In Defence of Wal Mart

Barack Obama, the Democratic Senator from Illinois and 2008 presidential hopeful, has publicly stated his objection to the Wal Mart Corporation’s business tactics. Obama claims that Wal Mart does not fairly compensate their workers, that they do not provide enough financial support for their employees to “send their kids to college and save enough for retirement.” Obama fails to realize, however, that not only is he wrong about a corporation’s social responsibility, he is wrong about Wal Mart’s effect on the working class in the United States. Wal Mart helps the poor.

It is true, as Obama claims, that Wal Mart drives down wages. One study, for example, found that Wal Mart lowered retail wages by $4.7 billion in 2000. Such a number, as high as it seems, pales in comparison to the amount that Wal Mart causes consumers to save – a staggering $263 billion in 2004, or $2,329 a household. Considering that all workers are consequently consumers, it is illogical to assert that Wal Mart does not help the poor.

Regardless of how much savings Wal Mart generates, it is true that the wages Wal Mart pays to some employees does not adequately support the dignified lifestyle that Americans expect – savings on consumer goods or not. The blame, however, cannot be placed on Wal Mart. It is not Wal Mart’s responsibility or duty to be socially conscious; its job is to secure profit. It is the government’s job not, in that case, to persecute Wal Mart, but to help those individuals not wealthy enough to support themselves. The fact is that Wal Mart creates jobs, and gives jobs to those who would previously not be employed.

The solution, therefore, is not to harangue Wal Mart on the evils of its wage-policies. Wal Mart sets its wages on simple supply and demand, the market principles that drive the notorious efficiency and productivity of the American economy. Instead, the government must aid those in need. An increase in the minimum wage has been proposed. That would be a mistake – it would only serve to prevent unskilled individuals from being employed. Instead, compensation must be given to those employed, but not earning enough to live decently. Not only would such compensation help those working get out of poverty, but it would also provide an incentive for unemployed to seek work.

The solution, coincidentally, already exists. Unfortunately, due to its relative complexity, it has not been advocated to the electorate (and thus not received as broad support by politicians) as much as a simpler concept such as the minimum wage. The solution is the Earned Income Tax Credit. The EITC, called “one of the biggest poverty-fighting tools in recent years” by economist Charles Wheelan, uses the income tax system to subsidize low-wage workers so that their total income is raised above the poverty line. A worker getting $11,000 a year, for example, might get an additional $8,000 through the EITC. The EITC, although it does not support the unemployed, does greatly help those employed, but earning very little. It thus compensates, for example, Wal Mart employees without compromising the efficiency of the corporation.

Wal Mart has been vindicated as an evil corporation. In truth, it is everything but – it is simply performing its duty as a business in America. Wal Mart has created jobs nation-wide and drove down retail prices across the entire sector. Its vindication is entirely unjustified. Instead of blaming Wal Mart for the plight of low-earning workers, we should turn to the government, and demand that in lieu of pushing ineffective policies such as the minimum wage, that the EITC be expanded.

An Army of Slaves: The Military Draft

Rep. Charles Rangel (D) has this past week called for the enactment of national conscription. He posits that a draft would reduce the likelihood that American politicians send their troops into foreign conflict, as they would face the moral dilemma of sending unwilling soldiers into danger. Such an argument, regardless of how true it may or may not be, does not justify the existence of a draft in the United States.

Freedom is a concept that is held dear by Americans. They value their individualism, and their right to live as they please, so long as it is within the (sometimes overbearing) constraints of the law. Indeed, such fundamentally American beliefs are upheld by the document all Americans hold revere, the Constitution. It is thus morally unacceptable for the government of the United States to enact a draft. A draft is governmental coercion: it is a government action undertaken to support governmental objectives. A draft, conscripting forcefully citizens into the standing army, forces the draftee into carrying out the wishes of those he does not necessarily support. It is outrageous that such force and coercion be used while calling it ‘patriotism’ in the process.

An army of slaves does not bode well for the world’s leader of freedom. And that is just what a draft would entail. Throughout its brief history, every war the United States has fought has been under the banner of freedom and liberation of those oppressed peoples of the world. Yet, especially in the Vietnam War of the 1960s, the United States operated under a cloak rife with contradictions. The soldiers used in Vietnam, to liberate the “oppressed” were in fact oppressed themselves, coerced into service, supporting government at the expense of personal liberty.

Conscription, while being morally indefensible, is at the same time economically unsound. A draft represents central planning at its finest. The government (military) coerces young men into service, and subsequently delegates them to the positions that the government deems fit, not the individual. The government, in a draft, has ultimate say in how military resources, in this case labor, are allocated. Central planning does not work as an economic system, and it doesn’t work in a military one. Inevitably, the government will misallocate conscripted soldiers, not maximizing the efficiency of the army – which could prove to be disastrous.

A volunteer army, on the other hand, tackles all the problems a draft poses. An army of volunteers ensures a military that is both willing and patriotic, ingredients critical to beneficial military morale and subsequently success. It also allows the individual to work in the capacity that he or she chooses, ensuring, as the market theory dictates, an efficient allocation of resources conducive to success.

The thought of a compulsory draft in the United States is disturbing. To consider it would be to support coercion, to support government intervention in how individuals lead their lives. To consider it would be to impose patriotism on the unwilling, nationalism on the reluctant. It is morally wrong, and economically unsound. A draft would be, quite simply, a disaster.

Netherlands to BAN the Muslim Veil in Public

I react to a possible ban in the Netherlands to the Muslim veil in public with disgust. Under the auspice of a concern for national security, the freedom of an entire religion has been compromised. In reality, such a law is typical politicking and the very reason why politicians are not to be trusted.

It does not matter one iota whether or not the majority of the Dutch people support such legislation. It does not matter if just one Dutch citizen opposes this legislation, while the remaining 16 million support it. The Muslim veil claims no victims. It has utility to those who wear it and no consequences for those who don’t, or even for those who do not like it. It is therefore indefensible for the Netherlands to ban such a harmless object, merely to garner support from their electorate.

Freedom is not to be limited to the temporary preferences and tastes of the people. Freedom is to be given to all those who do not wish to abuse it. And the wearers of the veil do not wish to abuse it any more than a white Dutch citizen wearing a t-shirt wishes to abuse that. It is unfortunate (and that is a vast understatement) those wishing to wear the veil in the Netherlands must be subject to the wishes of those who perhaps will never see a veil-wearing woman in their lives. Indeed, there are only 100 in the Netherlands. What a threat.

Milton Friedman Dead at 94

Someone who changed my life has died. That is not being overly dramatic; Milton Friedman did more to change me as a thinker than anyone else in my life. I was a languishing Republican, set in my convictions without truly seeing the world. And then I read Capitalism and Freedom. I didn’t agree with everything Friedman argued. I might not have agreed with half of it. Yet it was reading his tome that opened my eyes to way of thinking that I had previously disregarded. His systematic and unconventional approach (his ideas were considered radical at the time of publication) inspired me to examine my own beliefs and what I found was shocking. It was him, and solely him, that made me the thinker I am today. And it is him that will motivate me to continue to change, examine, and analyze. Rest in peace Mr. Friedman, I know I’m not the only one.

Gasoline Tax - A Further Examination

The dependence that the United States has on foreign oil is undisputed. Much of this foreign oil comes from politically volatile nations, often with foreign interests directly at odds with America. Venezuela and Iran are two glaring examples. Much ado has been made of America’s dependence on these nations, yet little has been done to curb it. Indeed, the United States is hamstrung, both abroad and at home, by its reliance on other nations for oil. Something must be done.

Pigou taxes, those that correct a market externality, appear to be taxes that correct social imbalances, or market deficiencies. A Pigou tax, for example, is a tax on cigarettes or alcohol. Yet Pigou taxes can have more far-reaching effects. A tax on gasoline consumption, another example of a Pigou tax, would not only lead to benefits domestically, but would also contribute to reducing America’s dependence on foreign oil. The Boston Herald reports that when asked if he would support an increase in the gasoline tax, former Chairman of the Federal Reserve Alan Greenspan said, “Yes, I would. That’s the way to get consumption down. It’s a national security issue.” And indeed it is. A higher gasoline tax would reduce gasoline consumption, and thus reduce the amount of gasoline America imports from abroad.

Such a reduced reliance on foreign oil-producing countries would certainly give the United States more flexibility in foreign affairs. And if one is to believe the arguments that it is oil that motivates America to involve itself in wars abroad, then a reduced reliance on the unstable countries that produce oil could perhaps even reduce the possibility of war.

Yet this is merely conjecture. And while such conjecture may indeed be correct, can such guess-work, and indeed political gerrymandering, be used to justify a significant hike on the consumption of a good many Americans deem indispensable? Perhaps it can, but it is most likely the belief of most Americans that their individual consumption of oil has little to do with America’s involvement in foreign conflicts. Therefore greater incentives are needed to make a rise in gasoline taxes more politically palatable.

Luckily, such incentives exist. The effect of gasoline consumption on the environment is becoming more and more apparent. The threat of global warming looms, and America is the world’s largest emitter of carbon dioxide. It is imperative, therefore, that America curtail its consumption of gasoline. And as it is known that the burden of a tax is shared by consumer and producer, it can be assumed that a gasoline tax will not only curb gasoline consumption, but also gasoline production. Instead, alternative energy sources will be invested in, and the reliance on gasoline will be further reduced.

The argument for a raise of the gasoline tax can be made on many more fronts. Increased revenue for the government, regulatory relief, economic growth and the reduction of road congestion are all likely byproducts of an increase in the gas tax. Yet it is the issues of national security and environmental concern that make an increase in the gasoline tax not just ideal, but imperative.

Pigouvian Taxes: Regressive?

Pigouvian taxes are taxes levied to correct the negative externalities of a market activity. Perhaps the most significant negative externality today is the destruction of the environment. An example of a Pigou tax would be a tax on gasoline consumption in order to encourage less of a dependence on gasoline, and more investment in alternate energy sources.

Such a tax, considering the importance of the environment, and the gravity of the situation, seems to be a viable and effective tool to curb gasoline consumption. Yet many argue that the tax is not morally defensible on the grounds that it is inherently regressive - that is, the tax would be more of a burden on the poor than on the rich. As conventional taxes go, such a regressive effect seems to be contradictory to the purpose of taxes themselves. Yet the purpose of a Pigou Tax is not to raise revenue for the government, nor to create more equality. The purpose is to correct negative externalities of the market and regardless of whether the tax is 'unfair' or not, the effectiveness is what is most important, and therefore the fact that the tax is regressive must be disregarded.

Nevertheless, the fact that a gasoline tax is regressive is apparent, and makes the tax an issue of political importance rather than solely an economic one. Therefore, some form of compensation for the poor must be available, if not to make it more morally appeasing, then to make it more politically viable. One possible solution is to take the revenue from the gas tax and distribute it in an expanded Earned Income Tax Credit (EITC). The Earned Income Tax Credit is a refundable tax credit that reduces or eliminates the taxes that low-income working people pay (such as payroll taxes) and also frequently operates as a wage subsidy for low-income workers. The credit would not just be given to those who are harmed by the gasoline tax (indeed that would give the poor an incentive to consume gasoline, exactly the opposite aim of the tax,) but would be distributed to all poor, as it is now. Such a scheme would at the same time reduce consumption of gasoline and alleviate the strains of poverty.

A hike in the gasoline tax is a necessary component of the attempt to save the environment. Such a tax, along with an expanded EITC, would contribute both to reducing gasoline consumption as well as reduced dependence on volatile oil producing states. Such advantages, at an expense that can hardly be considered tremendous, as other options to transportation certainly exist, would greatly benefit America as well as the environment.

Can Microfinance Work in America?

Muhammad Yunus and the Grameen Bank of Bangladesh were jointly given the Nobel Peace Prize this year. The focus of Yunus and his bank is microfinance - small loans given to the poor, most commonly women. The success of microfinance has been acclaimed by many, indeed, the payback rate has been surprisingly high and the fact that it helps the poor is undisputed. Many have insinuated that microfinance can solve the plague of poverty entirely - that is going too far, but microfinance is certainly a useful tool in alleviating the effects of poverty.

That said, microfinance is primarily thought of as a developing country-centric tool. There are indeed microfinance organizations in the United States - 246 in 2003, most of which were nonprofit. Yet the concept has not taken hold, especially not in impoverished areas. Commercial banks are, for obvious reasons, reticent to enter the realm of microfinance, and indeed, there is not much incentive for them to do so. But the Grameen Bank is an example for all to see that microfinance can be conducted by companies and organizations that are not nonprofit.

So, the question that begs to be asked, if microfinance is a feasible option in the United States for profit-seeking organizations, is clear: can it work? The question must be examined in the respect of alleviating poverty, and not in garnering profit. Although it may be irresponsible to disregard the profit motive in a dog-eat-dog economic environment such as the United States, the primary purpose of microfinance is to alleviate poverty and must be examined as such. So again, can it work?

Gary Becker, 1992 Nobel Laureate, writes, "Economic growth requires secure property rights, encouragement of private enterprise, openness to international trade, stimulation of education, limited and sensible regulations, and reasonably honest government. Microfinance makes only a small direct contribution to any of these variables." Becker is correct, but is commenting on the effectiveness of microfinance in developing countries. In the United States, where all the institutions and requirements for economic growth that Becker mentions are present, microfinance certainly can help alleviate poverty.

Some may point to the Small Business Administration, a governmental agency which aids small businesses, as an adequate substitute for microfinance in the United States. Yet, as it is a government organization, it is a terribly inefficient instrument for poverty reduction, and indeed a private sector replacement -commercial microfinance- would be far more effective. Microfinance in the United States is, however, vastly different from that in developing countries. In the latter microfinance is given to encourage primarily women to start low-technology enterprises, such as fruit stands. In the United States such ventures would be fruitless – there is simply not enough demand for fruit stands for it to be an economically viable solution for a poor family. Instead, microfinance needs to be conducted on a larger scale in order to fully ameliorate the would-be business starter. But the risk for a $5,000 loan is significantly higher than that for a $500 loan, and as such it is understandable why commercial microfinance would be seen as unviable in the United States.

Nevertheless, budding entrepreneurs throughout the United States, including those with hardly a penny to their name, abound, and available capital to them would surely in some instances reap rewards. The Small Business Administration itself, in the loans it has made, has, despite defaults, been able to actually make money for the government. How? Increased tax revenues from companies that it has helped. Quite simply, the fact that a governmental organization has been able to make money is a huge indication that the private sector can and should make itself involved in similar ventures.

The lack of a significant commercial microfinance presence in the United States, where demand would certainly be high, is troubling. It can only be hoped that the spreading popularity of microfinance will take hold in the United States, where its benefits will certainly be clear for all to see in the reduction of poverty.

Campaign Finance: Equality Cannot be Restricted

Campaign financing has gotten out of control. In the 2004 US Presidential election, George W. Bush spent $367,228,801 and John Kerry spent $326,236,288. For both candidates, that entailed spending more than $5 per voter. Such wanton and indiscriminate spending occurs for one reason: candidates are able to spend such huge amounts on their campaigns. Indeed, if they did not, they would be drowned out by their more free-spending opponents. But such spending allows the more wealthy to exert their influence and thus receive more widespread support than less wealthy but perhaps more qualified candidates.

The Federal Election Campaign Act 1971 initiated campaign reform that placed legal limits on campaign contributions. The act stipulated that candidates must disclose sources of campaign contributions and campaign expenditure. It also introduced public financing of campaigns but such funding would be available to candidates only if they accept limits on campaign expenditure. For candidates who have enough campaign funding, and do not need public financing, there is no incentive to accept such public financing. Thus, such rich candidates must not abide by any limits in campaign expenditure, while other less wealthy candidates, who must accept public financing, are entitled to limit their spending.

While such campaign finance reform certainly contributes to more transparency in campaign contributions and expenditure, it also effectively weeds out those not capable of raising enough funds. Arthur M. Okun, a notable economist, states that: “public financing of campaigns for the Congress and the Presidency is an indispensable ingredient in any satisfactory recipe for reform.” But must the taxpayer really pay for candidates that he does not support? Of course not, and thus public financing is both impractical and morally indefensible. Okun goes on to state that “society must erect a sign that clearly says ‘no trespassing’ on the right of universal suffrage.” And with this statement, I completely agree with Mr. Okun.

Yet Okun contradicts himself. We must, according to Okun, curtail one freedom (that to spend money as we see fit) with another (that to participate in fair elections.) And indeed, does public financing really ensure a fair distribution of campaign finance? Surely loopholes will be uncovered, and corrupt politicians will be able to exercise their support for certain candidates without regard to individual equality.

Instead, a universal limit on campaign spending must be instituted, which, while not limiting the distribution of information to voters, allows all candidates to participate fairly in an election, regardless of personal wealth or lobbying capability. Such a limit would also prevent unscrupulous lobbying activities during campaigns, such as those that lobbyist Jack Abramoff participated in. Is such a limit a restriction on personal freedom? Yes, for those running for office, and perhaps those wishing to support a certain candidate. The freedom that it ensures for millions of others, however, allows it to be defensible, and, indeed, necessary.

The Constitution outlines explicitly that every American, regardless of race, sex, or personal wealth, has an equal right to vote. That right has been violated. And in order to restitute it, action must be taken in order to ensure equality in campaigns. Such action should not include limitations on voters’ rights, and thus should entail universally employed measures which contribute to equality without curtailing the freedom to choose.

France to Ban Smoking in All Public Places: An Expansion of Freedom?

France has banned smoking in all public places (not including streets and hotel rooms) effective January 2008. An apparant curtailing of freedom for smokers. Or, looked at from a different perspective, an expansion of freedom for those who do not have to suffer from inhalation of second hand smoke.

So which is it? Well, both, obviously. So it is then, in deciding whether to institute a ban on smoking, the responsibility of government to determine whether banning smoking would help more people than it hurts. Government must also make a value judgement of smoking, and consider the moral implications of a ban.

Considering that smoking is said to result in an extra tax burden - in order to fund rising health expenses as a result of smoking-related diseases and ailments, and considering the potential harm that smoking results in for both the smoker and those around him, a ban on smoking in public places may seem to be a government action that is beneficial to society.

Not so fast.

It is not the government's responsibility to exercise moral judgements on smoking, nor is its responsibility to curtail the freedom of individuals who would like to smoke. It is indisputable that smoking brings pleasure to smokers. And regardless of the possible harm that smokers can cause non-smokers through so called "passive smoking," a ban on smoking severely limits all people in their choices - smokers and current non smokers alike.

Would a tax on cigarrettes make sense? Yes, because it still gives choice to the individual. A ban eliminates choice, and imposes the government's values on people who should have the right to make their own decisions regarding smoking.

In a related topic, one of which I have the same opinion as on governmental bans on smoking, New York City is considering a ban on trans-fats in order to curb obesity. Government argues that it is helping those who would later run into serious health risks due to obesity.

According to the government.

Why must the government be allowed to decide what is good for us, when we are clearly rational individuals capable of making those choices for ourselves? We must be given the choice to make choices that benefit ourselves and oftentimes that is very different from what the government believes to be beneficial. We do not need a paternalistic state in order to be prosperous and happy. We need freedom.

The Economics of Gang Life

http://gregmankiw.blogspot.com/2006/09/lively-levitt-lecture.html

Steven Levitt, author of Freakonomics, discusses the economics of being in gang. It's fascinating to break down the thought-process of young inner city kids, and to think that joining a gang that makes profit by selling crack is actually a highly rationale decision. Levitt remarks at one point during his lecture that being a crack dealer in a gang is the worst job in America, yet he acknowledges the potential benefits of an inner city teenager doing just such a thing.

A street-trader in a crack cocaine gang in Chicago earns $3.50 an hour, and if he is in on the street selling cocaine for 4 years he has a 25% chance of dying. These are horrifying conditions, but the potential payoffs are enormous. If a street-trader becomes in charge of a small part of turf, with street dealers working for him, he will earn $100,000 annually. For a young inner-city kid, who cannot go to university, or get anything but a minimum-wage earning job, earning $100,000 is tremendous, and it is obvious why a young inner-city teenager would be lured into joining a gang.

There are two problems with this situation.

First, there is a 25% chance that these street-dealers will die if they stay in the gang for four years, and such a loss of life, at the hands of other humans, is simply not acceptable.

Second, talent that could be going to university and subsequently benefiting society is instead going into violent drug-dealing gangs.

So what should be done?

The most critical component of a solution to get inner-city kids off the streets and into productive society is education. And this is government's responsibility. Inner-city public schools are simply not able to effectively craft productive members of society, and are often a recruiting ground for gangs. Furthermore, inner-city public schools have a vicious lack of motivation cycle, whereby academic success is in some instances simply not possible.

Government should provide vouchers to good inner-city students to go to private schools that provide far better education than inner-city public schools. Funneling more and more cash into public schools will not do much at all to help; the best bet for inner-city school kids with potential is to be educated in an environment in which they will not be exposed to gang violence, as well as receive a great education.

But what about getting the kids that are already on the streets, off?

That is a more difficult question to answer, as members of gangs have probably subscribed to the dogma of the gang, and endorse gang life over all else. They are most likely resistant to taking other life-paths.

Instead of trying to convince individual gang members of the ills of joining gangs, of which they are certainly aware, and disregard, the best solution is to attack the problem at the source: get rid of gangs altogether. How can such a lofty ambition be accomplished? The solution is actually fairly simple. Gangs derive practically all their revenue from the black-market sale of drugs, so if the black-market for drugs is eliminated, gangs will have no source of revenue, and will thus cease to exist. So how do we eliminate the black-market? Legalize drugs. All of them.

The black market exists because it is illegal to produce, consume, and sell drugs such as cocaine, marijuana, ecstasy, etc. Making them legal and available at licensed stores removes the black market, and allows a private and far more efficient market to arise. One might say that legalizing drugs will result in widespread consumption and the subsequent degradation of society, but to that point I argue that drugs are widely available now, and their consumption is not overtly widespread, at least not to the point of bringing society to its knees. Furthermore, drugs sold legally could be taxed, and the revenue gained from drug taxes could be used to fund school vouchers, or the police department in the inner city.

I disagree with drug illegalization on a theoretical, moral basis. Yet the illegalization of drugs has a far more widespread effect than just my objection to it. It is my strong belief that the legalization of all drugs will significantly reduce the impact gangs have on the inner city, allowing inner city kids to become productive members of society, instead of gang members trained to kill.

Al Gore Proposes Carbon Tax to Replace Payroll Tax

http://www.taxfoundation.org/blog/show/1849.html

Al Gore has proposed scrapping the payroll tax that finances social security, and replacing it with a carbon tax. According to him, the revenues from taxation would remain the same, the difference is the individual would not be taxed for working, giving him a larger incentive to work, and the business would be taxed for polluting, giving it a larger incentive not to pollute.

In short, I think this is a fantastic idea. The fact that payrolls were taxed to finance benefits that the very people who were directly taxed were to receive I find ridiculous. Why not let them spend their money as they please? It is simply government paternalism. The environment, on the other hand, is an issue which needs decisive action. A direct tax on carbon emissions would give industry a higher incentive to explore other alternative fuel possibilities, and at the same time it would lower the tax burden on the workers.

Reducing the tax on employers would give employers more incentive to employ, as they have more money available to pay workers. So not only would scrapping the payroll tax lead workers to be more productive, it would lead more workers to be employed.

The fact that under Gore's plan, carbon emissions would be taxed will inevitably be reached with harsh opposition by business ineterests, especially the coal industry, as they will certainly be hurt by a tax on emissions. So be it. The threat to our environement is too great, and the burden on the employers and employed too overbearing, for the current system of social security financing to be continued.

Of course, everything could be better if the whole system was scrapped altogether, but that, unfortunately, is political suicide.

Do Corporations Have a "Social Responsibility"?

My friend reacted poorly to my entry on “Fair Trade” standards. “Chris,” he said, “by your logic we shouldn’t buy our favorite clothes either, because they were probably manufactured in a sweat shop. How can you blame the companies?” And how can you? Is not every corporations sole obligation that towards the shareholder? Should a corporation not be concerned exclusively with profit?

My friend’s protestations of my attacks on the Starbucks corporation bring up a question that has existed as long as the corporation itself: should corporations be held morally and socially responsible?

The answer is obviously too complicated to be answered with a simple yes or no, but it is my opinion that corporations should indeed be held morally and socially responsible. At the same time, however, a corporations primary objective should be to maximize profits and benefit shareholders. So clearly a balance is required, between a corporation concerned solely with the welfare of society, and not its actual business, and one that is ruthless and merciless in its pursuit of the almighty dollar.

I draw the line at two issues, and both relate to the economic stability and welfare of society at whole: transgressions of the law, and misinformation.

I believe corporations should be held entirely responsible for staying within the boundaries of the law, whatever they be, at all costs. The law helps provide stability and predictability to a market, which, if followed by all parties, insures competing ends that any transactions they enter will be able to be backed in court, and upheld. Without adherence to the law, individuals and corporations alike would not be able to determine if transactions they undertake are fair to them, thus an adherence to the law is absolutely necessary for corporations and individuals alike.

Misinformation (also known as lying,) a subject a remarked on yesterday, hinders the ability of individuals to make decisions that benefit themselves, impeding the efficiency of markets. Starbucks, in falsely advertising that its coffee is “Fair Trade,” misleads the consumer into buying coffee that he/she believes to be environmentally friendly and ethically grown. Corporations must ensure that information they give the buyer or consumer is factually correct, and although often not upheld stringently by the law, as is the case with the Starbucks situation, it is a responsibility that corporations must undertake and accept.

So while I do not believe that corporations have the ‘social responsibility’ that many claim, such as the responsibility to provide healthcare and benefits to employees, or to be more environmentally friendly than is required, I do believe that corporations must operate within certain simple bounds, that, when transgressed, do harm society and the ability of the markets in which the corporations exist to operate efficiently.

So to my friend, when he asks me “how can I blame the corporation?” I answer quite simply that I can blame the corporation because it does not uphold its duties as a component of a free-market system, that works on the availability of information and operating within the law.

Enjoy your Starbucks Coffee You Disgusting Pigs

Starbucks, as well as many other coffee retailers, advertise their coffee as being "Fair Trade" certified. Fair Trade grown coffee is *supposed* to mean that the coffee growers were paid directly by the buyers, that workers for the coffee growers were paid minimum wage, and that the growing of the coffee was in accordance with certain environmentally friendly guidelines, among other things.

Starbucks, in advertising that its coffee is "Fair Trade" is, quite simply, lying.

An investigation by the Financial Times revealed that hardly any coffee farmers pay their workers the minimum wage, primarily because they are not being paid the minimum wage themselves. Furthermore, the Financial Times found one Fair Trade licensed farm in Peru to be growing 20% of its coffee illegally by planting on National Park designated area.

So, Starbucks, the bastion of liberal psuedo-intellectuals everywhere, the onus is now on you. Will you, given this new information, continue to brandish the Fair Trade label in order to secure more profit, at the expense of the coffee growers and workers in third world countries? Or will you act as a responsible corporation, and fight for what you advertise so vociferously?

When you walk into a Starbucks next, and see the "Fair Trade" label next to a $5.00 cup of coffee, think of the Peruvian plantation worker, getting paid $3.00 a day. And then think of the greedy Starbucks executives sitting in their boardrooms.

Oh wait!! I thought this was supposed to be a free-market, capitalist, blog? It is! Free-market means FAIR. And exploiting misinformation and lack of regulation in order to get a quick buck is not a capitalist value, and certainly not a value of mine.

I'm Back

I'm back to writing for this blog, after a hiatus of a few months. In the future I will try to concentrate on analyzing current political and economic events, but I may write a few essays as I have done in the past on various theoretical subjects.

The Federal Reserve meets on Wednesday (2 days from now.) Many analysts are predicting the Fed to keep the interest rate at 5.25%, but I think that would be a grave mistake, and an indicator of the Fed's willingness to allow excess liquidity to flow not into customary inflation, but into asset markets, such as the housing market. A huge housing market bubble has resulted, and has fueled American consumer spending. As America's economy is reliant on heavy consumer spending, a burst in the housing market bubble, which would greatly reduce the purchasing power of American households, would be disastrous.

Yet this type of bubble is exactly what the Federal Reserve (and China) continues to finance. In 2003 the Fed slashed interest rates to as low as 1% out of a fear for deflation. Why? The Fed obviously still has bitter memories of the Great Depression, in which deflation resulted in a vicious cycle of economic stagnation. But the economic situation of the 1930s is not at all similar with the economic situation of today. A comparable time period would be the 19th century, when the industrial revolution greatly increased production and thus lowered prices, resulting in deflation. Today, new industry and technology do not have as much to do with the global economic boost as does a new phenomenom: gobalization. During the industrial revolution, deflation was accompanied by great economic growth, so the fear of inflation that the Fed exhibits today is entirely unfounded.

So how has globalization contributed to lowered inflation? Emerging economies, most notably China, are able to produce goods at much lower prices than developed economies such as the United States. Thus, an influx of cheaply priced goods into the US results in lower prices across the board, holding down inflation despite economic growth and lax monetary policy.

So if monetary policy is lax, meaning there is a large amount of money in the economy, and prices are down, where does the money go? Into various asset-markets, most notably the housing market. The Federal Reserve should have encouraged deflation, and kept interest rates high, thus preventing the housing market bubble. Is it too late to fix the problem? I think a backlash of some kind from the bubble is inevitable, but the Federal Reserve must take note of the severity of the situation. Inflation has slowed in recent weeks, due to lower oil prices and a slowing of the housing market, and the Federal Reserve should attempt to continue that trend by raising interest rates at its meeting on Wednesday. This would allow the housing market to become progressively depressed rather than building up the bubble, only to have it burst instantaneously, throwing millions of Americans into economic disarray.

Some pessimism: “This soft-landing scenario is a fantasy,” says Ed Leamer, director of the UCLA Anderson Forecast."

And some more from the same economist: “Anything housing-related is going to feel like a recession, almost like a depression.”

Monopoly: Public vs. Private

Recently, the State of Indiana leased the Indiana toll road to a Spanish-Australian consortium for 75 years. This is an important step in the direction of privatization. The concerns about privatization – that is, the government giving over responsibility for an industry or utility to the private sector- are numerous. Most notably, those against privatization argue that privatization creates monopolies that extort the consumer. I argue that this concern is entirely unfounded.

First, let’s compare private companies and public, government operated ones. Private companies are far more efficient than public ones, especially with regards to setting prices and costs. This is because private companies have both a strong financial incentive and also competitive pressure to do so, something public companies do not. Furthermore, private companies’ pricing and purchasing decisions are not distorted by political pressures, or corruption, as public companies are. The problem arises, in regards to privatization, when the privatization of certain industries, companies or utilities leads to a monopoly.

Monopolies clearly are not beneficial to the consumer. They inhibit competition, innovation, and have the ability to extort consumers. Private monopolies are, however, a better alternative than public run companies. To begin with, we must understand that public companies are themselves monopolistic by definition. Therefore, in a public company, not only is competition inhibited, innovation stunted, and the consumer extorted, but pricing decisions are based almost entirely on petty politics and corruption. The other, and more important, difference between public monopolies and private monopolies is that while no possible alternative exists to a public monopoly, if a private monopoly exists, ever-changing technology and processes can bring competition to what appear to be protected markets if the profits are large enough. Take, for example, the monopoly that Microsoft held in the 1980s and 1990s. Microsoft was believed to the only available option for desktop users during that time, yet if Microsoft was not privately operated, we would not see today the other options that exist for PC users, such as Macintosh and Linux. Why? Because in order for a publicly run company to operate efficiently, and with profit, it must hold a monopoly on the services that it provides. This is logical, as public companies, which are far less efficient and profitable than private ones, would not be able to compete against privately run companies. So, in order to allow a public company to operate effectively (which, in actuality, it cannot in any situation) it must prohibit competition using its state power. This does two things: limit the freedom of the individual, and effectively prohibit any competition possible.

There are certain situations in which “natural monopoly” exists, because it is neither efficient, nor economical for there to exist competition in a given industry. If we take the Indiana Toll Road, for example, it is not at all economical for a competing company to build a toll road alongside the already existing toll road, so monopoly becomes inevitable. It is still, however, more efficient for the toll road to be privatized, as long as controls are imposed on prices levied by the company operating the toll road. This is because the operation of the toll road takes politics and corruption out of the business, and as long as the controls imposed on the company are just and fair to both the consumer and the company, a private monopoly allows the toll road (or any other industry) to be operated more efficiently.

Obviously, competition is the ideal, and monopoly, especially natural monopoly, is not. However, I believe that natural monopolistic situations are far less common today than they were, because of the ability of technology to foster competition, and allow companies that previously could not enter markets, to do so. Take as another example, AT&T. AT&T held a monopoly on telephone services in the United States, which was thought to be a natural monopoly, but new technology brought about cell phones and the internet, and the inability of AT&T to adapt to new competition has left them in the dust.

I am strongly in favor of privatizing all public enterprises when competition is effective and available, and would in most cases strongly support privatization of public enterprises in which no competition at the moment exists. Why? Because competition will always arise if profit is available, and in all industries in which a market exists, so does a profit.

Disregard the Status Quo: Minimum Wage Laws are Bad

Minimum wage laws are supposed to help the poor individuals and families who without minimum wage legislation would be severely underpaid. This logic is a fallacy of thought, because the minimum wage actually hurts the poor far more than it helps. Special interest groups (labor unions), much as is the case with public housing, have successfully been able to pressure the government into putting into legislation laws that explicitly hurt the people they claim to be helping.

Proponents of minimum wage believe that low wages are a sign of poverty, and that by introducing a minimum wage, poverty can be reduced. Isn’t poverty diminished if people are paid more? Not exactly. A minimum wage artificially raises wage rates to a level that is above their market value. Employers attempt to purchase the specific skills they need at the lowest available price, while individuals selling their labor attempt to find the highest-bidding employer. Thus the market value of wages, as well as prices, is determined entirely by the market – a simple concept of supply and demand. When the government sets wages through coerciveness (i.e. minimum wage legislation), however, the demand for labor will fall, and will result in unemployment.

Take, for example, an employer who would without a minimum wage set by government pay his lowest paid employee $5.50 an hour. If a law is passed dictating that the employer must now pay all his employees no less than $6.15 an hour, he will now hire less workers than he would before, as an individual will not be hired at $6.15 an hour if he is unlikely to produce at least that much value for the employer. Thus, a minimum wage creates unemployment, especially among the lowest paid and lowest skilled workers. The problem is, these are the individuals who are in most need of employment, and the very individuals that a minimum wage is supposed to help.

So what about those who are actually struggling to live on the bottom rung of the economic ladder? Is the government helping them by arbitrarily establishing the minimum living wage? To put it concisely, the answer is no. The government cannot create wealth by setting a minimum wage; it can only redistribute the existing wealth. So while for those who are already employed and skilled a distinct advantage is given, those who are the least employable are greatly hurt by the redistribution of wealth that results from a minimum wage. Minimum-wage legislation fosters economic inequalities by creating a gap in the economic ladder: those on the bottom rung are kicked off, but those on higher rungs climb up. By no means are such government-created inequalities fair or just.

It is the unskilled and inexperienced workers who are hurt the most by minimum legislation, so it follows logically that teenagers are the potential workers who are hurt the most. The unemployment rate for teenagers searching for a job is over 16%, while national unemployment is around 5%. Furthermore, the black teenager unemployment rate is a whopping 33.1%, 6 times higher than the national average. Why the discrepancy between black teens and white teens? It is due to the intrinsic link between a minimum wage and racism.

Say, for example, an employer is racist, and prefers to hire whites instead of blacks. And for simplicity, suppose that the employees from which he chooses are identical in terms of productivity. If there is a law, such as the minimum wage law, that requires that employers pay the same wage no matter who is hired, the employer is able to effectively discriminate against certain individuals at no cost to himself. This is because, if we assume the minimum wage is $6.15 an hour, the employer will be paying $6.15 an hour to the employee, no matter what his skin color. Without a minimum wage, the black could be hired for less, which although still discriminatory, is better than not being hired at all.

Proponents of a minimum wage argue that they are intended to help adults trying to support a family. What they neglect to realize, however, is that over 76% of minimum wage earners are not heads of households, and only 2.2% of working adults earn the minimum wage. So in actuality, a minimum wage is not helping most adults trying to support a family, and is at the same time considerably raising unemployment.

The job loss that results from a minimum wage is evident. According to a 1981 study, the 46 percent rise in the minimum wage between 1977 and 1981 destroyed 644,000 jobs among teenagers alone. Yet the government has continued to raise the minimum wage since then, because of lobbying from labor unions. Matthew B. Kibbe of the Cato Institute writes,

“Labor unions and their members are the most obvious beneficiaries of government-imposed minimum wages. As the established elite of the workforce, union members are on the receiving end of the minimum wage's redistribution process. To fully understand how unions gain from minimum-wage legislation, one must consider the essential nature of unions.”

So the government, bowing to the demands of labor unions, has disrupted the efficiency and equilibrium of the economy, and tremendously hurt unskilled workers who are made unemployed by the minimum wage.

Furthermore, the minimum wage, while preventing many from getting a job, also lessens the incentive for many workers to become more skilled, and prevents those who became unemployed from getting the experience they need to receive higher wages in the future. Obviously, this is not beneficial to the economy, and essentially allows a few to benefit at the expense of many.

The minimum wage should not be accepted solely because it is the status quo, and has been in operation for an extended period of time. The effect of powerful special interest groups on the government is profound, and in the case of minimum wage legislation, the economy, and the people, are hurt as a result.

Public Housing: Not What It Seems

Public housing, the darling of those who support social welfare, view the government, in undertaking public housing projects, to be humanitarian. This is far from being the case. While one may not realize it, the effects of public housing are deleterious to those that one may not expect: the poor. The real reason that public housing has been built by the government is not to help the poor, far from it. Instead, the government, pressured by special interest groups (who will be explained,) has, like so many of its projects, undertaken the seemingly good-willed public housing program in order to secure votes.

Arguments are frequently made that public housing improves two things: the welfare of the poor, and the well-being and appearance of the neighborhood. We will term the latter “neighborhood effects,” as Milton Friedman has termed them. In dealing with neighborhood effects, it can be said that destroying slums in order to build public housing betters the appearance of the neighborhood, but it does not better the neighborhood’s well-being. Why? Well, let’s first examine what well-being is, in a neighborhood. A low crime rate, and good education, these are two factors that lead to a neighborhood’s well being. Let’s look at each individually, in relation to public housing.

One would think that public housing deters crime. This cannot be further from the truth. In fact, public housing greatly increases crime, by concentrating the number of potential criminals together (as those who live in public housing commonly are), in one housing unit, crime becomes, obviously, more prevalent. Furthermore, public housing actually reduces the amount of housing available, as the amount of housing that has been destroyed in the course of erecting public housing projects has been far larger than the number of housing units constructed. In reducing the number of housing units available, public housing leads to homelessness and over-crowding, both of which contribute to crime for obvious reasons.

Education is also significantly worsened by public housing. “Good” students, those who behave, and work hard at school, often do not come from so called “broken” families. This is an unfortunate but true fact. Therefore, a high concentration of broken families, as there exists in public housing, for reasons that are clear, lead to schools in close proximity to public housing units to be considerably worse off. Indeed, the plight of inner-city schools is visible for all to see. Granted, public housing is not the sole cause for the ineffectiveness of inner city schools, but it does account for a large part of it.

So as a neighborhood’s well-being is clearly not promoted through public housing, what is? Those who are proponents of public housing argue that they help those poor individuals and families who would not otherwise be able to afford decent housing. But if we are interested in the poor’s welfare, why does the government not give the poor cash handouts, for the poor to use at their own accord, instead of using that money to build housing for them? What the government is doing, in building public housing, is paternalistically telling the poor: you should not trust yourselves to spend money correctly, so we will do it for you. This obviously infringes on the individual’s ability to choose. Milton Friedman states of public housing: “It can be justified, if at all, only on grounds of paternalism; that the families being helped “need” housing more than they “need” other things but would themselves either not agree or would spend the money unwisely.” So why shouldn’t the poor be able to spend money, being used on them anyway, as they wish? I am not a proponent of treating the poor without equality, as they should be given the ability to spend money as they deem fit, not the government.

Furthermore, as mentioned above, public housing projects actually destroy more housing than they create, so instead of providing more housing for the poor, public housing displaces many, and leads to severe overcrowding. This overcrowding, of course, is exacerbated by the faulty plumbing, miserable conditions of living in the ghetto, and the too often inability to rise from public housing to better accommodations.

So what is the real reason that public housing is built? A common theme in politics, it is due to powerful lobbying, and, perhaps, unintentionally paternalistic attempts at good will. The lobbying comes from those who own business, property, or interests in areas in which slums exist. They, obviously, would rather see a public housing unit instead of a slum, because this would bolster their business, their property value, or other such things.

Public housing, like many other governmental projects, should not be regarded as “good” because it is the status quo. When taking a look at the evidence, it is clear that public housing does far more harm than good, especially to the poor. My solution would be for the government to subsidize both private companies wishing to build low-cost housing, and economically disadvantaged individuals, not specifically for housing, but for whatever they determine their needs to be.

The Faults of the Occupational Licensure System

The effect that occupational licensure has on the economy is often not recognized, or noticed. Many are willing to accept occupational licensure as a way to protect citizens against fraud and dishonesty, but when a closer look is taken, it can be seen that occupational licensure does more to hurt the economy, and thus the people, than it does to help. Licensure edicts that individuals may not engage in particular economic activities except under conditions laid down by a constituted authority of the state. For example, one must pass the bar in order to practice law. This may seem logical, as preventing those who are not competent enough to pass the bar ensures that the individual, when searching for a lawyer, will be able to employ a competent one. This is not entirely true, however.

Taking the profession of law as an example, we must first take a look at the process that a potential lawyer must undergo in order to pass the bar. He must first go to undergraduate school, then to law school, and then take the bar[1], sometimes multiple times, in order to legally practice law. The costs of this procedure are enormous, and they cannot be undertaken by many. Thus, licensure of the law profession significantly reduces the number of lawyers in relation to their potential demand.

Occupational licensure also stunts innovation, because the licensed professional has no incentive to innovate or invent – he has already been granted the “reward” that innovation or invention would result in: money. As licensed professionals charge high costs solely for being licensed, what incentive do they have to be creative, and risky? Indeed, the professionals themselves, who are already licensed, discourage such innovation. Take, for example, two poignant examples of recent years. The medical profession attempted to inhibit prepaid health plans, and lawyers attempted to ban low-cost legal clinics. What are the effects of such suppression of innovation? Consider this: Thomas Edison, under today’s licensing regulations and restrictions, would not have been able to be a licensed engineer. Mies van der Rohe and Frank Lloyd Wright would not qualify to sit for the architects' certifying examination.

So what effects, you ask, do a limited number of lawyers have on the economy? Well, in terms of simple supply and demand, a limited supply, along with a high demand, as there is for lawyers, greatly increases the cost. So through occupational licensing, lawyers, who certainly support licensure, as it benefits them, are able to keep their costs exorbitantly high, at the expense of the consumer.

What is interesting to note, taking lawyers as a further example, is that the bar exam in some states, Virginia, for example, was not instilled in order to protect the individual from incompetent lawyers, but in fact, to prevent blacks from practicing law, as they did not have the financial means necessary to even take the exam. That was a form of government paternalism then, and it still is now. The government, in saying that only those who pass the bar are allowed to practice law, is essentially saying to the citizens: you should not be able to trust yourself to choose a lawyer, so we will choose them for you. This obviously is a grave infringement on individual liberty, and furthermore, does not allow the economy to act efficiently.

Licensure does nothing for the consumer but artificially raise prices. What it does for the professional is keep prices artificially high, and the number of people practicing the profession, artificially low. Of course, in a free market economic system, any supply and demand totals that are kept either artificially high or low negatively affect the economy.

Even so, one might argue, if the quality of medicine, for example, is higher due to licensure, the higher costs are justified. This is faulty logic, as it does not take in to account the many, who, because of the high costs, can no longer receive the medical aid that they would have had, had there been no licensure. These would-be consumers instead rely on “do it yourself” methods, which obviously put the individual at risk, and is of significantly worse quality medical aid than what would be received by the individual if there were no licensing laws.

Why is an unfair advantage given by the government to these producer groups? For one thing, it is clear that the producer groups that require licensure to operate are powerful lobbying groups. The American Medical Association (AMA), for example, has essentially a monopoly on the medical business in America, and has greatly stunted growth and innovation in the medical field. So why, you ask, has it not been targeted under the Sherman Anti-Trust Act? Well, it has, in 1943, in American Medical Ass'n. v. United States, the Supreme Court ruled against the AMA. The AMA continues, however, to operate the same as it did 60 years ago, because it is a powerful lobbying group in Washington that politicians are too afraid to contend. The same is true for other organizations of producer groups, such as the Bar Association.

So what should be done? It is clear to me that occupational licensure, in all professions, should be done away with, and true competency, as shown through actual experience, should be the deciding factor in a professional’s ability to attract customers. This is the way a true free market system works, and how the economy runs most efficiently. If licensure is abandoned, we will see more innovation, lower costs, and greater supply, thus greater availability.

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[1] Although it is not necessary to go to either university or law school in order to take the bar exam, it is widely accepted as the only way to be able to pass the exam.

Gary Becker's Solution to Traffic Congestion

A great piece on how traffic congestion can be solved by an economics professor at the University of Chicago.

http://www.becker-posner-blog.com/archives/2006/02/the_solution_to.html

The Faults of Socialism

There are many who, now that the bitter taste of the USSR's failure has begun to wear off, point to socialism as a viable and successful model. These proponents of socialism (by the way, where were they in 1985, for example?) argue that socialism increases standard of living, by providing citizens with a highly centralized government, that provides myriad benefits. These benefits include free healthcare, education, welfare, etc. What socialism does not provide, however, is personal liberty. Socialism by definition requires an extremely high tax rate, in order to fund its many welfare programs. It also does not allow the economy to reach its potential, as a free market system does, because socialism does not encourage competition, and thus fosters complacency.
Many believe that it is possible for a socialism economic system to exist alongside a political democracy. I argue that such a situation is impossible. I refer to a particularly poignant passage by Milton Friedman, the founder of modern economics:

"Economics arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arragnements is itself a component of reedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom."

An individual's power to choose is a freedom that he or she sacrifices in a socialist system. By giving the majority of one's money to government, through taxes, the socialist is sacrificing the ability to invest that money in what he deems necessary. He is, essentially, admitting that government better knows how to spend his money than he does.
In a truly capitalist system, the individual is given the ability to invest his money how he likes. In the free market system, healthcare and education systems will exist privately, because there is demand for them. Because of this demand, there will be many choices in healthcare and education available to the individual, as opposed to the only one healthcare and education system that exists under the auspices of a socialist economic and political system. Thus, the individual's power to choose is eliminated in a socialist system, but encouraged in a free market capitalist one.
Competitive capitalism, unlike socialism, also promotes political freedom, as it separates economic power from political power and thus enables the one to offset the other. In a socialist system, the government controls the economy, so the individual has neither political, nor economic freedom.

Hey

This is going to be a blog on a variety of things, hardly any of it concerning my personal life. I will comment on a range of subjects, but most often politics and economics, as these are the subjects that interest me the most. I might update weekly, maybe bi-monthly; I'll see how it goes.