Adumbration

One of the expressions I found to be memorable among the words of Harry Browne is "monument to vanity", which he used to characterize how politicos of various stripes squander the public purse on buildings, statues, and other fabrications that they hope will outlast their time in office.

Michael Madigan, speaker of the house of the legislature in Illinois, provides a recent illustration of this phenomenon.  The Chicago Tribune reports (3/4/2014) that Madigan and his fellow legislator Monique Davis want to spend $100 million in taxpayer funds to subsidize a library of records from current US President Barack Obama.

It is ironic to build a library to commemorate a President who has set new standards for secrecy while in office.  For other examples, see numbers 22, 25, 26, 42, 65, 67, 77, and others in this listing of abuses.

The etymology of "privilege" is helpful to consider as a framework for political economy - privus+lex = private law, "a special right, advantage, or immunity granted or available only to a particular person or group of people" (thanks, Mr. Google).   One of the precepts of fairness that I value is equal treatment before the law, so when the law provides for privilege then I start to raise objections.  A pity it is not more difficult to find examples, but sometimes there are layers of privilege that cloud the issue.

The Seattle Times reported on legislation recently passed in Washington that seems to put the Tesla motor company in a favored position ("Legislature acts to allow Tesla to sell cars directly"), with the writer Ashley Stewart aiming in the first sentence to make the connection explicit

"Tesla can continue to sell cars directly to customers under amended bills passed in the state House and Senate, but it will be the only car manufacturer with that privilege."

To be clear, this new legislation does seem to put the Tesla company in a favored position as compared to other automobile companies, both current and possible future upstarts, because it allows for more alternatives to be arranged in the purchase and sale agreements made between Tesla Motors and their potential customers.  The new rules don't forbid a dealership model such as used by other car companies, so that option remains available to Tesla in addition to the direct sales approach.

To ask why it is that other car companies are not allowed to sell their product directly to consumers starts to expose how the layers of rules obscure who is really in the privileged position.  For decades in Washington and elsewhere, the State legislature has made it illegal for car companies to sell directly to the public, has forbidden the option of consumers to negotiate directly with those producers to arrange the most advantageous deal that suits their needs and pocketbook.  Instead, car buyers across the country have no other option than to make those deals through the middleman represented by local dealerships.  

From here it is not difficult to recognize that those dealerships are the ones given the privilege.  They are the ones with the local political connections who legislate guaranteed business arrangements in direct conflict with the interests of the consumer.  The politicos claim to protect the poor car buyer from rapacious auto manufacturers, but this is a smokescreen to their collusion with local business owners to restrict competition and keep prices higher than they would otherwise be. 

The situation becomes even more obvious when considering whether legislation prohibits consumers of other goods from making purchase directly from the producer - public choice theory and practical observation tells us this happens whereever people think they have a political advantage, but auto dealers are clearly among those given a unique advantage against consumers and other businesses.

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The politically supported adversarial relationship between dealers and manufacturers had a part in the recent failure of GM and Chrysler, because those state laws also restrict the ability to close down unprofitable car lines.  The dealership sales campaigns are also weirdly convoluted, as described in narrative by This American Life of the challenges in making monthly quotas for a typical dealership, and through this interview by Russ Roberts with the sales manager of a dealership where he recently purchased a car.

Oh, no - "Obama threatens Karzai with total Afghanistan troop withdrawal over security deal delay" - comes a report from Australia, echoed by the AFP here.

Please, please please Mr Karzai, save the people of the United States from continuing this interference - keep up the delays over a security deal.  You are better off without US politicos and generals commanding the manner in which you attempt to reconcile the differences in your own population.  Get those US troops out of Afghanistan as quickly as you can, be as intransigent as you must.

Somehow the US will survive without the loss of life, loss of treasure, and the increased hatred directed at Americans that has resulted from our misguided attempt to fix the society in which you live.

Maybe an alternative of free trade, without entangling alliances, will promote the gradual restoration of peace and prosperity for all of us.

It seems that Mr. Nick Hanauer is not the only person to take lightly the prospects of condemning people with the least level of skills and abilities to permanent unemployment.  The Seattle Times reports that U.S. Senator Patty Murray and WA legislature Representative Suzan DelBene, national and state level politicos who nominally represent some portion of the people of Washington, feel similarly (“Murray, DelBene unfazed by predicted job losses from minimum-wage boost”)

To be clear, this is not just one or two people facing this, but 500,000 Americans who will likely lose their jobs due to raising the Federal minimum wage to $10.10/hour, bearing the brunt of the trade-off in welfare that the likes of Hanauer, Murray, DelBene, and many others consider within their purview to make.

That goes for “Martina Phelps, a 22-year-old McDonald’s employee from Skyway, [who] said a raise would help her be able to afford to go back to school”, cited by Jim Brunner in the ST story.  Sure, it might help her go back to school - if it doesn’t put her and hundreds of thousands of other people like her completely out of work in the mean time.

The prospect of increasing the minimum wage is ripe for exploitation by more people than politicians pandering to the economically illiterate.  It sounds so good to be in favor of making the poor better off - anyone who disagrees can be painted as a callous troglodyte, while the proponents can wrap themselves in high-sounding rhetoric.  But with all the self-righteousness claimed by the promoters comes the self-interest of people who want to protect their established businesses from upstart competition, people who want to make their competitors face an added burden, and politicos willing to play each against the others for the favor of campaign contributions and another few years pulling the strings.  This dimension is illustrated by the remarks quoted from ice cream store owner Molly Moon Neitzel - she "is worried the Seattle effort might hurt small businesses like hers.  But as for corporate chains – no problem. “McDonald’s could do it tomorrow” - as if businesses at all levels are not constantly faced with the challenge of delivering a product to consumers at a price they think to be a value, as if McDonald's is immune to the pressures that will drive fewer employees, greater work load on remaining employees to compensate for the higher wages, increasing automation, and other means of cost reductions.

The prospect of job losses due to increasing the minimum wage seems all the more likely in Seattle, where the debate surrounds a substantially greater increase in the minimum wage - to $15/hour, a level that has already been imposed in the neighboring Sea-Tac community (“$15 wage floor slowly takes hold in SeaTac”).  While that level has been imposed for only a few weeks, the anecdotes are illustrative of what we would expect - here are a few reported in the ST article by Amy Martinez:

“At the Clarion Hotel off International Boulevard, a sit-down restaurant has been shuttered, though it might soon be replaced by a less-labor-intensive cafe"

hmmm...  shuttered... maybe to be replaced by a business that operates with fewer employees.  How much more clear can the connection be illustrated?  Well, don't worry, because ...

"The nearby Cedarbrook Lodge, by contrast, is undergoing a $16 million expansion."

What happens with Cedarbrook Lodge employment remains to be seen, of course, but we might start by observing that forcing that other business to close reduces the competition faced by CL and the other businesses that manage to stay open.  Another aspect to this is how many businesses will deliberately stay small to avoid the burden of the minimum wage, futher reducing competition.  A third consideration is that expansion is not necessarily one to employ more people, let alone enough to make up for the losses from other businesses.  Another possibility is that "expansion" is targeting a more upscale clientele, for whom the level of service might demand the services of people who can already demand wages above the legal minimum.

"Other businesses have adjusted in ways that run the gamut from putting more work in the hands of managers, to instituting a small “living-wage surcharge” for a daily parking space near the airport. ... The new surcharge of 50 cents a day at MasterPark in SeaTac is an attempt to recoup some costs of the $15 minimum wage, said managing partner Roger McCracken.  He said he also is considering cuts to MasterPark’s advertising budget, but he called layoffs “foolish” and rejected the notion that cashiers soon would be replaced by automation.”

In other words, the nature of the work and compensation will be changing for people to remain employed at the higher rates.  Benefits that used to be provided as part of the employment arrangement will now be an expense levied on the employees.  People at all levels of the organization will be working harder.  Related businesses that provide accessory services in the overall structure of production will have reduced demand, putting pressure on their profitability and consequently employment.

"Meanwhile, workers are flocking to SeaTac to apply for minimum-wage jobs, and recipients of the mandatory pay raise say they’re enjoying the freedom of having extra money to spend or save."

No doubt they are, except for the people who have already lost their jobs.  The people who lose their jobs in the coming months will less clearly see the connection.  Those who are never hired at all will just be lost.  My pessimistic streak makes me think that the responsible people - Nick Hanauer, Patty Murray, Suzan DelBene, and their ilk - will deflect their responsibility for this disaster and be off on a new crusade to make it all better with a new pronouncement to restrict how the rest of us make our way in this world.

Last summer I wrote briefly on the minimum wage in the context of my critique of a few of the candidates for Mayor of Seattle in the 2013 local election season.  The minimum wage continues to make the national news (such as this Planet Money podcast, and as the UPI reports here), and appears recently in The Seattle Times report by Jim Brunner ("Seattle 1-percenter a leader in push for $15 minimum wage", 2/15/2014). 

Brunner's report focuses on the person of Nick Hanauer, someone who managed to take earnings from his family business and make a few bucks through shrewd investments in Amazon and other companies.  With a lot of money and some time to spare, Hanauer has engaged in politics, writing and public speaking in favor of increasing the minimum wage.  I am taking this opportunity to raise some questions about the few points Hanauer makes surrounding the economics of such a change.

To begin with is this remark from the story:

Hanauer: “Prosperity isn’t something that squirts out of rich people.” It’s a result of policies that boost the wages of average workers.

The wage level is a very limited perspective on the nature of prosperity, and simply wrong to the extent that such a statement ignores purchasing power of those wages.  Prosperity is measured in terms of value of those wages as compared to real goods and services actually available for consumption.  We could have extremely high dollar wages, but our level of prosperity reduces to the extent that the value of the dollar falls in respect to our consumption demands. Prosperity is not wages - in our search for goods and services to satisfy our individual wants and desires, we are made better off to obtain more with less, to get more value for our dollars.  Where public policy is concerned, the advancement of prosperity should be concerned with removing obstacles to production. 

Hanauer made his name in the family pillow business before striking it rich as an early investor in Amazon. Now more interested in public policy than making money, he spends much of his time researching, writing and talking about income inequality. And his ideas have penetrated deep into Democratic politics.  “This is my world, I know a lot of these folks,” Hanauer said in an appearance on MSNBC last week. “These are borderline sociopathic people, and they don’t care about other people and they have no empathy.”

I don't know the people he is referring to , but hope Hanauer does not extend that uncharitable characterization to everyone who disagrees with him.  Too bad that the minimum wage policy that he promotes condemns the least well off segment of the population to permanent unemployment.

The idea even horrifies the CEO of Hanauer’s family pillow business.  “If someone were to force me to move the base wage in our manufacturing organizations to $15 an hour, we will be out of business in six months. Period,” said Joe Crawford, CEO of Seattle-based Pacific Coast Feather. ... Critics of raising the minimum wage — even his own CEO — fail to see the big picture, Hanauer says. If all workers receive higher wages, they’ll have more money to spend — and they’d spend some of it on pillows. A federal $15-an-hour minimum wage would lead to $450 billion in additional consumer spending a year, he estimates.

Hanauer is guilty here of the broken window fallacy - the idea that the community is better off when property is destroyed because it triggers a series of productive activities to restore the damage, which fails to recognize the alternative efforts which would have been performed in the absence of the original loss.  His statement also reveals that even reasonably smart people can fail to appreciate the unseen behaviors of their neighbors and fellow citizens. 

An increase in production costs results when the state imposes a minimum wage.  That increase is seen by consumers, some of whom will hold back from acquiring the more expensive good; those people are less well off, because their preferences are not being satisfied as effectively.  Those who continue to purchase at the now-higher price level thereby have less money remaining to spend on other things that they also desire.  Both conditions lead to reduction in demand, less production and correspondingly a less well off community.   

The low wage workers, people who are nominally targeted to an improved state, are also made worse off by the higher prices because they have less disposable income.  A defining feature of the industrial revolution, which continues to this day, is the notion of mass production - production for the masses.  Textile mills in the 19th Century weren't providing lace and silks for the landed gentry, they were making inexpensive fabrics available for putting clothes on the backs of everyone.  The mass of production is what makes goods inexpensive and broadly available to all segments of the population, which effect has been to raise the standard of living of even the poorest of us to levels never dreamed of in generations past.   Making increasingly efficient use of all the factors of production - capital, land, and labor - in all areas of our society, is the cause behind that advancing living standard.

Consumers in all economic classes are not the only people who are hurt by such policy - the load bears directly and heavily on those people who's knowledge, skills, and abilities and not sufficient to trade their potential contribution to the goods and services that consumers find of value at the prices offered.  Those people lose their jobs, or are not offered any work in the first place, and are condemned to poverty or to living on the dole, when at a lower wage they could be making a valuable contribution.

When pressed, Hanauer acknowledges that quickly raising the minimum wage that high could be problematic for some companies. That’s why the task force he’s part of is considering phasing in the wage in Seattle and adding exemptions for small businesses.  “Do we want to live in a society where people work full time and still have to get government assistance and go on food stamps? Do we want to live in a society that is economically optimized for places like McDonald’s and Wal-Mart?” Hanauer said.  Forcing higher wages might harm such companies, he said. “But I would respectfully suggest that if you have a business model that can’t survive without paying people poverty wages, maybe you should go out of business.”  Besides, Hanauer noted that taxpayers wind up subsidizing low-wage workers who qualify for food stamps and other government aid.

Phasing in the minimum wage is a convenient approach to hide the job losses that ensue from increasing the wage.  Businesses will take time to adapt to the new conditions, but they will find lower priced alternatives or reduce production to a level sustainable at a higher price point, and hope to retain sufficient customers to remain in business.  They will reduce employment, or employ greater automation to replace the services formerly provided by those low skilled workers.  The phase in time just gives those businesses time to adjust.

The small business exemption is just another way to keep the little guy small and out of the hair of larger companies, as growing beyond the threshold introduces penalties that larger companies may be more able to tolerate.  It also reveals a cynical perspective on the whole issue, because if the motivation for raising the minimum wage is some perspective on "fairness", it suddenly becomes less unfair for small business owners to pay lower wages.   But there is no economic rule that proclaims only small businesses are operating on thin margins, for whom even small cost increases in critical factors of production can mean the difference between profit and loss, success and failure, a thriving business or a closed up shop window. 

The remark to "go out of business" casts him in a self-righteous but cavalier light;  evidently, Nick Hanauer doesn't care that the alternative to working at minimum wage is no work at all, no production for the benefit of the community, and reduced living standards for everyone.

Too bad Hanauer doesn't take his vast wealth and ability as "one of the world’s best strategists" to think through a few more of the downstream implications of the minimum wage.  Instead it seems like he has a vision, and the world will just have to conform.

To be clear, I appreciate the desirability to replace the SR-99 viaduct through Seattle.  I used to drive that route every day, and more than once considered the prospects of an earthquake flattening me and my little car.  A tunnel may very well have been the most cost effective and efficient solution. 

But it is naive to expect such projects work perfectly  - last month they finally determined that the obstacle blocking Bertha for the preceding weeks was a steel pipe left in the path by a prior survey crew of the same organization.   Complex development projects are not limited to just a single issue that crops up which no one could foresee.

In the latest installment, one of the things we might recall about this situation is that when a private entity faces some setback, or the need to recover from some blunder, the rest of us can watch from the sidelines with bemusement or intellectual curiosity. 

On the other hand, when the people in governments take on such projects, the waste of time and resources becomes a personal affront to everyone those people claim to represent.

It's easy in such situations to engage in recrimination - they should have done this, or that, or the other thing, instead of what they did end up doing that led to the current disaster.  But those are only symptoms. Symptoms of a mindset that believes that a common good can be achieved by giving a small group of people tremendous power to impose on everyone else one particular answer to that common good.

One doesn't spend a year in equatorial West Africa as a youth without retaining some interest in what happens in the third world.  The words "basket case" frequently come to mind when I consider the struggle of people in Africa to overcome the impositions of colonial oppression, only to face subsequent decades of official corruption, varying degrees of socialism creating obstacles to sustainable development, and outright destruction and mass murder - internal conflicts with seeds arising from colonial divisions that bore little relation to the bounds of existing cultures.

With an interest in improving conditions in Africa, and more than a little skepticism as to the net benefit accrued by what passes for foreign aid from the US government, Heifer International has been on my charity list for a while.  What appeals to me about their approach is the apparent practicality of converting my dollars into livestock and bees and other things that people in impoverished rural communities can put to direct use to improve their quality of life - starting a sustaining production that serves their family and which excess is available for sale in their community.  A superior approach than trying to build a "school", which may turn into concrete and a roof, but less actual education*.

Some time back, I became aware of an institution that is taking a unique approach to making charitable contributions in the third world.  Give Directly gives cash with no strings attached, with the expectation that the recipients use it to pursue their own goals and priorities.  This approach has some appeal to my observations on other parts of this world - who better than the principles to know what it is they need to improve their situation.  While a cow might suit some people, a new roof will better fit the needs of others, and a small motorcycle could make possible a small taxi or delivery business for someone else.  Additionally are savings in administration; rather than needing a large staff of trainers and monitors and purchasers and what-have-you, the Give Directly approach just needs to identify recipients and find a reliable and safe way to send them money.

I am something of a promoter of voluntary exchange, not completely for reasons that those are the most likely means to gradually improve the general welfare.  The alternative, imposition by third parties on the terms and conditions of how we conduct our daily lives, tend to undesirable consequences if our objective is to improve the lot of ourselves and fellow human beings.  Aside from that practical consideration, I find objectionable the notion that it is morally acceptable for third parties to impose such terms on what are otherwise freely determined arrangements among the rest of us.

The Give Directly approach has some appeal to my predilections to bottoms-up modes of social organization, but is there any evidence that it does any good? - can the recipients really be trusted to use the windfall for something we perceive to be of value? or will they waste it on wine, women, and song?  Another question of perhaps greater importance - is their approach more effective than that of charities that will give almost anything except cash grants?  The treatment of those questions by the team at Give Directly is what made me pick them for recent contributions - they appear to be sincerely interested in answering those questions, and have been collecting data into what actually works to improve the conditions of people in the third world.

Here is a story from This American Life and a related story from Planet Money that discuss some of the features and challenges of the Give Directly program, with some comparisons to Heifer International.

* - For a deeper discussion of the what counts for education policy in the third world, see this discussion on econtalk with Lant Pritchett - schooling ain't learning.

The situation of US-Iran foreign relations has fallen from the top levels of the daily news (another installment of fiscal "crisis" has taken that position recently), so maybe there is opportunity to shed a little light of historical perspective on the subject.

The Financial Times offers a summary of the situation on this day, which mostly focuses on what terms can be arranged for treatment of nuclear materials. The FT summarizes what the New York Times refers to as the "bad cop" in the equation.

The House of Representatives has already passed a new round of swingeing sanctions on Iranian oil exports. A Senate aide said that if the administration could not demonstrate progress in the talks by the end of the month, the Senate would probably begin discussions about the new sanctions bill.

[for you non-English speakers of English, swingeing translates in Merriam-Webster as "very large and difficult to deal with, very critical or severe"]

So as the world waits to see whether we might ever achieve some form of normalized relations with Iran, let alone whether handling of chemical weapons will lead to forces of the United States will be ordered into another middle east war in Syria (a land with a huge set of other problems we should be very cautious about trying to resolve), The Seattle Post-Intelligencer proffers a summary of US government foreign relations with the governments of Iran.  

While the history of that region stretches to the beginnings of recorded civilization, the last century seems particularly tumultuous.  Here is how the PI (via AP) describes the CIA-led coup in the immediate post-WW2 period that kicked off a period of confrontation and intervention in Iran that has lasted ever since.  

The aftermath of World War II and the advent of the Cold War make Iran a U.S. policy focus for the first time. Washington sees the country as a bulwark against Soviet expansion and a source of stability in the oil-rich Persian Gulf. It cultivates a friendly relationship with Shah Mohammad Reza Pahlavi. The partnership is threatened with the 1951 appointment of Prime Minister Mohamed Mossadegh, who moves to nationalize Iran's oil industry. A CIA-backed coup ousts Mossadegh in 1953. The shah returns from his brief exile and resumes control.

A few sentences don't make a complete history, but it is still interesting how the early interest in "a bulwark against Soviet expansion and a source of stability in the oil-rich Persian Gulf" transforms to hostility when the Iranian Prime Minister "moves to nationalize Iran's oil industry".

While I have fundamental objections to the state confiscating private property, I'd have to guess that the ownership of those assets was clouded by preceding history of British, Russian, and French colonialism that pervaded the entire Middle East region in decades preceding those years.  A privatization scheme that gave equal shares to everyone who lived there might have been a more fair reconciliation of prior issues with ownership.  Otherwise, while nationalized control of the oil under Iran would have likely led to great corruption and inefficiencies, the value of those resources would have driven whoever controlled it to continue production and sale around the world.  Furthermore, the oil industry was then as now is a global affair, with production and processing that takes place in a great many locations, so even reduced access from a location like Iran would have been a blip in the broad perspective of the market, similar to ones we have seen many times in the years hence. 

Some people might object that US foreign policy was being driven by concern that Iran would fall under the sway and become a satellite of the USSR.  That presumption is far from certain, given that the murderous approach of communism was visible even then, and must have been far more visible to people in the region who met with refugees from the destruction of civil society that was taking place with Russian dominance of ethnic minorities across the USSR.  While that would be a sorry turn for the Iranian people, I imagine that their dislike of that yoke would have turned to revolution in far less time than it took them to rise up against the Shah. 

But the prospects of such a turn of events was hardly an existential threat to the United States.  The threat to the United States of the former Soviet Union turned out to be the huge number of atomic weapons which existence continues to put the population of the world at risk of mass destruction.  So I question the idea that we needed to control Middle East leaders to serve as a bulwark against Soviet expansion.  The Soviet system was unsustainable from the start, and at the end of WW2 they were faced with having lost a tenth of their population due to the war, while their insane social and economic policy was leading to mass starvation.  To stave off complete bankruptcy they looted the parts of Eastern Europe that they controlled consequent to US President Truman allowing that sphere of influence at the Yalta conference in 1945.  Even in those regions nominally controlled by the Soviets, the local people were fomenting unrest (reference Hungary and Czechoslovakia); in other areas, the Soviets were further impoverishing themselves by sending huge amount of resources to subsidize the communist leaders (e.g. in Cuba).

Back to the actual history, unrest and discontent in Iran with the US-backed Shah bubbled for years leading to the revolution in 1979.  This so infuriated US political leaders that they chose to support Iraqi President Saddam Hussein during the eight-year war between Iran and Iraq. 

The rest of that history is so mired in tragedy that I will conclude to say that it is ironic, tragic, and an unfortunately familiar story of the backfiring of US Middle East policy - fomenting and initiating conflict that (surprise!) leads to more conflict. 

The Guardian calls my attention to another figure in the international police establishment coming out in favor of major reform to the prohibition of drugs.  Here is how they describe Mike Barton, currently the chief constable of the community of Durham in the UK:

"Barton is one of the north of England's most experienced crimefighters and has pioneered initiatives to break up criminal networks in County Durham via his force's "Operation Sledgehammer". He also holds the national intelligence portfolio for the Association of Chief Police Officers across the UK. Under his watch as assistant chief constable of Durham prior to his appointment to the top post earlier this year, there was a recorded 14% drop in total crime figures for his region."

Barton wrote a column published Saturday in The Guardian's Observer that lays out his case, including the following arguments that will sound familiar to those of us on the side of a rational drug policy:

"If you started to give a heroin addict the drug therapeutically, then we would not have the scourge of hepatitis C and Aids spreading among needle users, for instance. I am calling for a controlled environment, not a free-for-all."

"In my force area we have 43 organised crime groups on our radar. Most have their primary source of income in illicit drug supply, all of them are involved in some way. These criminals are often local heroes and role models for young people who covet their wealth. Decriminalising their commodity will immediately cut off their income stream and destroy their power"

Perhaps the UK will be the next European country to take concrete steps to banish the scourge of drug war paranoia, following steps taken 13 years ago in Portugal.

Reuter's reports that US politicos in the Obama administration are stating that a diplomatic solution in Syria might take some time.

"A day after President Barack Obama urged Americans to support his call for military strikes if diplomacy failed, officials warned of a long process ahead."

Hmmm.  Imagine that.

"The State Department said those talks would last two days or more."

Wow.  Two whole days. 

Considering that the meddling approach of US foreign policy has been under way since the 1950's and hasn't brought peace and stability, I wouldn't be surprised if a diplomatic approach to cleaning up the mess might take equally as long.

I'm willing to give it 60 years before once more going to war in the Middle East.