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Economy

Rod Long on the Plight of the Worker, by Bryan Caplan

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In response to my Nickel and Dimed posts, my old friend Roderick Long referred me to his original review of the book.  Highlights of Rod’s review:

Ehrenreich went “undercover” to document the lives of the working poor and the Kafkaesque maze of obstacles they face: the grindingly low wages; the desperate scramble to make ends meet; the perpetual uncertainty; the surreal, pseudo-scientific job application process; the arbitrary and humiliating petty chickenshit tyrannies of employers; the techniques of intimidation and normalisation; the mandatory time-wasting; the indifference to employee health; the unpredictably changing work schedules, making it impossible to hold a second job; etc., etc.

None of this was news to me; I’ve lived the life she describes, and she captures it quite well. But it might well be news to those on the right who heroise the managerial class and imagine that the main causes of poverty are laziness and welfare.

Of course the book has its flaws…

But Ehrenreich’s misguided diagnoses and prescriptions occupy at most a tenth of the book. The bulk of the book is devoted to a description of the problems, and there’s nothing sneerworthy about that. And libertarians will win few supporters so long as they continue to give the impression of regarding the problems Ehrenreich describes as unimportant or non-existent. If you’re desperately ill, and Physician A offers a snake-oil remedy while Physician B merely snaps, “stop whining!” and offers nothing, Physician A will win every time.

Rod’s solutions:
First: eliminate state intervention, which predictably works to benefit the politically-connected, not the poor. As I like to say, libertarianism is the proletarian revolution. Without all the taxes, fees, licenses, and regulations that disproportionately burden the poor, it would be much easier for them to start their own businesses rather than working for others. As for those who do still work for others, in the dynamically expanding economy that a rollback of state violence would bring, employers would have to compete much more vigorously for workers, thus making it much harder for employers to treat workers like crap…
Second: build worker solidarity. On the one hand, this means formal organisation, including unionisation – but I’m not talking about the prevailing model of “business unions,” conspiring to exclude lower-wage workers and jockeying for partnership with the corporate/government elite, but real unions, the old-fashioned kind, committed to the working class and not just union members, and interested in worker autonomy, not government patronage.
I’ve had similar debates with Rod before, but I still can’t resist responding.  Verily, I do “heroise” the managerial class.  And at least in the First World, I do think that irresponsible behavior (partly fueled by the welfare state) is the main cause of severe poverty.  Specifically:
1. Management quality is vital for productivity – and measured management quality really is high in First World countriesContrary to stereotypes, poor countries have very little big business. Instead, their economies are dominated by “informality” and self-employment.  So yes, I am most grateful to managers for doing their jobs – especially given all the abuse that intellectuals and activists have heaped upon them.
2. In rich countries, non-work is the main cause of severe poverty.  A small percentage of non-workers are seriously disabled or genuinely can’t find a job.  The overwhelming reason for non-work, though, is behavior that intuitively seems highly irresponsible.  Such as?  Not searching for a job.  Not showing up for work on time – or at all.  Having impulsive sex.  Committing crimes.   Sloth (“laziness”) is one poverty-inducing vice, but don’t forget lust and wrath.
3. There are, of course, many full-time workers who – like Ehrenreich and most of her co-workers – end up moderately poor.  How is this possible?  I endorse the standard economic explanation: low-paid workers are, on average, low-skilled.  Since their aren’t very productive, employers don’t bid much for their services.
4. Why, though, do low-skilled workers endure such unpleasant working conditions?  Again, I endorse the standard economic explanation: making work more pleasant costs money – and low-income workers don’t want to take a pay cut to get more pleasant working conditions.
5. Rod apparently rejects both textbook stories.  Instead, he blames the government for using “taxes, fees, licenses, and regulations” to prevent the poor from “starting their own businesses rather than working for others.”  While I would be happy to see “taxes, fees, licenses, and regulations” go away, I’m afraid there’s little reason to think this would sharply increase the poor’s rates of self-employment or small business ownership.  Why not?  Because  it’s far from clear that regulation on net penalizes small businesses relative to big businesses.  Yes, some regulations impose fixed costs, which discourage small business and self-employment.  However, many regulations specifically exempt small business.  Furthermore, it is much easier for small business to evade regulation.  I wouldn’t be shocked if self-employment and small business became somewhat bigger under laissez-faire, but Rod’s confidence that this effect would be big is wishful thinking.
6. I totally agree with Rod’s view that government hurts the poor by suppressing economic growth.  Because government hurts almost everyone by suppressing economic growth.
7. I’m honestly puzzled by Rod’s desire to see the poor start their own businesses.  Romantic thinking aside, most people lack the competence for self-employment. With or without regulation, it’s incredibly hard.  I get that Rod has seen the ugly side of low-skilled employment first-hand.  But what about the ugly side of low-skilled self-employment?  Instead of bosses mistreating you, you’re mistreated directly by customers.  If you can actually get some customers, which is like pulling teeth.  Imagine how bleak Ehrenreich’s book would have been if, instead of trying to find a bunch of low-skilled jobs, she tried to found a bunch of low-skill businesses!  Without her savings, she probably would have ended up homeless.
8. I’m even more puzzled by Rod’s desire to “build worker solidarity” and support for unions.  The standard economic story says that unions are labor cartels; they improve wages and working conditions for members at the expense of other workers and the rest of society.  While I’ll defend the legality of unions on libertarian grounds, they’re nothing to celebrate.  The best I can say is that without government help, very few people will belong to unions.  Indeed, even with hefty pro-union regulations on their side, private sector unions have almost disappeared in the U.S.  But isn’t solidarity nice?  Not solidarity with large, unselective groups like “workers” – and not when you build solidarity by scapegoating employers as exploiters and managers as bullies.
9. General observation: If you know a little social science and a lot of libertarianism, Rod Long’s story sounds great.  If you want to sell libertarianism to leftists, his approach is plausibly more persuasive than mine.  Alas, if you take the time to learn more social science, Rod’s story isn’t tenable.

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Economy

Bonus Quotation of the Day…

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… is from page 426 of the late Jan Tumlir’s January 1984 speech at the Cato Institute – a speech titled “Economic Policy for a Stable World Order” – as this speech is reprinted in Dollars, Deficits, & Trade (James A. Dorn and William A. Niskanen, eds., 1989):

Indeed the difficulty for the economist may now lie in explaining why the world economy still functions at all, however dissatisfied we may be with its functioning. The answer is, of course, that there is a lot of ruin in any economy with a modicum of freedom. I am sometimes unsure whether it is actually an advantage of the capitalist system that it can take such an enormous amount of beating. If it were in the habit of collapsing more frequently, we would perhaps govern ourselves more prudently (and more cheaply to boot).

DBx: Indeed.

I’ve long argued that the economist’s standard assertion that government intervenes into the economy first and foremost to correct market failures fails spectacularly as a positive theory of government intervention into the economy. It’s far closer to the truth to say that government intervention into the economy is fueled not by market failures (as understood by economists) but, rather by the market’s astonishing success and robustness.

The market’s success at raising people’s standards of living creates the expectation that wealth creation is easy and normal while poverty is out of the ordinary. But of course historically poverty is the norm – and poverty so deep, unrelenting, and overwhelming that few Americans today can begin to imagine a condition so crushing. Because the market makes wealth so abundant and its production appear to be normal and easy to the point of being practically automatic – and because nearly all of the massive number of details of the intricate processes at work at every moment to create wealth are hidden from view – the market’s ‘failure’ to create heaven on earth is believed by many to be an unanswerable indictment of the market.

On top of this ‘problem’ is the market’s mighty robustness: tax it, saddle it with diktats, poison it with easy money, accuse it of being run by and for demons and devils, and the market keeps motoring along, improving the lives even of those who most hate it and who do the most to harass it. The market works less well than it would absent these intrusions, of course, but it still works surprisingly well. As long as, and insofar as, prices and wages are allowed to adjust according to the forces of supply and demand, the market’s robustness is Herculean. (The market is not, however, indestructible. Harass it too much and it will quit working.)

If the market truly collapsed completely more often, giving people a taste of what life is like without it, the world would have in it not only far fewer communists and socialists, but also far fewer “Progressives” and “conservative nationalists.”

The market’s true failure, in short, lies is its incredible capacity to succeed and to keep on keeping on. The market fails to prevent people from taking it for granted.

The post Bonus Quotation of the Day… appeared first on Cafe Hayek.



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Economy

Market Talk – December 12, 2019

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ASIA:

According to reports from Reuters, China is trying to propose a plan to promote Macau to be its next “Hong Kong” by building it into a world-leading financial center. China unveiled plans of creating a yuan-denominated stock exchange, as well as allocating extra land to Macau for it to grow. The region was a former Portuguese colony and will target companies from Portuguese speaking countries such as Brazil in order to avoid direct competition with China and the mainland.

Indian Parliament passed Citizenship Amendment Bill on 11-Dec-2019, which proposes to accord citizenship to illegal Hindu, Sikh, Buddhist, Jains, Parsis and Christian migrants from Pakistan, Bangladesh and Afghanistan. It, naturally, implies that migrants, who identify themselves with any group or community other than those mentioned above, from these countries won’t be eligible for citizenship. The bill also relaxes the provisions for “Citizenship by naturalization.” The proposed law reduces the duration of residency from the existing 11 years to just five years for people belonging to the same six religions and three countries. The bill covers six communities namely Hindu, Sikh, Buddhists, Jains, Parsis and Christian migrants from Pakistan, Bangladesh and Afghanistan.

The Indian government has prohibited gift imports through e-commerce portals except life-saving drugs and rakhi. The import of goods was earlier free and not subject to customs duties. The move will impact Chinese e-commerce web sites like Club Factory, Ali Express and Shein who are the largest users of this route.

The US reprimanded Pakistan Air Force chief for misusing F-16 fighter jets by undermining their shared security platforms and infrastructures months after the Indian Air Force shot down an F-16 jet of Pakistan Air Force during an aerial combat over Kashmir. Andrea Thompson, the then-undersecretary of State for Arms Control and International Security Affairs, wrote a letter to Pakistani Air Force Chief Air Chief Marshal Mujahid Anwar Khan in August over the matter.

The major Asian stock markets had a mixed day today:

  • Shanghai decreased 8.72 points or -0.30% to 2,915.70
  • Kospi increased 31.73 points or 1.51% to 2,137.35
  • ASX 200 decreased 43.80 points or -0.65% to 6,708.80
  • NIKKEI 225 increased 32.95 points or 0.14% to 23,424.81
  • Hang Seng increased 348.71 points or 1.31% to 26,994.14
  • SENSEX increased 169.14 points or 0.42% to 40,581.71

The major Asian currency markets had a mixed day today:

  • AUDUSD increased 0.00241 or 0.35% to 0.68931
  • NZDUSD increased 0.00003 or 0.00% to 0.65823
  • USDJPY increased 0.5860 or 0.54% to 109.1310
  • USDCNY decreased 0.04597 or -0.65% to 6.98293

Precious Metals:

  • Gold decreased 5.54 USD/t oz. or -0.38% to 1,470.81
  • Silver increased 0.013 USD/t. oz or 0.08%% to 16.9207

Some economic news from last night:

Singapore:

Unemployment Rate (Q3) remain the same at 2.3%

Japan:

Core Machinery Orders (MoM) (Oct) decreased from -2.9% to -6.0%

Core Machinery Orders (YoY) (Oct) decreased from 5.1% to -6.1%

Foreign Bonds Buying increased from -511.1B to 235.8B

Foreign Investments in Japanese Stocks decreased from 394.0B to -200.4B

Australia:

MI Inflation Expectations remain the same at 4.0%

New Zealand:

External Migration & Visitors (Oct) decreased from 1.40% to 0.10%

FPI (MoM) (Nov) decreased from -0.3% to -0.7%

Permanent/Long-Term Migration (Oct) decreased from 4,290 to 4,120

Visitor Arrivals (MoM) increased from -0.1% to 0.0%

Some economic news from today:

Singapore:

Retail Sales (MoM) (Oct) decreased from 2.0% to -2.2%

Retail Sales (YoY) (Oct) decreased from -2.1% to -4.3%

India:

CPI (YoY) (Nov) increased from 4.62% to 5.54%

Cumulative Industrial Production (Oct) decreased from 1.30% to 0.50%

Industrial Production (YoY) (Oct) increased from -4.3% to -3.8%

Manufacturing Output (MoM) (Oct) increased from -4.0% to -2.1%

EUROPE/EMEA:

UK elections went underway today, with still the outcome being unpredictable. The election results will be counted out in the morning. Yesterday, both Labour and Conservatives gave their final pitches with PM Boris Johnson saying his side was the only side who can bring Brexit forward.

France is gearing up for another round of strikes tomorrow over the proposed reforms of the pension plan and age of retirement.

According to the WSJ, Saudi Arabia is seeking to defuse the situation with Iran, with the Pakistani FM acting as a mediator between the two.

The US senate comittee has now officially signed off a bill which places sanctions on Turkey over thier recent purchase of the S-400 missile defense system.

The major Europe stock markets had a green day today:

  • CAC 40 increased 23.39 points or 0.40% to 5,884.26
  • FTSE 100 increased 57.22 points, or 0.79% to 7,273.47
  • DAX 30 increased 74.90 points or 0.57% to 13,221.64

The major Europe currency markets had a mixed day today:

  • EURUSD decreased 0.00204 or -0.18% to 1.11126
  • GBPUSD decreased 0.00821 or -0.62% to 1.31169
  • USDCHF increased 0.00346 or 0.35% to 0.98606

Some economic news from Europe today:

UK:

Thomson Reuters IPSOS PCSI (Dec) increased from 47.8 to 48.5

RICS House Price Balance (Nov) decreased from -6% to -12%

Germany:

Germany Thomson Reuters IPSOS PCSI (Dec) decreased from 53.55 to 53.43

German CPI (YoY) (Nov) remain the same at 1.1%

German CPI (MoM) (Nov) decreased from 0.1% to -0.8%

German HICP (YoY) (Nov) increased from 0.9% to 1.2%

German HICP (MoM) (Nov) decreased from 0.1% to -0.8%

Swiss:

SNB Interest Rate Decision remain the same at -0.75%

PPI (YoY) (Nov) decreased from -2.4% to -2.5%

PPI (MoM) (Nov) decreased from -0.2% to -0.4%

France:

France Thomson Reuters IPSOS PCSI (Dec) decreased from 43.69 to 42.49

French CPI (YoY) increased from 0.8% to 1.0%

French CPI (MoM) (Nov) decreased from 0.0% to -0.1%

French HICP (YoY) (Nov) increased from 0.9% to 1.2%

French HICP (MoM) (Nov) increased from -0.1% to 0.1%

Italy:

Italian Quarterly Unemployment Rate decreased from 9.9% to 9.8%

Italy Thomson Reuters IPSOS PCSI (Dec) increased from 38.88 to 40.11

Euro Zone:

Industrial Production (YoY) (Oct) decreased from -1.8% to -2.2%

Industrial Production (MoM) (Oct) decreased from -0.1% to -0.5%

Deposit Facility Rate (Dec) remain the same at -0.50%

ECB Marginal Lending Facility remain the same at 0.25%

ECB Interest Rate Decision (Dec) remain the same at 0.00%

US/AMERICAS:

The US-China trade deal is close to completion, according to President Trump. “Getting VERY close to a BIG DEAL with China. They want it, and so do we!” he posted this Thursday. CNBC reported that US negotiators are ready to cancel the new tariffs and cut existing tariffs by 50% ($360 billion). With only three days left before the US imposes an additional $156 billion on Chinese goods, time is of the essence.

Bank of Canada Governor Stephen Poloz sees Canada’s economy expanding in the new year at a steady. Last week, the central bank voted to maintain the target rate at 1.75% where it has remained for over a year. Growing government debt, not just in Canada, is one of Poloz’s main concerns. “Experience shows that high debt levels can amplify the impact of a shock on the economy,” the governor stated. Poloz expressed concerns over global trade as well, stating that companies are dismantling supply chains in favor of cheaper, less effective, options.

Canada’s Conservative Party Leader Andrew Scheer resigned this Thursday. Scheer’s resignation comes after it was revealed that he used Conservative Party funds to pay for his children to attend private school. Dustin van Vugt, executive director of the party, may be forced to resign as well for similar reasons.

Brazil’s central bank voted in favor of dropping the target rate to 4.5%. “Essential conditions for sustained growth were laid down in 2019. Brazil is ready for a new development cycle,” stated Waldery Rodrigues, special secretary to Brazil’s Economy Ministry. Brazil certainly amped up efforts to build business, attract foreign and domestic capital, lower the debt ceiling, and solve the ongoing pension crisis. However, the pension dilemma is ongoing as are domestic conflicts such as the Amazon wildfires. Unemployment remains high at 11.6%, but is expected to decline in the new year. The government cited optimism about continued economic growth and predicts GDP to rise to 2.3% in 2020.

US Market Closings:

  • Dow advanced 220.75 points or 0.79% to 28,132.75
  • S&P 500 advanced 26.94 points or 0.86% to 3,168.57
  • Nasdaq advanced 63.27 points or 0.73% to 8,717.32
  • Russell 2000 advanced 12.89 points or 0.79% to 1,644.81

Canada Market Closings:

  • TSX Composite advanced 7.29 points or 0.04% to 16,946.90
  • TSX 60 advanced 1.56 points or 0.15% to 1,012.93

Brazil Market Closing:

  • Bovespa advanced 1,235.87 points or 1.11% to 112,199.74

ENERGY:

The IEA report was released this week which was contrary to the OPEC optimism for demand.

The oil markets had a green day today:

  • Crude Oil increased 0.4992 USD/BBL or 0.85% to 59.3943
  • Brent increased 0.4959 USD/BBL or 0.78% to 64.3858
  • Natural gas increased 0.0381 USD/MMBtu or 1.68% to 2.3095
  • Gasoline increased 0.0032USD/GAL or 0.20% to 1.6422
  • Heating oil increased 0.0141 USD/GAL or 0.73% to 1.9477
  • Top commodity gainers: Wheat(2.16%),Steel(13.28%),Ethanol(1.90%), and Natural Gas(1.68%)
  • Top commodity losers: Cocoa(-9.37%), Oat(-5.03%), Baltic Dry (-4.93%), and Orange Juice(-0.97%)

The above data was collected around 12:40 EST on Thursday.

BONDS:

Japan -0.02%(-2bp), US 2’s 1.63% (+2bps), US 10’s 1.88%(+9bps);US 30’s 2.24%(+2bps), Bunds -0.32% (-0bp), France 0.03% (-1bp), Italy 1.34% (+2bp), Turkey 12.10% (-8bp), Greece 1.39% (-61bp), Portugal 0.41% (+5bp), Spain 0.47% (+4bp) and UK Gilts 0.82% (+5bp).

  • US 30-Year Bond Auction decreased from 2.430% to 2.307%
  • US 4-Week Bill Auction increased from 1.500% to 1.540%
  • US 8-Week Bill Auction increased from 1.520% to 1.540%

 



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Economy

Was There a Housing Bubble?, by David Henderson

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In his recent book Shut Out, Kevin Erdmann, a finance expert and visiting fellow at the Mercatus Center at George Mason University, has two main messages. The first, which is not controversial among economists, is that restrictions on residential construction in coastal California and the urban Northeast have constrained supply so much that housing in those areas is virtually unaffordable for people in the lower- and middle-income classes. His other message is more controversial, that the financial crisis last decade was not due to a housing bubble but, rather, to bad policy decisions based on the idea that there had been a bubble. Whereas I was already convinced of his first point, I, like the majority of economists, was skeptical of his second. But because of all the data and reasoning he brings to the issue, I now find myself at least 90% convinced.

Probably because his second point is the more controversial, Erdmann spends about the first half of the book making that case. At times his narrative gets bogged down and his language is often sloppy. For example, he uses the word “shortage” to refer to a situation where demand increases but supply doesn’t. Economists, however, tend to reserve that word for situations where the price fails to clear the market such that quantity demanded exceeds the quantity supplied. The good news is that he often saves the day with pithy, clever quotes that sum up his message. Also, the more than 100 graphs he uses in the book seem like overkill, but that is better than underkill.

 

Types of cities / Erdmann makes his case by looking at the diverse characteristics of U.S. cities rather than lumping them all together, and by studying changes in housing prices and rents over time. He focuses on the 20 largest U.S. metropolitan areas and divides them into four categories: Closed Access cities, Contagion cities, Open Access cities, and Uncategorized cities. The five Closed Access cities are New York City, Los Angeles, Boston, San Francisco (including San Jose), and San Diego. In those cities, local and state governments have imposed strong restrictions on construction.

Erdmann seems a little vague about when those restrictions got really tight. His narrative suggests that it was in the 1990s, but there’s no index to help one look for a clear answer; he did confirm in an email to me that he dates it to 1995. In those cities, housing starts, even in economic expansions, have been low, incomes have been high, rents have been high (and rising) even relative to incomes, and there were large rates of out-migration of households with low incomes.

The above are the opening 4 paragraphs of David R. Henderson, “Was There a Housing Bubble Last Decade?Regulation, Winter 2019/2020, pp. 63-65. Read the whole thing. [Scroll down about 60 percent of the way.]

Thanks to Jeff Hummel for improving a previous draft and to Kevin Erdmann for promptly answering the questions I emailed him.

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