Tuesday, June 28, 2011

The Iron Law of Intervention

Economist Art Carden identifies what he calls an Iron Law of Intervention in his recent Forbes column: "If you want to make a problem worse, pass a law to fix it."

Art illustrates the law by explaining how price gouging laws actually make conditions much worse, not better, for the victims of natural disasters like the recent tornadoes in Alabama and Missouri.

Other examples of the Iron Law would be: a) rent control laws, which worsen shortages of affordable housing, and b) minimum wage laws that make unskilled workers worse off, not better off. 

37 Comments:

At 6/28/2011 3:16 PM, OpenID American Delight said...

Insightful & succinct. But modern American politics cannot accept that disasters are, well, disasters. Unfortunately, we've got it into our heads that we elect politicians to "solve problems."

 
At 6/28/2011 3:16 PM, Blogger morganovich said...

and, of course, the price fixing that turned venezeulans from a food exporters to famine victims.

 
At 6/28/2011 4:06 PM, Blogger Benjamin said...

Okay, as far as it goes.

But simple platitudes do not answer serious questions, such as carcinogenic pollution, or the property rights of people whose land is polluted.

There are times when the price signal fails.

Should have a GOP Congress held a special session, and should have George Bush cancelled his vacation(!) to pass a law to keep Terri Schiavo "alive"?

Did that law make matters worse?

 
At 6/28/2011 4:23 PM, Blogger Methinks said...

Benji,

There are no simple platitudes in that Forbes piece. The only place I can find platitudes on this thread is in your comment.

But simple platitudes do not answer serious questions, such as carcinogenic pollution, or the property rights of people whose land is polluted.

Ever heard of Ronald Coase? He did a lot of thinking on these issues. Won a Nobel Prize and everything.

 
At 6/28/2011 4:48 PM, Blogger PeakTrader said...

Some laws benefit society, e.g. the minimum wage:

Making Work Pay
The Case for Raising the Minimum Wage
March 1996

A Moderate Increase in the Minimum Wage Does Not Cost Jobs

The standard criticism of the minimum wage is that it raises employers' costs and reduces employment opportunities for teenagers and disadvantaged workers.

However, several studies have found that the last two increases in the minimum wage had an insignificant effect on employment.

Furthermore, an extension of the time-series studies that had previously been used to claim that raising the minimum wage decreases employment, no longer finds a significant impact.

In a recent review of the literature, Professor Richard Freeman of Harvard, a widely respected labor economist, wrote: "At the level of the minimum wage in the late 1980s, moderate legislated increases did not reduce employment and were, if anything, associated with higher employment in some locales."

In discussing the minimum wage, Robert M. Solow, a Nobel laureate in economics at the Massachusetts Institute of Technology, recently told the New York Times, "The main thing about (minimum wage) research is that the evidence of job loss is weak. And the fact that the evidence is weak suggests that the impact on jobs is small."

 
At 6/28/2011 5:25 PM, Blogger Benjamin said...

Methinks-

The whole "Iron Law" piece was a simple platitude, by dealing with situations in which markets forces largely work.

The problems of pollution and health care are far less tractable to easy-as-pie market solutions.

Ronald Coase is an interesting thinker, but he proposes with dispensing with property rights in favor of economic output (the Red China solution).

See this: "Coase argued that without transaction costs it is economically irrelevant who is assigned initial property rights; the rancher and farmer will work out an agreement about whether to restrict the cattle or not based on the economic efficiency of doing so. Property rights allocation will hence matter only in determining distribution.

With sufficient transaction costs however, initial property rights will have a non-trivial effect. From the point of view of economic efficiency, property rights should be assigned such that the owner of the rights wants to take the economically efficient action. To elaborate, if it is efficient not to restrict the cattle, the rancher should be given the rights (so that cattle can move about freely), whereas if it is efficient to restrict the cattle, the farmer should be given the rights over the movement of the cattle (so the cattle are restricted)."

Oh, that's dandy. The cattle rancher wants to graze on my land, and I can't say no.

And how does this apply to carcinogens? I don't have a right to keep pollution off of my land? You can dump filth on my property, as long as you pay for it? I can't say no?

This makes eminent domain look like something for sissies.

I can't imagine the libertarians or right-wingers going for the Red China (Coase) solution.

Neither do I.

 
At 6/28/2011 5:28 PM, Blogger Monkeesfan said...

PeakTrader is wrong - those studies he cites did not show that moderate minimum-wage increases had an insignificant effect on employment, and the case for minimum wage has zero realworld economic credibility.

 
At 6/28/2011 5:30 PM, Blogger PeakTrader said...

There are at least two ways how a higher minimum wage stimulates economic growth:

1. The wage gains are greater than the employment losses.

2. The lowest income workers have the highest marginal propensities to consume.

However, there may be too few workers earning the minimum wage to begin a virtuous cycle of consumption-employment.

 
At 6/28/2011 5:33 PM, Blogger PeakTrader said...

What studies are you citing? You may want to look at ‎Card-Krueger.‎

 
At 6/28/2011 5:56 PM, Blogger PeakTrader said...

If a firm is so weak that it can't survive a minimum wage increase that doesn't even keep up with inflation, perhaps, it should go out of business.

Currently, many firms are able to earn record profits, keep prices low, and gain more productivity.

 
At 6/28/2011 5:57 PM, Blogger Benjamin said...

Until we get rid of local government barriers-to-entry in such business as jitneys, push-cart vending, prostitution, recreational drug sales, speakeasies, rolling barbershops and the like, then I reluctantly support minimum wage.

Essentially, we wipe out free enterprise for people without money. So, they are forced to seek jobs.

 
At 6/28/2011 6:00 PM, Blogger morganovich said...

methinks-

if you can get benji to understand coase, i'll give you a nobel prize.

i've tried a half a dozen times.

 
At 6/28/2011 6:05 PM, Blogger morganovich said...

"The problems of pollution and health care are far less tractable to easy-as-pie market solutions."

as methinks said, read your coase.

markets can handle things like pollution quite well once you put a value on the negative externality. doing so is difficult, but markets are still better at it than governments. consider DDT, a fairly benign chemical banned and replaced with far more dangerous and ineffective ones because the wrong bureaucrat read some psuedoscience.

if the damage is small and the number of victims is large, it may make sense to have a government role in the settlement process, but for them to set the rules entire pretty rarely works out well.

why don't you give us an example of government intervention that has worked durably and not would up being worse than the problem it was intended to solve.

i mean, look at the FDA or the EPA. both have gone WAY past any sane level of regulation and both are no causing enormous harm.

 
At 6/28/2011 6:06 PM, Blogger morganovich said...

"Should have a GOP Congress held a special session, and should have George Bush cancelled his vacation(!) to pass a law to keep Terri Schiavo "alive"?

Did that law make matters worse?"

no. it was stupid thing to do and none of their business.

yes, that law made matters worse.

 
At 6/28/2011 6:06 PM, Blogger morganovich said...

"Should have a GOP Congress held a special session, and should have George Bush cancelled his vacation(!) to pass a law to keep Terri Schiavo "alive"?

Did that law make matters worse?"

no. it was stupid thing to do and none of their business.

yes, that law made matters worse.

 
At 6/28/2011 6:08 PM, Blogger morganovich said...

"If a firm is so weak that it can't survive a minimum wage increase that doesn't even keep up with inflation, perhaps, it should go out of business."

and if a worker is so unskilled that they cannot produce $7.50.hr in value, then they are useless and should be unemployed?

the minimum wage law is absurd. we have dozens of would be interns begging to work for us for free. we have to tell them no, because it's illegal. how does that benefit anyone?

 
At 6/28/2011 6:13 PM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 6/28/2011 6:14 PM, Blogger PeakTrader said...

Morganovich, I doubt American workers, no matter how unskilled, can't produce $7.50 of value in an hour.

Even severely handicapped Americans can produce $7.50 an hour.

The problem may be the economics or management of the firm.

 
At 6/28/2011 6:18 PM, Blogger PeakTrader said...

Morganovich says: "the minimum wage law is absurd. we have dozens of would be interns begging to work for us for free."

"Absurd" belongs somewhere in the second sentence.

 
At 6/28/2011 6:22 PM, Blogger Benjamin said...

Morgan-

I generally favor taxes over regs for controlling pollution, but in answer to your question, smog controls in Los Angeles have worked, and whole sections of the city once dying have sprung back to life in parts thanks to blue skies.

Getting lead out of gasoline was probably a good reg too. Unless you enjoy your double-digit IQ.

Even Milton Friedman said free markets have no solution for pollution.

But, cities do have regs for the real dangers in life--scantily clad waitresses in cafes, where there are gaming machines! The horrors!

OC Register


The city's sexy lingerie cafes have less than a week to comply with a new ordinance, which will essentially ban nudity, arcade games, smoking and dark, tinted windows at the establishments.
Last month, the City Council modified a city ordinance to include specific regulations on arcade games, smoking and how much skin waitresses can show at these Vietnamese cafes, which are Little Saigon's best-kept secret

Police Chief Kevin Raney, who went to the council with the amended ordinance, said police have been distributing copies of the ordinance to the coffee houses over the past several days. The ordinance went into effect Friday, but the cafes will get a one-week grace period to get into compliance, he said.
"Enforcement will start this coming weekend," Raney said.
Officials say there are 37 of these coffee houses in Garden Grove. Raney told council members that the cafes have become notorious for gang activity and waitresses who wear nothing under their sheer dresses. The ordinance requires the waitresses not to expose the area of their breasts below the areola.
Police also found that a number of the cafes rigged regular arcade machines for gambling. Gaming machines at some of the cafes could be converted to a gambling machine with a Smartphone app with a push of a button, undercover officers found.
In March, eight police departments teamed up to target the cafes and conducted a raid, which netted more than 200 illegal gaming machines and more than $145,000 in cash. Those raids took place at more than 20 cafes, bars and pool halls and resulted in 23 people being arrested on misdemeanor charges of possessing illegal gaming machines, officials said. While several café owners pleaded guilty to the charges, some cases are still ongoing."

 
At 6/28/2011 6:33 PM, Blogger PeakTrader said...

If a firm is so weak that it can't make up for a minimum wage hike through profits, productivity, or prices, it may instead pay the brother-in-law accountant $118,000 instead of $120,000, so the five guys at the bottom doing the heavy work can get the minimum wage raise.

 
At 6/28/2011 6:36 PM, Blogger Mark J. Perry said...

Even if some empirical evidence finds that raising the min wage has no signifcant effect on employment levels (which is questionable because it would violate the Law of Demand), that still doesn't prove that raising the min wage has NO adverse effects for unskilled workers.

If an employer is forced by the government to pay a higher, mandated monetary wage for unskilled labor, that employer will make adjustments and REDUCE: a) the number of HOURS of unskilled labor demanded, and b) non-monetary forms of compensation.

A reduction in the number of hours worked would not affect the level of employment, but would adversely affect the unskilled worker.

Likewise, a reduction in non-monetary compensation would also adversely affect unskilled workers even if employment levels are not affected, e.g.

a. Uniforms are no longer provided for free, or at subsidized prices.

b. Free or discounted meals are no longer provided.
c. Other non-cash benefits (health care, paid holidays, tuition reimbursement) are elminated or reduced.

d. Company-sponsored holiday parties, picnics, or sporting events are cancelled.

e. On-the-job training is no longer provided for unskilled workers, because after an increase in the minimum wage the employer will have an incentive to hire workers will more skills and experience.

Therefore, unskilled workers might be WORSE OFF after an increase in the min wage EVEN if they are lucky enough to keep their job and the level of employment for unskilled workers stays the same.

 
At 6/28/2011 10:50 PM, Blogger Methinks said...

Moranovich,

Well, if you can't I certainly won't be able to. My effort ends here then.

Peak,

Card-Kreuger, as I remember it, found little impact on total employment. It said nothing about the effects on who is employed. The least skilled find it harder to get any employment at all.

I find it fantastic that you can't imagine there are very disadvantaged people who can't produce even $7.50/hour worth of value. You must have lived a very privileged life that didn't include meeting any people living in places like public housing and attending what passes for (government "provided") zoos...I mean, schools.

 
At 6/29/2011 1:49 AM, Blogger juandos said...

"Morganovich, I doubt American workers, no matter how unskilled, can't produce $7.50 of value in an hour"...

Hmmm, PT you ever been to a grocery store?

 
At 6/29/2011 1:57 AM, Blogger juandos said...

"Card-Krueger, as I remember it, found little impact on total employment. It said nothing about the effects on who is employed"...

Exactly...

At one time the minimum wage was mostly allocated to teens just starting into the labor force...

 
At 6/29/2011 2:05 AM, Blogger Ron H. said...

"Morganovich, I doubt American workers, no matter how unskilled, can't produce $7.50 of value in an hour."

Here's one.

 
At 6/29/2011 2:17 AM, Blogger Ron H. said...

""If a firm is so weak that it can't survive a minimum wage increase that doesn't even keep up with inflation, perhaps, it should go out of business."

If that camel is so weak that it can't carry one more straw...

I'm sure the 50 previous employees of this weak company will agree with you.

 
At 6/29/2011 2:19 AM, Blogger PeakTrader said...

Methinks, I think, labor should be an investment rather than an expense.

I doubt most low or unskilled workers are hopeless.

Juandos, it could be a high wage management problem rather than a low wage worker problem.

There are teens who refuse to work for minimum wage, because it's too low.

 
At 6/29/2011 2:25 AM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 6/29/2011 3:03 AM, Blogger PeakTrader said...

Ron, your "Here's one" link proves there are some hopeless workers :)

 
At 6/29/2011 7:25 AM, Blogger Methinks said...

PT,

It doesn't matter whether you classify labour as an expense or as CAPEX - the input called "labour" still must produce more than it costs.

Most unskilled workers are not "hopeless" and "hopeless" has nothing to do with it. They aren't worth the price the state mandates for them. Those two conditions are not mutually exclusive.

 
At 6/29/2011 10:17 AM, Blogger morganovich said...

""Absurd" belongs somewhere in the second sentence."

why? do you find it so difficult to believe that students from top universities (harvard, MIT, etc) would happily trade their labor for the chance to learn useful skills and get a good resume item and a reference letter?

those things are VALUABLE.

we used to have 30-40 applicants for every spot. these are kids paying big money to go to top schools for education. we are offering it for free (learn by doing). we train them, they work.

what's absurd is that we now have to charge them and call it a class. (we charge $1)

tell me that law makes any sense at all.

regarding work worth less that $7.50/hr, you are just being ridiculous. bagging groceries, mowing lawns, all the jobs that teenagers traditionally had. gee, i wonder why the teen unemployment rate is off the charts since they hiked the min wage?

besides, someone who can produce more than $7.50 in value can command more than that in wages.

i would never even consider hiring someone for wages that low.

but someone else might. why prevent it?

 
At 6/29/2011 10:31 AM, Blogger morganovich said...

"smog controls in Los Angeles have worked, and whole sections of the city once dying have sprung back to life in parts thanks to blue skies."

define worked.

how do you measure the cost/benefit?

the smog regs are a little different anyway. to drive a car on governemnt roads, you must adhere. it's the price of using their infrastructure. such laws have no effect at all on your own property. i have owned cars that were for track use only. on laguna seca, there are no smog rules.

thus, smog laws are not coercive.

again, you need to go read coase, as it's going to stop you from asking a lot of these question.

regulation does makes sense in a small number of cases (very small harm caused to a large number of people and therefore to cumbersome to remediate) but this gets taken much too far. for each that might make sense (lead in gas) there wind up being a dozen (like DDT or god help us CO2) that are monstrous failures and do far more harm than good and massively misallocate costs.

you are overstating what friedman meant.

if i dump sludge into your yard, then the free market has excellent ability to remediate it. one agent caused significant harm to one victim. it even has excellent remediation ability for things like smoking or asbestos.

it does makes sense to regulate some kinds of pollution. if the harm is small or difficult to link in a chain of causality ( eg.how do you know it was mercury that caused your brain condition, and even if it were, how do you know it was MY mercury?)

the problem is that that assumes perfect knowledge. regulators make absurd guesses about dangers based on idiosyncratic data or often none at all. DDT is an excellent example. it would never have been banned by the market, only a bureaucrat would make such an error. read wildovsjy's excellent book "but is it true" for dozens of excellent examples.

if the EPA regulates CO2, then it will be the worst example yet and will singlehandedly do more harm that they have ever done good, and for no useful purpose at all.

regulation should always be an absolute last resort, and even then, it mostly fails. look at the horrific failure of most fisheries regulation. the only thing that has worked is the market solution of property rights.

 
At 6/29/2011 10:33 AM, Blogger morganovich said...

"There are teens who refuse to work for minimum wage, because it's too low."

so? you can refuse to work for $500k because you think it's too low. that doesn't make you right.

employment requires two people to agree. if a teen thinks $7.25 is too low, but the employer thinks it's too high, then nobody gets hired.

what you think you are worth is only relevant if you can get someone to agree with you.

 
At 6/29/2011 12:41 PM, Blogger Ron H. said...

"There are teens who refuse to work for minimum wage, because it's too low."

There are teens who refuse to work for minimum wage, because someone has told them it's too low. All of those teens are unemployed.

The min wage was never intended to help teens in any case, but to protect white workers from black workers willing to work for less.

 
At 6/29/2011 3:32 PM, Blogger PeakTrader said...

Methinks, investments sometimes pay off later.

Anyone who can't produce at least $7.50 an hour in America should be unemployed, e.g. on disability.

Morganovich, why prevent a race to the bottom for all low skilled workers.

If a student wants to spend money gaining experience rather than earn money gaining experience, they obviously can afford it.

Given the high unemployment rate, you're implying they want too much money to work.

 
At 6/29/2011 6:18 PM, Blogger Ron H. said...

"Anyone who can't produce at least $7.50 an hour in America should be unemployed, e.g. on disability."

Why is the magic amount $7.50? Why not $5.00 or $10.00? Who decides? The market can pick the correct price for any job, but bureaucrats? I don't think so.

"If a student wants to spend money gaining experience rather than earn money gaining experience, they obviously can afford it."

But, how can they earn money gaining experience if their current value as employees isn't enough to justify the pay they would get? They need the education, skills, and experience to justify the pay.

"Given the high unemployment rate, you're implying they want too much money to work."

What does the unemployment rate have to do with the value of potential interns? Are there a lot of unemployed people in the fields in which internships might be offered?

Students are not unemployed.

 

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