The “New” Monopsony Argument and the Suppression of Wages

A recent issue of The Economist had an article on monopsony and the “non-compete“ agreements that some lower-paid fast-food chain workers have had to sign as a condition of employment. On the whole, The Economist doesn’t like this because it supposedly holds down wages. The Economist is not alone in thinking this. Even noted economists Jason Furman and Alan Krueger have said in The Wall Street Journal: “There is no reason why employers would require fast-food workers and retail salespeople to sign a noncompete clause—other than to restrict competition and weaken worker bargaining power.” What Furman and Krueger are thinking is that these employees have no “trade secrets” to reveal to other firms.

Does this make sense?

The fast-food low wage case has little to do with trade secrets. In this situation the usual argument in favor of such agreements turns on the provision of general human capital. When a firm provides, at a cost, a skill highly specific to its own operations it need not worry that employees will leave and use that skill elsewhere. It cannot be so used. On the other hand, if the firm provides general training that can be used elsewhere it faces a problem. It incurred a cost to provide the skill but then, having acquired it, the employee offers his services elsewhere at a premium. She can do so because she is better equipped to hold the job than others who need costly training.

Is this then evidence that a non-compete agreement holds wages down? Hardly. If this becomes the usual case, the employer will not have the incentive to train the worker or, if he did train the worker, he would have an incentive to reduce the wage by the expected lost of value due to the employee leaving. There would then be lower wages than otherwise for the job.  What if the minimum wage prevents this? In that case fewer employees would be hired at the minimum wage. What if the employers really “need” these workers? Then they might hire them at a loss for a while until they can reduce their need for such workers through computerization of the ordering process and other forms of mechanization. This is currently happening in response to rising minimum wages and the reducing costs of labor-substitution.

If fast-food and other such firms were truly monopsonies, then some of these adverse effects would not occur because wages would have been held down in the first place. But are they monopsonies?  I find it difficult to see that. In the first place, the skills the employers are providing are general which means that they can be used in many places. If there weren’t many places to use these skills then the employers would not worry enough to have a non-compete requirement. Secondly, let’s take a closer look at what is being taught. For many teenage and young workers it is simply skills most of us take for granted:  showing up on time, not staying up late the night before drinking or doing drugs, the proverbial learning the value of a dollar and so forth.  Other skills may be related to fast-food preparation, operating equipment and even making sure that the purposes are added up correctly. (We are not dealing, by and large, with rich prep school kids.) There is no monopsony buyer of these basic skills.  The case for employers holding down wages through non-compete agreements has not been made.

Postscript: (1) If schools were doing a better job of inculcating basic life skills perhaps there would be less need for non-compete clauses. (2) The monoposony argument is an old one. I remember this being discussed seriously in the 1960s and in articles dating back to the thirties and forties. At the time is was mainly to buttress pro-labor union positions. The only thing liberal about that was how “liberally” people used that tenuous argument.

Richard Thaler’s Nobel Prize

by Mario Rizzo

Richard Thaler has won the Nobel Prize for initiating the behavioral moment in economics.

My view of the Nobel Prize in economics is much like Time magazine’s view of its “Person of the Year.” It is awarded to the economist who “for better or for worse… has done the most to influence” the course of economic thinking – at least in certain respects. It also, like Time magazine, operates under the constraint that an award must be given every year.

A Crisis in Economics?

by Mario Rizzo

Periodically, people warn about the “crisis in economics.” I have heard about several of these over my professional career. Somehow the mainstream or orthodox economists never seem to notice these crises or take them seriously. They continue doing what they were doing.

Today the crisis, if there is one, is due to behavioral economics. The traditional rationality assumptions of economics are under assault. Why should we care? After all, they were unrealistic in the first place. And yet they did lead us to some definite conclusions about a wide variety of matters regarding economic theory, applied economics, and policy economics. A consensus seemed to be forming that markets, if not efficient in the strong sense, were at least subject to strong corrective pressures. Now the collection of biases we have accumulated makes it seem like a miracle that markets work at all. We must now not only worry about market failure but we must think about “decisionmaking failure.” People cannot be relied upon to pursue their own interests effectively in matters from deciding how many potato chips to eat to whether to join an employer-sponsored retirement savings program. They might also choose the wrong bank account because of fees for add-on services (like overdraft protection) that are not made salient enough. People cannot be simply given information about the dangers of smoking; they must be subject to worse-case scenarios (biased in themselves) to offset other biases that plague decisionmaking. But many biases move in opposite directions. Others cannot be quantified very accurately. More importantly, biases are being sought. Many researchers stop when they have found one or more.

All this is fueled by several factors. Young economists want to make a name for themselves. The most direct way is to overturn some conventional wisdom. Much of that is based on models that assume agent rationality. So now we get results in public economics that if you don’t make sales taxes salient, that is, don’t add the tax on to the price label before checkout, the taxes will not have much of an effect on demand. When you do, demand for the product will fall. (I wonder what happens if tomorrow all price labels for all products include the tax – will the demand to hold money increase and a recession start?) Another factor is the demand for policy measures by politicians who need to keep providing services. If new (behavioral) problems can be found then new solutions can be proposed. This demand and incentive to respond to it must be great because even articles that are primarily theoretical have some discussion of the possible policy relevance of the model. A third factor is the decades-old mindset of fine-tuning. For example, in a world of scores of biases, all sorts of things can go wrong in financial markets. So why not have regulators with a broad mandate to curb systemically problematic behavior? There can be no end to the possible perverse biased behavior that these regulators need to monitor and control. The approach that Milton Friedman and others preferred was to establish clear general rules. Because behavioral biases are so contextual (that is, they come and go depending on the concrete details of the particular case) it is not feasible to rely simply on general rules.

Out of all this comes two problems. First, are they any general lessons we can teach Principles of Economics students or members of the general public? I still think we can teach basic concepts like opportunity cost – unless of course people fall victim to the “sunk costs fallacy” which behavioral economists say they do. Oh well. There must be something… Second, the normative standard of economists has not changed. The ideal is still neoclassically rational behavior. But now that behavior has become so seemingly preposterous that deviations from ideal behavior almost find themselves. Perspective is lost. We wonder how things can ever go right, even though “Paris gets fed.”

I am afraid that the days of the straightforward Economics in One Lesson of Henry Hazlitt or the direct implications of University Economics of Armen Alchian and William Allen are over. You can have almost any set of beliefs about how the economic world operates and have an economic theory to support it.

I do not suggest a solution. None is possible yet because not enough people have faced the problem squarely.

Local versus Broader Equilibrium

This is the final installment of my comments at Liberty Matters in the discussion of Israel Kirzner’s theory of entrepreneurship and its interpretation by Peter Boettke.

Austrian Revival Photos

For those of you with a keen interest in the history of economic thought, especially with regard to the history of the early revival of Austrian economics from the late 1970s, there is a site which has some interesting photos.

Please check out the website for Austrian Economics Re-Examined: The Economics of Time and Ignorance at timeandignorance.com and then go to the media (photos) section.

David Rockefeller as an Economist

David Rockefeller in the late ’30s reading Oscar Morgenstern’s The Limits of Economics 

 

David Rockefeller, grandson of John D. Rockefeller, died recently at the age of 101. He was known for many things. But perhaps the least known of his accomplishments was his dissertation for which he was awarded a Ph.D. in economics from the University of Chicago in 1940. This dissertation was published by the University of Chicago Press as a book in 1941 entitled Unused Resources and Economic Waste. Although the book is hard to find, I was able to secure a copy and read it. I include here the Preface from the book (Rockefeller, Preface).

The book is very heavily influenced by Frank H. Knight. This means that there is much subtlety, self-critical reflection and, above all, caution in the claims made. It also shows the less beneficial influence of Abba P. Lerner insofar as Rockefeller buys the market-socialist idea that under a form of socialism the attributes of pure competition might be approximated. Nevertheless, this idea is of quite minor importance in the book. The topic of the dissertation (and hence the book) was suggested by F.A. Hayek when Rockefeller was at student at the London School of Economics for one year in the mid-1930s.

The book, as the title indicates, is about unused resources and whether or not they constitute waste from an economic perspective. The topic was a major concern during the Great Depression and thereafter. Unfortunately, Rockefeller does not deal with the business cycle issues that may have been foremost in the reader’s mind (both then and today). Nevertheless, there is a good deal of valuable analysis regarding the connection – or lack thereof – between unused resources and waste.
Rockefeller is at great pains to show how unused resources are the outcome of entrepreneurial expectations. Suppose a firm expects demand to rise and then fall over a period of time. It may be quite economical to build a plant that is sufficient to produce for that demand for a number of years and then let it sit idle in whole or in part for a few years after that. Risk can also cause resources to go unused if the planner finds that demand turns out to be too low or costs too high. Uncertainty in the Knightian sense (the absence of clear-cut objective probabilities) can induce a planner to build a plant of great flexibility but at the cost of not being at minimum technological cost for any output. All of this is designed to show that there is no sense in equating unused resources with waste from the point of view of the firm. Certainly this is true in the ex ante sense but also in the ex post if we do not hold entrepreneurs to the standard of perfect foresight.

So what is waste? This is the unrealized net value that could be attained but is not. In the above examples, entrepreneurs do the best they can, so practically speaking, there is no waste. But waste can be engendered by monopoly, legal restraints, political barriers and so forth. Therefore, waste may occur at different levels of analysis and of constraints. What is not waste from the perspective of the firm — say the monopolist producing less than “ideal” output and hence using a smaller physical plant which does not produce at the lowest possible cost for that output —  may yet be waste from the perspective of society. Waste “can only have meaning in connection with environmental conditions which are subject to change by means of conscious human action” (p.226). Waste is the foregoing of value due to a failure to act. Overcoming waste involves changing the current constraints.

But some people have suggested that we to take constraints that produce waste as simple givens.  Rockefeller cautions us, just as his teacher Knight did, not to adopt a deterministic view of the world.

[I]f all of the psychological forces influencing the actions of, say, the entrepreneur were taken into account, as well as the institutional and other environmental conditioning limiting his behavior, the entrepreneur would be powerless to choose any course of action other than the one actually pursued. …But in that case all discussions of purposive action would be meaningless (232)

Thus it is not true that background social and political conditions deterministically give rise to institutions or constraints that produce waste. Entrepreneurs may be able to find more efficient methods of production. Policymakers may be able to reduce or eliminate monopoly power and the consequent social waste. But often this is not accomplished. One fundamental reason is inattentiveness of the entrepreneur or the policymaker.

Waste as it has been defined in this chapter implies unrealized value or satisfaction due to the inattentiveness on the part of the leaders of the group in question [family, firm, political entity] to the interests whose furtherance along established lines was their recognized responsibility (233-34).

Unfortunately, there is not much discussion of this in the book.

The book is dominated by a concern for the role of expectations in creating the appearance, but not the reality, of resource waste. The technologically feasible use of resources is not always the economically feasible. Sometimes not using a resource creates value and sometimes using a resource is wasteful.
There is Austrian content in the book — mostly in the overlap area between Hayek and Knight. But Rockefeller was a Knightian. The book also shows well his competence as an economist. What if he had pursued an academic career? I think he would have made significant contributions. But would that have been a waste from his perspective?

 

 

Boettke is Right and Wrong and Right and maybe Wrong about Kirzner and Entrepreneurship

My latest comments at the LibertyMatters discussion of entrepreneurship is now posted.

Discussion of Israel Kirzner’s Work on Entrepreneurship

Check this out at Liberty Matters.

Lead Essay: Peter J. Boettke, “Israel M. Kirzner on Competitive Behavior, Industrial Structure, and the Entrepreneurial Market Process” [Posted: March 1, 2017]

Responses and Critiques

Mario J. Rizzo, “Kirzner’s Theory of the Market Process” [Posted: March 6, 2017]
Peter G. Klein, “Entrepreneurial Discovery: Who Needs It?” [Posted: March 8, 2017]
Frederic Sautet, “Purposeful Human Action and Entrepreneurship: Kirzner’s Misesian Contribution” [Posted: March 9, 2017]

Best of ThinkMarkets 2008–2016

by Andreas Hoffmann and Mario Rizzo

We had a look at the statistics of the blog when we updated the page.  We learned that ThinkMarkets has published almost 800 blog posts since 2008. Some posts have received a lot more attention than others.

We have selected an all-time TOP 5:

New Look & Social Media Links

Dear readers,

ThinkMarkets was set up in late 2008. It needed a facelift. We hope you like the new mobile-friendly look. You can now follow us on Facebook and Twitter.

Stay tuned for new posts!

Time for Reflection: “The Unity of the People”

This is from more than eight years ago. It was written in response to the Obama campaign and its call for unity. It applies again today to the World of Trump.

ThinkMarkets

by Mario Rizzo

After most presidential elections in recent years there is talk of uniting the country, somehow overcoming differences and working for the betterment of the nation. This is a dangerous idea if it is taken seriously.

View original post 556 more words

Chickens Coming Home to Roost: The Progressive Destruction of Employment Opportunities

By Mario Rizzo

There comes a point where the continual mandating of benefits and restrictions on hiring has big consequences. We can see the handwriting on the wall in Europe as well as in the US. In Europe the young are more and more being left out of the traditional forms of hiring .

A recent article in the Financial Times (August 5, 2015) has a very interesting analysis of the issue. “In a continent known for strong employee protections, more than half of the eurozone’s young workers are in temporary jobs, churning from one short-lived contract to the next.”  And this is in countries with high unemployment rates among the young.

Temporary jobs among the 15 to 24 year-olds (of those who are employed)

Spain: 69.1%

France: 57.0%

Italy: 56.0%

Germany: 53.4%

OECD: 24.1%

UK: 15.2%

Japan: 14.4%

“…[I]n Italy, France, and Spain…fewer than 30 per cent of temporary employees have moved on to permanent jobs three years later.”

These temporary workers are not good candidates for on-the-job training and other employer investments in human capital. In the United States we see an increase in “gig hiring” in those areas of entry restrictions (taxis) and in areas of technological expertise. Some of this in both the US and Europe is, no doubt, desirable to workers from the point of view of freedom to decide one’s hours and so forth.

However, it is one thing to make a decision in an undistorted labor market and another thing to make a decision for this type of employment because mandates have significantly increased the costs of traditional employment. Furthermore, among the groups who have done the most to create this state of affairs – labor unions and so-called progressives – the reaction is quite interesting.  They bemoan the decline of the middle class and the security of the good ole days. And they worry about more and more workers avoiding the “protections” and “benefits” of union and state.

The simplistic line that much of the public has accepted is that we can pile mandate upon mandate, condition upon condition without much effect on labor markets. We can mandate the good things people want. On the other hand, I am not so sure that labor unions really buy this line. After all, their interests lie with incumbent workers, not those who are struggling to get ahead. But ignorance abounds in all quarters.

Gary Stanley Becker (1930-2014): Through My Austrian Window

by Mario Rizzo

It is tempting to over-romanticize a person when he or she is gone. I will strive to be balanced in keeping with how I feel and think about Gary Becker.

I am saddened by his recent death (May 3rd). I have known him since at least 1974 – some forty years. He was not on my dissertation committee but he took a strong interest in and liking to my dissertation on the effect of crime on property values. I audited his version of the first-year sequence in price theory at the University of Chicago. It was, in my view, the best of the three versions I was exposed to. He was a little scary insofar as he lectured and then suddenly would call on a student with a question. Since I was an auditor only, my name did not appear on the class list so I escaped the surprise questioning.

He loved economics and loved to apply it to a wide range of problems. He was no enemy of mathematical economics but thought that theory should be as simple as possible and developed with applications in mind. He was a true follower of Alfred Marshall on this: theory as the engine for the discovery of concrete truth. He was also no “positivist” in methodology. (Some people are quite careless about how they use that term.) He did not think that every statement in economic theory has to be falsifiable or testable. In response to what I believe to be the methodological disaster of behavioral economics, he argued that rationality per se is never testable. What is testable is the complex of assumptions and basic structure of a theory when it is applied to concrete problems. (I add, for those schooled in the philosophy of science, that he invoked the “Duhem-Quine Thesis.” )

He accepted Lionel Robbins’s view that economics is a science of choice generally, and not only a science of market exchange (what used to be called catallactics). In accepting that view he accepted the same perspective on this matter as Ludwig von Mises and the British economist Philip Wicksteed – from both of whom Robbins derived his own view. So there is immediately an undeniable Austrian connection.

Within the past couple of years or so, I wrote to Gary about how I thought his view on “irrational” preferences was similar to those of Philip Wicksteed who, in 1910, argued that irrationalities and inconsistencies of preference tend to be eliminated under the pressure of costs, when in fact those preferences detract from the agent’s attainment of his own goals. He agreed with me, with – in typically Beckerian fashion – the proviso that Wicksteed didn’t have adequate empirical evidence, but Becker did in some of his papers. Okay.

Some Austrians may think that Becker was an enemy of Austrian economics because in 1962 he and Israel Kirzner had a debate in the pages of the Journal of Political Economy. In the fullness of time, I believe that neither of them had a clear view of their own developing perspective in 1962. Nevertheless, Kirzner was emphasizing that some assumption about rationality (later “alertness”) was necessary if a market is to move from disequilibrium to equilibrium. Becker was arguing that you don’t need a rationality assumption to get a negatively sloped demand curve – scarcity is enough. Becker, I believe, was getting at a point later made by Vernon Smith that “rational” behavior can be provoked or engendered by the (institutional) constraints of the system under study. The interesting question is when is alertness the key and when are institutional constraints the key. What is the relative role of each?

I think to a certain extent contemporary economics has moved beyond (but probably not nearly enough) the equilibrium versus process divide. Most good theories borrow from each paradigm. Nevertheless, it is hard to argue that Becker’s relatively equilibrium-oriented approach has not provided useful insights about the real world.

Gary Becker will be missed not only for the breadth and depth of his ideas, but also because of his kindness and generosity to others.

Ave atque vale.

Libertarianism and Classical Liberalism: Is There a Difference?

by Mario Rizzo

I consider myself both a libertarian and a classical liberal. I have been teaching a seminar in classical liberalism at the NYU Law School for six semesters. I am always asked about the difference.  My answer is basically this. Classical liberalism is the philosophy of political liberty from the perspective of a vast history of thought. Libertarianism is the philosophy of liberty from the perspective of its modern revival from the late sixties-early seventies on.

The philosophy of liberty has always admitted of gradations or degrees. Consider that in the nineteenth century there were such thinkers as Lysander Spooner, Auberon Herbert, and Benjamin Tucker. These thinkers are sometimes called “individualist anarchists.” Clearly, they espouse a political philosophy that would anathema to most who call themselves “classical liberals.” Yet they do begin from many of the same premises as mainline liberals. They disagree with those who advocated a limited state insofar as they believed that a completely voluntary order based on private property was possible and morally desirable. They elevated the individual to the primary place in their analysis just like the rest of the classical liberal tradition.

Interview with Gerald O’Driscoll

by Mario Rizzo

I am happy to post a very interesting interview with my long-time friend and Cato senior fellow, Jerry O’Driscoll. As readers of ThinkMarkets know, Jerry frequently contributes to this blog. This is from the Lara-Murphy Report. The entire report can be accessed immediately below. The interview with O’Driscoll begins at page 24.

LMR Interview with Odriscoll

O’Driscoll Interview

First Page of Interview

Poverty of Ethics without Economics: Bangladesh

by Mario Rizzo

In a world where people’s ethical goals are intrinsic values we could easily argue, as did David Hume, that the values themselves are not subject to scientific analysis.  But, as things turn out, many of what people believe to be intrinsic values, and therefore ultimate goals, are not. They are intermediate ends to which the attainment of some more nearly ultimate goal is imputed. For example, if I believe that my happiness is an intrinsic moral good, and I think that the connection between my happiness and making more money is completely unproblematic, then I may legitimately believe that additional money-making is an ultimate moral goal. (How one intrinsic good should trade off against another is a separate issue.)

Some people think that policies that mandate good wages and safe working conditions are ultimate goals. Or at least they seem to believe that. Much of the discussion about the recent Bangladesh factory fire has this air about it. Much to my disadvantage in polite company, I argued that the advocates of “justice for the poor” were ignoring important factors.

Even if you do believe that better working conditions and higher wages for Bangladeshi garment makers are intrinsic values, what kinds of policies will achieve these values? Does it matter whether the policies will result in some workers improving their wages and working conditions, while other will see a decline in their wages and working conditions?

Let Wedding Cake Bakers Discriminate in Peace

By Mario Rizzo

“A Colorado judge says a baker who refused to make a wedding cake for a same-sex ceremony must serve gay couples despite his religious beliefs, a ruling that a civil rights group hailed as a victory for gay rights.” Fox News 12/06/2013

Friedrich Hayek argues in his famous essay “Why I am Not a Conservative” that conservatives and socialists alike have no principled way of dealing with people whose moral views differ from theirs. Neither of them has absorbed the true lessons of toleration. Socialists (and I would add “progressives”) argue, in effect, for the imposition of their specific collective hierarchy of values including ideas about the allocation and distribution of resources in society. Conservatives often want to impose a hierarchy  of social values including restrictions on pornography, teaching of traditional values in the public schools (“creationism”), restrictions on entry into consensual social relations (“marriage is exclusively for one man and one woman”) and so forth.

The classical liberal insistence on a society that makes maximal room for a pluralism of values starts with the insight that markets permit individuals to make decisions according to their own hierarchies of values. Markets do not insist that we all share the same goals about the use of resources. And yet, subject to a few basic general rules, we can have coordination (not homogenization) of values through the price system. You can work , for example, for Amazon to help pay for your child’s clothing while the manager in your Amazon division is saving for a flat screen TV; the executive working for Amazon may be working for a vacation while the senior-citizen stockholder of Amazon is using the appreciation of stock-value to pay for copays on his medicine. And then there are all of the different goals of those working or investing in firms that deal with Amazon. And so forth as we spread our sights through the whole complex system of market interactions.

Economics Will Not Be Mocked

by Mario Rizzo

A few years ago I read and studied in great detail Pope Benedict XVI’s encyclical on globalization “Caritas in Veritate” or “Charity in Truth.” I posted a three-part analysis on the doubtful economics contained therein at ThinkMarkets. The first part is about the destructive influence of the encyclical. The second part is about globalization. The third part is about the attack on classical liberalism.

Shortly thereafter, I went to a conference that included discussion by economists of the encyclical. There were almost no defenders of the pope’s economics. In fact, I was told by one participant not to waste my time in a detailed examination of papal ideas relating to economics. No one in places of intellectual or policy influence much cares what the pope says. I was told that I care only because of my sixteen years of Catholic education. Perhaps this is all true; I do not know.  Nevertheless, the pope is worth listening to and reacting to because, in the modern world, there are few attempts by prominent public figures to address moral issues honestly.

The current statement of the “social gospel” by Pope Francis in “Evangelii Gaudium” or “The Joy of the Gospel” is less authoritative than the previous encyclical by Benedict insofar as it is considered simply an “apostolic exhortation” or pastoral letter. However, the ideas expressed are in keeping with the recent Church teaching. (Nevertheless, one cannot help thinking that Pope John-Paul II’s economics in the encyclical “Centesimus Annus” was much better than that expressed by the two most recent popes.)

I will not go into the details of the current letter because I think my previous comments on Pope Benedict at ThinkMarkets effectively cover most of these. I want now simply to make a “meta-critique” of Pope Francis’s letter only insofar as it deals with issues that have economic content.

Adam Smith and Obamacare

by Mario Rizzo

Based on my non-scientific sampling of the morning talk-programs on TV, the “progressives” have discovered the law of unintended consequences. There seems to be universal agreement that if Obamacare is altered to allow people to keep their current healthcare insurance, regardless of whether it covers all of the contingencies the law has so far mandated, the entire Obamacare framework will begin to unravel. As Steve Rattner (of the auto bailout “fame”) admitted on the MSNBC program “Morning Joe,” the law is a complex web of interrelated provisions. Once you pick at one, the law may unravel.

Let me take this opportunity to remind everyone of the famous passage from Adam Smith’s Theory of Moral Sentiments in which he sees so clearly the problem with statist redesign of social institutions.

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder (VI.II.42, Liberty Press edition).

There really is nothing more to add. So I will not (for now).

The Macroeconomics of Food Stamps

by Mario Rizzo

The expansion of food stamp eligibility in response to the Great Recession was part of the so-called stimulus package. There were several aspects. First, there was a simple increase in the maximum amount allowed to beneficiaries of about 14%. There was also a tremendous drive to get people who are eligible, but did not get food stamps, to apply and get them. Then there was a loosening of eligibility requirements in some states. Finally, there was the increase in unemployment resulting from the recession and thus an increase in the number of eligible people.

In 2007 the number of people on food stamps was 26 million. Today it is about 48 million! But look more closely at the data (in thousands):

2008	28,223
2009	33,490
2010	40,302
2011	44,709
2012	46,609
2013	47,637

The reader should note that, even as unemployment has declined, the number of food-stamp recipients has increased. Based on decades long trends we should have observed a significant decrease in the number of recipients.

O’Driscoll on Inflation

by Mario Rizzo

ThinkMarkets blogger, Cato Senior Scholar, and former VP of the Federal Reserve Bank of Dallas, Gerald P. O’Driscoll, Jr., speaks on the Fox Business channel about the problems of deliberate inflation as a policy to reduce unemployment and spur growth. See the video here:

Gerald O’Driscoll on Inflation

The Return of Inflationism?

by Mario Rizzo

The Fed has become desperate, not because the American economy is currently falling apart, but because the economy has stubbornly failed to respond well to the policies of the “best and the brightest.” And now, as if to welcome the impending chairmanship of Janet Yellen, stories are surfacing in various places about the growing consensus inside and outside of the Fed for inflation. There is not enough inflation to stimulate adequate economic growth. Just a little more, or maybe even a lot more (perhaps as high as 6 percent) is needed as Ken Rogoff of Harvard is suggesting.

The arguments being used today are not exactly the same as those of the 1970s, yet I have the feeling that I have been here before.  It is important to distinguish theory from what policy economics is about. Policy economics often comes down to rather simple ideas. The real world has a way of making a mockery of today’s sophisticated macroeconomic theory. For one thing, policy has to be relatively simple if it is to be transparent.

Military Service and the New Paternalism

by Mario Rizzo

In the last few years there has been a small expansion in the number of universities that are reinstating ROTC (Reserve Officer Training Corps) after the cancellation of such programs due to protests against the war in Vietnam. I express no opinion here about whether universities should have ROTC programs. My points here have equal applicability to military recruiting of all kinds.

My concern here is a relatively wonkish one. Why have not the new paternalists (those who base their paternalistic policies on the findings of behavioral economics) sought to apply their ideas to young college students signing up for ROTC? Or to other young people going to their neighborhood military recruitment center.

Consider that these potential recruits seem to meet all of the behavioral red flags. First, they are young with little experience of the world and so their decision is would be one in which their data base is deficient. They would seem to be similar to first-time home buyers who are alleged to be easily subject to fraud and manipulation.

Lawrence Klein: Keynesian Economist Who Wanted to Sidestep the Constitution

By Richard M. Ebeling

Nobel Prizing-winning Keynesian economist, Lawrence Klein died on October 20, 2013, at the age of 93. A long-time professor of economics at the University of Pennsylvania, he was awarded the Nobel Prize in 1980 for his development of econometric (or statistical) models of the United States “macro” economy for purposes of prediction and “activist” government policy making.

 

He also was a senior economic advisor to Jimmy Carter during his successful run for the presidency in 1976, but Klein declined a position in the Carter Administration for fear of the negative publicity from his membership in the American Communist Party in the 1930s. 

 

What is less well known today is that immediately after World War II he was one of the great popularizers of the “new economics” of John Maynard Keynes, especially in his widely read book, The Keynesian Revolution, published in 1947.

 

Keynes’ Conception of Government as Savior

In The General Theory of Employment, Interest, and Money (1936) Keynes had argued that the market economy was inherently unstable and susceptible to wide and unpredictable swings in output, employment, and prices. Worse yet, he asserted, the market could get stuck in a prolonged period of high unemployment and idle resources. Only judicious government monetary and fiscal policy could assure a return to sustainable full employment.

Questions for Free Market Moralists? Some Answers

By Mario Rizzo

A philosopher, Amia Srinivasan, fellow in philosophy at All Souls College, University of Oxford, writing in the New York Times Opinionator (online commentary) says that in order to be a consistent defender of Robert Nozick, the free market and classical liberalism, one must answer “yes” to all four questions below. And she believes that such consistent yes answers are not plausible. She is wrong that we are required to answer yes to all four and she is wrong that yes answers on any are implausible. She also misconceives the task of liberalism as a political philosophy.

Let us start with the last point. As Ludwig von Mises constantly reminded us, liberalism is not a philosophy of life. It does not deal with the ultimate questions of man’s place in the universe and the full range of choices human beings must make both in dealing with others and in guiding one’s own life. It is a philosophy about the role of the state in a world in which people differ in their life-philosophies or in the concrete application of a philosophy to different circumstances of time and place.

With this in mind we can briefly answer her questions: