Encouraging Job Creation in Claycomo, Mo. Louisville, Ky.

Posted on by Christine Harbin

Contributors to Show-Me Daily have previously discussed the state subsidization of the Claycomo Ford plant, which secured $150 million in tax credits from the state government over the summer.

It appears that the company figured out how to secure tax credits from the state government without increasing the level of employment. Ford is sending one line to Kentucky, but it is starting a new line in Kansas City. Although the number of jobs will remain constant, the company will continue to receive financial assistance from the state. Failing to deliver on promises, in terms of job creation and economic activity, is unfortunately a pervasive problem in Missouri. From an article in the Kansas City Business Journal:

The automobile side of the Kansas City Assembly Plant will cease production sometime during the fourth quarter of 2011, soon after the Louisville Assembly Plant in Kentucky begins production of the next-generation Ford Escape.

The effect on the 3,700 hourly employees in Kansas City remains unclear. However, Missouri state officials seem to expect some downtime at the Kansas City Assembly Plant in Claycomo, Mo., creating an opportunity for a big retooling in preparation for a new product.

Ford has a long history of pitting states against each other, so this news is not particularly surprising. The company has a pattern of securing millions in incentives from state governments, then shutting down operations and leaving the state unless it can secure additional incentives. Taxpayers, of course, are left to pick up the tab.

Don’t forget that the state of Michigan issued $909 million in incentives to Ford in October.

I find it disconcerting that the state government has a working relationship with the company in its operations. According to a statement from Gov. Jay Nixon’s office:

We have been working closely with senior Ford officials for months to make sure the vehicles of the future are manufactured at the Claycomo plant, and it’s clear that our hard work will pay real dividends for Kansas City and suppliers in communities across Missouri. We look forward to putting the finishing touches on this agreement in the coming weeks. Automotive manufacturing has a bright future in the Show-Me State.

Government officials can attempt to anticipate what the most efficient solution to a given problem will be — but, in all likelihood, they will get it wrong. This is because no individual has access to perfect information. As the Show-Me Institute’s editor Eric Dixon explained in the comment section of a recent post, the likelihood that an individual is wrong increases as he becomes further removed from the decentralized feedback loops that markets provide. Nixon and state policymakers are too far removed from the business of manufacturing vehicles to know the optimal state of the market. Missourians would be better off if the state government stayed out of this particular market, and instead allowed market forces to work.

This reminds me of the following concept that Henry Hazlitt describes in Economics in One Lesson. I cite this classic work frequently because it relates to many public policy issues in Missouri. I referenced this passage in a recent post in which I argued that government non-intervention is the optimal job creation strategy. Hazlitt wrote:

When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only where bridges must be built, the government spenders begin to ask themselves where bridges can be built.

Would the Claycomo plant stay open in the absence of the subsidy from the state of Missouri? If it would not, then the plant is, essentially, an invented project that is maintained because it can be, rather than because it satisfies a market demand. The fact that the new line has yet to be determined makes me wonder whether the project is in the process of being invented.

Obamanomics: Growing the Pie or Dividing the Pie?

Posted on by Jeffrey Miron

Jeffrey A. Miron, senior fellow at the Cato Institute and director of undergraduate studies in the Department of Economics at Harvard University, discusses the economic impact of the federal government’s 2009 stimulus package. Miron says because tax liabilities accompany any government spending program, last year’s stimulus package may not have expanded the output of the American economy, but instead simply redistributed the economy’s output. This lecture was presented in conjunction with Saint Louis University’s John Cook School of Business on March 17, 2010.

Miron’s area of expertise is the economics of libertarianism, with particular emphasis on the economics of illegal drugs. He has served on the faculty at the University of Michigan and as a visiting professor at the Sloan School of Management, M.I.T. and the Department of Economics, Harvard University. From 1992-1998, he was chairman of the Department of Economics at Boston University. He is the author of Drug War Crimes: The Consequences of Prohibition and The Economics of Seasonal Cycles, in addition to numerous op-eds and journal articles. He has been the recipient of an Olin Fellowship from the National Bureau of Economic Research, an Earhart Foundation Fellowship, and a Sloan Foundation Faculty Research Fellowship. Miron received a B.A., magna cum laude, from Swarthmore College in 1979 and a Ph.D. in economics from M.I.T. in 1984.

The Case for Eliminating Subsidies to Industries

Posted on by Christine Harbin

On a previous post about subsidizing industries, a Show-Me Daily reader poses the following question:

So it would be better to not subsidize these programs and allow them to not exist? It’s not worth it to let them become proven while working toward the longer-term goal of eliminating the subsidies?

The writer introduces infant industry argument, which supporters of subsidies commonly use. The argument implies that emerging industries need to be protected temporarily in order to develop the economies of scale that established companies and industries possess.

My answer is an emphatic yes. For reasons that I am about to describe, it would be better if the state did not subsidize these programs.

If these subsidies were eliminated, many groups would be better off. Consumers represent one group that would certainly benefit. Protecting industries hurts consumers because it: (1) restricts new suppliers from entering the market (which restricts supply and increases the price to the consumer); (2) removes the incentive for existing suppliers to innovate (which decreases product quality); and, (3) restricts their access to consume non-protected competitive products. Furthermore, eliminating subsidies to particular industries will not restrict the variety of goods and services available to consumers. When industries focus production according to their comparative advantage and then trade with others, Missourians will still be able to consume in the absence of subsidy.

Taxpayers would be better off in the absence of such subsidies, as well. The subsidies distort relative prices, which consequently distorts the mix of goods and services available for consumption. A firm that receives a subsidy from the government can charge a lower price to consumers, who consequently have an incentive to consume a greater quantity of it. Additionally, if the subsidies were eliminated, taxpayers would be able to keep a greater percentage of their earnings that they can save, invest, and/or spend on the goods and services that they naturally prefer in the private sector, rather than the goods or services that happen to have artificially lower subsidized prices.

Another group that would benefit from the elimination of subsidies is businesses and industries that do not currently receive subsidies. The government places this group at an artificial competitive disadvantage by dispensing political favors to its competitors.

Milton and Rose Friedman disputed the infant industries argument in their book Free to Choose: A Personal Statement. They wrote:

[T]he “infant industry” argument [is] advanced, for example, by Alexander Hamilton in his Report on Manufactures. There is, it is said, a potential industry that, if once established and assisted during its growing pains, could compete on equal terms in the world market. A temporary tariff is said to be justified in order to shelter the potential industry in its infancy and enable it to grow to maturity, when it can stand on its own feet. Even if the industry could compete successfully once established, that does not of itself justify an initial tariff. It is worthwhile for consumers to subsidize the industry initially–which is what they in effect do by levying a tariff–only if they will subsequently get back at least that subsidy in some other way, through prices lower than the world price or through some other advantages of having the industry. But in that case is a subsidy needed? Will it then not pay the original entrants into the industry to suffer initial losses in the expectation of being able to recoup them later? After all, most firms experience losses in their early years, when they are getting established. That is true if they enter a new industry or if they enter an existing one. Perhaps there may be some special reason why the original entrants cannot recoup their initial losses even though it may be worthwhile for the community at large to make the initial investment. But surely the presumption is the other way.

Additionally, subsidized industries have difficulty weaning themselves off government assistance. I have previously discussed this in the context of film tax credits. When a state protects a particular industry and/or provides financial aid, the industry tends to remain dependent on that protection or subsidy. Furthermore, industries that are subsidized do not have an incentive to innovate because they are not subject to the same competitive pressures as those that are unsubsidized.

More often than not, when an industry refers to itself with the “infant” term, it’s simply seeking rent through legislative favoritism. Milton and Rose Friedman also discussed this concept in Free to Choose: A Personal Statement. They wrote:

The infant industry argument is a smoke screen. The so-called infants never grow up. Once imposed, tariffs are seldom eliminated. Moreover, the argument is seldom used on behalf of true unborn infants that might conceivably be born and survive if given temporary protection; they have no spokesmen. It is used to justify tariffs for rather aged infants that can mount political pressure.

Lessons of the Great Depression

Posted on by Lawrence Reed

Lawrence W. Reed, president of the Foundation for Economic Education, explains the causes of the Great Depression of 1929 – 1941 and outlines the clear lessons that historical episode provides for modern economic crises. This lecture was presented at a Show-Me Forum luncheon on Nov. 11, 2009, at the Kansas City Public Library.

Lawrence W. Reed is President of the Foundation for Economic Education (FEE), heading up one of the oldest and most respected economics institutes in the United States. Before joining FEE, Reed served as president of the Mackinac Center for Public Policy for two decades, helping it emerge as the largest, and one of the most effective and prolific, of more than 40 state-based free-market think tanks in the United States. Reed has traveled all over the world as a freelance journalist, and has shared his observations about politics and economics through thousands of newspaper, journal, and magazine articles, as well as radio commentaries, commencement addresses, speeches, and five books. His most recent book is Striking the Root: Essays on Liberty. In addition to writing a regular column for The Freeman, a journal published by FEE, Reed has served on the board of directors for the State Policy Network, as well as on the board of trustees for FEE, acting as chairman of FEE’s board of trustees from 1998 through 2000. Reed holds a B.A. in economics from Grove City College and an M.A. in history from Slippery Rock State University. He has received honorary doctorate degrees from Central Michigan University and Northwood University.

I Love Arbitrash!

Posted on by Mary Chism

Arbitrage, in economics, is when someone trades commodities in such a way as to realize a profit from the price differences within or between markets. Arbitrage involves, essentially, taking advantage of opportunities for profit with little risk. This might be seen as sneaky or underhanded, but arbitrage actually helps stabilize prices across a market, by neutralizing any glaring price inconsistencies. Arbitrage is great, because it demonstrates a wonderful market niche that derives maximum efficiency from the available resources.

When wealth in the form of goods, such as clothing, appliances, or furniture, is obtained basically for free, because it has been deemed useless by a previous owner, I call that “Arbitrash.” It may be trashy, but it sure can be profitable in the form of physical wealth obtained for little or no money. Examples of arbitrash include thrift stores (whose primary merchandise consists of old clothes that people wanted to throw away), money paid for cans at a recycling plant, getting furniture or scrap metal out of the trash (or next to the trash), Dumpster diving, and hand-me-down clothes.

Especially when many people are worrying about their financial futures, arbitrage begins to look better and better, because it entails being resourceful and paying attention to sources of wealth that are being ignored. In the days of the Great Depression, people were forced to adopt this mindset, and they summarized it with a popular saying: “Use it up, wear it out, make it do, or do without.” I have to admit that I love this little poem, because it makes me feel like I can go shopping for free! You may have surmised from this point that I am quite a tightwad. As a youth, I loved reading the The Tightwad Gazette, a newsletter published by Amy Dacyczyn, the Frugal Zealot. Amy’s creative, miserly wisdom is just the thing to help folks with recently shaky finances make the most of their resources — and, more importantly, to prepare for a future of miserly, financially responsible spending.

As an example of how Americans might be more open to accepting the idea of arbitrage, the online marketplace Etsy sells handmade items, many of which are clearly made from trash (and don’t try to hide it). They even have a word for this: “upcycled.” The term implies that what was once just trash becomes something better and useful, or beautiful. In other words, wealth created from waste. This listing even advertises:

Be prepared for the uncertain future while keeping waste out of our landfills! This item is 100% made in the USA.

This listing says it more concisely:

Sustainable is the new classy!

Some of the worst items marketed on Etsy are recycled as digital arbitrash in the form of Regretsy, a blog highlighting hilarious handmade products. The blog not only entertains readers and pays the bills for April Winchell, its author, but it also raises money to fight childhood cancer, and increases Etsy’s web traffic by way of many links to items for sale. In fact, many Etsy crafts featured on Regretsy sell for high prices, because so many people want to own the item, sometimes made out of trash, that was mocked by Winchell. Regretsy aside, I’m not making fun of the Etsy sellers for making stuff out of trash; instead, I am applauding the wealth creation that occurs when people are allowed to dream up their own market niches.

The wonderful thing about arbitrage is that it takes waste and transforms it into wealth. For example, from The Myth of the Robber Barons, the Show-Me Institute’s book club learned that when Benjamin Silliman, Jr., refined crude oil into kerosene as a substitute for the whale oil commonly used to light lamps, he also created paraffin and gasoline as by-products. I guess he wasn’t such a SillyMan after all.

Why Do Wages Increase?

Posted on by John Payne

My last post comparing the standard of living of George Vanderbilt with that enjoyed by most Americans today has inspired a fair amount of debate, which has recently centered on the question of what has caused the incredible increase in real wages over the past hundred plus years: free markets or unions and government intervention. Instead of simply writing another comment in the thread, I decided to address this in another full blog post because this question gets to some of the most fundamental differences between those, like myself, who want minimal government control over markets and those who believe that governments need instead to steer markets and engineer desired outcomes.

Before I explain the factors that cause wages to increase, let’s look at two factors that do not increase wages but are commonly assumed to do so: minimum wages and unions. Elementary economics holds that a price floor will cause a surplus; in this case, the minimum wage sets a price floor for labor and results in excess unemployment. Throughout the 1990s, supporters of the minimum wage frequently trotted out a study by economists David Card and Alan Kreuger that purported to show an increase in employment in New Jersey after the passage of a higher minimum wage. Unfortunately, Card and Kreuger relied on surveys of business owners to establish employment data, and when other economists attempted to replicate their results by looking at the actual payroll data, employment was found to have fallen after the increase in the minimum wage, just as standard economic theory predicted.

More recently, David Neumark and William Wascher wrote the book Minimum Wages, published by MIT Press in 2008, analyzing more than 300 studies of the minimum wage. They found that the vast majority of the studies showed a negative effect on employment. As Neumark wrote in a 2009 Wall Street Journal editorial:

Despite a few exceptions that are tirelessly (and selectively) cited by advocates of a higher minimum wage, the bulk of the evidence — from scores of studies, using data mainly from the U.S. but also from many other countries — clearly shows that minimum wages reduce employment of young, low-skilled people. The best estimates from studies since the early 1990s suggest that the 11% minimum wage increase scheduled for this summer will lead to the loss of an additional 300,000 jobs among teens and young adults. This is on top of the continuing job losses the recession is likely to throw our way.

The reduction in jobs for youths might be an acceptable price to pay if a higher minimum wage delivered other important benefits. Many people believe, for instance, that it helps low-income families. Here, too, the evidence is discouraging. There is no research supporting the claim that minimum wages reduce the proportion of families living in poverty. Research I’ve done with William Wascher of the Federal Reserve Board and Mark Schweitzer of the Cleveland Fed indicates that minimum wages increase poverty.

The minimum wage can raise the wages of some low-skilled workers, but others will lose their jobs altogether because they lack sufficient skills to make their labor worth the higher legislated price. This more than wipes out any societal gains that might result from an extra dollar or two per hour for the workers who remain employed. The minimum wage’s effect on aggregate wages is neutral at best — merely transferring wages from some low-income workers to other low-income workers who possess better skills. More often, the effect is negative.

Unions are not necessarily as detrimental as a minimum wage, but they are still a zero-sum game at best. A union’s gains must be another group’s loss. One commenter on my previous blog entry, Dempster Holland, admitted as much when he wrote that “Unions have hist[o]rically shifted money from business owners to the workers who make their business work.” That’s certainly possible, and I even agree that sometimes unions have been useful in achieving greater equity for themselves. However, those gains come at a cost, and therefore cannot explain generally rising standards of living. If George Vanderbilt’s employees took everything he owned for themselves, they might be personally wealthier than they would have been otherwise, but society would still have the same amount of wealth — redistribution of existing wealth doesn’t create new wealth. It is simply not possible that we achieved a standard of living for the average American that is higher than Vanderbilt’s in many ways simply by dividing up his wealth, or the wealth of others like him, among far greater numbers of people.

Furthermore, a union’s ability to redistribute money from business owners is limited. In most enterprises, there aren’t many owners relative to workers, so taking money from them to give to the workers would yield limited dividends. More commonly, unions benefit their members by dividing a given amount of wages among fewer people, by limiting the labor pool. A large survey of unions and employment in 17 OECD countries from 1960 to 1996 revealed that although unions increased the wages of prime age men, they led to greater unemployment among women, youth, and older men. In short, union activity does not result in wages going up across the board — it merely reshuffles existing wealth, from workers outside the union to those inside it.

If unions and minimum wages don’t make us richer as a society, what does? Higher productivity. In order for people to enjoy more goods and services, we have to produce more goods and services, and that means more capital — both physical and human. Faster computers, more efficient machines, improved delivery techniques, and more efficient methods for synthesizing drugs all enable each worker to produce more wealth than he could otherwise, and businesses need no encouragement from the government to pursue any of those strategies. Thanks to the profit and loss system, businesses have an automatic incentive to do more with less, because in the short run this will increase their profits. However, as their competitors also adopt the same innovations, those profits are competed away and instead translate into both higher wages for workers and lower prices for consumers, which also contributes to an increased standard of living.

It’s important to note that this process of maximizing efficiency in order to produce more with less is a positive-sum game, unlike the zero-sum (or negative-sum) game of redistribution through minimum wage laws or unions. That means that new wealth is created where there was none before, rather than simply moving existing wealth from one person or group to another. Only through this kind of positive-sum activity can the standard of living increase throughout society over time. There are policies that government officials can pursue that help to maximize productivity gains, but there is no magic wand that they can wave to make everyone richer by fiat. Economic growth is a dynamic process that cannot be planned or controlled from the top down.

Charter School Benefits and Research: An Interview With Dr. Caroline Hoxby

Posted on by Caroline Hoxby

During Dr. Caroline Hoxby's recent trip to Saint Louis to speak about charter school research, she spent a few minutes speaking with the Show-Me Institute about some of the key points contained in her lecture. In this interview, Hoxby explains the benefits of charter schools, outlines the challenges that charter schools currently face, points out the reasons for success in many charters, and more.

Hoxby is the Scott and Donya Bommer Professor of Economics at Stanford University, a senior fellow of the Hoover Institution, the director of the Economics of Education Program at the National Bureau of Economic Research, and Senior Fellow of the Stanford Institute for Economic Policy Research.

Slate Article About Film Projectionists Provides Insight Into Occupational Licensing

Posted on by David Stokes

A Slate article about the decline of the film projectionist profession provides insight into the real reasons for occupational licensing standards. From the story (emphasis added):

Platters appeared in the mid-’70s and, suddenly, instead of two projectors showing individual 20-minute reels of film, projectionists were taking all the individual reels and building them into one monster reel that lay on its side on a spinning platter, and the entire film would feed through a single projector. Films would still have to be built—assembled from individual reels into platters—but with no need for reel changes and a consistent light source, projectionists were no longer needed to run the movies. The unions tried to hold back the inevitable, but chain theaters wanted to get away from expensive union contracts, and the first thing to go were licensing standards.

“Giuliani came in and started to change things to be more favorable to management, and we sensed it was going to be a problem,” Rivierzo says. “They wanted to get rid of the projectionist license completely. We fought it at city council, and eventually what they did was water down the test so anyone could pass it.”

“Before, you used to have to take a 100-question exam to become a licensed projectionist,” Ramos says. “And you had to know electricity, you had to know your currents and your storage and so forth, and you also took a practical exam. But they dumbed it down to a 40-question exam, and the department of consumer affairs took over testing rather than the bureau of gas and electricity. So managers were able to get their license and run the theater, run the box office, run everything, for ten bucks an hour.“

This is a pretty clear example of unions using licensing standards to protect jobs which are being threatened (or eliminated) by technological improvements. If it were up to the union in this story, theaters would still be required to follow the old projectionist rules despite the fact that technology has made the old job pointless in most cases. Some union jobs would have been maintained, albeit at a higher and totally unnecessary cost to filmgoers. They used political power to fight the advance of technology as much as they could. Using the term “dumbed it down” in reference to the test is absurd, because the test only eliminated the necessity of knowing information that was no longer applicable to the new technology.

This is, of course, a familiar story. We are seeing it play out right now with HVAC licensing in St. Louis County. Business down because of the recession? Expand licensing, claim you are protecting safety, and drive your small or non-union competitors out of business. “Drive out of business” may be an exaggeration in this instance, though, because the protectionism here entails more of a restriction on how non-licensed competitors can grow their businesses, by restricting what they can work on. It also prevents future competition by making it harder for people to enter the market in the first place.

Occupational licensing serves primarily to protect the interests of the people already working within an occupation. It always has, and always will.

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