Nightcap

  1. Promotions galore for hawkish Chinese diplomats Tian & Zhai, Reuters
  2. The allocation of essential supplies during a crisis Peter Boettke, Coordination Problem
  3. Racism and the contamination of freedom Fabio Rojas, Bleeding Heart Libertarians
  4. Indo-Pacific versus Asia-Pacific Francis Sempa, Asian Review of Books

Nightcap

  1. What holds China together? Ian Johnson, ChinaFiles
  2. Bernie Sanders was wrong about America Conor Friedersdorf, Atlantic
  3. Assessing the problems caused by the creation of America Mark Spencer, TLS
  4. Should we ration coronavirus testing by price? Tyler Cowen, MR

Nightcap

  1. Not In My Backyard and “Buy Local” hypocrites Farhad Manjoo, New York Times
  2. Why the American Left should not go socialist Joseph Stiglitz, Foreign Policy
  3. Who was Maxwell Taylor? (Cold War) Gregory Daddis, War on the Rocks
  4. The lure of Western Europe Anne Applebaum, New York Review of Books

The Nonsensical Meaning of Sustainability

Along with ‘Inequality’ and ‘Democratic socialism’, ‘Sustainability‘ is one of the words that captures the essence of my generation. A sustainable project, event or business is met with “wow”s and “oooh!”s, an indicator of its owner’s moral righteousness and altogether praiseworthy character.

But its meaning is far from clear from all but its most fervent supporters. Dealing with the extraction of resources, the use of ecological reserves or harvesting of crops, a process is allegedly ‘sustainable’ if the naturally occurring regeneration exceeds the current levels of extraction. Simply put, don’t use more than what is (annually?) renewed. Moreover, a process branded as sustainable usually involve a mix of some other virtue signalling activities of our time: carbon emission neutrality or offsetting; at least a superficial concern for one’s environmental impact; energy produced in ‘renewable’ ways (read: nothing but solar, wind or hydro); or the use of recycled materials.

If this sounds unobjectionable and self-evident to you, this piece is for you. Despite the fancy branding, the SDGs, the fervor of self-proclaimed do-gooders, is the ‘sustainability’ of an activity really what we care about?

There are at least two major confusions with the assessment of activities as sustainable or its despised opposite: unsustainable. First, and most frequently occurring, is the belief that we aim to pursue our current endeavor in the same way for all eternity. If you think about it, the indignant objection of unsustainability is often quite meaningless, worthy of nothing but a ‘so what?’ response; everything we do at any given moment is in a sense “unsustainable”:

  • if I keep typing on my computer I will eventually starve;
  • if I keep lifting weights or endlessly running on that treadmill, I will collapse;
  • if I keep eating this chocolate cake of mine, I will be sick.

So? Everyone who has ever engaged in those activities understand that there are ends to them, that we’re only doing them for a particular purpose for a certain period of time, and that extrapolating snapshots of reality is quite silly; I do not intend to continue this activity until the brink of whatever physical boundary there might – or might not – be. Until I approach some “safe” distance to that brink, I’ll happily indulge in my chocolate cake, lift my weights or type away at my keyboard. In economic speak we are trading off one resource for another, until saturation or the fulfillment of some other aim becomes more important (prime example is Environmental Kuznets Curves).

The other confusion is to believe that economic systems cannot change and that humans cannot adapt. It is emphatically irrelevant that there is a physically limited amount of oil in the ground, since price systems and their incentives effectively ration oil use according to urgently-induced needs and encourage substitutes when those are needed. More importantly, the price system for raw materials incorporate and incentivize technological improvements that 1) through discovering new deposits literally expands “the” amount of resources,  2) shape cost-effective processes to hard-to-access deposits we couldn’t profitably exploit before, 3) improve the bang for our buck, i.e. how much output we can squeeze out of a given quantity of material. Thus, there might ultimately be a physical limit, but not an economic limit.

Let me give an iconic example: chopping down trees quicker than the forest grows. Such an activity seem pretty ‘unsustainable’ since the declining size of the forest implies that one day there will no longer be a forest. So what? There might be urgent present reasons for doing that (say, for instance, no other source of heat/fuel for cooking or no other source of income) that are very likely to change in a fairly short time frame (ie, before complete deforestation has occurred); the current prices of pulp or firewood may be meaningfully higher than their anticipated future prices (‘selling’ off some capital assets would therefore be fairly prudent); there might be future technological innovations that a) (re-)grows forests quicker, b) offers a better substitute to the current use of wood, c) allows us to cheaply make use of more from what we chop down.

Almost any practice taken as a snap-shot in time is literally ‘unsustainable’. Naively believing that they will mindlessly continue linearly into the future is quite silly; hailing processes that don’t as righteous and ‘sustainable’ is similarly silly. Human societies and their economic process are dynamic systems capable of (read: constantly) change.

By saying that something is unsustainable, my generation wants to convey the idea that these activities are immoral and that they shouldn’t continue. It’s a naive and erroneously nonsensical conviction.

Monetary Progression and the Bitcoiner’s History of Money

In the world of cryptocurrencies there’s a hype for a certain kind of monetary history that inevitably leads to bitcoin, thereby informing its users and zealots about the immense value of their endeavor. Don’t get me wrong – I laud most of what they do, and I’m much looking forward to see where it’s all going. But their (mis)use of monetary history is quite appalling for somebody who studies these things, especially since this particular story is so crucial and fundamental to what bitcoiners see themselves advancing.

Let me sketch out some problems. Their history of money (see also Nick Szabo’s lengthy piece for a more eloquent example) goes something like this:

  • In the beginning, there was self-sufficiency and the little trade that occurred place took place through barter.
  • In a Mengerian process of increased saleability (Menger’s word is generally translated as ‘saleableness’, rather than ‘saleability’), some objects became better and more convenient for trade than others, and those objects emerged as early primative money. Normally cherry-pick some of the most salient examples here, like hide, cowrie shells, wampum or Rai stones.
  • Throughout time, precious metals won out as the best objects to use as money, initially silver and gradually, as economies grew richer, large-scale payments using gold overtook silver.
  • In the early twentieth century, evil governments monopolized the production of money and through increasingly global schemes eventually cut the ties to hard money and put the world on a paper money fiat standard, ensuring steady (and sometimes not-so-steady) inflation.
  • Rising up against this modern Goliath are the technologically savvy bitcoiners, thwarting the evil money producing empires and launching their own revolutionary and unstoppable money; the only thing that stands in its way to worldwide success are crooked bankers backed by their evil governments and propaganda as to how useless and inapt bitcoin is.

This progressively upward story is pretty compelling: better money overtake worse money until one major player unfairly took over gold – the then-best money – replacing it with something inferior that the Davids of the crypto world now intents to reverse. I’m sure it’ll make a good movie one day. Too bad that it’s not true.

Virtually every step of this monetary account is mistaken.

First, governments have almost always defined – or at least seriously impacted – decisions over what money individuals have chosen to use. From the early Mesopotamian civilizations to the late-19th century Gold Standard that bitcoin is often compared to, various rulers were pretty much always involved. Angela Redish writes in her 1993 article ‘Anchors Aweigh’ that

under commodity standards – in practice – the [monetary] anchor was put in place not by fundamental natural forces but by decisions of human monetary authorities. (p. 778)

Governments ensured the push to gold in the 18th and 19th centuries, not a spontaneous order-decentralized Mengerian process: Newton’s infamous underpricing of silver in 1717, initiating what’s known as the silver shortage; Gold standard laws passed by states; large-scale network effects in play in trading with merchants in those countries.

Secondly, Bills of Exchange – ie privately issued debt – rather than precious metals were the dominant international money, say 1500-1900. Aha! says the bitcoiner, but they were denominated in gold or at least backed by gold and so the precious metal were in fact the real outside money. Nope. Most bills of exchange were denominated in the major unit of account of the dominant financial centre at the time (from the 15th to the 20th century progressively Bruges, Antwerp, Amsterdam and London), quite often using a ghost money, in reference to the purchasing power of a centuries-old coins or social convention.

Thirdly, monetary history is, contrary to what bitcoiners might believe, not a steady upward race towards harder and harder money. Monetary functions such as the medium of exchange and the unit of account were seldomly even united into one asset such as we tend to think about money today (one asset, serving 2, 3 or 4 functions). Rather, many different currencies and units of accounts co-emerged, evolved, overtook one another in response to shifting market prices or government interventions, declined, disappeared or re-appeared as ghost money. My favorite – albeit biased – example is early modern Sweden with its copper-based trimetallism (copper, silver, gold), varying units of account, seven strictly separated coins and notes (for instance, both Stockholms Banco and what would later develop into Sveriges Riksbank, had to keep accounts in all seven currencies, repaying deposits in the same currency as deposited), as well as governmental price controls for exports of copper, partly counteracting effects of Gresham’s Law.

The two major mistakes I believe bitcoiners make in their selective reading of monetary theory and history are:

1) they don’t seem to understand that money supply is not the only dimension that money users value. The hardness of money – ie, the difficulty to increase supply – as an anchoring of price levels or stability in purchasing power is one dimension of money’s quality – far from the only. Reliability, user experience (not you tech nerds, but normal people), storage and transaction costs, default-risk as well as network effects might be valued higher from the consumers’ point of view.

2) Network effects: paradoxically, bitcoiners in quibbling with proponents of other coins (Ethereum, ripple, dash etc) seem very well aware of the network effects operating in money (see ‘winner-takes-it-all’ arguments). Unfortunately, they seem to opportunistically ignore the switching costs involved for both individuals and the monetary system as a whole. Even if bitcoin were a better money that could service one or more of the function of money better than our current monetary system, that would not be enough in the presence of pretty large switching costs. Bitcoin as money has to be sufficiently superior to warrant a switch.

Bitcoiners love to invoke history of money and its progression from inferior to superior money – a story in which bitcoin seems like the natural next progression. Unfortunately, most of their accounts are lacking in theory, and definitely in history. The monetary economist and early Nobel Laureate John Hicks used to say that monetary theory “belongs to monetary history, in a way that economic theory does not always belong to economic history.”

Current disputes over bitcoin and central banking epitomize that completely.

Communism / socialism is rubbish – both in theory and in practice.

I’m getting tired of reading and listening to so-called libertarian or conservative people saying that “in theory socialism is beautiful.” No, it’s not. In theory, socialism can be summed up as “the end of private property.” This is how Karl Marx summed it up. The genius of Ludwig von Mises is precisely in the fact that he did not have to wait until 1989, when the Berlin Wall fell, to realize that this does not make sense. When the Soviet Union was still a young country sweeping intellectuals around the world, von Mises made the following remark: without private property, there is no supply and demand. Without supply and demand, there is no price formation. Without prices the economic calculation is impossible. And that is precisely what happened in the USSR and happens in countries that follow the path of socialism: without the compass of free market prices, governors can not make decisions about allocating resources. Socialism is the death of rationality in economics. Socialism is rubbish in practice because before that it’s rubbish in theory. Please stop talking nonsense. The free market, on the other hand, is beautiful in practice because first of all, it is beautiful in theory.

SMP: The Macro Bifurcation

One of the major issues in contemporary macroeconomics concerns monetary policy since the 2008 crisis. For many, if not most, of the major central banks, the conventional channels through which the money supply changes do not work anymore. For instance, by paying interest on reserves, the Federal Reserve has moved from adjusting the money supply to influencing the banks’ money demand. Some central banks have even maintained that money supply does not affect inflation anymore.

Continue reading at the Sound Money Project.

A Little More on “Price Gouging”

In my previous post on this subject I argued that the critics of “anti price-gouging laws” are mistakenly assuming that is possible to satisfy demand at the pre-natural disaster price. That is, sadly of course, fiction. It it not our reality anymore and we are better accepting the new situation than blindly deny it. As many economists are explaining these days, to not let prices increase after a natural disaster does more harm than letting prices increase. This can easily be seen in a demand and supply graph.

Prige gouging

Consider first just the lines in black. Those lines represent the pre natural disaster situation. What is considered “normal prices”. At price p0, a quantity q0 of a good is traded in the market (i.e. bottles of water.)

Now there is a shock. A hurricane hits this region and demand increases (shifts to the right). This is the demand line in color red. The red dotted line that extends to the right shows the size of the shortage (q2 – q1) at the “normal and fair” price.

Price gouging is an emotional loaded word, but it doesn’t have any specific economic meaning. How does “price gouging” show up in this graph? It is the increase in price from p0 to p1. This is the increase in price required to satisfy the higher demand and provide the extra number of goods (q1 – q0). No… supply is not horizontal.

What happens if price increases are banned? Then at the pre-crisis quantity (q0), consumers are willing to pay p2, a price even higher than price gouging. This means two things. First, a number of people in need will be unable to acquire the goods (the empty shelf problem). Second, that the actual total cost (to those who acquire the quantity q0) is p2, not p0. The difference between the price in the store and total cost falls into waiting in long lines, visiting a long number of stores, bribing producers (yes… with natural disaster price controls also lead to black markets), calling favors., etc. Any principles of microeconomic textbook has plenty of more examples under the price ceiling discussion.

There are three scenarios being discussed here.

  1. Quantity q0 at price p0
  2. Quantity q1 at price p1
  3. Quantity q0 at price p2

The natural disaster makes scenario 1 impossible. And it is not clear that scenario 3 is better for those in need than scenario 2. Less goods are provided at a higher total cost than in scenario 2.

One final remark. Note that in this analysis the natural disaster only affected demand. Of course, it is quite likely that supply would also be affected. The point, however, is to show that prices are not pushed up only by produces. As we can see in this case, it is consumers who are increasing the price and producers reacting to the new behavior of consumers.

Price Gouging: Reality vs Fiction

In a previous post I comment on a too common economic fallacy, that a natural disaster is good for the economy because of its alleged impact on GDP. Economic fallacies are not the only misconceptions gaining momentum during a natural disaster, but a confusion between reality and fiction becomes also quite common. The issue of price gouging provides a good example of this situation.

After a natural disaster, the price of certain goods such as water or gas, increases significantly. This is seen as an immoral exploitation by merchants who are taking advantage of the people affected by the natural disaster. Even though in this post I want to comment on another issue, it is worth mentioning that the now limited resources should be allocated to those in most need (rather than, for instance, to whoever happens to be the first one in line.) And unless someone has a crystal ball, there is no way of knowing who is in most need without changes in relative prices.

The mention to reality versus fiction refers to the fact that the critics of price gouging seem to (implicitly) assume that the natural disaster did not occur. It is plausible to assume that an event like this would (1) shift the supply to the left [reduce supply of goods] and (2) shift the demand to the right [increase the demand of goods.] At the usual (or “normal”) price these goods are in serious shortage.

This means that in the event of a natural disaster the option is between (1) having goods at a higher price or (2) not having goods at the “normal” price. This is the new reality. The old and normal reality does not exist anymore. To limit price gouging results in a lower price in the store, but not goods on the shelf. This would not help those in need. The fiction consists in thinking that a larger supply can be secured without an increase in the price (why should we assume supply is horizontal when these goods usually have a low elasticity?) An efficient policy would secure the provision of goods rather than secure a low price without the goods. Reality, rather than fiction, should be the first driver of a policy designed to assist during a natural disaster. As Milton Friedman insisted, a policy is to be valuated by its results (or design), not by its intentions.

The first rule for an efficient policy should be to not get in the way of changes in relative prices. Otherwise help will become erratic and inefficient. It might be more efficient, for instance, to make use of firms specialized in logistics (i.e. firms such as Walmart) and subsidize the demand than start a price control policy. For instance, a tax credit or a check can be sent to those affected by the natural disaster allowing them to pay the now higher prices. Similarly, a subsidy can be given to those firms bringing goods to the damaged areas (who says the government has the monopoly of charity or that the only one who can do it efficiently?) A policy on these lines would be more efficient than interfering with relative prices.

However, some opponents of price gouging seem to be more interested in damaging merchants than in making sure resources will be efficiently allocated among the ones affected by the natural disaster. Those who do not oppose price gouging do so because they have the affected ones first in line. It is not about merchant’s revenue, it is about allocating goods efficiently. Damaging the merchants should not be more important than worsening the situation of those in need.

Minimum Wages: Short rejoinder to Geloso

A few days ago I posted here at NOL a short comment on some reaction I’ve seen with regards to Seattle’s minimum wage study. Vincent Geloso offers an insightful criticism of my argument. Even if his point is quite specific (or so it seems to me), it offers an opportunity for some clarification.

But first, what was my argument? My comment was aimed at a specific point raised by advocates of increasing minimum wages. Namely, that even if Seattle’s study shows an increase in unemployment, a study with a larger sample may say otherwise. My point is that the way I’ve seen this criticism raised is missing the economic insight of minimum wage analysis, namely that jobs will be lost in less efficient employers and employees first. So far so good. The problem Geloso points out is with my example. I refer to McDonald’s as the efficient employers fast food chain (think of economics of scale) and as less efficient employers the neighborhood family-run little food place (neighborhood’s diner).

Geloso correctly argues that different employers react in different ways. It is expected, for instance, that a larger employer such as a fast-food chain would have more options to make a marginal adjustment when there is an increase in minimum wages. Of course, I agree, but the point I’m rising is about where jobs will be lost first (not the specific mechanism in each employer). Geloso flips my example and argues that a small diner has more (in relative terms) to lose by letting go one out of two employees than a fast food joint that has to let one employee go among maybe ten thousand. By letting one employee go, the small employer loses a larger share of its output. Therefore a small employer would be more inclined to keep all of his labor force and cut costs on another front (less hours work in average doesn’t cut it, that’s like a shared unemployment that would also cut output down).

A large employer like a fast food chain, however, can let one out of ten thousand employees go because the loss in output is not that significant. I have two issues with this example. The first one is that a fast food chain is facing the increase in minimum wage ten thousand times, not two. To cut even the rise in cost, the firm fast food chain has to cut down its labor force 15% (1,500 employees.) But I think the problem with this example does not end here. If it were the case that small diners don’t cut employment but fast food chains do, then we should see more unemployment in larger employers than in small neighborhood diners.

A second point I want to make is with Geloso’s argument that the study is about focusing “like a laser” on one out of multiple channels in the group most likely to respond in that manner (unemployment?). That the study, as long as the focus is on unemployment, should focus on the less efficient employers (and employees) first, and not just look at the unaffected employers because that’s where we just happen to have better statistics for is my point. There are two options. The first option is that what matters is focusing on the channel the increase in cost will be managed by employers. But this is neither a focus on unemployment nor on the criticism I’m replying to. Option number two, that the study should focus on the employers “most likely” to reduce unemployment, which is actually my point regardless of how many “channels” are included in the sample.

Minimum Wages: Where to Look for Evidence

A recent study on the effect of minimum wages in the city of Seattle has produced some conflicted reactions. As most economists expected, the significant increase in the minimum wage resulted in job losses and bankruptcies. Others, however, doubt the validity of the results given that the sample may be incomplete.

In this post I want to focus just one empirical problem. An incomplete sample in itself may not be a problem. The issue is whether or not the observations missing from the sample are relevant. This problem has been pointed out before as the Russian Roulette Effect, which consists in asking survivors of the increase in minimum wages if the increase in minimum wages have put them out of business. Of course, the answer is no. In regards to Seattle, a concern might be that fast food chains such as McDonald’s are not properly included in the study.

The first reaction is, so what? Why is that a problem? If the issue is to show that an increase of wages above their equilibrium level is going to produce unemployment, all that has to be shown is that this actually happens, not to show where it does not happen. This concern about the Seattle study is missing a key point of the economic analysis of minimum wages. The prediction is that jobs will be lost first among less efficient workers and less efficient employers, not equally across all workers and employers. More efficient employers may be able to absorb a larger share of the wage increase, to cut compensations, delay the lay-offs, etc. This is seen by the fact that demand is downward sloping and that a minimum wage above its equilibrium level “cuts” demand in two. Some employers are below the minimum wage (the less efficient ones) and others are above the minimum wage (the more efficient ones.) Let’s call the former “Uncle’s diner” and the latter “McDonald’s.” This how it is seen in a demand and supply graph:

minimum wage

Surely, there is some overlapping. But the point that this graph is making is that looking at the effects minimum wage above the red line is looking at the wrong place. A study that is looking for the effect on employment needs to be looking at what happens with below the red line. This sample, of course, has less information available than fast food chains such as McDonald’s; this is a reason why some studies focus on what can be seen even if the effect happens in what cannot be seen (and this is a value added of the Seattle study.)

This is why it is important to ask: “what do minimum wage advocates expect to find by increasing the sample size?” To question that minimum wages increase unemployment, then the critics also needs to focus on the “Uncle’s diner” part of the demand curve. If the objective is to inquire about something else, than that has no bearing on the fact that minimum wage increases do produce unemployment in the minimum wage market and at the less efficient (and harder to gather data) portion of it first.

PS: I have a previous post on minimum wages that can be found here.

Simple economics I wish more people understood

Economics comes from the Greek “οίκος,” meaning “household” and “νęμoμαι,” meaning “manage.” Therefore, in its more basic sense, economy means literally “rule of the house.” It applies to the way one manages the resources one has in their house.

Everyone has access to limited resources. It doesn’t matter if you are rich, poor, or middle class. Even the richest person on Earth has limited resources. Our day has only 24 hours. We only have one body. This body starts to decay very early in our lives. Even with modern medicine, we don’t get to live much more than 100 years.

The key of economics is how well we manage our limited resources. We need to make the best with the little we are given.

For most of human history, we were very poor. We had access to very limited resources, and we were not particularly good at managing them. We became much better in managing resources in the last few centuries. Today we can do much more with much less.

Value is a subjective thing. One thing has value when you think this thing has value. You may value something that I don’t.

We use money to exchange value. Money in and of itself can have no value at all. It doesn’t matter. The key of money is its ability to transmit information: I value this and I don’t value that.

Of course, many things can’t be valued in money. At least for most people. But it doesn’t change the fact that money is a very intelligent way to attribute value to things.

The economy cannot be managed centrally by a government agency. We have access to limited resources. Only we, individually, can judge which resources are more necessary for us in a given moment. Our needs can change suddenly, without notice. You can be saving money for years to buy a house, only to discover you will have to spend this money on a medical treatment. It’s sad. It’s even tragic. But it is true. If the economy is managed centrally, you have to transmit information to this central authority that your plans have changed. But if we have a great number of people changing plans every day, then this central authority will inevitably be loaded. The best judge of how to manage your resources is yourself.

We can become really rich as a society if we attribute responsibility for each person on how we manage our resources. If each one of us manages their resources to the best of their knowledge and abilities, we will have the best resource management possible. We will make the best of the limited resources we have.

Economics has a lot to do with ecology. They share the Greek “οίκος” which, again, means “household.” This planet is our house. The best way to take care of our house is to distribute individual responsibility over individual management of individual pieces of this Earth. No one can possess the whole Earth. But we can take care of tiny pieces we are given responsibility over.

Immigration and Jobs – Reprise

A good op-ed in the March 24 issue of the Wall Street Journal by Mark Krikorian forces me to go back to one of my recent postings on immigration: “Immigration and Jobs.”

Krikorian is executive director of the Center for Immigration Studies in Washington D.C. Mr Krikorian accuses everyone in America of “not facing the facts” about current and recent immigration. He insists that some questions must be posed instead of skirted. I agree, of course, but I don’t know that it’s true that people are not facing the facts. I think instead that many busy and fair people are hearing contradictory statements and that they don’t have a good framework to think things through. Krikorian states that he rests his case on an authoritative study by the National Academies of Science, Engineering and Medicine. The academies are a respected source. I take it seriously if Krikorian reports accurately. (Be aware that I have not read the study in question.)

Krikorian’s most troubling assertion is as follows: All Americans benefit from immigrants being in the US. This benefit is entirely extracted from the higher wages Americans competing with immigrants would receive absent wage lowering immigrants’ competition. In other words: Americans who compete with immigrants receive lower wages than they should; everyone else benefits from these lower wages.

I think that’s obviously overstating the case. There must be at least one immigrant generating product (GDP) that would not otherwise exist in the American economy. Maybe, there are two. One is in Silicon Valley, inventing a product – like the personal computer forty years ago – that will eventually cause the employment of thousands, or millions. The second is in Kansas, saving from demolition a beat-down hotel that provides immediate employment for two-to–four minimum wage-earning maids. (Both entrepreneurs are Indians, obviously). In general, immigrants might benefit all by offering additional, or better, services than do the native born. I develop this thesis below.

Krikorian seems to be operating from a standpoint where the work pie to be shared by Americans and by immigrants is of a permanently fixed size. This erroneous perspective, in turn, may well come from a respectable desire to stick close to research findings. Research that also (also) takes into account immigrants’ contribution to increasing the size of the pie is doable but it’s more difficult to perform and to integrate with previous findings than research that relies on a static representation of reality.

Let me admit that I don’t have any numbers at my disposal and that any reasonably credible set of numbers could blow out of the water everything I am going to say below.

First, it’s obvious that there are currently many unfilled jobs in the US. Organized labor and anti-immigration spokespeople will argue that all those jobs would be filled if the wages offered were high enough. I am skeptical of this argument for two reasons. First, Silicon Valley employers affirm vigorously that they just don’t find enough would-be employees with the required skills, at any price. I tend to believe them to some extent because they evidently spend energy and resources raiding each other for expensive existing personnel. This kind of practice suggests true, absolute scarcity. I have mentioned in one of the companion essays the difficulty farmers encounter in recruiting pickers even when they offer wages significantly superior to both the minimum wage and to the going wage in my job-poor area. I would argue that their difficulties are rooted in the same problem facing Silicon Valley employers: a shortage of local competence. Picking strawberries, for example, is not easy at all. And it requires a certain attitude, or fortitude, that is not common anymore among Americans, as I have argued elsewhere.

Second, presented below, a forbidden argument. But I must make a disclosure before I move to it: I am one of the 43 million foreign-born people now living in the US. I studied in the US and I was permanently admitted on a variant of a B1 visa. I had a main career as a university professor. I don’t believe that an extra teaching position was ever added in any university to accommodate me. (It happens for some foreigners, a very few, of star quality, like Einstein; I wasn’t one of them, let’s face it.) Of course, to obtain any university position, I had to possess the same credentials as native-born Americans who also wanted the position. (That’s right, there is no affirmative action track for white Europeans!) Good university positions are surprisingly competitive to obtain; earning tenure is even more competitive. Every position I obtained, I got from winning against similarly situated native-born.

Each time, I won the gold, if you will. This simple fact would seem to suggest that I was at least slightly better in conventional terms than those native-born who did not get the position. This fact implies at minimum that had I not competed for the position my students would have been served at best by a silver medalist. (I choose the Olympics language on purpose, from a surfeit of honesty. It’s not absurd to argue that the quality difference between the gold and the silver winners is insignificant or even accidental: On a different day, with a different wind, perhaps, the silver winner would have won the gold. But there is more.)

Like many but not all immigrants, I grew up in a language different from English, French in my case. So. I had to achieve the same credentials as my competitors in what was for me a second language. Forgive me for seeming to brag but doesn’t this indicate an intellectual competence over and above what the formal credentials express? If you doubt this shameless assertion, ask yourself how many native-born Americans are able to teach anything – besides the English language – in any francophone university anywhere. And I am not an extreme case of talent among immigrants to the US. I know a man, a distinguished biological scientist, who grew up in the African language Wolof, went to secondary school in French, to college and graduate school in English. Would you guess he possesses a certain mental nimbleness uncommon among determined monolinguals?

I will reluctantly take another step. I do it reluctantly because it is sure to lose me some friends. I will use my own case as an immigrant for an example because it’s the case I know best. It’s about the cultural endowment we carry around over and above, or aside from mastery of a foreign language.

Let me say right away that I don’t contend that I enjoy a 100% understanding of American culture, even after fifty years. I don’t understand the rules of baseball, for example. I never bothered to learn because the game seems boring. Yet, I must be conversant with a lot of national culture, just for having acquired my professional credentials and, even more so, for navigating everyday life in my society of adoption. The point is that the acquisition of another culture does not entail a one-for-one exchange, like changing clothes, for example. Much, most of what the immigrant brings with him, he retains, as one might easily assume. When I was learning American culture, I was not leaving French culture behind with the hat-check girl.

The first thing that immigrants, those who immigrate as adults, keep is mastery of their native language. This may sound mysterious to a monolingual person. It’s true that one can become “rusty” in a language one does not use. The quality of self-expression, for example, may deteriorate over time spent abroad. Yet, it’s very unlikely that an immigrant will lose the ability to watch the news in his native language, or to read a newspaper. So, I follow the news in English, of course, but also in French, some of the time. The reporting of the same events do not overlap perfectly, far from it. So, I am learning things I probably would not learn if I knew no French. (That’s in addition to carrying in my head much disorderly information from my society of origin. More below.) In my job as a teacher and as a scholar, I was routinely able to draw on broader information than did my native-born colleagues. I wouldn’t say (although I am tempted) that I had twice as large a store of information at my fingertips as they did but that I had definitely more than they.

So, in fact, I am arguing – with little embarrassment – that I must have been a better teacher and scholar than most (not all) of my native-born colleagues with similar credentials by virtue of being an immigrant.* There may be no metrics allowing an assessment of this outrageous claim. That’s because what college professors actually do is so mysterious. (Another story.)

It’s also true that to measure accurately the added work value of immigrants you have to find a way to factor in laziness, which varies much among individuals. In my case, I suspect strongly that if I had been native born, I could not have had the normal academic career I enjoyed, given my above-average level of laziness. In other words, the informational advantage associated with being a bilingual immigrant may have paid the fare for my laziness. Had I been the same person, with the same formal credentials, except less lazy, however, my presence would have much benefited American society. This detour supports my main argument of course: It does not make much sense to deny that competent bilingualism adds to normally credentialed efficacy. This is true in an occupation such as university teaching. It’s true though possibly to a lesser extent, for a plumber who will, at least, be a better citizen than a comparably situated monolingual. This is all common sense. No hard data are needed to give this scenario credence although hard figures might destroy it.

It should be fairly clear that a second language is like another tool in one’s personal toolbox. Immigrants have yet more, other additional tools that may be more elusive, more difficult to describe. I am giving it a try. All of us approach new situations through a filter that is made up partly of our past experiences, through the colander of past experiences if you will. Many of the experiences that compose the sifting device are repetitive, partly superfluous: The tenth car accident you witness does not have the same power to influence your driving as the first. There is often an excess of material in the sifter. This means that whatever the sifting process accomplishes would be accomplished as well, or nearly as well, on the basis of fewer past experiences.

My experiences in my society of origin do not perfectly duplicate those of a similarly situated native-born American. For example, I lived through a school system that was much more authoritarian than he experienced. I take from this the strong impression that my experiences in my society of origin adds to my experiences in my society of choice to give me a better sifter than what exists among the native-born population. It does this in a non-repetitive way (unlike, say, the 9th car accident.) I don’t mean that I have twice as large a sifter as they do but perhaps that I have 125% of what they carry in their heads.

This second extra tool in my tool box is factually associated with the first, bilingualism, but it’s not the same thing. An Australian, with a perfect command of English and perfectly innocent of knowledge of another language would carry the same extra tool as I do. The advantage gained through this second tool is difficult to express. It’s tacit. (I have never read anything about the topic.) I believe that my experience of another society – again, independently of bilingualism – acts like a second pair of glasses. I think I am able to watch events and people from one perspective, and then, to some extent, from a second perspective. I suspect it does not give me extra-depth but an edge in exercising common criticality. Possibly, it acts like a few IQ points that would be added to my measured IQ. Again, this thesis is very exploratory, supported by no real numbers. I must add that this second tool associated with being an immigrant is free from the effects of education. I think I have observed the expected extra resourcefulness among Mexican immigrants I knew to be semi-literate (in Spanish) performing ordinary manual jobs, in construction and in repair work, for example.

In conclusion: I and hundreds of other immigrants I have observed contribute to the society in which we live over and above the contributions of the native-born. Thus, we add to the general well-being even if we are paid exactly the same as the native-born.

The above is a short string of arguments in favor of immigration. None of it is a call for open borders. I subscribe to the lifeboat view of immigration. Too numerous immigrants could easily sink the boat that made them swim to developed societies in the first place. (According to retired foreign service officer Dave Seminara’s review of relevant studies – that I have not read – 150 million people world wide would like to move to the US, including 34% of Mexicans.) In addition, there are non-economic arguments against large-scale immigration that I support although they may be even more difficult to describe than what I tried to explain above. My analysis supports instead an active stance to design immigration policies that make rigorously the conceptual distinction between immigrants we need and immigrants in need. This distinction is not inimical to any refugee policy whatsoever; perhaps, the reverse is true.


* Please, don’t try to factor in a putative superior European education brought to the job of being an American academic as an alternative explanation. I am a French high school dropout.

How dairy farmers unions in Canada are distorting the facts about supply management

Under heat recently as President Trump has criticized supply management in Canada and retaliated against it, the different provincial associations representing dairy farmers have moved on the offensive. To promote the virtues of this system meant to reduce production in order to prop up prices through the use of trade tariffs, production quotas and price controls (how can we call those virtues), these unions have produced numerous infographics to make their case. It is even part of what they dub their These-infographics-show-that-diary-prices-are-lower-in-Canada-than-elsewhere, that milk is still a cheap drink relative to other type of drinks and those prices, supposedly, increase more slowly than elsewhere. All of these graphics are dishonest and must be dismantled.

The most egregious of these infographics – present in the “lobby day kit” – shows the price of milk in Australia (1.55 CAD), Canada (1.45 CAD) and New Zealand (1.65 CAD). They are seemingly using 2014 prices. First of all, they use data that conflicts massively with the reports of Statistics Canada that suggest that milk prices hover between 2.33$ to 2.48$ per liter.  Their data is provided by AC Nielsen but no justification is presented as to why they are better than Statistics Canada. The truth is that it is not better. Participants in Nielsen surveys come from a self-selected pool of storeowners who wish to participate and are then selected by Nielsen to be part of the data collection. Then, they can record prices. It should be mentioned that not all regions of Canada are covered in the data. Although the Nielsen data does have some uses (especially with regards to market studies), it hardly measures up Statistics Canada when comes the time to evaluate price levels. This is because the government agency collects information from all regions and tries a broader sweep of retailers in order to create the consumer price index.

But an even larger problem is that, in their comparison of prices, they don’t mention that New Zealand taxes milk. In New Zealand, all food items are subjected to sales tax, which is not the case in Canada and Australia. Hence, when they compare retail prices, they are comparing prices that exclude taxes and prices that include taxes. One would like to find if they acknowledge this fact in the methodological mentions, but there are none!

Using prices available at Numbeo.com and Expatisan.com and the exchange rates made available by the Bank of Canada, we can correct for this problem of theirs. Simply changing prices source leads to a massively different result with regards to Australia whose milk prices are lower than in Canada. Secondly, once we adjust for the sales tax in New Zealand, we find that prices in New Zealand are lower than in Canada. In fact they are lower than in one of Canada’s cheapest market, Montreal (let alone Toronto or Vancouver).  So the infographic they show in order to lobby governments is a fabrication.

Table 1: The real price of milk

Using Numbeo.com (regular milk)
Unadjusted Adjusted for taxes
 Australia  $           1.59  $                 1.59
 New Zealand  $           2.26  $                 1.97
 Canada  $           1.99  $                 1.99
 Using Expatisan.com (whole milk)
 Unadjusted  Adjusted for taxes
 Sydney  $           1.82  $                 1.47
 Wellington  $           2.42  $                 2.10
 Montreal  $           2.87  $                 2.87

Source: Numbeo.com and Expatisan.com, consulted May 16th 2014 and the Bank of Canada’s currency converter. Note: using the Statistics Canada price would make Canada’s situation even worse by comparison.

This is part of a pattern of deceit since they also massage data for numerous other graphs that are presented to Canadians in efforts to convince them of the virtues of supply management. One other example is an infographic that presents a figure of nominal milk prices in Australia before and after the abolition of supply management. Given that prices seem more volatile after 2000 and that they increase more steeply, they try to make us believe that liberalization was a failure. This is not the case. Any sensible policy analyst would deflate nominal prices by the general price index to control for inflation. When one does just that using the data from the Australian Bureau of Statistics, one sees that real prices stabilized in the first ten years of deregulation after increasing roughly 15% in the decade prior. And since 2010, real prices have been falling constantly.

Other examples abound. In one instance, the Quebec union of dairy farmers circulated an infographic meant to show that nominal prices for dairy products increased faster in the United States than in Canada. Again, they omit inflation. Since 1990 (their own starting date), prices of dairy products have risen more slowly than inflation – indicating a decline in real prices. In Canada, the opposite occurred – inflation increased more slowly than dairy prices indicating an increase of the real price.

The debate around supply management is complicated. The policy course to adopt in order to improve agricultural productivity and lower prices for Canadians is hard to pinpoint. But whatever position one may hold, no one is well-served by statistical manipulations offered by the unions representing dairy farmers.

Minimum wages: The economist as a psychologist

Both Ludwig von Mises and F.A. Hayek are known for arguing that there is no such thing as a good economist who is only an economist. For these two thinkers, a good economist-as-scientist also needs to know history, philosophy of science, ethics, and physics. Mises and Hayek are thinking of what an economist-as-scientist should be familiar with and have some minimum knowledge beyond his discipline.

I would add that the economist as public educator, that is, when the economist talks as an economist to non-economists, also needs some awareness of psychology. I may not be using the term “psychology” in the most proper way, but I mean the awareness to understand what the interlocutor feels and needs and then figure out how to communicate economic insights in a way that will not be automatically (emotionally or psychologically) rejected; how to make someone accept an economics outcome they do not want to be true. How to break the bad news with empathy? This is a challenge I try to get my students to understand as one day they, too, will be economists out of the classroom in the real world.

A few days ago I found myself unexpectedly in the “psychologist” position. Only seconds after meeting for the first time two persons dropped the question: “So, what do you think about increasing the minimum wages, should we do it?” I knew nothing about these two individuals, and the only thing they knew about me was that I’m an economics professor. The answer to such a question is an Econ 101 problem: if you increase the minimum wage (above the equilibrium price) some lucky workers will get a wage increase at the expense of other ones loosing their jobs.

The first question I asked myself was “what do these two nice ladies actually want, the analytical/scientific answer, or do they want instead the ‘professor’ to confirm their bias?” This might be a delicate discussion since they may well have a loved one in the minimum wage market.

The first thing to get out of the way is that my answer as an economist is not ideologically driven or does not respond to secret political agendas. How can that be made clear? One way is to show the economics profession’s consensus on the subject from an impersonal position. I explained to them that any economics textbook from any author from any country in the world used in any university would say the same thing: “If you put the price of labor above its equilibrium (a minimum wage), it will produce a disequilibrium (unemployment). You cannot fix the price outside equilibrium and at the same time remain in equilibrium.” Yes, as Ben Powell reminds us, even Paul Krugman agrees on this. By mentioning a worldwide consensus there is no room for ideological or political agendas. It is important to mention that economics is not always about politics. The economic analysis of minimum wages has nothing to do with being a Democrat or a Republican; the political position of each party may differ, but those are not economic analyses, those are political strategies.

The next step was to deal with the issue that if such a consensus exists, why are there mentions of studies showing no harmful effects of increases in minimum wages. This is no mystery either. A well known reason of why an increase in minimum wages does not increase unemployment is because in fact there is no such increase. The politician may say he is increasing the minimum wage, but he does not say that the minimum wage is being located just above the equilibrium level and therefore he is not doing much. Another reason is to look at the effect of a minimum wage increase in a small location where low skilled workers can get another job in the next town without the need to move and therefore they will not show up as unemployed. This is another case of an ineffective increase in minimum wages. Or maybe the minimum wage increases but a benefit goes down. The total compensation to the employee does not change, its composition does.

But can the economist show his claim? Is there more clear evidence that the effects of increasing minimum wages does do harm than the complicated cases where there are no harmful effects? Again, I went geographically large. First, I compared the U.S. with Europe, which has higher minimum wages with respect to the U.S. In Europe you find higher unemployment rates, higher unemployment in the youth population, and also higher long-term unemployment. Second, I brought the case of the U.S. Fair Labor Standard Act of 1938, which fixed the minimum wage at 25 cents per hour. This law included Puerto Rico where the many workers were earning between 3 to 4 cents. Bankruptcies and unemployment skyrocketed. It was in fact unions who asked Congress to make an exception for Puerto Rico, which took two years to consider. For two years people in Puerto Rico were forced to work in the black market or fail to make a minimum income. Want more cases? See here. “See,” the psychologist says, “minimum wages are very dangerous; you can seriously harm yourself. Is that a bet you really want to make?”

Two issues remain to be explained after dealing with these three problems, (1) objection to minimum wage increases is not (necessary) an ideological or political position, (2) studies that deny the effect are doubtful for easy reasons to understand, and (3) if you look at a sample broad enough the economist’s prediction is right there.

First, when an economist objects to an increase in minimum wages it does not mean we do not want wages to go up. We are just saying that a minimum wage increase is not the right way to do it. I wish it were so easy, but the laws of demand and supply inform otherwise. I guess most economists would advocate for minimum wages if their negative effects were not real. Second, explain Milton Friedman’s lesson that a policy is valued by its results, not by its intentions. The economist objects because of the unintended effects of fixing the price of labor outside equilibrium, not because we wouldn’t like to see real wages increasing.