Where do wages come from?

We've all heard the imaginative tales innocent children will concoct when they try to figure out where babies come from. Does the mother's belly open like a breadbox to deposit the child when it's ready? Do storks or pixies or ancestral spirits bring the child from another realm? Kids don't know so they make up the best answer they can, despite lacking important information.

That's a perfect parallel to what happens when many adults try to explain where wages come from. There are oodles of stories surfacing about how workers of major corporations often collect some kind of government assistance, and they make the claim that the company is costing the government money because its wages aren't high enough.

Here's a typical example, with its description of Domino's:

Domino’s has more than doubled its net income since 2008, when the company posted $54 million in earnings. Many of Domino's employees are likely enrolled in government programs. According to [the National Employment Law Project], the company could have raised employee wages rather than spend that money expanding aggressively overseas and investing heavily in technology aimed at easing the ordering and delivery process. The stock has surged over the last five years with the share price up more than 900%. Meanwhile, the compensation of J. Patrick Doyle, Domino’s CEO since 2010, amounted to more than $6 million in 2011 and more than $9 million in 2012.

Somewhere in America, a writer thinks that wages come from the stork.

How else could you explain this reckless assumption that Domino's would have dumped its investment money onto its low-skilled employees? To the economically-ignorant, wages are a gift employers give to employees because they are nice. To those with economic understanding, wages are determined by the market and will reach the dollar amount required to attract a competent workforce

I was a Domino's driver in college and it was best money I had made at that time. It paid more than the small businesses and large corporations I had worked at before. It also took little skill and there were tons of people qualified to do the same job. If wages were raised, I doubt I would have been able to keep my job, as adults with more work experience would leave their fields and take the positions away from people like me. Without these kinds of low-paying jobs, young workers can not get a break into the workforce.

Noticeably, the article's estimate for what the government gives in assistance to Domino's Workers ($126 million) is more than the companies annual profits ($112 million) and CEO compensation ($9.1 million) combined. The author insists that the company should have avoided expanding their business and making capital investments and instead give cash gifts to employees.

Does this person also believe in unicorns? What a downright idiotic thing to write.

By the way, since the writer is so bitter about the $3 million increase in the CEO's compensation package between 2011 and 2012, why not simply divide it between all the employees. I'm sure that annual increase of $40.58 per employee would go a long way.

Welfare programs that cut off benefits when workers find some work trap people in poverty. If someone has low skills and few offers, they can lose money if they take a job and sacrifice their government benefits. It's a positive thing that these people are working while on government assistance. The alternative these shallow activists seek would lead to higher government assistance costs and more people blocked from working.

By the way, anyone worried that Domino's pizza workers aren't making enough money can try giving a generous tip.


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No, unreasonable wage increases would not have simple results

Forbes Staff Writer Clare O'Connor penned a fundamentally-flawed piece this week trumpeting the claim that a radical wage increase for McDonald's employees would have a minor effect on the price of food.

O'Connor breathlessly repeated the claims of Arnobio Morelix, a research assistant at the University of Kansas School of Business. Despite his listed credentials his thought process reveal him as a non-economist. He claimed that increasing the starting hourly wages of McDonald's employees from $7.25 to $15 would only raise the price of a Big Mac by 68 cents and the price of a dollar menu item by 17 cents.

Here's the man himself speaking:

“Some folks online are complaining they will not pay $2 for their Dollar Menu, but the truth is that even if McDonald’s doubled salaries the price hike would not be 100%,” Morelix said. “I will be happy to pay 17 cents more for my Dollar Menu so that fast food workers can have a living wage, and I believe people deserve to know that price hikes would not be as high as it is often portrayed.”

I'm not an economist either, but I do play one on this blog. Let me spell this out for you. We don't care one bit that you would happily pay 17 cents more for a dollar menu item. You are not McDonald's only customer and other customers would buy less. We call this concept marginalism, where when the cost of something goes up people respond by buying less of it.

This assumes of course that McDonald's doesn't change it's menu to respond to the wage changes. I remember a few years ago when double cheeseburgers were on the dollar menu. Material costs became an issue and McDonald's responded by creating the "McDouble," which is a double cheeseburger with only one piece of cheese.

Because of these losses in sales, McDonald's would become less profitable. This is because of something called deadweight losses, where cost increases change the point of equilibrium. That's a double-whammy for McDonald's, a loss in sales and in profits for each sale.

While Morelix feels good because the workers he's seeing are enjoying a political creation called a "living wage," the laid off workers he's not seeing are having a worse time. That's because when the cost of labor goes up employers respond by buying less of it. You know, like we learned three paragraphs ago. That means more automation of tasks, smaller work crews and more demanding workloads for all employees.

Morelix's analysis isn't just superficial, it's fundamentally flawed. The same time O'Connor's post went up the Huffington Post withdrew a similar piece after the Columbia Journalism Review said it fundamentally misunderstood the composition of McDonald's as a whole and that those cost estimates were only two-thirds of the way there. If current wages doubled it would wipe out nearly all of the company's profits.

That didn't stop lefties from spreading the misinformation to the four corners of the Earth, but isn't that what people do when an outrageous pieces confirms their world view?
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What economists think of the minimum wage

Last month President Barack Obama rekindled political discussions about the impact of increasing the minimum wage. Unfortunately, those discussions draw very little wisdom from academic economists and are instead based on the whims and guesses of the public.

Here's a short history of the economist perspective on the minimum wage. There was a scientific consensus that the minimum wage harms low-skill workers by pricing them out of the labor market. These upstart workers lack soft skills and have trouble competing with experienced workers so their labor is not worth very much to employers. When the government tells employers they have to pay them more than what their labor is worth, some employers will opt to not hire them instead of raising their wages. That hurts the very people the law is supposed to help and most economists opposed it.

That consensus is now gone because of a 1992 study by David Card and Alan B. Krueger in New Jersey that compared fast food employment with and without a minimum wage. The study showed that the workers were able to receive higher wages without losses in employment. The Card and Krueger study has plenty of critics, but it clearly broke the consensus.

Economists are now divided on the issue, with about a third in support of the laws, a little more than a third in opposition and the rest unsure.

The way the issue is framed in the public realm is very different as well. The popular opposition claims that the problem with the minimum wage is that small businesses will be harmed. I'm tempted to dismiss this as a tactical approach, but claiming it harms the poor would seem to be an equally effective tactical approach and comes packaged with academic support. I think the real issue here is columnists and politicians who don't study economics are just spouting whatever pops into their head and sounds reasonable.

I never want to do that. Even though I fully oppose the existence of a minimum wage, for reasons described by Bryan Caplan and Don Boudreaux, honesty requires that I admit my perspective does not have a consensus and the issue is up for debate.

One footnote to that thought: The pro-minimum wage arguments assume the wage is set at a modest rate. If it went up to something absurdly high like $20 an hour then you would have a strong consensus about its harm to employment levels.
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Buy Local myths at Skepticamp

My talk from last October at the New Hampshire Skepticamp event is now online.




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Focus on the consumer, not the merchant

This week I stumbled across two mournful articles about trends that benefit the consumer. The first was about how Amazon.com is gearing up to offer faster deliveries for free, including same-day deliveries, and the second was on how the country is suffering from a "glut" of lobsters that is pinching lobstermens' bottom line

"Glut" being a negative way to describe an abundance.

The Amazon article reveals an interesting twist. Brick and mortar retailers have (falsely) claimed that Amazon's low prices come from online purchases being free of sales taxes, not the massive economies of scale. Now that multiple states have started forcing the company to collect that tax, Amazon isn't restricting its warehouses to tax haven states and will have less distance to cover when it ships from these new locations. The slight price increase for Amazon goods will be offset with faster deliveries.

In all fairness, the lobster story did manage to give a decent amount of focus on a customer who benefits from these lower prices.

While lobstermen wring their hands, consumers are making the most of the low prices. At a busy intersection in South Portland, Maine native Barbara McFarlane parks her car and heads for an early lunch at Docks Seafood restaurant and market.

 "We just love lobster. We're Mainers, and usually we can't afford it," she says. "It's grand to be able to afford it this year." 

I can sympathize with the reporter here. I've had to write multiple stories for different newspapers about how a warm winter didn't allow specific merchants to profit off of customers. I made sure to include some examples of those who benefited from the weather, such as a motorcycle shop and a public works department that saved a lot of taxpayer money in road salt.

Despite some good efforts from the reporters, the headlines their editors gave the pieces were unreasonably negative for two stories about consumer benefits. They were "Lobster Glut, Low Prices Leave Boats High And Dry" and "I Want It Today: How Amazon’s ambitious new push for same-day delivery will destroy local retail."

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How not to defend local food

Fresh from losing a debate with author Pierre Desrochers, loco-vore Jill Richardson has posted an article responding to several arguments she claims he makes. Tellingly, the article provides no link or mention of their interaction two weeks ago.

It's as if she wants the public to see her respond to Desrochers, but not in a venue where they can immediately hear his response.

Some of the arguments she attempts to thwart are straw men. For example, I don't know of anyone who is claiming GDP is the end-all way of measuring progress. There's also some slimy cherry picking. When trying to decide if eggs from free-range chickens are better or worse than conventional ones, she could have cited a USDA study or an experiment conducted by Mother Earth News. The two gave conflicting results, but her article ignores this and just focuses on what she wants to be true.

There's no need to dig further than her fourth point. Like so many failed DIY economists before her, she claims comparative advantage can be rejected and ignored. This is like a creationist rejecting Gregor Mendel's work on genetics as an outdated concept. She wrote:

The idea is simple. If Idaho can produce potatoes cheaper than California can, and California can produce strawberries cheaper than Idaho can, then Idaho should grow all of the potatoes and California should grow all of the strawberries, and they should trade. To some extent, this makes sense. No one is suggesting that Mexico attempt to produce its own maple syrup or that Vermont should try to grow its own pineapple. But relying on large-scale monoculture as suggested by the notion that California should supply the nation with strawberries runs into the need for toxic agrochemicals.

Richardson goes on to hype fears of toxic death from living near large-scale food production. This is more of a wandering response to economies of scale, not comparative advantage.

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The Cycle of Ignorance

One of the great tragedies of the human existence is the way certain problems are defeated at a great cost, only to resurface later, fully rejuvenated and dangerous as ever.

Take the snake oil and patent medicine craze, where hucksters sold phony cures using a variety of tricks and specious reasoning. It went away, but several generations later it has returned under the banner "alternative medicine."

I call this phenomena the cycle of ignorance. People are victimized by some problem, such as a natural disaster or the consequences of a bogus idea, and after much suffering, they learn how to protect themselves. The problem is fixed and everything is fine, but time marches on. Those dark days are forgotten and younger generations who never experienced them fail to protect themselves. The hard-learned lessons are forgotten.

Look at HIV and AIDS rates among the gay community in America. After surviving the gruesome AIDS crisis of the 1980's and early 1990's, gay men embraced condom use and infection rates dropped off quickly. However, the younger generation of gay men never lived through the horror of the AIDS crisis and as a group, have been less careful and have seen a large spike in new cases.

Disproved economic ideas always come back. The central issue of this blog, the "Buy Local" movement, is just a rehash of Mercantalism. That bogus idea never fails to show up as a scheme to boost the economy whenever times are tough.

Price controls made the gas shortage of the 1970's worse and as soon as that generation dies, we can expect to see it considered as a solution again.

The embrace of socialism among even well-educated young people is a horrifying trend, albeit a minor one. We can expect to have Marxist prophets fling themselves in front of crowds for the rest of civilization. Hopefully, the high death count can dissuade people from giving it one more chance.

It appears that unfortunately, real-life experience is a better educator than text and testimonials. How many of the problems we bury today will be dug up by our children, like an unwitting explorer opening the cell door that imprisoned a demon.
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More economics for skeptics

I've made a few attempts in the past to introduce basic economics to skeptics, as it's an important science that painfully misunderstood in the skeptical community.

As such, I was very happy to stumble across this recent episode of Rationally Speaking, the New York City Skeptic's podcast where author Joseph Heath talked about his book "Economics without Illusions."

It starts off a bit worrying, as the subtitle is "Debunking the Myths of Modern Capitalism" and early in the interview Heath said he didn't take economics classes in college because he thought it was a right-wing ideology.

However, he went back as an adult and the evidence lead him to accept capitalism while still identifying as a progressive. The bulk of the book is six myths the right believes about economics and six myths held by the left.

If that wasn't enough, Heath was eager to share Friedrich von Hayek's lesson that the problem with socialism isn't just getting people to work. It's not motivation so much as information, as he puts it. It's a great summary of The Use of Knowledge in Society.

The interview reminded me of a recent Bryan Caplan piece about "substitution" as an explanation for economic illiteracy. Caplan explained that a lot of positions the economically illiterate hold can be understood as an answer to a different, simpler question.

For example, when asked if the minimum wage helps low-skilled workers, they may give an answer to the question "Would I be happy if employers gave low-skilled workers a raise?"

The podcast is worth giving a listen, which implies the book is good as well.
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Occupy Wall Street is like social media

Judging by what I'm observing on Facebook, the Occupy Wall Street movement has gained a lot of popularity with starry eyed 20-something liberals and bitter old progressives. I am now of the opinion this isn't going to just die down like the left's last attempt to replicate the Tea Party with the recent pro-union protests.

But that doesn't mean the protests will actually accomplish anything. Since they made the critical error of having no actual goals, they may be end up wasting their momentum by trying to adopt every vaguely left-wing position and spreading themselves too thin.

All that angry shouting may make the protesters feel energized, but if its not focused it won't actually accomplish anything.

As science-based marketing champion Steve Cuno has said, "Never mistake marketing-related activity for actual marketing." What we have here is social media popularity, where a lot of people may click "like" on a picture of the item your selling, but never actually buy one.
There have been a few sprawling lists of demands from the protest organizers, or people claiming to be in charge. I think the response was so much bigger than anticipated that the anti-capitalists who helped start the protests quickly lost control. Movements like the Tea Party and Earth First! function without central leadership, which makes it difficult to hash out cohesive doctrines.

The demands I have seen emerge are all over the place. There are some I agree with, like ending the war on drugs and Patriot Act, but others are so ignorant I had to check to make sure they weren't a parody. For example:

Demand one: Restoration of the living wage. This demand can only be met by ending "Freetrade" by re-imposing trade tariffs on all imported goods entering the American market to level the playing field for domestic family farming and domestic manufacturing as most nations that are dumping cheap products onto the American market have radical wage and environmental regulation advantages. Another policy that must be instituted is raise the minimum wage to twenty dollars an hr.

Good grief. With so many unattainable, awful demands like this one, any movement that tries to establish them is doomed to failure. This is a complete divorce from economic reality. The ignorant protectionism is then curiously followed with a demand for free and open borders. This is strange, as open borders are essentially free trade for labor.

Along with other demands, the little darlings put a bow on top with the line: "These demands will create so many jobs it will be completely impossible to fill them without an open borders policy."

This is a recipe for unemployment and high prices, not prosperity.

The stupidity of these demands suggests that police have indeed been hitting the protesters in the head with billy clubs. I think if the smart liberals who are jumping on board see some of these ideas like a $20 minimum wage become central to the movement, they will either try to change them or abandon ship.

This movement can only be popular as long as it doesn't try to accomplish anything. If it never narrows down its demands, it will never accomplish anything. If it chooses moderate liberal positions, it will just be swallowed up by the Democratic party. If it chooses the radical demands being floated at this point, membership will drop and the movement will be marginalized.
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Economists as political villians

I've never gotten over how large a role economics plays in politics, and by that I mean, how large a role Do-It-Yourself Economics plays. Essentially, outsiders think they can guess their way to mastery of this strange and counter-intuitive body of knowledge. That explains why there's still a debate on things like free trade, despite the issue being as firmly entrenched among experts as Darwinian evolution.

What really makes my blood boil is when I see these guess-based economists dismissing important economic scientists for political reasons. I see some of my fellow right-wingers talk about John Maynard Keynes as if he was a bumbling fool, and denounce his General Theory. In reality, Keynes was an absolute genius who cast a shadow on the intellect of thinkers as brilliant as Bertrand Russell.

Some lefties have done the same thing with my hero, Milton Friedman. From disrupting his Nobel Prize ceremony to casting him as the villain in political books, lefty hacks have never understood the moral, gentle-natured man Friedman was, or how much good he's done for the world as an intellectual.

It's no secret that I reject Keynesian policies, but that's not the same as rejecting the entirety of Keynesian economics. There are actually two Keynes, as well as two Friedmans: They each had a scientific and political side, and they each made undeniable advances to economic science.

Political commentators may think of Keynesians and Friedmanites as warring parties, but actual economists like Greg Mankiw and Brad Delong are quick to cite both as major influences. Friedman himself spoke highly of Keynes and had no qualms about borrowing ideas from him.

I do want to caution that I do not extend the same courtesy to Karl Marx, who I insist was the Trofim Lysenko of economics. He did not contribute anything meaningful to economics and his influence has lead to inexcusable calamity. He made direct calls for violence and there's a reason his modern followers are on the fringe.

Economists are scientists, looking to learn more about the clockwork of our beautiful world. Sometimes their scientific conclusions lead them to support or oppose specific policies, and it's troubling to hear people claim that is a recipe for villainy. I do not accept all of Keynes's conclusions, but I would never go so far as to lump him in with the likes of Darth Vader, Adolf Hitler or Karl Marx.

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