The Angry Economist

"My" (I certainly didn't vote for her; just because lots of other people did, that doesn't create any ownership for me over her) State Senator Hillary Rodham Clinton writes:

While the bill focuses on transportation, Mrs. Clinton is selling it as economic stimulation. Every $1 billion in highway construction creates 46,500 jobs, she said. "This is a jobs bill."

Her statement is true and false. She is correct in saying that it's a jobs bill. She is incorrect in saying that when the government spends money, that creates jobs. In fact, it's likely that it destroys jobs. The money that the government spends didn't come from nowhere. It came from taxpayers, who now have less to spend on whatever they wanted to buy. Those purchases would have created jobs as well, and everyone would have gotten what they wanted most. Instead, if a highway is constructed, some people will get what they want, and some people will not.

If you want to have a high Economist Intelligence Quotient (EIQ), you have to avoid these pedestrian errors. When you get really basic things like this wrong, as Hillary did, then you're starting from zero, as she is.

Andy Oram, who ought to know better, since he isn't a fool or loon, posits that Universal Service is a good thing. After all, he says, many other things are subsidized to good effect -- why shouldn't telecommunications be subsidized? As a perfect example of why subsidies are wrong from the start, look at the subsidized bus service between Plattsburg and Watertown (NY). Riders pay $10.30 to ride from Canton to Watertown, and $15.90 from Canton to Plattsburg, but the ride costs $115.

I think that, as penance, Andy should have to ride the bus himself, and whenever somebody tries to get on it, offers them a check for $115 if they'll find another way to get there. Anybody think he won't get any takers? Think anybody will refuse?

That's not his only mistake. He praises the E-Rate program (in spite of its flaws) saying "Tens of thousands of institutions have received Internet access thanks to the fund." He is making the classic non-economist mistake of only seeing what exists, what has happened, what has occurred. Give yourself ten points if you immediately saw the flaw in his reasoning. Economists realize that everything is a trade-off. If you do one thing, you don't get to do another thing. So, no action can be evaluated by itself. It must be evaluated in the light of what else could have happened. "What would have happened with those E-Rate dollars?" is the question Andy failed to ask.

Orson Scott Card is nominally a writer of Science Fiction. In his recent essay covering Optimism, Pessimism, War, and Oil, he gets the economics wrong. He insists that government has a magic wand which it can wave to create the next source of energy beyond oil. He wants government to wave that magic wand.

Orson needs to get a clue. Every time the government waves its magic wand, it's a swing-and-a-miss. Look at canals. Not a one of 'em made money except for the Erie, and it only made money if you assume that the capital that went into it had no better use. Look at railroads. The ones that the government subsidized didn't make money, and the ones that it didn't need to subsidize did.

Orson has several suggestions for what people should do. The major point that he's missing is the time value of oil. He suggests that we should preserve it for the future, because it will be more valuable then. If he was right, then people who have oil in the ground would be happy to leave it there in anticipation of a higher price later. They don't do that, though. Instead, they sell it. They sell it because they expect that oil, like every other commodity, will be cheaper and more available in the future.

Orson might be right. The people who stand to make a lot of money if he's right are doing the exact opposite of what he suggests. I think, therefore, that it's most likely that he's mostly wrong.

Update: Oleg Dulin comments, wondering how future value can be brought into the present. Ordinarily the way that is done is through property rights and futures contracts. If you own something, and you think it will be worth more tomorrow, you won't sell it today. But what if you need money today? If your property rights are secure, then you can sell a futures contract. You agree to sell something in the future for a price greater than the current price, but less than what you actually think it will sell for then. You accept the payment today, and transfer ownership tomorrow.

The problem that Oleg doesn't anticipate is: what if your property rights are not secure? What if you are the corrupt ruler of an oil sheikdom, and are shaking your country down for the oil? You can still sell a futures contract. It currently discounts the price as described above. The discount is increased by the unlikelihood that your country will actually transfer the oil after you have transferred the profits to your Swiss bank account.

Before you get too smug about those corrupt oil sheikdoms, consider that the same mechanism applies in an elective democracy, in spades. When a politician is elected for only four years, he has no guarantee that he will continue to have the same power beyond the election. Elected politicians cannot afford to waste time taking advantage of their power. An oil sheik can reasonably rip off his country for the rest of his natural life, and so can afford to take the long-term view.

Both Brad DeLong and Steven Landesburg get the minimum wage argument wrong (thanks to Tyler Cowen for pointing me to them. Don Bordreaux has also blogged on it recently.). The theory predicts that a minimum wage will destroy jobs. You sell the most of something when you're free to set your own price. If somebody forces you to set it higher or lower, you'll sell less or more than you would like. If somebody forces you to sell your labor for a higher price than you'd like, you'll sell less of your labor. This isn't Economics 101, it's Economics 001. If it's not true, all economists go home and cry into our beer because our work is all completely wrong. In order to arrive at a conclusion that goes against the theory, you need very good empirical data. If you want to prove that light can travel faster than the speed of light, you need very good evidence. That data doesn't exist.

The data is in fact crummy given the size of the increases in the minimum wage. First, the minimum wage intentionally affects very few workers. Second, the minimum wage is only increased after it isn't really necessary. Third, you can count the people who got more money, but you can't count the people who lost their jobs.

I took a course in statistics when I worked in production engineering at Hewlett-Packard. They emphasized several points. In order to get good data, you can't just monitor your processes. You have to run experiments at the limits of your processes. You have to replicate to reduce experimental error. You have to randomize to eliminate changes over time.

So, in order to answer the minimum wage question, you can't just increase the minimum wage by a few cents and then go measure everything you possibly can measure. You have to both completely eliminate it, and double it. You have to do it for two randomly-selected populations. Nobody wants to run that experiment. Everybody knows what would happen if the minimum wage was doubled: Huge numbers of people would lose their jobs. That's exactly what happened in Haiti in the 1930's when a continental US minimum wage law accidentally applied to Haiti. So, really, everybody who refuses to run the experiment has the answer firmly in their head; it's just in their heart that they refuse to acknowledge it.

Sigh. Tom Blackburn is right and wrong, but mostly wrong in his column on the minimum-wage debate. He spends two thirds of his column summarizing the debate among economists, which is a waste of time. Only incompetent economists fail to acknowledge that the minimum wage creates unemployment to the extent that it actually raises wages above the market-clearing price. He does this in order to conclude that the argument for the minimum wage is moral, not economic. The thing is, he's right, it is a moral argument!

Economists do not make moral judgements. They tell you what will happen as a result of an action that you choose. It is up to you to decide whether those actions will be moral. Tom is trying to say that he can ignore economics when it comes to making his moral judgement. He has found economists who disagree with the truth of the matter. This is necessary for him, because Tom's morals require that paying a minimum wage only be a cost to businesses. If he was to respect good economics, he would have to conclude that the minimum wages are immoral. How can it be moral to help some low-paid workers at the cost of hurting lower-paid workers by causing them to be unemployable?