I can think of in a positive light: increasing the child tax credit for newborns.

    I think there are good reasons to support a kind of policy like this because the current Social Security welfare system is subsidized heavily by parents. Under current US law, parents pay the bulk of the expenses of raising their children, but when those children grow up and work, their wages are used to support the retirement of everyone—so parents are indirectly supporting retirements.

    Historically, support for retired parents was directly assumed by their children. Now, the benefit of children in this facet is socialized, while the cost is privatized to parents.

    As such, I’m generally supportive of more tax credits. In theory, it tackles the twin problems of an anti-natal system combined with the looming baby bust.

    My praise for Harris for this policy proposal is qualified, however, because the numbers just don’t amount to much. The policy proposal calls for a one-time increase in the child tax credit for newborns, to $6,000. Right now, the child tax credit varies, but it hovers around $3,000 per child.

    So, as I read the proposal, this is a one-time increase of $3,000 spread out over 18 years of a child’s life. It isn’t nothing, but a couple hundred bucks a year isn’t exactly consequential either.

    Will this policy fix a looming baby bust? Probably not. While money incentives can work to increase birth rates, they tend to come with high price tags before they work. Besides, there are better ways to increase birth rates that cost a lot less money and would have a far greater impact.

    In sum, Kamala Harris’s first round of economic policies range from underwhelming to downright bad. We can only hope that, if she wins, cooler heads prevail at the policy table.

    Source: https://fee.org/articles/comrade-kamala-assessing-three-of-harriss-new-economic-proposals/


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  • How Bad Economics Chased Uber and Lyft Out of the Twin Cities

    Posted on by Azrael Comment

    The ride-hailing services Uber and Lyft announced last week that they are pulling up stakes in the Twin Cities because of a new ordinance designed to raise driver pay.

    The Minneapolis City Council voted 10–3 to override the veto of Mayor Jacob Frey, passing a policy that will raise the pay of drivers to the equivalent of $15.57 per hour.

    In response to the plan, Uber and Lyft announced that they will cease offering rides beginning May 1 throughout the entire Twin Cities, the 16th largest metro in the United States, saying operations were economically “unsustainable” under the plan.

    “We are disappointed the Council chose to ignore the data and kick Uber out of the Twin Cities, putting 10,000 people out of work and leaving many stranded,” Uber said in a statement.

    City Council supporters say they simply want drivers to earn the minimum wage, but if that’s the case, they passed the wrong ordinance. The Star Tribune reports that council members “seemed oblivious” to a recent Minnesota Department of Labor and Industry study that concluded drivers could be paid $0.49 per minute and $0.89 per mile and make the minimum wage.

    “By contrast, the plan approved by the City Council guarantees a floor of $1.40 per mile and 51 cents per minute,” the newspaper reports.

    In other words, the wage plan the council passed doesn’t appear remotely close to the minimum wage. But this ignores the larger problem: Neither the Minneapolis City Council nor the State of Minnesota should be setting the wages of Uber or Lyft drivers.

    Nobody is forcing drivers to give rides. The arrangement between ride-share companies and drivers is an entirely voluntary one. This is the beauty of gig work. It allows people flexibility and choice about how they’d like to spend their time.

    It’s all about opportunity cost. One person might wish to spend $20 to see Dune: Part Two. Others would rather spend the two hours earning money driving Uber. Others might want to see Dune but might not have $20, so they drive Uber for an hour or two while coming back from work.

    Nobody knows precisely how much money the driver will make. But that’s not what matters. What matters is that this is a voluntary arrangement that works for drivers and ride-share companies alike and also benefits customers who can utilize services at affordable prices.

    This arrangement works across countless cities in the United States, but it is now threatened in the Twin Cities because City Council members believe they know what a “just” wage is. This might sound progressive. In truth, it’s regressive.

    Wage and price controls have been failing for some 4,000 years. They appear in the Code of Hammurabi (1755–1750 BC), and that’s not even their earliest appearance. Some might be tempted to blame Marxists for importing price controls to the United States, but the truth is that they existed in North America well before Marx was born.

    In the early 17th century, Puritans in the Massachusetts Bay Colony departed from the wisdom of Thomas Aquinas, who argued in the Summa Theologiae that the “just” price of a good was the market price. Wage controls were enacted in the second year of the colony’s existence. These were followed by a ban on “excess profits.” Puritans in Connecticut passed similar policies, and all of the policies had similar adverse effects.

    “The men involved in trade in 1635 had about as little notion of what constituted the limits of state authority in the realm of economics as men have today,” Gary North argued in An Introduction to Christian Economics.

    Fortunately, the early American Christians were practical people. They learned that these policies tended to create a host of problems, including shortages, surpluses, waste, and inactivity. After people learned these lessons over a few decades, price controls would mostly fade away from America for the next 200 years, with some notable exceptions.

    Wage and price controls were resurrected with a vengeance in the 20th century, of course. And though the harms of minimum wage laws are well known by economists, and national price-control schemes failed conspicuously, modern Americans are apparently slower learners than our Puritan ancestors.

    This is particularly true of Twin Cities lawmakers. In 2022, St. Paul passed the harshest rent control law in the U.S. only to walk back and hollow out the policy to avoid a housing catastrophe.

    Minneapolis is playing a similar game with Uber wage controls. It is likely to fail just as badly, and for the same reason.

    Prices are signals that convey information to buyers and sellers about scarce resources. Instead of allowing them to work in a voluntary market, lawmakers, like Hammurabi and the Puritans, fell for the false idea that they know what a “just” wage really is.

    Source: How Bad Economics Chased Uber and Lyft Out of the Twin Cities – FEE


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  • Debunking All the Main Arguments for Antitrust Laws

    Posted on by Azrael Comment

    It does not take too much upstairs to see through the Biden administration’s rejection of the JetBlue-Spirit Airlines merger. The latter is on the verge of bankruptcy. It is $1.1 billion in debt. It faces the headwinds of a new labor agreement raising pilot pay by 34% and has trouble with its Pratt & Whitney engines. JetBlue offered Spirit a $3.8 billion buyout. Together the two of them would account for a 10.5% market share, fifth in this industry.

    It is exceedingly difficult to see the logic behind this antitrust refusal, unless it is to protect the market share of the “big four”: Delta (17.7%), American (17.2%), Southwest (16.9%), and United (16.1%).

    Nor was this the only recent interference with free enterprise on the part of the Biden administration. Another took place with its kibosh on biotech giant Illumina’s $7.1 billion reacquisition of Grail. These bureaucrats have also put paid to deals between air carriers Alaska and Hawaiian, between grocery chains Kroger and Albertsons, and between amusement park giants Six Flags and Cedar Fair. They have been busy little bees ruining the US economy.

    A more important consideration is to ask why we need antitrust law in the first place. After all, the entire ethos of competition is to outdo your rivals in terms of providing consumers with a better and more reliable product at a lower price. The better you perform that task, the larger your base of operations becomes… and the more likely you are to run afoul of antitrust law. Here is a public policy that explicitly, knowingly, and purposefully clamps down on entrepreneurship, profits, earnings, and customer satisfaction, the very ideals of the free-enterprise system.

    The Rotten Roots of Antitrust Law

    The justifications for this set of laws are several. From an academic point of view, it stems from a diagram in microeconomics which has been crammed down the throats of aspiring economics students for lo these many decades. On the basis of it, four indictments of so-called “monopoly” have emerged.

    First, the price charged by the monopolist will be higher than that exacted by the perfectly competitive industry. But what is wrong, necessarily, with a higher price? You pay more for a Maserati than you do for bubble gum. Should we legally penalize the purveyors of the former? Of course not. Economic efficiency—and justice too—requires free-market prices, which reflect scarcity and utility; we should not aim solely to minimize prices at any cost.

    Second, the monopolist will produce a smaller quantity than the perfectly competitive industry. But there are far fewer of these luxury automobiles than there are pieces of these chewy sticks. Should we get upset about this? Rectify this “problem”? Don’t be silly. There’s nothing wrong with producing less of something if that’s what you decide to do.

    Third, the monopolist will earn profits in equilibrium, while firms in the perfectly competitive industry will not. But profits are integral to the free-enterprise system. They make the economy go ’round. They signal entrepreneurs to invest in corners of the economy where they are most needed. Profits are the market’s call for help. Squelching them is akin to imposing decibel control on hikers lost in the wilderness. Further, if the monopoly is sold at a price that fully reflects the present discounted value of this future profit income stream, the new owners will earn zero profits.

    Fourth and last and most important in the case against monopoly is deadweight loss (DWL). It is claimed that the area under the demand curve, between the quantity supplied by the two organizational forms, is greater than that which lies below the marginal cost curve. The difference is the DWL. Consumers value the additional quantity more than it costs manufacturers to produce. This constitutes, horrors, a presumed misallocation of resources.

    But this is a totally fallacious way of looking at the matter. It commits the fallacy of making interpersonal comparisons of utility, a big no-no in any good economics. It attempts to compare the utilities of buyers and sellers, and cannot account for producers or consumers’ surplus, which are both merely psychological and thus can’t be measured.

    I have been calling the economic actor who ruins matters in this example the monopolist. More correctly, he is merely the single seller. The word “monopolist” should be reserved for firms which are able to use violence against their competitors, such as the U.S. Post Office for the delivery of first-class mail, or the Army Corps of Engineers, which does not have to bid against competitors for gigs and accesses funds through taxation, not a voluntary process. Ditto for labor unions, which can dismiss competitors (scabs) through legal violence.

    What about Predatory Pricing?

    Enough of economists misleading the public on these matters via academic legerdemain. The fear apparent to the man in the street is that if these airplane and other unifications go through, and/or companies grow into being the only suppliers in their respective industries, they will jack up prices to the roof, and renege on promoting the customer satisfaction that brought them the success that enlarged them in the first place.

    This widespread apprehension is due to a misinterpretation of the Standard Oil of New Jersey law case of 1911. John D. Rockefeller is used as a stick with which to beat up on the case for eliminating antitrust law root and branch. It is not too dissimilar to holding up a cross to ward off a vampire. John D. is reputed to have cut his prices way below costs, locally; he could afford to do so, since he could finance these losses from the profits of his nationwide holdings of refineries. The local competition was thus bankrupted; they could not compete with his artificially low prices and had no outside sources to finance themselves in this unfair price-cutting he imposed upon them. Then our man JDR would jack up prices to the stratosphere, and march on to the next victim. Eventually, he owned just about the entire oil refinery business in the country. Thank God for antitrust law; otherwise, evil monopolists would take over the entire economy. Or so, at least, goes the usual scare story.

    Not so, says John McGee in a brilliant analysis. The real source of Standard Oil’s success had nothing to do with such unfair, made-up, local-price-cutting machinations. Rather, vast success was the result of the fact that Rockefeller could refine oil far more effectively and cheaply than his competitors. As a result, he was able to lower prices and benefit consumers.

    Wouldn’t One Big Firm Just Take Over?

    Second, the charge that without government regulation One Big Firm would run roughshod over an entire industry—maybe an entire country, not only in oil, but in fast food, groceries, autos, airplanes, etc.—is just plain silly. The charge is that such companies would smash all smaller competitors. If you didn’t work for or patronize one of these behemoths, you didn’t work at all, and you could purchase nothing.

    No. The only way companies can succeed under free-enterprise rules is by making better offers, not worse ones, to employees, customers, and suppliers. The moment they get “uppity,” if ever they do, and stop providing better goods and services at lower prices, they get smashed down by the logic of the free-enterprise system: the supposed “victims” go elsewhere; new entrepreneurs spring up.

    The One Big Firm, were it to take over the entire economy, would face the same challenges as does the socialistic economy. True, the former would have arisen to its present (hypothetical) status through a voluntary process, we are allowing, but only arguendo, while the latter took over via coercion, a great moral difference. But economically, they would be indistinguishable. Without markets—and there would be none in either case—economic calculation would be impossible.

    The leaders of neither would know, could know, whether to build train rails out of steel or platinum; the latter, let us stipulate, would be preferable, but with no market-driven prices neither would know that platinum should be reserved for more important tasks. Further, with no market interest rate they would have no way of knowing whether to build a tunnel through the mountain or set up a highway around it. The former would cost more now, but save money in the future. The latter, the very opposite.

    No, the One Big Firm would be a “pitiful, helpless giant” subjected to overwhelming competition from a bunch of Lilliputians. This process would occur long before any one company got too big for its britches, obviating this entire scenario. (For more on this point, see Murray Rothbard’s discussion “Vertical Integration and the Size of the Firm” from Man, Economy, and State.)

    It’s Time to End the Antitrust Era

    To conclude: by all means allow all of these mergers to take place. If they bring about a better, more reliable product at a lower price, all will be well and good. If not, these companies will lose profits and court bankruptcy.

    But let’s also dig deeper than these particular cases, and reform the system that allows central-planning bureaucrats to determine which mergers shall get the thumbs-up signal, and which the thumbs-down.

    Additional Reading:

    How the Free Market Handles Monopoly by Peter Jacobsen

    Good and Bad Monopoly by Leonard E. Read

    https://fee.org/articles/debunking-all-the-main-arguments-for-antitrust-laws/


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