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The ‘Fallacy of the Special Case’: Intellectual inconsistency and economic malpractice regarding the minimum wage
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Walter Williams explains why he considers it to be “economic malpractice” for (former) economist Paul Krugman (and others) to claim that the Law of Demand applies universally except apparently in one case: the demand for unskilled and low-skilled workers. As the title of his column suggests (“Embarrassing Economists“), Professor Williams finds it embarrassing that some (former) economists like Krugman are not bothered by their own “intellectual and economic inconsistency” (see graphic above). Here’s Walter:
Suppose the prices of automobiles rose by 100 percent. What would you predict would happen to sales? What about a 25 or 50 percent price increase? I’m going to guess that the average person would predict that sales would fall. Suppose that you’re the CEO of General Motors and your sales manager tells you the company could increase auto sales by advertising a 100 percent or 50 percent price increase. I’m guessing that you’d fire the sales manager for both lunacy and incompetency.
It turns out that there’s a law in economics known as the first fundamental law of demand, to which there are no known real-world exceptions. The law states that the higher the price of something the less people will take of it and vice versa. Another way of stating this very simple law is: There exists a price whereby people can be induced to take more of something, and there exists a price whereby people will take less of something.
There are economists, most notably Nobel Prize-winning economist Paul Krugman, who suggest that the law of demand applies to everything except labor prices (wages) of low-skilled workers. Krugman says that paying fast-food workers $15 an hour wouldn’t cause big companies such as McDonald’s to cut jobs. In other words, Krugman argues that raising the minimum wage doesn’t change employer behavior.
Krugman says that most minimum-wage workers are employed in what he calls non-tradable industries — industries that can’t move to China. He says that there are few mechanization opportunities where minimum-wage workers are employed — for example, fast-food restaurants, hotels, etc. That being the case, he contends, seeing as there aren’t good substitutes for minimum-wage workers, they won’t suffer unemployment from increases in the minimum wage. In other words, the law of demand doesn’t apply to them.
Let’s look at some of the history of some of Krugman’s non-tradable industries. During the 1940s and 1950s, there were very few self-serve gasoline stations. There were also theater ushers to show patrons to their seats. In 1900, 41 percent of the U.S. labor force was employed in agriculture. Now most gas stations are self-serve. Theater ushers disappeared. And only 2 percent of today’s labor force works in agricultural jobs. There are many other examples of buyers of labor services seeking and ultimately finding substitutes when labor prices rise. It’s economic malpractice for economists to suggest that they don’t.
MP: I’ve often referred to the “intellectual and economic inconsistency” described by Professor Williams above regarding the minimum wage (and displayed graphically above) as the “Fallacy of the Special Case.” For example, to somehow exempt the labor market for unskilled workers from the Law of Demand is to fallaciously create a “special case” for that market when in reality that supposed “specialness” cannot be supported by any theoretical or empirical evidence. In reality, there is really nothing “special” about the market for unskilled labor that would distinguish it in any economically important way from any other good or service. In other words, the Law of Demand and the Law of Supply are economic laws that apply universally, without exception, and without any “special cases,” in the same way that the Law of Gravity applies universally, without any exceptions or special cases (Walter Williams makes this point in his column). To allow for exceptions or special cases to market fundamentals and economic reality is faulty, inconsistent and fallacious thinking.
Here are some other examples of the Fallacy of the Special Case:
1. After a natural disaster like a hurricane, flood, tornado or earthquake, government-mandated price controls to prevent “price gouging” are frequently imposed by local or state governments because those major disruptions are incorrectly viewed as a “special case” that justifies temporarily ignoring fundamental economic laws of supply and demand and outlawing market prices.
2. Tickets to concerts or sporting events are a “special case” that justify laws and price controls that prevent those tickets from being sold above face value (i.e. “ticket scalping”). In contrast, other goods like old coins that sell above face value, new cars that sometimes sell above their sticker price, bonds that sell above their par (face) value, and houses that sell above their listed price are not considered to be “special cases,” and there are therefore no laws against “coin scalping,” “car scalping,” “bond scalping” or “house scalping.”
3. Rental apartments in some cities like New York City, Berkeley, and Santa Monica are viewed as a “special case” of housing that justifies special treatment in the form of rent control laws that exempt rental housing from fundamental economic laws of supply and demand. Other housing options like condominiums, homes, co-ops and hotels are not special, and are therefore not subject to any special exemptions from economic reality and market pricing.
Bottom Line: The real danger of the Fallacy of the Special Case is that those allegedly special exceptions to basic economic laws almost always result in legislation that is based primarily on political, and not economic, considerations – minimum wage laws, price gouging laws, ticket scalping laws, and rent control laws. Ignoring economics and/or attempting to circumvent market pricing by allowing for some markets or goods to be “special” might make sense politically, but the legislation that follows makes us much worse off economically, makes us all poorer, and lowers our standard of living. Politicians and the general public can be excused for falling for the Fallacy of the Special Case and supporting price controls like the minimum wage that make us worse off, but the economics profession and (former) economists like Paul Krugman should really know better.
Petropreneur Harold Hamm summarizes the profound implications of the Great American Shale Revolution
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Shale pioneer and “petropreneur extraordinaire” Harold Hamm (Continental Resources CEO) has a great op-ed in today’s Investor’s Business Daily titled “Fracking Revolution Cuts Prices, Drives A Stake Through OPEC’s Heart.” Mr. Hamm outlines some of the important, and yet frequently overlooked, consequences of the Great American Shale Boom and its profound geopolitical and economic implications, here’s an excerpt (emphasis added):
We have heard the story before: political turmoil in the Middle East, disruption of global oil supplies by members of OPEC. In the past, the unrest in Iran would be causing oil prices to spike up. Instead they have been falling by more than 25%. Gas prices at the pump have fallen to below $3 a gallon in many markets.
That’s quite a change from the past 40 years, when OPEC and other foreign oil producers have wielded oil as a political and economic weapon to slow down and even cripple the U.S. economy. Saudi Arabia was by far the world’s biggest producer. In those years we were highly dependent on foreign oil and captive to OPEC supply disruptions, which led to a wild ride of oil price gyrations.
No more. OPEC is becoming a toothless tiger.
And the underappreciated reason for this bullish turn of events is the U.S. energy revolution and the technologies that made this all possible. Thanks to horizontal drilling and other smart drilling technologies, we have unlocked a treasure chest of shale oil and gas and other unconventional domestic sources, so America now has an almost unlimited supply.
What this means is that America is no longer a bit player in global energy production. Now our country is well-positioned for energy independence by the end of the decade and then for world energy supremacy for decades to come. Already the U.S. has surpassed Saudi Arabia as the No. 1 oil producer (see chart above) and Russia as the No. 1 natural gas producer. It’s almost impossible for OPEC to drive the world price of oil when America is the biggest producer.
At the same time, the Saudis are technologically way behind the U.S. in oil and gas drilling. The oil sheiks are nearly maxed out at their current rate of production. By contrast, the U.S. has increased oil production by an enormous 65% over the past five years. We can and should use our nearly unlimited oil and gas supplies to drive a stake through the heart of OPEC — forever.
The energy revolution in America that I have been proud to be part of is obviously good for jobs and economic growth in the U.S. Without our industry, the U.S. would practically still be in a recession. And we are clearly helping fight terrorism by importing less oil from those who compete with and dislike us.
Now we are learning that the spectacular rise in American-produced energy is helping consumers in a big way. As technology improves, we are just seeing the first stages of higher domestic output and lower prices. The decline in oil and gas prices at the pump is like a $75 billion tax cut per year for U.S. households. Let’s see Washington deliver anything like that soon.
MP: Harold Hamm is best known for pioneering the development of the large shale oil resources of the Bakken formation in North Dakota, where those oil fields are now producing more than 1 million barrels of oil per day, double the amount just three years ago. Overall, the Bakken formation has now produced more than one billion barrels of oil in total, and in the process has transformed North Dakota into an “economic miracle state” with the lowest state unemployment rate in every month since January 2009. And yet despite the Bakken miracle and its major implications for the US economy, energy security and geopolitical advantages, it’s an area of the country that President Obama has completely ignored. Until June of this year, the President had never visited the Peace Garden State during his more than five years in office, and when he did decide to make a trip there in June he visited the Standing Rock Sioux Indian Reservation where the unemployment rate is 79% instead of visiting the Williston area at the epicenter of the Bakken boom where the county jobless rate is the lowest in the country at only 0.8%. Not surprisingly, the president continues to ignore one of the greatest and most remarkable energy success stories in US history – the Bakken boom that Harold Hamm is largely responsible for – even though the energy and jobs stimulus to the US economy provided by the shale boom probably helped him get re-elected.
HT: Warren Smith
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In today’s WSJ, physicist and Manhattan Institute senior fellow Mark Mills explains why “The Oil Price Swoon Won’t Stop the Shale Boom,” and why in fact Shale Boom 2.0 is coming, here’s an excerpt:
With oil prices sliding, energy investors are worried, while Saudi Arabia and Russia no doubt hope, that low prices will cap America’s boom in shale-oil production. But price dips are common in oil and other markets subject to cyclical swings. True enough, sellers of any product prefer high prices to low; but the current slump sets the stage for what I call America’s shale boom 2.0. Three factors make it unlikely that the decline in oil prices will bring the shale revolution to an end.
1. Shale production is profitable at today’s lower prices. We know this because the boom began during the Great Recession years of 2008-09, when prices fell below $50 a barrel. The price U.S. shale producers got for their oil during the boom averaged around $85 to $90, even though the world price stayed well over $100.
That spread—the difference between the West Texas Intermediate (WTI) and world (Brent) price—was a direct consequence of too much domestic oil chasing too little capacity to move, store and use it. Yet in the past five years alone more than $500 billion of private investment went into hydrocarbon infrastructure. U.S. shale output was obviously profitable enough to spur the stunning growth in production and infrastructure when domestic prices were in the same range as world prices today.
2. Shale production is getting more efficient, which means that profits are possible at prices even lower than today. Smart drilling techniques—horizontal drilling, hydraulic fracturing and information technologies that accurately locate where to place rigs and enable precise steering of the drill through meandering horizontal hydrocarbon-rich shales—are far more productive than when the boom started.
According to the Energy Information Administration, the quantity of shale or natural gas produced per rig has increased by more than 300% over the past four years (see examples in the charts above). This rise in productivity matches (in equivalent terms of capital cost per unit energy out) the improvements in solar power, but it took 15 years for solar’s gains. Solar is now experiencing a slow-down in efficiency improvements; there is no sign of a slow-down in shale technology.
3. You might think that the latest drilling technologies are already in use, an easy sell when cash is gushing. Not so. Businesses rationally resist spending to disrupt existing machinery and operations simply to learn new tools and techniques. But they will chase profits through efficiency-boosting innovation in leaner times.
The pipeline of next-generation shale tech has been piling up with unfielded advances. These include automated drilling, micro drilling that allows for far faster deployment with a smaller rig footprint and new types of drills (some may use lasers soon), and big-data analytics to maximize yields by tapping into the surprising volume of data from complex shale operations. There is also nanotechnology to radically improve chemical formulations and safety, on-site water recycling and even water-free fracturing, and new classes of high-resolution subsurface imaging to radically improve exploration and production using real-time and microseismic imaging.
In a few years, as new technologies are adopted, journalists will be writing again about the “surprise” that U.S. production expanded by another three million barrels per day on top of that much growth over the past few years. The bounty will in due course spread to other nations where the geophysical shale resources easily match the thousands of billions of barrels in the U.S. Oil prices will continue to experience cycles as technologies are deployed. And the world will stay awash in oil.
Matt Ridley on why falling oil prices are unambiguously good – they make the world richer and fairer
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Matt Ridley has a great column on why cheap oil is unambiguously good news – it makes the world richer and fairer, and in the process allows us to abolish much more poverty, disease and misery. Here’s an excerpt:
So ingrained is the bad-news bias of the intelligentsia that the plummeting price of oil has mostly been discussed in terms of its negative effect on the budgets of oil producers, both countries and companies. We are allowed to rejoice only to the extent that we think it is a good thing that the Venezuelan, Russian and Iranian regimes are most at risk, which they are.
Yet by far the greater benefit of the oil price fall comes from the impact on consumers. Making this essential resource cheaper allows everybody, whatever their nationality, to spend less money on dull things like heat, transport, metal and plastic, which leaves them more money for things like movies, holidays and pets, which gives other people new jobs, which raises everybody’s living standards.
The price of Brent crude oil has fallen from about $115 a barrel in June to about $85 today (see chart above, prices are now below $85 per barrel and the lowest in almost 4 years – since November 2010). That will make a tank of gasoline cheaper (though not by as much as it should, because of taxes) but it will also make everything from chairs to chips to chiropody cheaper too, because the cost of energy is incorporated into the cost of every good and service we buy. The impact of this cost deflation will dwarf any effect of, say, a fall in the price of BP shares in your pension plan.
The industrial revolution itself was built around abundant cheap energy, mainly in the form of coal, which enabled mechanization, which vastly amplified the productivity of the average worker and therefore his income. Today a typical British family of four uses as much energy as if it had 400 slaves in the back room pedaling eight-hour shifts on exercise bicycles. It would use even more if it also fed those slaves!
The falling oil price is largely the Americans’ fault. By reinventing the extraction process for first gas, then oil, with horizontal drilling and hydraulic fracturing, engineers have almost doubled the country’s output of oil in six years. That ingenuity was made possible by the high price of oil, which promised fabulous riches to those who could get oil out of shale, but it is no longer dependent on the high price of oil. It is often said that the cure for high oil prices is high oil prices and so it has proved.
But is cheap fossil fuel not bad news for the climate? A new paper in Nature magazine argues that when the gas boom sparked by fracking goes global, prices will fall fast, economic growth will accelerate and so we will end up using more energy and producing more emissions than before, even if we give up coal. It forgets to mention that if we get that much richer, we will also abolish much more poverty, disease and misery, and have the investment funds to invent new, cheap and low-carbon forms of energy too.
HT: Warren Smith
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There’s been a lot of good economic news recently, here’s a sample below of 8 pretty positive economic reports that were (mostly) released this week.
1. Business Lending. The total volume of commercial and industrial loans at all US commercial banks reached an all-time high of $1.732 trillion in September (see chart above). That’s $147 billion and 9.3% above the previous peak of $1.585 trillion in October 2008, and 46% and $548 billion above the October 2010 trough of $1.18 trillion.
2. Leading Indicators. The Conference Board’s Leading Economic Index rose to a 7-year high in September, its highest level since August of 2007. According to the Conference Board, “The outlook for improving employment and further income growth are expected to support the moderate expansion in the U.S economy for the remainder of the year.”
3. Gas prices. The average nationwide retail price of gas fell this week to $3.08 per gallon, the lowest level since December 2010, almost four years ago. Fifteen US states now have average gas prices below $3.00 per gallon. The 62 cent per gallon drop in gas prices over the last six months will save consumers almost $85 billion over the next year collectively, and about $718 per US household.
4. National Activity Index. The Chicago Fed reported today that its 85-variable index of national economic activity (CFNAI) increased in September, led by improvements in production-related indicators. The index’s three-month moving average (CFNAI-MA3), increased to +0.25 in September, marking its seventh consecutive reading above zero. The last time that happened was mid-2006, more than eight years ago.
5. Future Construction Activity. The American Institute of Architects Billings Indexes indicate “robust conditions ahead for the construction industry.” As a leading economic indicator of construction activity, the organization’s billings index (ABI) reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The September ABI index was 55.2, up from a mark of 53.0 in August (scores above 50 indicate an increase in billings). The new projects inquiry index in September was 64.8, following a reading of 62.6 the previous month.
6. US Rail Traffic. The volume of raw materials, supplies, grains, lumber, cars, and petroleum moving across the country by rail continues to increase, and is now back to the pre-recessionary level of rail traffic in November 2007.
7. Temporary and Contract Employment. The American Staffing Association’s Staffing Index tracks the weekly changes in temporary and contract employment across the country at small, medium, and large staffing companies that provide services in virtually all sectors of the economy, and it recently reached the highest level since early December of 2007 when the Great Recession was just starting.
8. Jobless Claims Are Collapsing. Based on today’s report from the Department of Labor, jobless claims (4-Week Avg.) at 281,000 were the lowest since May 2000, and continued claims at 2.351 million were the lowest since December 2000. Adjusted for the size of the US nonfarm payrolls, jobless claims are the lowest ever in US history, see Scott Grannis for more details and commentary.
In the battle between sharing economy entrepreneurs and regulators, I’ll bet on the entrepreneurs like Uber and Airbnb
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Dan Rothschild wrote in April (“How Uber and Airbnb Resurrect ‘Dead Capital’“) that the two biggest economic stories of the last decade are: a) the Great Recession and b) the rise of the entrepreneurial sharing economy, or as he describes it, “a category of new businesses that turn noncommercial capital and individuals’ spare time into valuable commercial assets.” Which of these two big economic stories will have the greatest lasting impact over the next several decades? Dan argues that there’s a strong case to be made that the entrepreneurial sharing economy will have the greatest and enduring impact on the US economy. Not surprisingly, the biggest challenge to the new rising class of peer-to-peer entrepreneurs and the flourishing sharing economy is coming from local, state and federal regulators – the enablers and protectors of the status quo.
The new sharing economy upstarts like the ride-sharing services Uber and Lyft are disrupting the existing, and sometimes outdated, business models like traditional taxi cartels, which haven’t changed the way they do business in more than half a century. And those existing businesses (e.g. taxi cartels and traditional hotels) are increasingly seeking the help of powerful, heavy-handed government regulators for government protection against the upstart entrepreneurs and the Schumpeterian gales of “creative destruction” that are disrupting their traditional business models.
It’s maybe best described as a battle between the new economic entrepreneurs like Uber and Airbnb and a new class of “political entrepreneurs” – taxi cartels and hotel chains that are increasingly turning to government regulators to quash competition. Here is some recent commentary about that battle:
1. From Arthur Brooks in his October 17 New York Times op-ed “Start Helping the Helpers”:
Technically, Airbnb — like Uber, Lyft and other innovative companies — is helping people tackle the problem of “dead capital.” This term, coined by the Peruvian economist Hernando de Soto, refers to potentially productive assets owned by ordinary people who could use them if they could only find a way. As Daniel M. Rothschild of the Mercatus Center points out, there are 1.5 bedrooms for every man, woman and child in the United States. The owners or renters of many of these dormant bedrooms could use extra money in a lousy economy.
Ordinary people, especially vulnerable people without power and privilege, find Airbnb empowering and useful. It lifts Americans up with zero cost to the taxpayer. And people like it. Shouldn’t we encourage this? Instead, state and local governments have met the service with antagonism, seeking to limit Airbnb’s operations or shut it down. Just this week, the attorney general of New York issued a new report insisting that a majority of Airbnb’s operations in New York City are illegal, and says it is planning a major regulatory crackdown. Uber, Lyft and similar services that enliven dead capital have met with similar treatment from government officials.
Nobody wants zero regulation, and every company should follow the law. But policy should begin with admiration for new ways that citizens can build their lives, not with hostility to profits or the impulse to protect entrenched industries. Governments have their own golden opportunity to exercise creativity in service of the common good, whether that entails rethinking anachronistic zoning laws or adjusting tax policies that treat someone’s spare bedroom the same as a Marriott suite.
2. From an interview with Marc Andreesen in New York Magazine:
Q: Politicians like Rand Paul are seizing on young people’s embrace of companies like Uber and Lyft and Airbnb that are disrupting heavily regulated industries and saying, “You know, if you’re frustrated about Uber, let me tell you about these other regulations that are terrible.” Are these companies breeding a new generation of libertarians?
A: I guess I would say the following: If you have been in an Uber car and gotten pulled over and had the car seized out from under the driver when you were like in the middle of a trip that you were otherwise having a good time on, you might be a little bit radicalized. You might all of a sudden think, Wait a minute, what just happened, and why did it happen? And then you might discover what the taxi companies did over the last 50 years to wire up city governments and all the corruption that’s taken place. And you might say, “Wait a minute.” There’s this myth that government regulation is well-intentioned and benign, and implemented properly. That’s the myth. And then when people actually run into this in the real world, they’re, “Oh, f***, I didn’t realize.”
3. From Wayne Brough’s op-ed today in Real Clear Markets, “Political Entrepreneurs Are Crowding Out the Entrepreneurs”:
Entrepreneurs launching “disruptive technologies” are reshaping markets across the U.S. economy, often by disintermediation and innovation. While these new products and services provide consumers more choices and better value, regulators have place increased attention on these activities, from car services such as Uber and Lyft, to those offering accommodations like Airbnb, to pop up restaurants running afoul of local health codes. In many instances, these new products emerged because innovators were one step ahead of the regulators. But as the regulatory state grows, these innovators will face new challenges from regulators.
Entrepreneurs and regulators work in different spaces, with completely different views of the world. For the entrepreneur, the world is fast-paced and dynamic. The goal of the entrepreneur is to identify unmet demands in the marketplace and develop the products to meet these demands. This requires innovation, adaptability, and the willingness to take risks. Regulators, on the other hand, live in a static world. By definition, regulation is backward-looking, designed to address purported market failures that have already emerged, focusing on data about past market behavior.
As political entrepreneurs crowd out economic entrepreneurs, society shifts from the positive-sum game of wealth creation to the zero-sum game of wealth transfers. This demonstrates the importance of institutions. As the rule of law is overwhelmed by the administrative state, it becomes more difficult to harness the beneficent power of the market. The administrative burden of tax and regulatory structures distorts incentives and diverts resources from productive entrepreneurship to more destructive rent-seeking opportunities. Entrepreneurs play a vital role in any economy but only well-defined market institutions can harness their creative powers in a way that promotes economic growth, innovation, and consumer welfare.
MP: As I’ve noted before, it’s important to remember that Uber drivers and Airbnb hosts are already very heavily regulated, and in some ways they are regulated even more intensely than traditional taxis or hotels by a very ruthless group of regulators – the consumers who use their services and can rate each driver after every Uber ride and rate each host after every Airbnb stay. And the regulation goes both ways – the Uber drivers rate their passengers and the Airbnb hosts rate their guests. So the issue really isn’t a choice between government regulation and a completely unregulated sharing economy; the issue really is who is the primary regulator: a) government bureaucrats and legislators who are often captured by regulated industries like taxi cartels (Big Taxi), or b) the consumers. And there’s no question that captured regulators almost always put the special interests of the well-organized, concentrated groups of regulated producers like the taxi cartel over the public interest of the dis-organized, dispersed thousands/millions of consumers.
In the battle between the new, innovative economic entrepreneurs like Uber and Airbnb and the traditional businesses like Big Taxi and Big Hotel, I predict that innovation will be victorious. When it comes to the “power of the people” versus the “power of regulators,” I’ll put my money on the power of consumers to empower the new entrepreneurs and overcome the regulatory roadblocks.
Here’s my economic forecast: Expect continued and very strong hurricane-strength Schumpeterian gales of innovation, with a high likelihood of market disruption and creative destruction for Big Taxi and Big Hotel, accompanied by huge tsunami-level tidal waves of increased consumer surplus. The sharing economy is the biggest economic story in a generation, and the regulators won’t be able to stop it. Consumers have already gotten a taste of the significant benefits of the sharing economy, and they won’t go back to “business as usual.”
View related content: Carpe Diem
1. Bringing House Calls Back with UberHEALTH — Now there’s an Uber for flu shots. Today the ride-sharing service announced a one-day UberHEALTH pilot program in partnership with Harvard Medical School to deliver free flu shots on-demand. From 10 a.m.- 3 p.m. today Uber drivers delivered a registered nurse to customers anywhere within the three test cities of New York, Boston, and Washington. Source.
This is one more reason Big Taxi is doomed — Uber is running circles around them with cutting-edge innovation and the constant introduction of new services – services that Big Taxi, which has been around for more than half a century, would never in a million years think of offering!
2. Online “competency-based education” (CBE) is a faster, cheaper, more flexible way for adults to earn college credentials valued by employers and it’s coming on strong.
It’s easy to take the ‘high road’ of high wages at Zingerman’s Deli in high-income Ann Arbor with $17.50 sandwiches
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On the White House blog, Ann Arbor-based Zingerman’s Deli co-owner Paul Saginaw extols the virtues of raising the minimum wage, here’s an excerpt of his post titled “A Small Business Owner’s Perspective: ‘A High Road on the Minimum Wage‘”:
My partner, Ari Weinzweig, and I never subscribed to the conservative economic theory of Milton Friedman, that “the business of business is business.” To us, the right to conduct business is earned by being a good corporate citizen — by producing products and delivering services responsibly, hiring responsibly, generating profits responsibly, and finally, sharing profits with those who help produce them and with the wider community from which the revenues are drawn.
For more than three decades, our successful businesses have been profitable but never by underpaying our employees or withholding benefits. In fact, my 17 partners and I have always paid wages above the federal minimum and offered company-subsidized health care and paid time off. Rather than obstacles to profit, higher wages and benefits are profit enhancers. Good wages and good profits are interconnected because higher wages are directly tied to reduced business costs. Higher wages enable employees to be attentive and consistent in attendance and performance due to their abilities to meet transportation, health, and housing needs.
I would be an irresponsible employer if I provided jobs that could not support housing stability and health security. Currently at Zingerman’s, we have achieved consensus to gradually raise wages for all our base pay employees to a “thrive-able” level and increase the opportunity for employee ownership of the business brand. We’re motivated to invest in our employees, not in lobbyists who represent our industry associations that work to keep wages low.
I hear many in the restaurant industry say raising menu prices will result in customer loss and diminished profits, but I reject that and question the scale of those profit margins, wondering if the margins are maintained by shorting their employees. Now is a prime time to educate “voters” for ethical employment practices.
Many myths about the industry workforce and the minimum wage create a false reality and highly unproductive debate. The truth is that livable wages and profits are not mutually exclusive, and Zingerman’s are not the only businesses to know this and operate accordingly. RAISE, an alternative restaurant association, is aligning businesses across the nation to adopt “high road” labor practices. Zingerman’s Community of Businesses joined. I sense that there is public readiness to join this growing business leadership and leverage its consumer dollars to “vote” for raising standards for workers.
Every day, I am pained and motivated by the cruel irony that many of the 13 million women and men who produce and serve food in my industry are forced to use federal food stamps to feed themselves and their families. Change is needed now.
1. Perhaps one of the reasons that Paul Saginaw is able to adopt “high road” labor practices and pay high wages at Zingerman’s is because of the extremely “high prices” of his deli sandwiches, many of which are priced in the $16.50 to $17.50 range (see photo above). Add a soda, a cookie, tax and tip, and you’re looking at $30 tab at Zingerman’s for lunch. Mr. Saginaw is also operating his high-end, high-priced delicatessen in one of the most affluent counties of Michigan (Washtenaw), where the median household income is almost $60,000 and the median family income tops $82,000. Zingerman’s Deli is also located conveniently in close proximity to the University of Michigan, which employs almost 7,000 faculty and staff with annual salaries of $100,000 and higher. So it’s pretty easy for Mr. Saginaw to take the “high road” on wages when he’s selling “high-priced” sandwiches to such a “high income” clientele.
2. There are thousands of small businesses and fast food restaurants operating nationwide that don’t have the luxuries that Paul Saginaw enjoys operating Zingerman’s in Ann Arbor, and for them to take the “high road” of charging “high prices” and raising wages simply isn’t an option available to them if they want to remain in business and survive in the extremely competitive market for low-cost fast food. For example, imagine operating a McDonald’s franchise in one of Michigan’s nine poorest counties where median household income is below $35,000. For those fast-food restaurants to survive in low-income areas, many have to offer low-priced food items priced at only $1 (see the Dollar Menu above), and simply can’t afford to pay Zingerman-level wages.
3. Because Mr. Saginaw is already paying wages above the minimum wage, supported by his high-priced $17.50 sandwiches, an increase in the federal minimum wage would likely have a pretty minimal effect on his business and profits. On the other hand, many of Zingerman’s lower-price/lower-wage competitors could suffer significantly if they are forced to pay higher wages. In other words, a higher minimum wage would disproportionately and adversely impact Mr. Saginaw’s rivals, while leaving his business largely unaffected. It’s pretty easy to support raising the minimum wage when it doesn’t affect your business.
4. The fact that Zingerman’s high-price/high-end deli in a high-income market can already afford wages above the federal minimum is really in essence an argument against a national, uniform one-size-fits-all minimum wage, without any adjustments for the significant differences in: a) the cost of living across the country, and b) the types of businesses and industries that hire entry-level workers. As Andrew Biggs and I argued in our American.com article “A National Minimum Wage Is a Bad Fit for Low-Cost Communities,” a single national minimum wage will disproportionately and negatively affect low-skilled workers in low-cost areas of the country, and in low-wage, low-priced industries like fast-food restaurants. Mr. Saginaw might be able to afford wages above the federal minimum of $7.25 per hour because he’s operating a high-end, high-priced deli with an upscale clientele and the market conditions can support those wages – just like the market conditions in Williston, ND allow Walmart to offer starting wages of $17.40 an hour. But the small business owner or McDonald’s franchisee in Benton Harbor, MI or North Platte, NE might not be able to easily afford a 39% increase in the minimum wage to $10.10 per hour for entry-level workers and might even have to shut down – the market conditions for those small businesses in those areas just wouldn’t support the additional labor costs to employers of about $6,170 per year for each minimum-wage worker employed full-time.
Bottom Line: To further make the points raised above, I would challenge Mr. Saginaw to try opening a Zingerman’s Deli in Benton Harbor, MI where the median household income is $17,775 or in Flint, MI where the median household income is $26,000. Although McDonald’s successfully operates restaurants there – partly because they pay low wages and can offer some low-priced menu items for only $1 (see photo above) – I’m confident that Zingerman’s, with its $17.50 sandwiches and higher-than-minimum wages, couldn’t survive in those markets. And it probably couldn’t survive and operate profitably anywhere else in Michigan except at its current location near UM’s Ann Arbor campus, unless of course, it significantly cut both prices and wages. So it’s pretty easy for Zingerman’s to take the “high road” on wages when it’s operating an upscale operation with $17.50 sandwiches (5 times the cost of some sandwiches at Subway) in a high-income market like Ann Arbor. But let’s see them try that business model in Flint or Benton Harbor or Escanaba, Michigan, and they would quickly see that their “high road” doesn’t work so well. They would face the economic reality of many small businesses, who can’t afford the “Zingerman high-price, high-wage, high-income, high road” and can only survive with low prices and low wages, especially when their customers are mostly low-income and can’t afford $30 lunches at Zingerman’s.
Related: See Michael Saltsman’s WSJ op-ed from last April, “Why Subway Doesn’t Serve a $14 Reuben Sandwich.”
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…. is from Alex Epstein’s forthcoming book “The Moral Case for Fossil Fuels“:
The cheap, plentiful, reliable energy we get from fossil fuels, combined with human ingenuity, gives us the ability to transform the world around us into a place that is far safer from any health hazards (man-made or natural), far safer from any climate change (man-made or natural), and far richer in resources now and in the future.
Fossil fuel technology transforms nature to improve human life on an epic scale. It is the only energy technology that can currently meet the energy needs of all 7+ billion people on this planet. While there are some truly exciting supplemental technologies that may rise to dominance in some distant future decade, that does not diminish the greatness or immense value of fossil fuel technology.
Ultimately, the moral case for fossil fuels is not about fossil fuels; it’s the moral case for using cheap, plentiful, reliable energy to amplify our abilities to make the world a better place – a better place for human beings.
The unpopular but moral case of our time is fossil fuels. Fossil fuels are easy to misunderstand and demonize, but they are absolutely good to use. And they absolutely need to be championed. Mankind’s use of fossil fuels is supremely virtuous – because human life is the standard of value, and because using fossil fuels transforms our environment to make it wonderful for human life.
Obama: There is not a black, white, Latino, Asian America, but there are black/white/Latino/Asian college applicants?
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Barack Obama in 2014 discussing racial profiling and affirmative discrimination in college admissions: If the University of Michigan or California decides that there is a value in making sure that folks with different experiences in a classroom will enhance the educational experience of the students, and they do it in a careful way, the practice should be allowed.
Conclusion: Apparently when it comes to college applicants, there are black applicants and white applicants and Latino American applicants and Asian American applicants in Obama’s world, as Jennifer Gratz points out.